Analyzing India

Week Ahead: NIFTY Approaches This Key Support on Higher Timeframe Charts; Keep Positions at Modest Levels

Milan Vaishnav

Milan Vaishnav

The week that went by remained rather contradictory in nature; however, let's consider if this statement holds if we look at it from different perspectives and different timeframes. The markets certainly remained highly volatile, as they reacted, in turn, to the global market reactions to the 75 bps rate hike by the Fed on Wednesday. There are no second doubts about the kind of volatility that we witnessed this week. However, on the weekly time frame charts, it is just one more week of consolidation near the upper edge of the trading range, with the breakout getting just delayed! The markets found themselves having oscillated in a 627.65 points range; despite this, the headline index NIFTY ended with just a loss of 203.50 points (-1.16%) on a weekly basis.

 From a technical perspective, the 50-Week MA levels are in focus again. The NIFTY has delayed its breakout from the falling trend line that begins from the lifetime high point of 18600, which joins the subsequent lower tops. The NIFTY has closed below this trend line pattern resistance; this makes the levels of 17700 a significant resistance point for the NIFTY. However, the focus is on the lower edge; the 50-Week MA is currently placed at 17125. This level is expected to play out as crucial support for the markets on a closing basis. That means that any major slip below this level on a closing basis will invite incremental weakness for the markets.

While we looked at the technical structure of the chart, we need to keep a few data points in mind as well. FIIs have been shorting the markets; as per the derivatives data, net shorts are being added in the last three sessions. As of now, the markets sit with large amounts of shorts in the system. The coming week is likely to see the levels of 17500 and 17650 acting as resistance points, while the supports come in at the 17100 and 16920 levels.

The weekly RSI is 53.71; it remains neutral and does not show any divergence against the price. The weekly MACD is bullish and above its signal line.

The pattern analysis of the weekly charts shows that the NIFTY failed to achieve a breakout above the major pattern resistance that comes in form of a falling trend line. This trend line begins from the lifetime high levels of 18600 and joins the subsequent lower tops. The NIFTY has slipped near the 50-Week MA, which presently stands at 17125; this level is expected to act as important support on a closing basis.

Regardless of the talks around us concerning fear of recession, the extent of the possible decline in the markets, and the kind of panic reactions the current decline may trigger, we need to approach the markets with a sane mind. It is strongly recommended that one not resort to blindly shorting the markets, given the extent of the shorts that exist in the system. On the other hand, so far as making purchases is concerned, one will need to stay highly selective in approach. While following the basics, it is strongly suggested that the highly leveraged positions must be avoided and overall exposures should be kept at modest levels. A short-covering from the lower levels cannot be ruled out as we head into the monthly derivatives expiry week. A cautious 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 analysis of Relative Rotation Graphs (RRG) continues to show the NIFTY Financial Services, BankNifty and PSU Bank indexes placed in the leading quadrant while maintaining their relative momentum against the broader markets. These pockets are likely to relatively outperform the markets. The Midcap 100 and Realty Index are also inside the leading quadrant; they too may outperform, but they are also seen loosening up a bit on their relative momentum.

The NIFTY Consumption, FMCG, and Auto Indexes continue to advance further inside the weakening quadrant.

While NIFTY Pharma continues to languish inside the lagging quadrant, the Energy, Media, Infrastructure and PSE indexes also remain inside the lagging quadrant. However, they also appear to be improving their relative momentum while staying inside this quadrant. This holds true for the IT Index as well.

The NIFTY Metal index continues to hold firm 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 |

Milan Vaishnav
About the author: , CMT, MSTA is a capital market professional with experience spanning close to two decades. His area of expertise includes consulting in Portfolio/Funds Management and Advisory Services. Milan is the founder of ChartWizard FZE (UAE) and Gemstone Equity Research & Advisory Services. 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 18th year of publication. Learn More