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Dalal Street Week Ahead: Chase momentum only if fresh buying emerges, else be on alert

By Milan Vaishnav, CMT, MSTA

The domestic equity market had a strong week, and made a steady move on the upside to end the week with decent gains. In the week before, Nifty had defended its crucial support level at the 200-DMA on the daily charts and the 50-week MA on the weekly chart.

After successfully defending these levels, the market capitalised on it to inch higher. Nifty ended the week with net gains of 356.80 points, or 3.16.

We have a truncated week ahead, with Monday being a trading holiday for Maharashtra elections. Given the rise seen throughout the week gone by, Nifty has again scaled the levels that it had touched earlier following the corporate tax reforms. The most uncomfortable part of the last week’s up-move was that it has consistently come on the back of short covering. Nifty has to take out the previous high and capitalise on the current up-move, but it needs to be supported by fresh buying.

While volatility has declined steadily during the week gone by, we expect it to return. Nifty might see a volatile start on Tuesday as it adjusts to global trade. That said, if there is no fresh buying, there is every possibility of the current rally getting stalled near the 10,700 level. Though the 50-week moving average, which currently stands at 10,964, has become a solid immediate base, it would be critical for Nifty gets support from fresh buying to sustain the rally over the coming days.

Nifty will see the 11,700 and 11,890 levels acting as key resistance in the coming days while supports should come in at 11,460 and 11,300 levels.

The weekly RSI stands at 57.7464. Though it has marked a 14-week high in line with Nifty, it is meeting its pattern resistance. The weekly MACD has shown a positive crossover, and it now trades above its signal line.

Nifty’s price behaviour against the 11,700-11,750 zone will be crucial. Even if Nifty inches higher, one has to be wary of such an up-move if it is fuelled solely by short covering, and not supported by fresh buying. Any up-move caused only by short covering without any buying support will turn unhealthy at higher levels. So, in a rising market, one may have to chase momentum, but one should do so it with a lot of caution. Nifty’s failure to move past the 11,700-11,750 range will, in all likelihood, stall the rally and push the market into consolation mode.

USE NOW 2

In our look at the Relative Rotation Graph, 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.

The review showed while IT, Financial Services and Services sector indices are taking a breather, others like Auto, Energy, Infrastructure and Metal indices are building on their momentum and are placed in different quadrants on the RRG. Some sectoral rotation is evident within these groups.

Consumption and FMCG are the only two sectors that are placed in the leading quadrant. However, they are expected to take some breather, but likely to relatively outperform the broader market. Energy and Auto indices have firmly advanced within the improving quadrant. They will see stock-specific outperformance over the coming days. Pharma index has taken a U-turn and may soon find itself in the lagging quadrant if the steady loss of momentum continues.

Important Note: RRGTM charts show you 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 at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at [email protected])

Source: Economic Times