A week ago: NIFTY is expected to move within this volatility range. Reducing leverage exposure is recommended | India analysis

It was a truncated day in the markets. Over the last four trading sessions, Indian stocks have continued their upward trajectory, hitting record highs. Volatility also remained high. As mentioned in a previous technical note, the market is trending higher ahead of the June 4 general election results. This is one of the major external events affecting the market. Over the last four sessions, Nifty has maintained a lively trajectory. It oscillated in the range of 621.85 points. Volatility also continued to rise. India VIX surged 9.66% further to 21.71. Following a week of strong trends, the headline index closed with a net weekly gain of 491 points (+2.19%).

In the past few weeks, we have seen Nifty and VIX rising simultaneously. Past cases have shown that this phenomenon often serves as a precursor to imminent corrective action. The derivatives series expired this month. Nifty has built a new OI at 23000 and 23500 levels on the upside. On the lower side, 22500 appears to be establishing support as per options data. Derivatives data shows that Nifty is gearing up for volatile moves on both sides as it navigates the election results.

Trading could begin on a steady basis next week. The 23200 and 23350 levels are likely to act as immediate resistance levels. Support is provided at the 22700 and 23550 levels.

Weekly RSI is 67.29. This shows a slightly bearish differential relative to the price. Weekly MACD is trending lower and trading below the signal line. A strong white candle shows the upward trend that has existed all week.

Pattern analysis of the weekly charts shows that Nifty continues to remain in a small upward channel. However, the nearest support in the form of the 20-week MA exists well below 22179. So a small adjustment would result in a significant decline from current levels. 50-DMA is located at 22342. So, looking more broadly, the immediate support zone for the index exists at the 22150-22350 levels. As long as the market is above this area, it can stay in a wide range, but a violation of this support area can cause technical damage to the chart.

Overall, it will be very important to prepare for the volatility we will see in the markets as we navigate the upcoming monthly derivatives expiration week and the outcome of the general election thereafter. It would be wise to reduce your leverage exposure. New purchases should be limited to defensive, low beta stocks. Exposure to stocks with strong or improving relative strength would be an additional advantage. It is advisable to take a very cautious approach over the next week, while enforcing a strict protective moratorium and choosing to fence in wherever possible.

Next week’s sector analysis

With Relative Rotation Graphs®, we compared various sectors with the CNX500 (NIFTY 500 Index), which represents more than 95% of the free float market capitalization of all listed stocks.

Relative Rotation Graph (RRG) shows that Nifty Auto, Consumption and Metal Index remain within the leading quadrant. These groups are likely to continue to outperform the broader market.

Staying within the bearish quadrant, both the Real Estate and PSE indices are showing improving relative momentum to the broader market along with the Commodities and Midcap 100 indices. Apart from this, PSU banking, pharma, infrastructure and energy indices are also positioned in the bearish quadrant.

Nifty IT index continues to weaken within the lagging quadrant of RRG. It is likely to underperform the Nifty 500 index comparatively. The Media Index is also located within the lagging quadrant. However, relative momentum appears to be rapidly improving and is on the verge of rolling within the improving quadrant. Nifty Services sector index rolled back inside the lagging quadrant.

The FMCG index is firmly within the improving quadrant. Nifty Financial Services and Nifty Banking indices are also placed in the improving quadrant.

Important note: RRG™ charts show the relative strength and momentum of groups of stocks. The above chart shows relative performance against the NIFTY500 index (broad market) and should not be used directly as a buy or sell signal.

Milan Vaishnav, CMT, MSTA

Consulting Technology Analyst

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