market outlook: Dalal Street Week Ahead: A probable top may be around the corner for Nifty

The domestic stock market once again had a buoyant week and saw the headline Nifty50 index close at a fresh lifetime high. The domestic market has seen gains for four consecutive weeks; piled up over 1,121 points of gains and took a breather.

However, after pausing its rise for just one week, the market went on to pile up gains once again over the previous five sessions. The trading range for the week remained nearly the same. The week’s high was just 5-odd points short of the index’s lifetime intraday high.

After moving in a nearly 390-points range, the benchmark Nifty index closed with a net gain of 177 points, or 1.13 per cent, on a weekly basis.

Despite the relentless incremental rise, the market, in general, is also sending out several warning signs. The breadth, or the internal strength of the market, remains weak. The lead indicators continue to show ongoing bearish divergences against the price.

The immediate short-term indicators remain overbought. More concerning is the fact that volatility has once again gone back to its lowest levels seen only in the early 2020. Now, it is near its lowest level seen over several years. India VIX has come off some 9.66% again to 13.37. Nifty may continue marking higher points. However, the current technical setup disallows us to be complacent.

The 16,000 level remains psychologically important for the market. This point consistently holds maximum Call OI. Pattern analysis shows the 15,850-15,900 zone as a major area of resistance for the immediate short term. Nifty is likely to see resistance at the 16,000 and 16,195 levels in the coming week in the event of any continued move on the upside, while support should come in lower at 15,610 and 15,465 levels.

The Relative Strength Index (RSI) on the weekly chart stands at 68.54; it shows a strong negative divergence against the price. While Nifty has marked a fresh 14-period high, the RSI has not. This has resulted in a bearish divergence. The weekly MACD remains bullish; it stays above the Signal Line. However, from the near-flat Histogram, it is evident that the momentum is completely missing.

An examination of the patterns reveals that Nifty has taken support on the rising trend line pattern support for the second week in a row. This rising trend line is drawn from the low point seen in March 2020, and this trend line joins the subsequent higher bottoms on the weekly chart.

Although the market is showing no intent of correcting or consolidating, is it not moving higher in a healthy manner either. Prolonged periods of persistent low volatility can inevitably lead to phases of high volatility.

There is a possibility that as long as Nifty stays below the psychologically important 16,000 level, it will remain vulnerable to bouts of volatile profit taking at higher levels.

A couple of sentiment indicators, that are purely technical in nature, provide a hint that a probable top may be around the corner for the market. By saying this, it is important to lay the emphasis on the fact that it is practically impossible to catch the last and the highest or lowest point of the market.

However, using technical indicators, one can easily gauge the health of the market move. The current technical structure strongly suggests that though we may immediately start building aggressive shorts, it is definitely the time to protect our long positions. This is the time when strict trailing of stop-loss levels will help in optimum protection of profits at current and higher levels.

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.

The review of the Relative Rotation Graphs (RRG) shows the risk-on setup in the market. Nearly all economy-facing sectors are showing strong improvement in relative momentum against the broader Nifty500 Index. The SmallCap Index, Commodities, Metals and Pharma Indices are inside the leading quadrant. However, all these groups are paring relative momentum.

Only Nifty PSE Index is seen maintaining its relative momentum along with the Energy Index, which has just rolled inside the leading quadrant.

The Nifty Midcap Index continues to languish inside the weakening quadrant. The Nifty PSU Bank Index is also inside the weakening quadrant. However, it is showing a strong improvement in its relative momentum.

The Nifty Infrastructure Index has rolled inside the weakening quadrant. The Nifty Services Sector Index, Realty Index, Bank Nifty, Financial Services Index and the Auto Index are all inside the lagging quadrant. However, they are showing a strong improvement in their relative momentum against the broader market.

Nifty FMCG and the Consumption Indices are putting up a weak show; they are moving fast towards rolling back inside the lagging quadrant. However, at present, they are inside the improving quadrant and are seen losing their relative momentum sharply. Nifty Media Index stands firmly inside the improving quadrant.

Important Note: The 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)