Dalal Street Week Ahead: It’s crucial for Nifty to stay above 12,800 level

The domestic equity market is currently dealing with one of its most important pattern resistances. In the previous note, we had underlined the importance of this pattern resistance line. It was also mentioned that unless the 12,960-13,000 zone is taken out comprehensively, we may not see any major bounce in stocks. In line with that analysis, even when Nifty marked an incremental lifetime high, it came off the highest point before the end of the week. After marking a new lifetime high at 13,145; the headline index ended with a net gain of 109 points, or 0.85 per cent, on a weekly basis.
Nifty has so far defended this trend line resistance by staying above it. This makes the low point of the previous week, i.e. 12,790, a very important mark. On the other hand, it has exhibited all the signs that makes the 13,145 level a potential top for the market, as Nifty is yet to close above the 13,000 mark. There was no major change in volatility this week with India VIX rising just 1.02% to 19.8200 on a weekly note. For the coming week and beyond, it would be crucial for Nifty to sustain above the 12,800 mark.

Since the coming week is a truncated one with Monday being a trading holiday, the market will adjust to the global setup when it opens on Tuesday. The 13,100 and 13,225 levels are going to act as key resistance points, while supports will come in lower at 12,800 and 12,690 levels.

The weekly RSI stood at 69.97 level. It has made a fresh 14-period high, which is a bullish signal. The RSI is neutral and does not show any divergence against the price. The weekly MACD remains bullish and trades above the signal line. A Doji appeared on the weekly candles. Its occurrence at a high point is something that should not be ignored. It has the potential to stall the current rally and mark an intermediate top at the high point.

As the coming week will be a truncated one, it will be crucial for Nifty to keep its head above the 12,800 level. The move past this level has marked an attempt by the index to stage a breakout as it penetrated the two-year-long trend line resistance.

However, this attempt of a breakout will remain in force only if the index remains above the 12,800 mark. If Nifty slips below this level, this trend line pattern resistance will continue to pose a stiff hurdle going ahead, and it will also mark a potential top at the 13,145 level.

We recommend staying focused on stocks and sectors that have underperformed on relative terms in the past, and are showing signs of improvement in their respective relative strength against the broader markets.

We expect the market to continue to remains stock and sector specific and sectors like consumption, FMCG, pharma and select midcaps to do well against the broader market.

In our look at the Relative Rotation Graphs®, we compared various sectoral indices against CNX500 (Nifty500 Index), which represents over 95% of the free-float market-cap of all the stocks listed.
A review of the Relative Rotation Graphs (RRG) shows Bank Nifty and Nifty Services Sector indices remain firmly in the leading quadrant. These groups are set to relatively outperform the broader Nifty500 Index.

The IT Index has slipped inside the weakening quadrant. Nifty Auto and Midcap100 indices continue to crawl further down inside the weakening quadrant. Nifty Metal index, on the other hand, is seeing a sharp U-turn inside the weakening quadrant. This may lead to sporadic outperformance against the broader market.

Media and Pharma indices are placed inside the weakening quadrant, as are the Infrastructure, PSU Bank and PSE Indices. However, except for Media, other groups are showing an improvement in their relative momentum and appear to be consolidating or at least they seem to have arrested their decline. The FMCG, Consumption and PSU Bank Indices are also in the weakening quadrant. However, they all seem to be improving sharply in terms of their relative momentum.

Nifty Realty is the only index in the improving quadrant. However, it appears to be paring its relative momentum rapidly.

Important Note: 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 markets) 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 milan.vaishnav@equityresearch.asia)