Week Ahead: NIFTY Slightly Overstretched But Strong; RRG Chart Show These Sectors To Relatively Outperform

In the week that went by, we saw the markets adding more strength and piling up some more incremental gains. The NIFTY has not only stayed above the crucial 2-year long pattern resistance trend line, but also added some directional bias to it by moving higher. The markets stayed much less volatile than expected, which added consensus to the directional move. After staying in a trading range over nearly 450-points over the truncated week, this week was the fifth week in a row when the Index ended with gains. The benchmark NIFTY50 closed with net weekly gains of 289.60 points (2.23%).

With the NIFTY moving past the 2-year long trend line pattern resistance, in the process it has shifted the supports higher to 12800 level. This means that even if the NIFTY tests 12800 levels in future owing to any profit taking, the trend would still be intact; it would reverse only if the NIFTY slips below 12850-12800 zones. However, this reading does not undermine that fact that the rally has purely been on FII flows due to severe Dollar weakness and any pullback in DXY (Dollar Index) has a potential to disrupt the rally. The volatility dropped as the INDIAVIX slipped by 9.03% to 18.03.

The coming week is likely to see some consolidation happening at higher levels. With the markets now in uncharted territory, the levels of 13300 and 13485 may be expected to act as resistance. The supports will come in at 13100 and 12850 levels.

There are high possibilities that the trading range may get a bit wider over the coming days.

The weekly RSI is 72.21; it now stays in mildly overbought zone above 70. It has marked a fresh 14-period high which is bullish; however, it stays neutral and does not show any divergence against the price. The weekly MACD is bullish and above its signal line. The slightly widening slope of the Histogram shows some acceleration in the momentum over the past couple of weeks. Apart from a white body that occurred, no other important formations were seen on the candles.

The coming week continues to remain crucial and important enough to keep us on our toes. The FII flows are strong and this is causing an unabated up move in the markets. The DXY has been miserably weak and this is aiding the FII inflows to the emerging markets in general and India in particular. However, that being said, it will now be important to keep a close eye on the DXY which is quite oversold in the near term. There are possibilities of some technical rebound within the downtrend which may cause some minor disruption in the trend.

Given the present technical setup, we do not recommend initiating heavy shorts, but to keep chasing the momentum in an extremely watchful way. The markets will stay highly stock and sector specific and we recommend sticking to those stocks and sectors which are exhibiting either strong or improving Relative Strength against the broader markets. A cautiously optimistic approach is advised for the week ahead.

Sector Analysis for the coming week

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

The review of Relative Rotation Graphs (RRG) shows that Banknifty, Financial Services, and Services Sector Indexes are placed in the leading quadrant. Apart from that, the Metal Index has entered the leading quadrant following a strong rotation from the weakening quadrant. The Realty Index has also entered the leading quadrant following a strong rollover from the improving quadrant. These sectors are set to pose strong relative outperformance against the broader NIFTY500 index collectively.

NIFTY IT, and Auto Indices are in the weakening quadrant along with the IT index and the Midcap 100 Index.

While staying in the lagging quadrant, we see NIFTY Commodities and the Energy groups trying to improve their relative momentum along with the Infra index. NIFTY PSE and PSU Banks are getting strongly rolled over and moving in the improving quadrant. FMCG and Consumption, however, looks like they are taking a breather. Pharma and Media Indexes are also seen languishing in the lagging quadrant and may exhibit some relative underperformance against the broader markets.

Important Note: RRG™ 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

Consulting Technical Analyst,