Gemstone Equity Research & Advisory Services

Week Ahead: NIFTY Has A Tough Road To Travel; Keeping Eyes On All These Things Crucial

The week that went by has been in a stark contrast as compared to the earlier week as the NIFTY scaled new highs again and closed the week on a highly robust note. The earlier week had seen the headline index declining by 737.30 points. Over the past five days, the markets gave a massive thumbs up to the Union Budget that was presented on Monday. All through the last five days, the NIFTY witnessed a parabolic and vertical up move. In the previous session, the NIFTY also tested the historical 15000 mark while giving the intraday high of 15014.65 before coming off from that point. The index ended the week on a very strong note with a net gain of 1289.65 points (+9.46%) on a weekly basis.

For the coming week and after that, there are a couple of things that market participants will have to keep in mind as they approach the markets. The NIFTY has risen over 1200-plus point one-way, and its coming off a bit as a part of consolidation should not be surprising. Along with that, if we examine the weekly options data, there is high amount of Call writing done at 15100 and 15200 levels while the strikes of 15000 continues to hold maximum accumulation of Call Open Interest. This means that even if there are any upsides, they will remain limited in its extent. Finally, last but not least, the Dollar Index has sharply rebounded following a strong bullish divergence on the lead indicators. The US Dollar Index may not stay weak, but in fact may strengthen, and this will not be a great positive for the emerging markets.

The coming week may have wider trading range than usual. The levels of 15000 and 15190 will act as resistance. The supports come in much lower at 14700 and 14610 levels.

The weekly RSI stands at 73.02; it shows a bearish divergence against the price. The price has closed at a fresh high, while RSI has not done so. The RSI has also entered in the overbought zone again. The weekly MACD is bullish and trades above the signal line.

A large white body emerged on the candle. This showed a firm bullish consensus among the market participants.

The pattern analysis shows that given the sharp parabolic up move, the NIFTY has once again deviated far from its nearest mean. This is evident from the Bollinger bands which are much wider than normal. This shows increased volatility over the weeks. Longer the bands remain wider-than-normal, the higher are the chances of it returning within the normal range. The fastest Weekly MA, i.e., the 20-Week MA is at 13027, some good 1900-points lower than the current level.

What we have witnessed over the past five days is a reactionary move following the union budget. At the risk of feeling left out if the NIFTY continues to see the chase of the momentum, we recommend staying away from creating any fresh exposures in the frontline high beta stocks. There are greater chances of getting stuck up at higher levels as some corrective consolidation is overdue.

There has been a strong pick up of momentum in the FMCG, Pharma and Consumption space which are considered defensive sectors. The improvement of the Relative Strength of these sectors against the broader markets may continue to improve in the coming week as well. We recommend staying light and approach the markets in an extremely cautious and stock-specific manner.

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

The review of Relative Rotation Graphs (RRG) shows that except for the NIFTY PSU Bank Index and the Auto Index that are firmly placed in the leading quadrant, no other sector is placed so firmly. The NIFTY Realty sector is in the lading quadrant, but it appears to be mildly paring its relative momentum. NIFTY Metal and MidCap100 Indexes are also sharply giving up on their relative momentum despite being in the leading quadrant.

The NIFTY Financial Services Index, Services Sector Index and the BankNIFTY have slipped inside the weakening quadrant indicating a likely end to their relative outperformance against the broader NIFTY 500 index. The IT Index is also inside the weakening quadrant, but it is continuing to improve on its relative momentum.

NIFTY Energy pack is seen taking a negative turn from the leading quadrant and may rollover inside the lagging quadrant once again. The Pharma group is also inside the lagging quadrant, but it appears to be consolidating on its performance.

While the NIFTY PSE Index appears to be taking some breather, the FMCG, Consumption, Media and Infrastructure indexes appear to be comfortably placed inside the improving quadrant and may show stock-specific out-performance going ahead from here.

Important Note: RRG™ 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.  

This was first published on The Economic Times.

Milan Vaishnav, CMT, MSTA
Consulting Technical   Analyst
Member: (CMT Association, USA | CSTA, Canada | STA, UK)  | (Research  Analyst, SEBI Reg. No. INH000003341)

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