Analyzing India

Week Ahead: With Breakout Not Getting Confirmed, Chasing Technical Pullbacks Should Be Avoided


Throughout the previous week, the Indian equity markets remained less volatile than expected, but, at the same time, marked some important technical events. After trading in a 350-point range, the index hit its key resistance zones, retraced and ended the week with a modest loss. The RBI Credit Policy largely remained a non-event for the markets. The headline index NIFTY 50 ended with a net loss of 52.15 points (-0.44%) on a weekly note.

The previous week also witnessed a few important technical events. The NIFTY marked its fresh incremental high, but it failed to confirm this attempted breakout. The markets have reinforced the 12000-12040 zone as an intermediate top and key resistance area for the markets. The India Volatility Index (VIX) also declined another 7.53% to 14.86.

Additionally, the index resisted at the pattern resistance created by the lower trend line of the 30-month long upward rising channel, which the NIFTY broke on the downside in October 2018. As the nature of this trend line is rising, the NIFTY was unable break the line for the third week in a row, despite marking incremental highs.

As we head into another week, we need to take serious note of the fact that the markets are likely to face broader technical headwinds. The present technical structure on the charts does not show any possibility of fresh, sustainable runaway up moves. There may be some intermittent technical pullbacks, but a major, lasting up move is unlikely.

The coming week is likely to see the levels of 12000 and 12080 acting as stiff resistance points. Supports, on the other hand, will come in at 11750 and 11600.

The weekly RSI is 63.78; it remains neutral and shows no divergence against the price. However, upon visual inspection, the RSI shows forming lower tops, which may act in a bearish way going forward. The weekly MACD remains bullish and is trading above its signal line. No significant formations were observed on the candles.

The pattern analysis shows that the NIFTY continued to resist to the lower trend line of the upward rising channel for the third week in a row. The index has also failed to confirm an attempted breakout. The zone of 12000-12040 remains the key resistance area for the markets.

We are likely to see some intermittent pullbacks in the coming week. However, such pullbacks may remain temporary and the markets could continue to see selling pressures from higher levels. With the breakout not being confirmed, we may expect some bearish bias to prevail in the markets. Any technical pullback, if there are any, should be utilized to protect profits at higher levels. Beyond avoiding chasing the technical pullbacks, if any, a highly cautious view should be maintained 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.

Our review of Relative Rotation Graphs (RRG) shows that the coming week will see strong relative out-performance from the Services and Financial Services sectors and the IT packs. The Services and Financial Services are positioned in the leading quadrant and are building on their momentum. The IT Index, though, remains in the weakening quadrant, but is also improving its momentum. The CNX PSE, along with the Realty index, is seen sharply losing its momentum, despite remaining the leading quadrant.

The Infrastructure index remains in the improving quadrant along with the Auto Index, which has seen a sharp pullback. These groups may offer some selective out-performance against the broader markets.

The PSU Banks and the Bank Nifty indexes are seen drifting in the weakening quadrant. No show is expected from these pockets. Along with this, the Pharma, Media and Metal indexes are in the lagging quadrant and are likely to under-perform against the broader markets.

Important Note: RRG™ charts show you 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

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. Milan's primary responsibilities include consulting in Portfolio/Funds Management and Advisory Services. His work also involves advising these Clients with dynamic Investment and Trading Strategies across multiple asset-classes while keeping their activities aligned with the given mandate. Learn More
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