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Dalal Street week ahead: Nifty signals loss of momentum, volatility likely to increase

Marking a huge contrast to last week’s market behaviour, Dalal Street gave up all the gains of last week to end near the low point of the trading range. The market was sitting on the verge of a breakout, but that did not fructify as the market refused to break above its crucial resistance zone. Nifty stayed relatively rangebound during the week as Nifty oscillated in a 250-point range. The shorter timeframe charts had already shown some weakness and loss of momentum, and the longer-term charts painted a similar picture.

Nifty finally ended with a net loss of 134.55 points, or 1.12 per cent, on a weekly note. The markets is poised at a crucial juncture once again. India VIX has cooled off by a further 1.85% to 13.64. The Volatility Index currently trades near its multi-month low, and this reflects complacency of the market players. Complacency at market highs is not good for near-term outlook. Apart from this, Nifty has kept alive hopes for a possible breakout as the RSI has attempted to resolve its bearish divergence against the price. The coming week is going to be crucial and may decide market’s trajectory for the coming weeks.

While Nifty is likely to see a tepid start to the week, it will face resistance at 12,150 and 12,275 levels while supports will come in at 11,900 and 11,780. In the event of any downward move, the range may get wider than usual and volatility may also increase.

The Relative Strength Index (RSI) on the daily chart stood at 59.96; it remains neutral and does not show any divergence from price. The RSI has attempted to penetrate the falling trend line that joins RSI’s lower tops, but that is seen taking a breather. The weekly MACD stays in continuing buy mode and trades above the signal line.

No important formations were seen on the Candles. Pattern analysis of the weekly chart shows that after a secular 36-month-long uptrend got interrupted at the end of 2018, Indian market has been trading more in a broadly sideways range. We can interpret this as a small secondary trend. Despite making incremental highs, Nifty has not been able to get a breakout. All in all, while the market still has a few chances of achieving a breakout, it is likely to happen only if Nifty moves past and closes above 12,150 convincingly. Until this happens, we are likely to see some range-bound consolidation, and corrective pressures from higher levels cannot be ruled out. The attempt to break out failed to confirm itself, and the loss of momentum is evident on the charts. We recommend avoiding aggressive positions and approaching the market on a highly selective note until a directional bias is established.

In our look at Relative Rotation Graphs, we compared various sectors against CNX500 (Nifty500 Index), which represents over 95% of the free float market cap of all the stocks listed.

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The review of Relative Rotation Graphs (RRG) shows some sudden loss of momentum across a few sectors. Nifty Auto and Energy packs are seen continuing to lose momentum while remaining in the leading quadrant. The Financial Services group, which had shown a steady rotation in the previous week, is also seen retreating suddenly. Along with this, loss of momentum was also seen in the FMCG, Consumption, Commodities, Infrastructure and PSE indices. These groups, collectively, may not contribute much to the outperformance when benchmarked against the broader Nifty500 index.

The IT pack is seen arresting its decline. It stays in the lagging quadrant, but appears to have stalled its decline. The Realty and Services sector indices are also seen consolidating their performance and improving their relative momentum against the broader market.

Some resilient performance can be expected from PSU Banks, Metals, and Media packs as they are steadily advancing while remaining in the improving quadrant. Nifty Pharma index, too, is seen rotating strongly towards 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])

Source: Economic Times