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Week Ahead: Upside In NIFTY May Stay Capped; RRG Chart Says Perhaps It Is Time To Reduce Weight On This Sector

In the previous weekly note, we had mentioned the loss of momentum in the technical pullback that the markets had started to witness. In the week that has gone by, the loss of momentum became more evident. Despite a 500-point oscillation and a trading range, the NIFTY halted its pullback and ended with a net loss of 112.35 points (1.21%) on a weekly note. On the shorter time frame charts, the Index continued to stay in an area pattern with is likely to see capped upsides going ahead.

With the decline of over 8.16% to 39.12 levels, the India Volatility Index, INDIAVIX, has nearly halved from its peak. We have truncated week coming up as May 01, Friday, is a trading holiday as an observance of Maharashtra Day. The markets have retraced nearly 30% of its total decline from the recent low point. For the coming week, the price action of the NIFTY against the 9300-9450 zone would be critical to watch.

Monday is likely to see a tentative start to the week. The levels of 9230 and 9445 will act as overhead resistance points. The supports are expected to pitch in at 9065 and 8900 levels.

The Relative Strength Index (RSI) on the weekly chart is 32.58; it stays neutral and does not show any divergence against the price. The weekly MACD is bearish as it trades below its signal line. The PPO is negative.

On the candles, a candle with a long lower shadow emerged. This is not a classic hanging man type of pattern as the real body is larger than usual. However, it depicts some discomfort of the market participants at higher levels.
The importance of breach of the 11-year long upward rising trend line is highlighted as the NIFTY has sharted showing signs of loss of momentum as it approaches this critical resistance zone. Currently, the Index remains below this strong overhead resistance. Upsides, if any, will stay capped as the NIFTY is expected to lose strength as it gets near to this trend line.
The markets are witnessing unwinding of long positions from higher levels. This is evident from the F&O data, which shows that the declines are coming with a net reduction in the open interest. To top this up, the shorter time frame charts show an area pattern that typically arises after sharp bear market rallies. In the present technical structure on daily and weekly charts, there are higher possibilities that the markets may see capped upsides. We recommend protecting profits vigilantly at each higher level and continue approaching the markets with caution.

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 the Pharma Index is firmly placed in the leading quadrant long with the FMCG and Consumption indexes. These groups will continue to relatively outperform the broader NIFTY 500 index over the coming week. The IT index is also placed in the leading quadrant, but it is seen giving up on its relative momentum. Though some stock-specific outperformance cannot be ruled out, the current trend shows that it is probably time to reduce weight on this specific sector.

The Energy, PSE, and the Infrastructure groups are steadily moving ahead in the improving quadrant. The Energy Index, given its distance from the midpoint, is likely to deliver excess alpha as compared to the PSE and the Infrastructure groups.

Just like the previous week, the other key indexes like Financial Services, Services, Banknifty, PSU Banks, Metal, Media, Realty, and Auto are slipping further and showing loss of relative momentum while staying in the lagging quadrant. The commodities group has shown some consolidation, but the bottoming out process is not yet complete.

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. 

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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