Dalal Street Week Ahead: Nifty violating an important trendline is not a good sign

In a week where the trading range stayed narrower than the previous week, Indian equities saw a corrective decline. This was also a truncated week with just four trading sessions, and saw the headline index oscillate in a 375-point range.

While the trading range remained narrow, intraday volatility and ranged oscillations remained high. Nifty remained in the falling channel that it has formed, but refused to take any directional cue through the week.

In a volatile trading week, the benchmark index finally ended with a net loss of 276 points, or 1.89 per cent, on a weekly basis.

Despite having a narrow trading range, Nifty’s most recent move was a bit technically damaging on the weekly charts. In the previous weekly note, we had mentioned that Nifty had violated the rising trendline pattern support, but managed to bounce off that trendline. This trendline is a major pattern support, drawn from the lows made in March 2020, which joins the subsequent higher bottoms until today.

However, the recent price action has seen the index violate this important pattern trendline support. This has dragged Nifty’s resistance points considerably lower to the 14,500-14,600 zone.

Nifty has violated and closed below the 20-week moving average, which currently stands at 14,465, and which was acting as a proxy trendline for the index.

The market is likely to trade on a subdued note in the coming week and Nifty’s move past the 14,500 level will be extremely crucial. The 14,450 and 14,600 levels will act as key resistance points, while supports will come in at 14,200 and 14,000 levels.

The weekly RSI stood at 55.70 level; it has made a fresh 14-period low, which is a bearish sign. The RSI does not show any divergence against the price. The weekly MACD remains bearish and trades below the signal line. A spinning top occurred on the candles. Such formations occur when there is little market action and little difference between the opening and closing prices. It also reflects lack of directional consensus among the market participants.

The front-line indices are likely to relatively underperform the broader market. The Relative Strength Index of Nifty and Bank Nifty are declining against the broader Nifty500 Index. This does not mean both the indices would decline; they may continue to perform individually, but would continue to relatively underperform the broader market.

Given the current technical setup, it is strongly recommended to stay highly stock specific in approaching the market. Even if the Nifty tests the 14,000 level on the downside, it will still remain within the falling channel. It would be prudent to keep protecting profits on either side, rather than waiting for the market to establish a definite directional bias. An extremely cautious approach is advised for the coming week.

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

A review of the Relative Rotation Graphs (RRG) shows Nifty Metals, Commodities and Midcao100 Indices are firmly placed inside the leading quadrant and appear to be maintaining their relative momentum against the broader market. These groups are likely to relatively outperform the broader market along with the Nifty Energy Index, which has rolled over inside the leading quadrant. The Smallcap, Infrastructure and PSE groups are also inside the leading quadrant, but they appear to be taking a breather while modestly paring their relative momentum.

Nifty Financial Service, Realty and Nifty Bank indices continue to stay in the weakening quadrant, maintaining their south-west direction while giving up their relative momentum. The PSU Bank index also has rolled inside the weakening quadrant, indicating a likely end to its relative outperformance against the broader market.

Nifty Services Sector index has rolled inside the lagging quadrant. Along with this, Nifty Auto Index also continues to languish inside the lagging quadrant. The Media group is also placed inside this quadrant. These sectors are likely to continue to relatively underperform the broader market.

Consumption and IT Indices are inside the leading quadrant, but they appear to be improving on their relative momentum. The FMCG index has advanced further inside the improving quadrant.

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)