Dalal Street Week Ahead: Don’t take a breakout for granted; stick to steady stocks and sectors

Domestic equities showed a lot of resilience throughout the past five trading sessions, and managed to close at a fresh weekly high near its all-time high point. The market stayed resilient on the downside, but at the same time, showed strong consolidation at higher levels and did not make any meaningful move on the upside.

The week saw Nifty move in a trading range of 317 points, oscillating in a zone that was similar to the trading ranges seen over the past few weeks. Broadly speaking, the index spent the week consolidating as it awaited a clean and clear breakout.

The headline index ended with net weekly gains of 233 points or 1.49 per cent. The coming week is going to be a truncated one, with July 21 being a trading holiday on account of Bakri Id. The broader market has been seeing a strong outperformance against the frontline Nifty. The RS line of Nifty against the broader Nifty500 is under secular decline and below its 50-DMA.

Besides this, a clear breakout in Nifty50 is still being awaited, which will come when the index moves past the 15,900 level and closes meaningfully above it. While volatility continues to be a concern, INDIA VIX has plunged to one of its lowest points seen in the recent past. It declined another 9.56% to 11.70 on a weekly basis.

In the coming week, the 16,000 and 16,190 levels will act as immediate resistance, while supports will come in at 15,850 and 15,600 levels.

The weekly RSI stood at 67.65. It shows a strong bearish divergence against the price. While Nifty has marked a fresh 14-period high, the RSI has not and this has resulted in a bearish divergence. The weekly MACD has shown a positive crossover; it remains bearish and trades below the Signal Line. Apart from a while body that occurred on the candles, no other important formations were observed.

Pattern analysis showed Nifty is clinging on to its major support trend line, which begins from the low point seen in March 2020 and joins the subsequent higher bottoms. Given the rising nature of this trend line, longer the Nifty stays below the 16,000 level, the more vulnerable it will remain to a bouts of profit-taking at current levels. It may even end up violating this important pattern support.

All in all, even though Nifty has marked an incremental high at 15,962, it is yet to see any comprehensive breakout of the previous high of 15,915. The technical charts do not suggest any negative development. However, when you look at a holistic picture, with Nifty hovering near the high point for a long time with precariously low VIX level, a breakout is something that should not be taken for granted.

We recommend sticking to stocks and sectors with strong relative strength against the broader market and continue to adopt a mindful and alert approach, while following the current trend over the coming days.

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) shows the absence of any clear leadership among various sectors. The PSU Bank Index is the only one that has rolled inside the leading quadrant and showed a steady relative momentum against the broader market. Apart from this, Nifty Energy, Pharma, PSE and Smallcap Indices are still inside the leading quadrant. However, they all appear to be losing their relative momentum.

Nifty Midcap Index is seen improving its relative momentum and inching towards the leading quadrant. It is currently placed inside the weakening quadrant. Nifty Commodities and Metal indices are placed inside the weakening quadrant.

The lagging quadrant has Nifty Infrastructure, Nifty Bank, Services Sector and Financial Services Sector indices inside it. However, they all seem to be consolidating their performance and their relative momentum against the broader markets.

The Nifty Realty Index has seen a strong rotation inside the improving quadrant hinting at a likely end to its relative underperformance against the broader market. Along with that, Nifty Consumption, FMCG and Media Indices are placed inside 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 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)