Dalal Street week ahead: Mild technical pullback likely, but there’s more pain left

In the previous weekly note, we had raised concerns as Nifty had slipped below its 20-week moving average and the volatility index, VIX traded at a multi-month low. It was expected that volatility was likely to increase and the market would drift lower. The week gone by saw the index trading precisely on the anticipated lines.

After staying positive for most of the week, Nifty’s dismal performance on the last trading session of the week saw it end with losses on a weekly basis. The headline index ended the week 133.25 points, or 1.15 per cent, lower.

The market is precariously poised once again for the week ahead. India VIX has risen 4.31 per cent to 12.52 and continues to remain at one of its lowest levels of recent times. Although Nifty has rested on the pattern support in the form of a nine-month-long rising trend line, this is the lower trend-line of the secondary channel that the index has formed since October 2018. On the other hand, any breach of this level will create the possibility of Nifty testing its 50-week moving average.

Nifty might see a mild technical pullback in the coming week as the market is once again modestly oversold. However, the 11,375-11,425 zone will become a crucial area to watch, and any breach of this zone will make the market lose some ground.

The 11,480 and 11,590 levels will be key resistance for Nifty while supports will come in at 11,310 and 11,180. The Relative Strength Index or RSI on the weekly chart stood at 48.8153. The RSI has marked a fresh 14-period low, which is a bearish signal, and it also shows a bearish divergence against price. The RSI has marked a new 14-period low while Nifty has not done so. The weekly MACD remains bearish and trades below its signal line.

Nifty had formed a secondary upward rising channel after it breached the primary 30-month-long rising channel in October 2018. Pattern analysis of the weekly charts showed as of today, the index has taken support on the lower trendline of this secondary channel.

Nifty’s current derivative series is due for expiry next week. We expect rollover-centric activities to dominate trade. A lot of short covering and long unwinding was seen over the past couple of days and the market remains relatively light compared with that in the previous month. There is room for a mild technical pullback in the market. However, this pullback, if at all it occurs, would just be a swing trade and should not be chased.

We recommend keeping exposures at modest levels and approaching the week with a good amount of caution.

In our look at Relative Rotation Graphs, we compared various sectors against the CNX500 (Nifty500) index, which represents over 95 per cent of the free float market-capitalisation of all the listed stocks.

A review of the Relative Rotation Graphs (RRG) showed sharp polarity between the sectors that are either likely to remain resilient or relatively outperform the broader market and those which are expected to remain weak.

Bank Nifty, Financial Services, Services Sector, Infrastructure and Realty indices are in the leading quadrant and are likely to show resilience to any downsides. In the event of any rise, they may relatively outperform the broader market. The CPSE index is also in the leading quadrant, but it is heading downward while steadily losing its relative momentum.

Along with the above sectors, Consumption and FMCG indices are also moving higher in the improving quadrant. The PSU bank and media indices appear to be improving their relative momentum even as they continue to be in the lagging quadrant.

Apart from this, IT, pharma, auto and metals indices continue to lose relative momentum. These packs are likely to relatively under-perform the broader market.

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 Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)