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Nifty 50: Dalal Street week ahead: Nifty50 is now over-extended, may slip into consolidation

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Although domestic stocks logged gains on a weekly basis, they showed the first signs of an impending broad consolidation, as the market spent much of the past three days correcting from higher levels. The market was buoyant at the start of the week. But after marking the weekly high at 14,653, Nifty continued to witness bouts of profit booking at higher levels subsequently. The trading range did not expand much on either side, but volatility surges. Despite five days of volatile trading, the headline Nifty index closed with a net gain of 86.45 points, or 0.60 per cent, on a weekly basis.

There is no disputing the fact that the market has demonstrated very strong undercurrents. The US dollar will continue to stay weak following a large stimulus from new US government. All this will continue to fuel liquidity in the emerging markets in general. The buoyancy in the market can be gauged from the 10 positive weekly closes in the last 11 weeks. That said, the overbought and overextended structure of the charts may push the market into more consolidation.

Fresh bounces shall come only if Nifty manages to move past the 14,650 mark. Volatility surged as India VIX moved up 16.33 per cent to 24.01 level.

The market may consolidate in a broad range for some more time. The 14,500 and 14,675 levels will act as resistance points, while supports will come in at 14,285 and 14,100 levels. The trading range is likely to get a bit wider than that in the previous week. Volatility is also likely to rise some more.

NiftyAgencies

The weekly RSI stood at 79.88. It remained in the overbought territory above the 70 mark. The weekly MACD remains bullish above the signal line. A Shooting Star emerged on the candles. This is a classical Shooting Star pattern as the index opened the week higher than the previous one, and moved even higher, but corrected to end in the lower half of the candle, leaving a long upper shadow on the upside. The index marked the intermediate top at the 14,653 level for the near term.

Pattern analysis revealed Nifty has extended itself much higher following a breakout from the 12,800-12,850 zone. This has raised the support much higher to 13,000 level, given the rising nature of the trend line that Nifty took out while achieving the breakout.

Overall, Nifty has overextended itself and has largely deviated from the mean. Even the nearest 20-week moving average is now at 12,595. The Bollinger Bands have gotten much wider than normal and the possibility of Nifty returning to its normal range cannot be ruled out.

All in all, there is a high chance that the market may slip into consolidation in the coming weeks. In the event of any extension of the bounce, we strongly recommend sticking to only high-quality, high-liquidity stocks, which have been seeing improved relative strength against the broader market, and those which have not run up too much over the past weeks. This will help keep the risk-reward profile less skewed.

While continuing to stay highly stock-specific, vigilant protection of profits is advised at current levels.

In our look at the Relative Rotation Graphs®, we compared various sectoral indices against CNX500 (Nifty500 Index), which represents over 95 per cent of the free-float market-cap of all the listed stocks.

Nifty 500Agencies
Nifty 500Agencies

The review showed despite staying in the leading quadrant, Nifty Bank, Nifty Services Sector and Nifty Financial Services Indices are seeing near-vertical paring of relative momentum on the charts. Apart from this, Nifty Realty, Nifty Commodities, Nifty MidCap100 and Nifty Metal Indices are firmly placed in the leading quadrant. Also, Nifty PSU Bank Index has entered the leading quadrant.

The only sector present in the weakening quadrant is IT. However, even this is showing an improvement in relative momentum. Nifty Media and Auto Indices are in the lagging quadrant. However, they also appear to be sharply improving on their relative momentum. Nifty Pharma Index is also placed in the lagging quadrant, but it looks as if it is taking some breather and is in the process of completing its consolidation period.

Nifty Energy Index has entered the improving quadrant following the JdK RS-Momentum, rising above 100. This marks a probable end to the relative underperformance of this group.

Nifty FMCG, Consumption, Infrastructure and PSE Indices are placed in the improving quadrant and appear to be rotating favorably by maintaining the northeasterly trajectory of the rotation.

Important Note: The 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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