Dalal Street Week Ahead: Nifty Poised for Gains, Watch for Resistance

During the choppy and truncated trading week, markets extended their gains with some surge in volatility as well. In three out of four trading sessions, the Nifty index rose. In the previous technical note, it was categorically mentioned that the Nifty made a complete comeback by retesting the original breakout point and these retests often prove to be strong supports. Over the last four sessions, the index has been trading in the 460.50 point range and also managed to close above an important resistance point. The overall index closed with net weekly gains of 306.45 points (+1.58%).

Volatility has also increased slightly. IndiaVIX rose by 6.48% on a weekly basis to reach 11.83 levels. From a technical point of view, the Nifty has also crossed 19547; This is the 20 week AD. This level acted as both support and resistance when the Nifty was above and below it. After a rebound from the initial breakout zone of 18850-18900, the Nifty has bounced back over 750 points and remains in the broad bullish channel keeping its main trend intact. In the very near term, as long as Nifty keeps its head above the 19450-19500 zone, the main uptrend can remain protected.

It is important to note that Nifty has become part of the improvement process quadrant of the RRG; This could lead large caps to start relatively outperforming the broader mid and small cap space in the coming weeks. A stable start to the week is expected; the 19880 and 20075 levels could serve as resistance points. Supports should lie at 19535 and 19410.

THE Weekly RSI is 59.05; it remains neutral and shows no divergence from price. The weekly MACD is bearish and remains below its signal line. However, the narrowing of the histogram suggests that the rises were accompanied by accelerating momentum.

Trend analysis shows that the Nifty remains firmly in an ascending channel while keeping its main trend intact. After retesting the full comeback level of 18850-18900 when the index gave up all its gains, the said level acted as a very strong support on the expected lines. This helped the Nifty gain over 750 points in the recent pullback. It has surpassed the 20-week MA and remains firmly in an uptrend.

Overall, markets have become heavily weighted towards stocks and are likely to remain so for some time. Furthermore, NIFTY’s reversal into the RRG’s improving quadrant suggests that the overall index may well end its underperformance of recent months against the broader index. This would also mean that there are greater opportunities for large-cap stocks to start to relatively outperform the broader markets. It is strongly suggested to remain selective when making further purchases as some consolidation at higher levels can also be expected. So, while selecting good stocks with strong and improving relative strength, it would also be prudent to vigilantly monitor earnings at higher levels. (In our Relative Rotation Graphs® review, we compared various sectors to the CNX500 (NIFTY 500 index), which represents over 95% of the free float market capitalization of all listed stocks.)

Relative Rotation Charts (RRG) indicate that Nifty Infrastructure, PSE, Power BanksThe real estate, energy and commodities indices are in the main quadrant. The Nifty IT is also in the leading quadrant, but we see a slowdown in its relative momentum. However, all these groups are likely to outperform the broader Nifty 500 index.

The NIFTY Midcap 100, Metal and Media indices are moving further into the weakening quadrant. The auto and pharmaceutical indices are also in the weakening quadrant, but they appear to be improving from their relative momentum.

The Nifty Bank is currently the only index in the lagging quadrant; this too seems to improve its relative momentum compared to broader markets.

The Nifty Financial Services Index and FMCG Index have entered the improving quadrant. The Nifty Consumer and Services sector indices are also in this quadrant.

The Nifty Services sector is in the improving quadrant. Additionally, the Consumer Index also moved into the improvement quadrant, indicating a potential start of its relative outperformance phase.

(The author CMT, MSTA, is a consulting technical analyst and founder of EquityResearch.asia and ChartWizard.ae)