Dalal Street Week Ahead: Nifty behaviour against Falling Channel chart tells you to stay defensive

The truncated trading week gone by turned out to be a disappointing one in ways more than one. When it had appeared that Nifty had rectified the violation of its immediate and important trend line supports, it violated it again and took support in the short-term 20-week moving average.

The trading range remained narrower compared with the 446-point range witnessed in the week before. This time, the index oscillated in a 375-point range before ending on a negative note. The headline index closed with a net loss of 145 points, or 0.98 per cent, on a weekly basis.

Looking at things from the technical perspective, Nifty has again violated and closed below the rising trend line support. This trend line begins from the lows of March 2020 and joins the subsequent higher bottoms. The index has not only slipped below this trend line, but also faced resistance on the higher side precisely at the upper edge of the falling channel which it had created after the formation of the high point at 15,431.

This week, Nifty has taken support at the 20-week moving average, which currently stands at 14,620 level. Any violation of this level will cause more weakness to creep into the market. The rising trend line, which has since been violated, will now act as a strong resistance as and when Nifty tries to move above it again.

Volatility continued to decline this week as well. It had fallen significantly by 9.58%; last week and INDIA VIX declined 2.67% this week to 20.27 level on a weekly basis. Nifty is likely to face resistance at the 14,750 and 14,830 levels in the coming week, while support will come in at 14,610 and 14,505 levels.

The weekly RSI stood at 58.54 level. It remains neutral and does not show any divergence against the price. The weekly RSI is bearish and remains below the Signal Line. A Black Candle has appeared to signal a directional consensus on the downside which persisted among the market participants throughout the week.

Pattern analysis continued to depict a weak technical structure on the charts. On one hand, Nifty faced resistance precisely at the upper edge of the Falling Channel which was created post the formation of the lifetime high at 15,431, and on the other hand, on the lower side it has violated the rising trend line, which is turning out to be one of the important pattern supports. This trend line begins from the lows of March 2020 and joins the subsequent higher bottoms.

Our analysis for the coming week remains on much the same lines as the week before. The 15,000 level remains a sacrosanct resistance point, one lower than that exists at 14,800 level. As long as the 14,800-15,000 range is not taken out convincingly, Nifty will face selling pressure at higher levels on every bounce. The current texture of the market has also turned highly defensive.

Defensive stocks from IT, pharma, FMCG and consumption sectors are gaining strength relatively and this phenomenon is likely to persist in the coming week as well. A highly cautious and defensive approach is advised for the coming week. Traders are advised to keep the overall exposure at modest levels.

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (Nity500) 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 Nifty Metal continues to make good strides inside the leading quadrant on the anticipated lines. Also, pharma, FMCG and Consumption Indices are seen rotating strongly inside the improving quadrant along with the IT Index, which remains inside the improving quadrant. All these indices are likely to relatively outperform the broader Nifty500 Index.

The Smallcap, Commodities, Nifty Midcap100 and PSE indices also lay inside the leading quadrant. However, they appear to be losing their relative momentum against the broader market.

The Nifty PSU Bank and Nifty Infrastructure indices are inside the weakening quadrant and appear to be giving up on their relative momentum. Nifty Realty index has rolled over inside the lagging quadrant. Nifty Bank and Services Sector Indices continue to languish inside the lagging quadrant along with the Media Index. NIFTY Auto and the Financial Services Indices are also inside the lagging quadrant.

All these groups are likely to relatively underperform the broader markets.

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)