clever: D-Street Week Ahead: the trading range will be wider than usual; avoid creating shorts

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In strong but modestly varied sessions over the past five days, Indian stock markets extended their bull run for the fourth straight week. The five sessions were strong; the markets traded with a positive bias and used each of the consolidation periods to strengthen and post further gains.

The trading range remained that of 407 odd points; the directional bias, however, remained very unanimous. After a strong trend move, Nifty stock ended with net gains of 443.05 points (+2.49%) on a weekly basis.

Based on available derivatives data, the 18,200 level remains critical to watch for the week ahead. This level saw the highest addition of Put and Call OI on Friday; and interestingly, this level holds the highest accumulation of buy and sell OIs for the next weekly options expiry.

This is obviously very subject to change; but the direction in which it will change will decide the trend for the coming week. If Nifty is able to defend the 18,200 levels and hold its head above that, we could see further additional gains coming. Otherwise, some consolidation around current levels cannot be ruled out.

Volatility dropped over the previous week. India VIX fell 5.95% to 16.56 on a weekly basis. The week ahead will likely see the 18,390 and 18,600 levels act as immediate resistance points. Support comes in at the 18,050 and 17,900 levels. The trading range over the coming week is likely to remain wider than usual.

The Relative Strength Index (RSI) on the daily chart is 63.94; it is neutral and does not show any divergence from the price. The weekly MACD is bearish and below the signal line. However, the narrowing of the histogram hints at the likely crossover of this indicator over the next few weeks.

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A solid white body emerged over the candles. This showed a directional consensus of participants on the upside.

Pattern analysis shows that Nifty has taken support at the extended trendline near 16,400; he validated this model support and organized a remarkable technical retreat from these levels.

Currently, it is higher than the MA of 20 weeks; it also trades all of its major moving averages. From a technical point of view, the coming week looks strong; there’s a better chance that Nifty will continue to expand his move.

However, given the type of technical pullback last month, there are also opportunities for consolidation. In any event, even if any consolidation were to occur, the downsides would be very limited and such consolidation would need to remain highly defined and extensive.

It is recalled that to avoid creating shorts; all phases of consolidation must be used to make quality and selective purchases.

In our Relative Rotation Graphs® review, we compared various sectors to the CNX500 (Nifty500 Index), which accounts for over 95% of the free float market capitalization of all listed stocks.

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Analysis of the Relative Rotation Charts (RRG) shows that the Nifty IT Index is the only index that is in the main quadrant and also maintaining its relative momentum against the broader markets. Other than that, Nifty Auto is inside the main quadrant, but it looks like it’s reducing its relative momentum.

Nifty Media slipped further inside the weakening quadrant. Along with this, the PSU bank and the infrastructure index are also in the weakening quadrant.

The Bank Nifty and Financials indices continue to languish in the lagging quadrant. We may see relative underperformance from these groups.

Although the FMCG and Consumer Goods indices are also in the lagging quadrant, they are seen consolidating and improving their relative momentum against the broader Nifty500. The Nifty Pharma and Metal indices are seen as firmly placed in the improving quadrant and should continue to outperform the broader markets relatively.

Important note: RRGTM charts show the relative strength and momentum of a group of stocks. In the chart above they show relative performance against the 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 in Vadodara. He can be contacted at [email protected])

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