Weekly Outlook: Despite the decline, breadth remains a concern. Nifty tends to retrace | India analysis

It’s been an incredibly eventful week for markets as they react to exit polls and general election results. It all happened in the same week. Nifty has hit its own lifetime high and is down nearly 8% from its peak. The remarkable recovery continued and the Nifty also reached a new all-time high. The trading range was also very wide. Nifty oscillated in a huge range of 2057.25 points before closing near the high. Volatility also fluctuated significantly. At one point it soared more than 40%. By the end of the week, it was down 31.38% from the previous week’s close to 16.88. Following this move, the headline index Nifty 50 finally settled down with a net gain of 759.45 points (+3.37%).

As we enter next week, the market may see further declines. At the same time, at this point the market appears vulnerable to a profit-taking driven retracement from current levels or even higher. What is more important is the breadth of the market. The broader market is not as strong as expected. While the broader market index Nifty 500 is inching higher, its breadth does not seem to be keeping pace with the intensity it should. Moreover, despite the kind of volatility seen in the market, it proceeded within pattern resistance and support levels. Currently, Nifty has closed just below the pattern resistance level.

The markets may open quietly next week. The 23400 and 23550 levels are likely to act as possible resistance levels. Support is provided at the 22900 and 22630 levels.

Weekly RSI is 66.87. It shows a bearish difference relative to the price. Price closed at a new high, but RSI did not. This led to the emergence of a bearish divergence in RSI. The weekly MACD remains bearish and is below the trigger line. On the candle, you can see a long-legged doji. Doji is more powerful than a top. If it occurs near a high, it has the potential to disrupt an ongoing rally.

Pattern analysis of the weekly charts shows that the negative spike witnessed in the market found support in the rising trend line of the breakaway channel. During the bounce, the bulls closed just below the upper rising trend line of the small channel formed by Nifty. Leading indicators continue to show negative divergence and the breadth is still not as strong as expected. All of this continues to make the market vulnerable to higher levels of profit taking.

Overall, Nifty has seen a strong bounce from lower levels after the extremely negative reaction to the general election results. This decline may extend a little longer, but the market is now looking at imminent profit taking at higher levels. The market is also seeing defensive structures like FMCG and Pharma starting to perform well. It is now advisable to use these measures to protect your interests at a higher level. Leverage exposure should be reduced and new purchases should be focused on stocks with improved defensive pockets and relative strength. A cautious outlook is advised for next week.

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 continue to stay within the leading quadrant. Apart from this, Nifty Midcap 100 is also included within the leading quadrant. This means that the broader market space may outperform the frontline index relative to the market.

Nifty Energy, Commodities, PSE, PSU Banks, Pharma and Infrastructure indices are within the bearish quadrant. The Nifty Realty Index is also within the bearish quadrant, but its relative momentum to the broader market appears to be improving.

Nifty Services sector rolled inside the lagging quadrant. Apart from this, the IT index is also within the lagging quadrant. However, this appears to be improving relative momentum against the broader Nifty 500 index.

Nifty Bank, Financial Services, FMCG and Media indices are within the improving quadrant of RRG. Among these, the Financial Services and Nifty Bank indices were seen maintaining their relative momentum to the broader market.

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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