D-Street outlook: Dalal Street week ahead: Nifty likely to limit downside; expect stock & sector-specific action

In a range-bound trading week, the Indian equity indices halted their four-month-long winning streak. Nifty met its important pattern resistance from where it reacted. Over the past five sessions, Nifty has moved I a trading range of close to 500 points. Amid volatile moves, it was time for underperformance of the banks, while midcaps continued to outperform Nifty50 on a relative basis, as they gained 1.45 per cent on a weekly note despite the selloff that was seen.

The headline Nifty index, however, closed the week on a negative note, losing 313 points, or 2.69 per cent, on a weekly basis. Many technically important things happened this week. Nifty faced resistance precisely at the lower trend line of the channel that it had broken on its way down. This has added credence of the area of resistance.

Nifty continues to trade above its key moving averages, the 50-week moving average at 10,936 and the 100-week one at 11,035. This makes this 100-point zone of 10,935-11,035 a crucial support for the index in the near term.

With the risk-on liquidity-driven setup very much in place, this zone is unlikely to be taken out soon. Volatility, as represented by INDIA VIX, spiked 20.74 per cent to 22.15 from some of it lowest levels until earlier this week.

The market may not see any runaway rally in the week ahead, but we expect Nifty to limit the downside and attempt to gain some stability. The 11,435 and 11,550 levels will be the resistance points, while supports will come in at 11,250 and 11,035 levels. The trading range is expected to remain as wide as the previous week. Volatility, too, is expected to increase.

The weekly RSI stands at 58.88. It remains neutral and does not show any divergence over the 14-week period. The weekly MACD remains bullish and remains above the signal line. A Bearish Engulfing Candle has emerged. Its occurrence near key pattern resistance adds weight of the points of resistance. It has potentially marked an immediate lower top for Nifty.

Equities, as an asset class, will continue to relatively outperform other asset classes in the coming few weeks. Given the unabated rise that we saw of the previous weeks, the market may now go into a broader consolidation phase. However, we do not expect any sharp downside from the current levels. Also, on the upper side, Nifty will struggle to reach the point from where it started reacting.

All this translates into one thing – this market has grown too stock- and sector-specific. Leaving aside the bank stocks, which may continue to react to external news flow, we highly recommend staying put in the defensive stocks and sectors, and avoiding any major and aggressive positions on either side.

A cautiously optimistic view is advised for the coming week.

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (Nifty500 Index), which represents over 95% of the free-float market-cap of all the listed stocks.

A review of Relative Rotation Graphs (RRG) pointed towards some minor hit that the momentum of PSU banks took during the week gone by. Nifty Metal, Auto and Midcap100 indices are placed firmly in the leading quadrant. Giving it company is Nifty IT index, which has been rotating firmly in the leading quadrant after taking a sharp U-turn from the weakening leading quadrant a couple of weeks back. These groups are set to distinctly outperform the broader Nifty500 Index in the coming week.

Nifty Financial Services group is placed in the improving quadrant, and it is seen taking smaller strides. PSU bank stocks have seen a drop in relative momentum, but they remain in the improving quadrant. Bank Nifty, 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. Nifty PSE and Infrastructure groups are advancing in the lagging and weakening quadrants, respectively, and may continue to relatively underperform the broader market. Nifty Pharma index is placed in the weakening quadrant while Nifty Consumption and FMCG indices are places in the lagging quadrant. These groups are seen attempting to consolidate and improve on their relative momentum. Some stock-specific performance from them cannot be ruled out.

Important Note: RRGTM 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 is a Consultant Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at [email protected])