Weekly Outlook: NIFTY expands on charts. Don’t chase the upward move as consolidation appears imminent | India analysis

Continuing its relentless upward trend, the market once again reached a new lifetime high. Nifty also hit a new lifetime high on a closing basis. This week’s rally was fueled by the Federal Reserve, which kept interest rates on hold. This was widely expected, but what made markets react so strongly was the Fed’s comments hinting at three interest rate cuts next year. Nifty was trading in a wide trading range. It oscillated in a wide 722.80-point range before ending its seventh straight week of gains. The headline index closed with a strong weekly gain of 487.25 points (+2.32%).

The market is in uncharted territory. In the last two sessions, Nifty has surged by over 500 points. This month, Nifty has risen over 1323 points (+6.57%) so far in December. Given this kind of rise, the index is trading overbought on both the daily and weekly charts. Remaining overbought is a good sign because it shows strength in the uptrend. Securities and indices tend to remain overbought for long periods of time when they are in a strong upward trend. What’s worrying is that the market has risen close to vertical and remains overextended.

The index rose well ahead of the curve. The short-term 20-week moving average is almost 1700 points below the current level of 19757. The 50-week moving average, widely used to determine key trends, is located at 18808, more than 2600 points above current levels. This makes the current setup extremely risky and prone to violent profit taking if the market does not pause and consolidate. Even small profit taking leaves room for a significant retracement from current levels.

Markets are expected to remain tentatively at higher levels on Monday. The 21540 and 21750 levels are expected to act as resistance levels. Support is well below the 21100 and 20850 levels.

Weekly RSI is 75.90. A new 14-cycle high was reached. However, it remains neutral and does not show any difference for the price. The weekly MACD remains bullish and is above its signal line. The price closed above the upper Bollinger Band. However, while this can be considered optimistic, a temporary decline within the band cannot be ruled out.

Pattern analysis on weekly charts shows that Nifty has seen a strong breakout from the rising channel. The index has now closed higher for the second straight week since the breakout, and has closed for the seventh straight week overall. That is, although the index has pulled the support line higher than before, it still remains significantly lower as the index has moved so far ahead of the curve that a retracement or measured consolidation cannot be ruled out at current levels.

Overall, given how far the market has deviated from its average, it is time to be cautious and stop blindly following the market. Instead, the prudent way to capitalize on any upside gained here is to protect profits and move from stocks that are returning significant profits to stocks that are defensive and showing new relative strength. Buying very carefully and selectively, while the current technical setup ensures equal attention to protecting profits both at current levels and at higher levels. A very cautious outlook is recommended for next week.

Next week’s sector analysis

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

Relative Rotation Graph (RRG) shows that Nifty Energy, Commodities, Real Estate, PSE and Infrastructure indices are well positioned within the major quadrants. These groups will continue to outperform the broader market.

PSU Bank, Pharma, Midcap 100, Metal and Media indices are within the bearish quadrant. They can continue to perform individually, but their relative performance may eventually slow down.

Despite the strong move, the IT index is still within the lagging quadrant. However, momentum relative to the broader market appears to be improving.

Banknifty falls in the improving quadrant along with the services sector index. FMCG and consumption indices are also within the improving quadrant but appear to be losing relative momentum compared 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

www.EquityResearch.asia | www.ChartWizard.ae