D-Street outlook: Dalal Street Week Ahead: Nifty50 to stay rangebound with upside capped

Both price trend and investor sentiment of the domestic equity market got affected by the spike in US bond yields, which had an obvious impact on the emerging markets in general. The spike in yields and strengthening US Dollar Index led to a gap-down opening and triggered corrective moves in Indian equities, particularly during the second half of the week. However, after moving in a wide 635-point trading range for the past five sessions and despite seeing negative closings in the last two, the headline Nifty index ended the week with a net gain of 408 points, or 2.81 per cent, thus recovering nearly all of its previous week’s losses.

Volatility increased on a day-to-day basis. But, on a weekly note, INDIA VIX came off some 9.18 per cent to 25.56. Although the index had made a modestly higher top and a higher bottom, it still remains way off its lifetime high of 15,431, which is also probably the intermediate top for the index. The index is showing some classical signs of an impending consolidation, and therefore, all moves on the upside will continue to remain vulnerable to any selloff at higher levels.

More importantly, the sudden spike in US bond yields along with a strong US dollar will continue to cast its shadow on the domestic equities.

The Nifty Put-Call ratio (PCR) across all expiries stands at 1.12, which is quite healthy and should keep the market evenly poised. To add to this, there was an addition of significant short positions over the past two sessions, as reflected in the increase in Open Interest, which happened along with a decline in the Nifty50. This will keep Nifty rangebound in the coming week on both upsides and downsides, without taking any clear directional move.

The 15,200 and 15,365 levels will act as key resistance, while supports will come in at 14,900 and 14,780 levels. The weekly RSI stood at 67.57. It remains neutral and does not show any divergence against the price. The weekly MACD remains bullish and is above the signal line. However, as reflected in the narrowing slope of the histogram, the momentum is decelerating, and this may result in a negative crossover over the coming weeks.

A Harami pattern emerged on the candles. However, this candle also has a long upper shadow. The occurrence of such a candle has the potential to disrupt the current trend and push the market further into the consolidation mode, subject to the confirmation of the next bar on the charts.

Pattern analysis clearly showed Nifty has deviated sharply from its immediate mean and have run up much ahead of its curve. This becomes more apparent from the 20-week moving average, which is almost running as a proxy trend line along with the actual trend line drawn on the chart. The 20-week moving average currently stands at 13,700 level, which is a good 1,238 points away from the current level.

All and all, this has become a highly selective market, and there are all the possibilities of isolated outperformance instead of any sectoral move. Despite some broader relative weakness seen during the week gone by, there is a possibility that defensive plays like FMCG, IT and pharma will continue to show improving relative strength. Since a spike in US bond yields and a strengthening dollar will continue to have an overhang on the market, we recommend staying highly selective, avoiding leveraged exposure on the either side and protecting profits with every move in the market.

In our look at 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 listed stocks.

A review of the Relative Rotation Graphs (RRG) showed a pretty interesting picture. The Nifty Midcap100 Index has rolled back inside the leading quadrant. The Commodities Index has rolled over inside the leading quadrant. These groups along with the Auto Index, which is also inside the leading quadrant, are likely to show relative outperformance against the broader market. The Realty Index is seen losing its relative momentum and is moving down towards the weakening quadrant.

The Nifty Services, Metals, Financial Services and IT Indices and Bank Nifty are all placed inside the weakening quadrant. Despite some isolated stock-specific performances, these groups may broadly not contribute much to the overall market performance. The FMCG, consumption, media and pharma buckets are all languishing inside the lagging quadrant. These groups may broadly underperform the broader market.

Nifty PSE and Infrastructure Indices are about to roll over inside the leading quadrant from the improving quadrant. Apart from this, Nifty Energy Index also appears to be making a strong move inside the improving quadrant while maintaining its relative momentum against the broader market.

Important Note: RRGTM charts show the relative strength and momentum for a group of stocks. In the above chart, they show relative performance against the 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)