Dalal Street week ahead: Risk-on cooling off, but no big fall likely

Milan Vaishnav, CMT, MSTA

After testing a couple of important levels during the prior week, Nifty took a breather and consolidated over the last five sessions. In the previous weekly note, we had highlighted that the market momentum is diminishing at higher levels and this might lead to some consolidation.

The market spent the entire week in a limited range oscillating in a 320-point range. While showing no intent of making any strong move on the upside, the index also did not show any sign of major weakness.

The rangebound consolidation left the headline index with a net loss of 120 points, or 1.08 per cent, on a weekly basis. July was one of the best month in the recent times, as Nifty gained 771 points, or 7.49 per cent on monthly basis.

The market has shown sustained rise after Nifty moved past the 200-week MA, which currently stands at 10,430. Having said that, the index currently trades above the 50- and 100-week Mas, but it is now showing signs of impending consolidation at higher levels. More importantly, the global risk-on environment is now showing signs of cooling off. Volatility remains on the lower side, as volatility index INDIA VIX declined some 1.40 per cent to 24.19 on a weekly basis.
Nifty is likely to see a quiet start to trade on Monday. The 11,351 and 11,500 levels are likely to act as strong resistance at higher levels, while supports will come in at 11,000 and 11,860 levels. We expect the trading range to widen this week and also expect volatility to increase moderately.

The Relative Strength Index, or RSI, on the weekly chart stood at 58.33. It remains neutral and does not show any divergence against price. The weekly MACD looks bullish as it trades above the signal line. Apart from a Black Body that emerged, no other formations were noticed.

Importantly, the global risk-on environment that was firmly in place for over two months is seen taking a breather and cooling off. This does not mean equities will see a major downside, but this certainly paves the way for measured consolidation. It is also evident as the less risky assets like gold and debt instruments are seeing improvement in relative performance.

Despite this, we will continue to see equities outperforming other asset classes on a relative basis, though there is the possibility of intermittent corrective moves.

Avoid aggressive longs unless Nifty takes out the 11,300-11,350 zone on a closing basis. Until that happens, we will find the index vulnerable at higher levels. A highly focused and stock-specific approach is advised for the day.
In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (Nifty500 index), which represents over 95% of the free-float market-cap of all the listed stocks.
A review of the Relative Rotation Graphs (RRG) shows there is no significant change in the placement of the sectors compared with the previous week. We had mentioned in an earlier note that the IT sector is making a U-turn and appears to be moving towards the leading quadrant. This move continued over the previous week as well. Thee auto index, which continues in the leading quadrant, is seen paring its relative momentum.

It may continue to relatively outperform the broader market, but the momentum appears to be diminishing. Apart from this, Energy and Commodities groups are also placed in the leading quadrant, but they appear to be almost topping out and moving sharply towards the weakening quadrant shortly through a rapid loss of relative momentum.

Nifty Pharma index remains in the weakening quadrant, though it has performed well individually. The FMCG and Consumption indices are placed in the weakening quadrant.

The baton for outperformance, as of this day, remains in the hands of financial and banking stocks. Bank Nifty, PSU Banks and the Financial Services groups are placed in the improving quadrant and they are seen rotating north-easterly while maintaining their relative momentum against the broader market along with the Realty Index. The Media Index is seeing a strong negative rotation, as it moves down paring its relative momentum, but it still remains in the improving quadrant.


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)