Analyzing India

Week Ahead: NIFTY may relatively out-perform globally; upsides though, may remain capped


Before the start of this week, we had highlighted the possibility of NIFTY facing overhead resistance as it was inching higher. We also expected the week to remain much more volatile than normal. In line with this forecast, the week that went by remained highly volatile, with the index oscillating in a wide range. After meeting the overhead resistance area, the NIFTY took a sharp knock on the last trading day of the week (Friday), but still managed to end the week with just a modest loss. The benchmark index lost 51.45 points (-0.48%) on a weekly note.

The Indian markets have been greatly resilient to global weakness. The Dow Jones Index has lost over 1600 points (-6.87%) in the previous week, while many other European and Asian peers have remained weaker - by contrast, the Indian markets have relatively outperformed.

Despite the relative global out-performance, we can expect NIFTY to perform inside of a broad range. The previous week’s high of 10985 will continue to act as resistance. The index faces a falling trend line, which it has not penetrated yet. The upsides, if any, are likely to remain capped as the coming week is a truncated one, with 25th of December being a trading holiday. Further, we have the expiry of the current derivative series to deal with going ahead.

We expect a soft start to the trade on Monday; however, we also expect NIFTY to stabilize and honor important supports that are present on the Daily Charts. The levels of 10850 and 10985 will act as a resistance area for the markets. Supports come in at 10700 and 10560. The previous week’s volatility has made the range for the coming week wider.

The Relative Strength Index (RSI) on the weekly charts is 49.7248; it remains neutral and shows no divergence against the price. The Weekly MACD is bearish and is trading below its signal line. PPO, too, is negative - like MACD, it can be seen sharply narrowing its trajectory, foreshadowing a potential positive turn. Apart from a black body that emerged on Candles, no significant formations are seen. 

While performing pattern analysis on the Charts, it was observed that the NIFTY has continued to resist to the falling trend line pattern resistance. This overhead resistance line starts at the high of 11760 and joins the next lower top near 10950. As the trend line falls, the resistance area for the NIFTY subsequently shifts lower with each passing week.

Presently, the NIFTY has rested at the 50-Week MA, which is 10753.

Overall, despite the Indian markets relatively outperforming their global peers, it is still unlikely that we see a significant up move from current levels. There will be pullbacks, but they will be capped and technical in nature. For a significant up move to occur, it would be important for the index to move past the falling trend line pattern resistance. Until this happens, we will continue to see all up moves meeting overhead resistance and resulting in profit-taking bouts. We recommend continuing to protect profits vigilantly at higher levels, as well as continue making defensive purchases in modest quantities with each corrective downside that markets offer. Caution is advised for the coming week.

Sector Analysis for the coming week

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

A study of the Relative Rotation Graphs (RRG) paints a comforting picture. Except for the Metal Index and PSE (Public Sector Enterprises) Index, there is nothing in the lagging quadrants. Major indexes such as Infrastructure, PSU Banks, Bank Nifty, NIFTY Mid Cap 50 and Financial Services Index remain comfortably in the leading quadrant and are likely to continue to relatively out-perform the broader markets. The FMCG Index is on the verge of entering the leading quadrant after continued improvement in the momentum.

The Realty Index, Consumption and NIFTY Junior (NIFTY Next 50) have further advanced in the improving quadrant. The AUTO Index, too, has entered the improving quadrant after a prolonged under-performance against the broader markets. These groups are likely to remain resilient to weakness, if they experience any at all, and may offer stock-specific out-performances.

IT, Energy and Pharma have remained in the weakening quadrant and are likely to consolidate at current levels. These sectors will also continue to witness isolated stock-specific performance as they attempt to halt their corrective move and possibly consolidate.

Important Note: RRG™ charts show the relative strength and momentum for a group of stocks. In the above chart, they show relative performance as against the 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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