The trading range has remained narrow. The index has hovered in a range of 279 points, showing a bearish bias in recent days. The index finally closed with a net loss of 138 points (-0.87 percent) on a weekly note.
The market has not only shown classic distribution at higher levels, but appears to be showing many signs of a likely corrective move, which now appears to be imminent.
Nifty was unable to break out the 15,850-15,900 area despite a few attempts and this made this area an intermediate high for the market. Options data has shown that the addition of high open call interests in the 15,800-15,900 range makes this a formidable area of resistance for the index. Nifty faced resistance on major trendline support. A slip below the 15,550-15,600 area will make Nifty weaker.
Volatility continued to decline. India VIX was further down 9.56% on a weekly basis and now remains at 12.09. This level is close to the lowest level observed in the recent past.
The 16,000 level, just like the week before it, remains psychological resistance for Nifty. However, the 50 pack will face resistance at 15,850 and 15,915 levels. Support should be at the 15,550 and 15,430 levels. Any corrective movement is likely to make the trading range wider than usual.
The weekly RSI stood at 65.80. It remains neutral and shows no divergence from the price. The daily MACD remains bullish and remains above the signal line. However, the almost flat histogram shows that momentum is lacking in the Nifty movements. A black candle appeared. The same level of the open and the high point of the week shows that the consensus among market participants remains negative since the very beginning of the previous week.
Pattern analysis on the weekly chart shows that Nifty has relied on major uptrendline support. This trendline starts from the lows formed in March 2020 and joins the next higher lows. Since Nifty has tested this important model support, any movement below this area will make matters worse for the market.
Although the market shows no intention of correcting or consolidating, it is also not advancing in a healthy way. The persistent low volatility can inevitably lead to a phase of high volatility. There is every possibility that as long as Nifty stays below the psychologically important 16,000 mark, it will remain vulnerable to episodes of volatile profit taking at higher levels.
While no major negative moves have yet been seen in Nifty, there are a few technical signs that one cannot afford to ignore. The VIX remains near its all-time lows and a prolonged period of low volatility indicates complacency among market participants. Such a situation often leads to periods of high volatility.
The scale of the market remains small and is not as healthy as it should be. A strong market scale and wider participation are needed for a significant rebound to take place. Overall, we strongly recommend to refrain from creating aggressive long positions.
New purchases, if any, should be limited to low beta defensive stocks. While staying light on the overall position, we suggest using each rise, as it occurs, to protect earnings at higher levels.
In our review of Relative Rotation Graphs®, we compared various sector indices to the CNX500 (Nifty500 Index), which represents over 95% of the free float market capitalization of all listed stocks.
A review of the Relative Rotation Charts (RRGs) shows that the Nifty Commodities and Nifty Metal indices have slipped inside the weakening quadrant, indicating a likely end of their relative outperformance against the broader market. The Nifty Pharma, Energy, Smallcap and PSE indices remain in the main quadrant. These groups can relatively outperform the broader Nifty500 Index.
Nifty Midcap 100 stays inside the weakening quadrant. The PSU Bank Index is also in the weakening quadrant, but is improving rapidly relative to its relative performance.
The Nifty Auto index is inside the lagging quadrant. However, it appears to be turning to enter the improvement quadrant with the Nifty Financial Services Index, which exhibits similar behavior. Apart from that, Nifty IT Index is also found in the lagging quadrant. The Nifty Bank, Realty and Infrastructure indices are also in the lagging quadrant, but they are trying to consolidate and improve their relative performance.
The FMCG index fell inside the lagging quadrant. Consumer and Smart Media indices remain in the improvement quadrant; while the consumer index is seen rapidly reducing its relative momentum on the lines of the FMCG index.
Important Note: RRGTM charts show the relative strength and momentum of a group of stocks. In the chart above, they show relative performance against the Nifty500 index (larger market) and should not be used directly as signals to buy or sell.
(Milan Vaishnav, CMT, MSTA is a consultant technical analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be contacted at [email protected])