Analyzing India

Week Ahead: Nifty continues to trade below key resistance levels despite strong pullback


In our previous weekly note, we noted that we were expecting a rough ride for the Markets. Over the course of the last week, the markets dealt with the state election results and the sudden resignation of the RBI Governor.  Volatility ruled the roost, with the NIFTY seeing swings in the band of over 750 points before ultimately ending the week with modest gains of 111.75 points (+1.05%) on weekly basis. It is still set to face few technical overhead resistances going ahead, however.

The NIFTY recovered over 500 points from the low of 10333 that was marked on Tuesday. However, it has formed a potential lower top near 10950; this level may pose serious resistance to the markets.

We expect a soft start to the week, but the element of volatility will continue to remain present in the trade. The markets have exhibited strength by consolidating without showing any major declines, the overhead pattern resistance that the NIFTY faces cannot be ignored.

The coming week is likely to see the level of 10950 and 11275 acting as immediate resistance on the weekly charts. Supports come in at 10710 and 10600. Because of volatility we witnessed in the previous week, the range for the NIFTY has become wider.

The Relative Strength Index (RSI) on the weekly charts is 50.7970;  it does not show any divergence against the price. The weekly MACD still remain bearish as it trades below its signal line, but appears to be sharply narrowing its trajectory. PPO, despite its narrowing trajectory, remains negative.

While performing the pattern analysis on the charts, it can be seen that the present pullback has halted just below the 20-Week MA, which is presently at 10926. This MA also coincides with the important pattern resistance that the index is facing. The level of 10950 is a pattern resistance in form of a falling trend line, which joins the the high of 11760 to the previous week’s high of 10950. Unless this level is taken out, this may act as a temporary lower top for the markets.

The coming week is likely to remain extremely stock specific in nature. Despite pulling back over 500 points from the low of Tuesday, the NIFTY has shown no signs of corrective intent; instead, it has consolidated in a narrow range. This can be interpreted as inherent strength, but, at the same time, the overhead technical and pattern resistances cannot be ignored. We continue recommend remaining extremely stock-specific; exposures should be managed on a defensive note. Though shorts may be avoided, purchases, too, should be kept limited and modest. A cautious outlook is advised for the coming week.

Sector Analysis for the coming week

In our look at Relative Rotation Graphs, we compared various sectors against CNX500, which represents over 95% of the free float market cap of all the stocks listed.

A study of the Relative Rotation Graphs (RRG) shows that BankNIFTY and Financial Services Index have continued to show strong momentum, advancing with strength in the leading quadrant. Joining them are the PSU Banks and NIFTY Mid 50, which are likely to see strong out-performance relative to the broader markets.

The Infra Index, too, remains in leading quadrant and might witness stock-specific performance. The Services Sector is seen taking a pause and slowing down on relative momentum front. The Pharma, IT and Metal Indexes have continued taking a breather and are witnessing more slowdown in their performance. However, the Pharma Index is presently resting at its support, with the potential to consolidate at its current juncture and halt its decline.

The Realty and FMCG Index, although they remain differently placed on the RRG, have some shown some improvement in their momentum. This group might witness isolated stock-specific performance over coming days. The Auto Index continues to remain in the weakening quadrant, but it has halted its decline and improved its relative momentum compared to broader markets.

Important Note: RRG™ charts show the relative strength and momentum for a group of stocks. In the above chart, they show relative performance against NIFTY500 Index (Broader Markets) and should not be used directly as buy or sell signals.

Milan Vaishnav, CMT, MSTA
Consulting Technical Analyst

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Milan Vaishnav
About the author: , CMT, MSTA is a qualified Independent Technical Research Analyst at his Research Firm, Gemstone Equity Research & Advisory Services in Vadodara, India. As a Consulting Technical Research Analyst and with his experience in the Indian Capital Markets of over 15 years, he has been delivering premium India-focused Independent Technical Research to the Clients. He presently contributes on a daily basis to ET Markets and The Economic Times of India. He also authors one of the India's most accurate "Daily / Weekly Market Outlook" -- A Daily / Weekly Newsletter,  currently in its 15th year of publication. Learn More
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