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Market week ahead: Nifty pullback losing momentum; IT, bank in tight spot

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After a sharp technical pullback in the week before this one, Indian equities continued to extend the pullback, but on a very modest note. The trading range over the past five days remained wide, around 500 points, but kept the net incremental gains limited.

Given the near-oversold nature of the market on the longer timeframe chart, Nifty extended the gains on the anticipated lines. The headline index ended with a net gain of 154 points, or 1.70 per cent, on a weekly basis.

From a technical perspective, Nifty has pulled back nearly 1170 points, or 14 per cent, from the immediate closing level. Looking at this another way, the Indian equity market has relatively underperformed its global peers, again on the expected lines. Over the past week, volatility continued to cool down, and India Volatility Index, INDIA VIX, declined significantly by another 14.38 per cent to 42.59 level.

On the daily charts, Nifty has formed a classic wedge, which usually resolves in the direction of the preceding trend. This makes it crucial for the market the coming week, which is likely to see a quiet start on Monday. The 9,350 and 9,535 levels will act as overhead resistance points for Nifty while support will come in lower at 9,165 and 8,935 levels. The trading range for the week ahead is likely to remain wide, just like the previous week.

The weekly RSI stands at 33.39; it remains neutral and does not show any divergence against price. The weekly MACD is bearish as it trades below the signal line. A candle with a long lower shadow occurred on the chart. This is not a classic Hanging Man pattern, but the longer-than-normal shadow indicates a mild loss of momentum in the technical pullback.

Pattern analysis does not show anything different than the previous week. Nifty declined sharply in March, violated the 11-year long upward rising trend line. After it got deeply oversold, it has pulled back ~14 per cent from the most recent lows on a closing basis.

On the weekly chart, there is still some room for the market to continue with the pullback. However, the loss of momentum remains a worry for the near term. Also, on the shorter timeframe charts, the technical setup is not so encouraging. Given the slightly divergent technical structure on the daily and the weekly charts, we strongly recommend traders to approach the week with a considerable amount of caution.

While taking each day as it comes, no long-term or extended directional positions should be taken, and profits should be protected vigilantly on either side.

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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 listed stocks.

A review of Relative Rotation Graphs (RRG) showed some positive rotation that appeared in the Energy and PSE groups continued this past week as well. The Energy, PSE, and Infrastructure groups have continued to rotate positively in the improving quadrant.

Nifty Pharma, Consumption, FMCG and IT indices continued to remain in the improving quadrant. However, among these four groups, IT appears to be losing relative momentum. The remaining three groups may continue to relatively outperform the broader Nifty500 Index. The IT index is showing signs of tiredness at current levels. So, Pharma, Consumption and FMCG are likely to continue to relatively outperform the broader market, while Infrastructure, Energy and the PSE groups will contribute to the relative outperformance selectively.

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Although, Auto and the Commodities group have attempted to arrest their decline, they haven’t completed their bottoming out process. Other key indices like Bank Nifty, PSU Banks, Financial Services, Services, Metals, Media and Realty continue to languish and are likely to underperform the broader markets relatively.

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 market) 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])

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