Nifty continued its pullback and closed with gains for the second consecutive week. The trading range remained wide, on expected lines, as Nifty oscillated 651.55 points in the last five sessions. After a very weak start on Monday, the indices staged a strong and sharp pullback in the next four days, crawling past some important resistance levels. While continuing to maintain an inherently strong undercurrent, Nifty ended the week with net gains of 315 points (1.83%).
From a technical perspective, Nifty closed near its high point which increases the possibility of the pullback getting extended over the coming days. Importantly, Nifty has also crawled above the 20-Week MA, which presently stands at 17,344. Staying above this point will be very important as the longer the Nifty stays above it, the higher will be the chances of the current technical pullback getting extended.
The low point of this week — 16,900 level — will continue to remain sacrosanct support for the index. Any violation of this point will lead to long-lasting weakness creeping in the markets. Following the resumption of the up move after a sharp reversion to the mean, the primary uptrend continues to remain intact.
Along with the surge in the market, the volatility has declined. India VIX came off 12.98% to 16.06.
The coming week is likely to see the levels of 17,650 and 17,800 act as potential resistance levels. The supports will come in at 17,350 and 17,180 levels. The trading range for the coming week is likely to stay wider than usual.
The weekly RSI is 57.78 and neutral. It does not show any divergence against the price. The weekly MACD is bearish and stays below the signal line. The pattern analysis shows that Nifty still remains below the 18-month long upward rising trend line. This trend line begins from the lows formed in March 2020 and it joins the subsequent higher bottoms. Nifty has violated this trend line and currently, it is below this pattern resistance. However, the upward primary trend remains intact.
Over the past five days, there is clear evidence of discomfort of market participants at lower levels. Not only is there short covering at lower levels, but we have seen fresh longs added across sectors, shows F&O data.
Although traders should not blindly chase the up moves, they can avoid shorts as long as Nifty stays above 17,000-17,200 levels. Over the coming days, we may not see any particular sector dominating the moves, but pockets like pharma, consumption, it, select banks, and auto are likely to relatively outperform the broader markets.
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 analysis of Relative Rotation Graphs (RRG) shows Nifty Media inside the leading quadrant, along with the PSU Bank Index. These groups are likely to relatively outperform the broader markets. The energy, realty, PSE, infrastructure and Midcap 100 indices are also inside the leading quadrant. However, they appear to be slightly slowing down on their relative momentum. They may continue to outperform the broader markets but may do so on a stock-specific basis.
Nifty IT index and SmallCap index are inside the weakening quadrant. However, they are rotating northeast and improving on their relative momentum. It is only the Nifty Consumption index that is rolling towards the lagging quadrant. Nifty FMCG is inside the lagging quadrant, however, it appears to have begun its consolidation process. Nifty Pharma and Nifty metal are inside the lagging quadrant as well, but they appear to be sharply improving their relative momentum. They are in the process of completing their consolidation phase.
The improving quadrant has Nifty Bank but it appears to be paring its relative momentum. Apart from that, auto and financial services indices are also inside 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 Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae and is based at Vadodara. He can be reached at [email protected]