Dalal Street week ahead: Nifty50 faces crucial time technically; stay defensive

Even as it traded on the expected lines, the Indian equity market did not make any major directional move and consolidated in a defined range. Nifty did not move past previous week’s high point and consolidated as it faced resistance at that level. The trading range also remained narrower than what it was the week before this one.

The index oscillated in a range of 240-odd points over the past five days. The entire week remained within the range of the previous week as Nifty formed a slightly lower top and a higher bottom on the bar charts. After spending the entire week in a limited zone, the headline index ended with a net gain of 167 points, or 1.43 per cent, on a weekly basis.

The coming week is going to be extremely important from technical perspective. From a pure analytical point of view, the 12,000 mark will be a major and important resistance level, both from the point of view of classic market technicals and on the basis of derivative data.

Equity as an asset class has slipped into the weakening quadrant on the RRG, while high yield debt and treasuries have entered the improving quadrant. The slippage of equity into the weakening quadrant points to a likely end of its relative outperformance among all asset classes. Volatility is virtually absent now, as India VIX has gained just 0.84 per cent on a weekly basis.
The coming week is likely to start on a soft note. The 12,025 and 12,120 levels are likely to act as key resistance points, while supports will come in at 11,800 and 11,710 levels. The weekly RSI stood at 62.44. It remains neutral and does not show any divergence against the price.

The weekly MACD remains bullish, as it trades above the signal line. The formation of an Inside Bar, where the high point of the week is slightly lower than previous week’s high and low of this week is higher than the previous week’s low, has led to the formation of a Harami pattern on the candles. This is a bullish Harami candle. But, it is important to note that since it has occurred near the high point, it is not likely to be potent and should be best ignored in the present technical setup.

The slippage of equities into the weakening quadrant should not be confused with the possibility of any drastic downside. Equity may continue to perform individually, but may under-perform other asset classes. The US dollar is showing signs of a mild technical pullback once again, and this may have its effect on emerging markets.

Overall, we expect a clear shift in focus over the coming days to defensive stocks. Classic defensives like consumption, FMCG and pharma may come into focus once again, while high-beta and riskier stocks may take a backseat. We recommend avoiding large leveraged purchases, unless Nifty moves past the 12,000 mark convincingly. Until that happens, exposures should be limited to defensive stocks and one should adopt a highly stock-specific approach.

In our look at the Relative Rotation Graphs®, we compared various sectoral indices against CNX500 (Nifty 500 Index), which represents over 95% of the free-float market-cap of all the listed stocks.

A review of the Relative Rotation Graphs (RRG) shows a few sectors are handing over the relay baton to other sectors as they get ready to take some breather. Nifty IT index is the only sectoral index that is firmly placed in the leading quadrant. Apart from this, the broader Nifty Midcap 100 is currently in the leading quadrant, but is seen losing momentum sharply and rotating in the south-westerly direction. This also appears to be the case with Nifty Media group.

The Metal Index has slipped into the weakening quadrant, marking a likely end to its relative outperformance. On exactly similar lines, Nifty Auto Index has slipped into the weakening quadrant, which is where the Pharma Index continues to be.

The PSU Bank Index has again slipped inside the lagging quadrant following a negative rotation. Along with it, the Infrastructure and PSE indices also continue to languish in the weakening quadrant. Nifty Consumption and FMCG groups are also in the lagging quadrant, but they appear to be improving on their relative momentum. However, they are yet to bottom out completely. Nifty Financial Services index is firmly placed in the improving quadrant along with Bank Nifty, Realty and Services Sector Indices. All these groups are likely to show stock-specific outperformance over the coming days.

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 market) 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 milan.vaishnav@equityresearch.asia)