Dalal Street Week Ahead: Will Nifty continue to bleed in truncated week?

In a week where the trading range remained much wider on expected lines, the Indian equity market remained predominantly under pressure.

For the four out of five days, Nifty sustained corrective pressure as it ended each of these days on a “measured” corrective note. Nifty saw itself in an 865-point trading range during which it tested a few of the important levels on both daily and weekly charts. The directional bias throughout the week remained strongly bearish. The benchmark finally ended with a net loss of 638.60 points (-3.50%) on a weekly basis.

The coming week is important in many ways.

It is the expiry week of the current monthly derivative series. Apart from that, Nifty, as of now, has tested and defended the 50-DMA which presently stands at 17,505. It has closed a notch below the 100-DMA which stands at 17,640. On the weekly charts, Nifty has tested the 20-week MA which is presently at 17,645. Though it has ended a notch below this point, it is practically defended as of today.

It would be precariously important for the market to take support at these levels in order to avoid the current weakness turning into a prolonged corrective phase.

The coming week will also be a truncated one with January 26 being the Republic day holiday.

The volatility spiked this week with India VIX surging 14.09% to 18.89.

The coming week is expected to see the levels of 17,750 and 17,800 acting as resistance points. The supports are likely to come in at 17,500 and 17,350 levels. The trading range is likely to get a bit narrower as compared to the previous week.

The weekly RSI is 55.39 and neutral. It does not show any divergence against the price. The weekly MACD remains bearish and trades below the signal line. On charts, the formation of a Big Black Candle shows a bearish directional consensus of the market participants.

The pattern analysis shows that Nifty has marked a lower top in the zone of 18,280-18,350 after the original lifetime high of 18,600 levels. This makes the zone of 18,280-18,350 a formidable resistance area for the markets. We will not see any runaway up move unless Nifty is able to move past this zone.

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For now, it would be important for the markets to find a base and stabilise themselves.

In a way, the current correction can have a good base for a pre-budget rally as we approach the Union Budget over the coming days. Even if weakness persists, it is recommended that it may be used to pick good quality stocks. Short-term selling may be overdone.

Any weak start to the week may see strong short-covering from lower levels. While keeping overall exposures at modest levels, a cautious approach is advised for the coming week.

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

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The analysis of Relative Rotation Graphs (RRG) shows that there is no major change in the sectoral setup as compared to the previous week. Nifty Auto and IT remain in the leading quadrant. They are likely to relatively outperform the broader markets.

The Midcap 100 Index, Realty, and Media along with the Infrastructure Index and PSU Bank Index are inside the weakening quadrant. However, looking at the trajectory of the respective tails, stock-specific outperformance from these groups cannot be ruled out.

Nifty Bank, PSE Index, FMCG, and the Financial Services indices are inside the lagging quadrant. However, they all appear to be in the process of consolidation.

The Commodities, Small Cap, Pharma, and the Metal indices are inside the improving quadrant. They are likely to offer resilient performance as benchmarked to the broader markets.

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 Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae and is based at Vadodara. He can be reached at milan.vaishnav@equityresearch.asia