Dalal Street Week Ahead: Nifty looks firm; avoid shorts & guard profits too

The previous week had been an eventful one, as Nifty tested all its crucial support levels on the daily and weekly charts. This past week, Nifty respected a few crucial support levels on the higher timeframe charts and showed a technical pullback. The four-day trading week saw the headline index stage a comeback.

The positive point was that the rally seen over the past couple of days was not merely because of short covering but also because of buying at lower levels. Nifty managed to recover 75 per cent of the loss of the earlier week, as it ended with net gains of 366.70 points on a weekly basis.

The coming week will see the Indian stock adjust to a global trade setup, as Friday was a trading holiday in India. There might be some kneejerk reactions and volatile moves due to the US market’s reactions to US President and his wife testing positive for Covid and their likely implications on the election campaign.

Apart from this, Nifty has reinforced the 100-week moving average as a crucial support by first taking support in it on a closing basis, and then bouncing from that level. The 100-week MA stands at 11,075. The US Dollar Index is showing signs of weakness again; this will continue to benefit emerging markets, per se.

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The 11,530 and 11,700 levels will act as next overhead resistance points for Nifty in the event of any continued up-move, while supports will come in at 11,310 and 11,130 levels. The trading range for the coming week is expected to be wider than usual.
The weekly RSI stood at 57.77; it has marked a 14-period high, which is a bullish signal. It also appears to be attempting to break out of a formation. The weekly MACD remains bullish and trades above the signal line. An Inside Bar has occurred; which usually happens with a lower top and higher bottom. Also, a Bullish Harami pattern was observed on the candles. Though this is not a classic Bullish Harami, but the current white body of the candle is completely engulfed by a larger black body on the previous bar. This is happening near the support point of the 100-week MA, which makes this an important support for the near term.

Pattern analysis showed Nifty may on its way to try and take out few critical resistances on the shorter time frame charts. Currently, the 10,932 and 11,075 levels —which happen to be 50-week MA and 100-week MA – continue to be important supports.

All in all, as long as Nifty remains above the 50-, and 100-week MAs, i.e. above the 10,932-11,075 zone, it will see broad rangebound consolidation without breaking down.

Structural weakness will creep in only if the index slips below this zone.

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Amid the global uncertainty and aided by weakness in the US Dollar, some moves on the upside cannot be ruled out. Even if we see some uncertain volatile moves initially, we recommend staying away from creating major shorts. Dips may be used to make fresh purchases. But investors must remain vigilant and guard profits at higher levels as the risk-on setup may have some steam left as long as the Nifty defends the crucial 10,932-11,075 zone in the near term.

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 the possibility of financial stocks gathering some momentum again. Nifty IT, Midcap100, Auto, Media and Metal groups remain in the leading quadrant. These sectors will continue to relatively outperform the broader market over the coming days.

Nifty Pharma Index is still in the weakening quadrant. However, it appears to be heading northward, while trying to improve its relative momentum. Nifty Energy continues to rotate south-west while staying in the weakening quadrant and heading towards the lagging one.

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FMCG and Consumption indices are in the lagging quadrant. However, some divergence was seen in the trajectory of the tail as the Consumption pack is trying to improve its relative momentum as the FMCG continues to languish. Nifty PSE and Infrastructure indices remain in the lagging quadrant. Nifty Realty remains firm in the improving quadrant, while Nifty PSU Banks index is yet to start playing catch-up, and the Financial Services group and Bank Nifty appear to have started consolidating their recent underperformance while staying 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 [email protected])