In the recent weekly notes, we had mentioned the markets getting overstretched and overextended over the immediate short term. It was a matter of concern, as any form of a consolidation or corrective move stood imminent; the absence of either was making the present uptrend highly risky and unhealthy. On the expected lines, the markets started the previous week with a very sharp and violent corrective move that saw the NIFTY slipping below the 13200-mark. However, the following four days saw the NIFTY recouping all of those losses. The headline Index ended absolutely flat, with a net loss of 11.30 points (-0.08%).
Regardless of the sharp pullback that the markets saw in the subsequent four sessions, the NIFTY has flashed a first warning sign. Without disputing the underlying buoyancy and the liquidity that is chasing the markets, the sharp violent corrective has shown that, unless the present uptrend is not followed up with some breather from the markets, the current setup has turned unhealthy in its present form. The volatility also took a sharp rise; on Monday, it rose over 25%, but, on the weekly note, the INDIAVIX moved higher by 7.22% to 19.97.
The coming week is expected to see a ranged movement with limited upsides. If the markets see some corrective action, the range is expected to get wider just like the previous week. The levels of 13850 and 14065 will act as resistance. The supports will come in at 13500 and 13360.
The weekly RSI is 75.48; it is still overbought and remains neutral as it does not show any divergence against the price. The weekly MACD is bullish as it stays above the signal line. A long-legged Doji occurred on the Candle. When this happens near the high point, as in the case of NIFTY, it is once again a warning signal of potential disruption of the present uptrend.
The pattern analysis shows that, after taking out the 2-yr long rising trend line, the NIFTY has reached in a highly overbought zone. The present rise has gotten overstretched while it heavily deviated from its mean. However, in the process of this breakout happening, the NIFTY has dragged its near-term support higher to 13000 levels.
All in all, over the past couple of days, the markets have shown a highly tactical shift in the form of sector rotation. We have seen the defensives like FMCG, Consumption and Pharma staying relatively strong, along with the IT sector, which has relatively underperformed the broader markets over the past quarter. We reiterate the need to avoid high beta stocks and those sectors which have runup too hard. We recommend staying put with the defensive stocks, while keeping leveraged exposure at moderate levels and maintaining a cautious view of the markets.
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) continues to show sector rotation happening strongly over the past couple of weeks. The NIFTY Bank, METAL, REALTY, and Financial Services index are in the leading quadrant and appear to be keeping relatively strong momentum relative to the broader NIFTY 500 Index. The NIFTY Service Sector is also in the leading quadrant. However, this index and the NIFTYBank are seen taking something of a breather and mildly giving up on their relative momentum. However, all these sectors are likely to put up a reasonably resilient show.
The NIFTY IT stays in the weakening quadrant. Without showing any signs of improvement in its relative momentum, it continues to rotate in the south-west direction. NIFTY Auto has crawled inside the lagging quadrant, while NIFTY MidCap 100 has rotated back inside the leading quadrant from the weakening one.
The NIFTY Energy Index has continued to show a near-vertical improvement in the relative momentum. Although it is present in the lagging quadrant, it is making a strong rotation towards the improving quadrant. NIFTY Pharma and Media are also inside the lagging quadrant, but all of them are showing mild improvement in their relative momentum against the broader markets.
NIFTY Consumption and FMCG have advanced inside the improving quadrant. Along with them, the NIFTY PSE, PSUBanks and Infrastructure Indexes also continue to rotate favorably inside the improving quadrant.
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 | www.EquityResearch.asia