Dalal Street Week Ahead: Nifty likely to trade with limited upside and incremental volatility in truncated week

Unlike the previous week, when the market had been rather uneventful, the week ended this Friday, September 25, turned out to be immensely volatile one for Dalal Street.

The market saw a good start to the week, but the second half of the week turned terribly volatile and markets saw deep cuts, even though there was a strong recovery on the last trading day of the week.

Over the past five sessions, Nifty oscillated over 745 points, i.e., close to 7 per cent, before ending with a net loss of 454 points, or 3.95 per cent, on a weekly basis.

The market was eventful even from a technical perspective. Nifty came very close to its 200-DMA, which currently stands at 10,758 level. On the weekly chart, the index violated the crucial zone that existed between 10,930 and 11,070 levels. This is made of the 50-week and 100-week moving averages currently placed at 10,937 and 11,067 levels, respectively. After violating this crucial pattern support zone, Nifty managed to crawl near the 100-week MA.

We ended this week lower. And if we end this month lower too, it will likely mark a potential short-term top.

We have a short week ahead with Friday being a national holiday on account of Gandhi Jayanti.

The coming four trading sessions are likely to see Nifty trade with limited upsides and incremental volatility. The 11,090 and 11,190 levels will act as key resistance points, while supports will come in lower at 10,930 and 10,810 levels.

The weekly RSI stood at 53.03. It remains neutral and does not show any divergence against price. The weekly MACD remains bullish as it remains above the signal line. The slope of the histogram, however, suggests decelerating momentum. A large black body emerged on the candles, signifying a bear grip on the market.

Nifty 50Agencies

Pattern analysis on the weekly chart not only suggested the formation of a potential lower top near 11,800 level, but also saw Nifty fall out of a large, sharp rising wedge that was formed during the lows formed in March. Currently, Nifty has tested the crucial support in the 10,930-11,070 zone. Any breach of this zone is likely to invite incremental weakness over the coming weeks.

The RS line of Nifty50 against the broader Nifty500 Index is seen declining steadily. It has also slipped below its 50-week moving average. This may mean the broader market will continue to relatively outperform the frontline index.

Some possibilities of short covering cannot be ruled out over the coming days. However, upsides will continue to remain capped. We recommend adopting a highly sector-specific approach.
Staying with defensive stocks will be rewarding over the coming weeks even though they may relatively underperform in the immediate short term.

In our look at the 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 stocks listed.

Graph 1Agencies
Graph 2Agencies

The review of Relative Rotation Graphs (RRG) shows possibilities of broader markets performing relatively better over the coming days.

Nifty MidCap100, Nifty Media and Nifty IT indices stay firm in the leading quadrant. They are likely to continue to relatively outperform the broader Nifty500 Index. Nifty Auto is also in the leading quadrant, but it is seen paring momentum along with the Nifty Metal Index. However, these groups may perform better than other pockets.

Nifty Pharma remains in the process of consolidating even as it remains in the weakening quadrant. Nifty Energy index is advancing in the southwest rotation and remains in the weakening quadrant too.

Nifty Infra has advanced further inside the lagging quadrant along with the FMCG and PSE packs. Nifty Consumption group is also in the leading quadrant, but appears to be improving its relative momentum and may show some stock-specific performance.

The remaining indices will continue to underperform the broader market. The PSU Bank index is seen rotating negatively towards the lagging quadrant unless its performance improves. Bank Nifty also stays in the improving quadrant along with the Financial Services index. However, the direction of the rotation is not clear, i.e., the tail is not in the desired direction and appears to be steadily losing momentum. The Realty Index stays firm 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 markets) 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 [email protected])

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