Analyzing India

Week Ahead: Staying Above These Levels Crucial for NIFTY; RRG Chart Shows These Sectors Continuing to Outperform


In a wide-ranging trading week, the Indian equity markets halted their four-month winning streak. The NIFTY met its important pattern resistance, from which it reacted. Over the past five trading sessions, the NIFTY saw a trading range of close to 500 points. Amid volatile moves, it was a time for underperformance in the banks, but the midcaps continued to relatively outperform the frontline NIFTY 50 as they gained 1.45% on a weekly note despite the selloff. The headline index NIFTY, however, closed the week on the negative, losing 313.75 points (-2.69%) on a weekly note.

Many technically important things happened this week. The NIFTY resisted precisely at the lower trend line of the channel that it broke on its way down. This has added to the credibility of the resistance area. The index continues to trade above its key moving averages, with 50-week MA and 100-week MA at 10936 and 11035, respectively. This makes this 100-point zone of 10935-11035 crucial supports for the NIFTY in the near term. With the risk-on liquidity-driven setup staying very much in place, this zone is unlikely to be taken out soon. The volatility, represented by INDIAVIX, spiked 20.74% to 22.15, which was at one of its lowest levels until this week.

The coming week may not see any runaway up moves, but we expect the markets to limit downsides and attempt to gain some stability. The levels of 11435 and 11550 will remain resistance points. The supports will come in at the 11250 and 11035 levels. The trading range is expected to remain just as wide as the previous week. Volatility, too, is expected to increase.

The weekly RSI is at 58.88; it remains neutral and does not show any divergence over the 14-week period. The weekly MACD is bullish and still above its signal line. A bearish engulfing candle has emerged. Its occurrence near the key pattern resistance adds to the credibility of the resistance point. It has potentially marked an immediate lower top for the markets for the near term.

Equities, as an asset class, will continue to relatively outperform the other assets over the coming few weeks. Given the unabated up moves that we saw, the previous week may have pushed the markets in a broad consolidation phase. However, we do not expect any drastic downsides from the current levels. Also, on the upper side, NIFTY will struggle to reach to a point from where it reacted.

All this translates into one thing – markets have grown too stock- and sector-specific. Leaving aside banks, which may continue reacting to the external news flow, we highly recommend staying put with the defensive stocks and sectors, as well as avoiding any major and aggressive positions on either side. A cautiously optimistic view 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 (NIFTY 500 Index), which represents over 95% of the free float market cap of all the stocks listed.

The review of Relative Rotation Graphs (RRG) points towards a minor hit that the momentum of PSU Banks has taken in the previous week.

NIFTY Metal, NIFTY Auto and the NIFTY MIDCAP 100 are firmly placed in the leading quadrant. Giving them company is the NIFTY IT index, which is also rotating firmly in the leading quadrant after taking a sharp U-turn from the weakening to the leading quadrant a couple of weeks back. These groups are set to distinctly outperform the broader NIFTY 500 Index over the coming week.

The NIFTY Financial Services group is placed in the improving quadrant and is seen taking smaller strides. The PSU Banks have seen sharp paring of their relative momentum but still remain well in the improving quadrant. BankNIFTY and the Realty and Media groups are all well-placed in the improving quadrant while maintaining their relative momentum. These groups are expected to continue posting resilient performance.

The NIFTY PSE and NIFTY Infrastructure groups are advancing in the lagging and the weakening quadrant, respectively, and may continue underperforming the broader markets relatively. The NIFTY Pharma is placed in the weakening quadrant while NIFTY Consumption and FMCG are in the lagging quadrant. These groups are seen attempting to consolidate themselves and improve on their relative momentum. Some stock-specific performance may note be ruled out from them.

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,

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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