Dalal Street week ahead: Nifty looks stretched; FMCG, Consumption, Pharma look well poised

Over the past five trading sessions, the market, in general, displayed some corrective tendencies, but continued to extend its gains. Compared with the market behaviour in the previous two weeks, which had a wide trading range of 723 and 400 points respectively, Nifty had a narrower trading range this week, as it oscillated in a range of 230-odd points.

Following a capped but volatile move over the past few days, the headline index ended with a net gain of 139 points, or 1.09 per cent, on a weekly basis. Despite bouts of sharp profit taking witnessed in the past five sessions, volatility remained unchanged. India VIX lost 0.43 per cent over the week to finish the week at 19.62.

Nifty has not been able to move the two-year-long pattern trend line resistance, though it tried to inch out a bit. This trend line will remain a stiff resistance over the coming days and the 12,963 level will now be a potential intermediate top for Nifty, unless taken out comprehensively.

It will be important to watch Nifty’s behaviour against the 12,963 level and the pattern trend line resistance in the coming sessions. The expiry of monthly derivative contracts is falling due next week and the 12,960 and 13,135 levels will act as potential resistance points, while supports will come in at 12,750 and 12,530 levels.

Any retracement or corrective move is set to make the trading range wider in the coming week. The weekly RSI stands at 69.09. It has marked a new 14-period high, which is a bullish signal. The RSI remains neutral and does not show any divergence against the price. The weekly MACD remains bullish and trades above the signal line.
A candle resembling a Small Hanging Man occurred on the charts. This is not a classical Hanging Man, as it has a small upper shadow, which is supposed to be ideally absent in Hammers or Hanging Man patterns. However, the occurrence of such candles near a strong pattern resistance area highlights the importance of the pattern resistance and may potentially stall a rally as it has occurred following a downtrend. However, this will require confirmation on the next bar.

The coming week remains crucial for the market in ways more than one. On the shorter and daily time frame chart, Nifty remains grossly overstretched. Also, it is now in the uncharted territory and has marked the 12,963 level as an intermediate potential top unless it is taken out comprehensively. An improvement of the relative strength has been noticed in traditionally defensive sectors such as FMCG, Consumption and Pharma and this trend may continue in the coming days as well.

In our look at the Relative Rotation Graphs®, we compared various sectoral indices against CNX500 (Nifty500 Index), which represents over 95 per cent of the free- float market-cap of all the listed stocks.
A review of Relative Rotation Graphs (RRG) shows Nifty Bank (Bank Nifty) has entered the leading quadrant, and is likely to relatively outperform the broader market. Nifty Services Sector Index is also in the leading quadrant and appears to be maintaining its relative momentum as well.

Nifty Services Sector Index has just crawled inside the leading quadrant. The IT Index continues to be in this quadrant as well, but appears to be losing its relative moment. The broader Nifty MidCap100 and Nifty Auto indices have drifted further down in the weakening quadrant. The Nifty Metal index stays in the weakening quadrant but is seen picking up again on the relative momentum front. Nifty Pharma and NIFTY Media Indices have crawled inside the lagging quadrant, while Nifty Media Index continues to drift lower, but Nifty Pharma appears to be picking up a bit.

Nifty PSU Banks, Infrastructure, PSE, Energy FMCG and Consumption Indices are in the lagging quadrant. Among these, FMCG, Consumption and PSE indices appear to be improving their relative momentum and look like in the process of bottoming out.

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 market) 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)