market outlook: Dalal Street Week Ahead: Time to turn defensive; action likely in IT, metals & auto stocks

Domestic equity indices ended the week with modest gains as they struggled to keep afloat when global markets saw sharp corrective moves leading to a reversion to mean. In a trading range that stayed narrower compared with the week before this one, the headline index ended with gains while the banking and financial stocks continued to remain subdued.

The corrective moves affected sectors across the board and the broader market was not spared either, leading to the market closing the week on a negative note. Nifty oscillated in a range of just over 300 points before closing the week with a net gain of 130.60 points, or 1.15 per cent.

What we saw over the past two weeks is a sharp mean reversion. The markets, in general, were overextended and they moved towards their nearest moving averages (MA) for support, which is a usual phenomenon. Only when they drop below the 50-period MA, will it become a matter of concern.

During the week gone by, Nifty saw some important pattern developments, which may cause some serious concern in the immediate term. Volatility has declined, as India VIX has come off by another 6.50 per cent to 20.71 level; which is one of the lowest values in recent times. In the event of volatility increasing, Nifty’s behaviour vis-à-vis the 50-week and 100-week MAs would be crucial as they form a major pattern support in the near term.

In the coming week, the 11,585 and 11,650 levels are going to act as key resistance for Nifty, while supports will come far lower at 11,250 and 11,000 levels. In the case of any uptick in volatility, we may stare at a wider-than-usual trading range.

The weekly RSI stands at 60.41. It remains neutral and does not show any divergence against price. The weekly MACD is still bullish; it remains above the signal line. However, the declining slope of the histogram points towards decelerating momentum on the charts. After forming a large Bearish Engulfing Pattern on the candles in the previous week, Nifty has formed a hammer. However, its occurrence during an uptrend is insignificant, and can have implications more like a Hanging Man candle in the current structures.

Pattern analysis paints a worrying picture. On the daily chart, Nifty is falling out of a large Rising Wedge pattern. The wedge is large and looks more like an upward rising channel, but it is sharply narrowing and making a wedge. In the same way, such a rising wedge is clearly seen on the weekly charts, and Nifty has fallen out of this pattern. The fractal nature of these patterns is a matter of concern.

More so, when this pattern ended, and Nifty fell out of it exactly at a pattern resistance point of the lower trend line that Nifty had broken. In the process, the 11,800 point has become an intermediate top for Nifty in the near term. All in all, even though momentum was seen in the discretionary and riskier segments, it would be prudent to stay focused on the defensive stocks and sectors for now.

IT, too, may start performing, if there is even a slight pullback in the Dollar Index, which will cause the rupee to depreciate. We recommend sticking to a defensive approach throughout 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 the Relative Rotation Graphs (RRG) showed the PSU Bank index has continued to lose momentum just like it did in the previous week.

Nifty IT, Metal and Auto groups are firmly placed in the leading quadrant. To give them company, Nifty Media Index has also moved inside the leading quadrant. These groups will continue to relatively outperform the broader Nifty500 Index.

The financial space has lost some more momentum during the week gone by. The PSU Banks and Bank Nifty indices have shown a decline in their relative momentum, as the markets awaited the Supreme Court verdict on the interest waiver. They are currently placed in the improving quadrant. Nifty Financial Services and Realty Indices are also placed in the improving quadrant.

Nifty Pharma index is placed in the weakening quadrant, but it appears to be improving on its relative momentum. The Infrastructure Index has moved inside the lagging quadrant. The FMCG, Consumption and PSE Indices also appear to be languishing inside the lagging quadrant. They are set to underperform the broader Nifty50 on a relative basis.

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])