market outlook: Dalal Street Week Ahead: Signs of fatigue all over; watch dollar & bond yields

Displaying signs of imminent consolidation, Indian equities took a breather during the week gone by and ended with a modest cut. The market breadth remained a bit wider than it was during the week before, as Nifty oscillated in a 533-point range during the week. The five sessions also saw the market close at yet another lifetime high, and then the index pared some of the gains in the following days. From a technical perspective, some fatigue at higher levels was visible as Nifty closed with a net loss of 181.55 points, or 1.20 per cent.

Volatility did not show any spike. INDIA VIX rose just 0.94% to 22.25 level on a weekly note. As we head into the expiry of the monthly derivative series, the market is likely to be dominated by rollover-centric activities in the coming week. The index is likely to move in a defined range in the coming five sessions, with the upside capped.

Weekly options showed the index may stay in a defined range between 15,000 and 15,500 levels, and any violation of the 15,000 mark will trigger incremental weakness. Nifty Put-Call Ratio (PCR) across all expiries remained at a healthy 1.19 level. It would be crucial for the market to move past and stay above the 15,000 mark.

Despite this, it would be necessary that market participants keep a keen eye on the Index, which is in the process of marking a near-term bottom, and on the spike in US bond yields. A spike in yields, per se, is not harmful. But it tends to happen on inflation fears, which then becomes a cause for concern. Over the next week, the 15,300 and 15,485 levels will act as key resistance points, while supports should come in at 14,900 and 14,750 levels.

The weekly RSI stood at 71.43. It remains neutral and does not show any divergence against price. The RSI is also in the mildly overbought zone. The weekly MACD is bullish and remains above its Signal Line. A small Bearish Engulfing Candle appeared on the charts. Its occurrence near the high point is a matter of concern. However, for any bearish implications, it will need a confirmation in the next bar.

Pattern analysis showed Nifty has deviated sharply from its mean. The fastest 20-week moving average stays at 13,410 level, which is at quite a distance. This may not mean any overnight downtrend, but the current technical structure definitely has the potential to push the market into a wide-range consolidation.

All and all, Nifty is likely to see a modest technical pullback in the initial part of the week. To avoid further weakness, it would be crucial for Nifty to crawl back above the 15,000 level and stay above that. However, despite the expected technical pullback, the 15,431 level has now become an intermediate top for Nifty, and it will continue to witness pressure on every bounce unless this level is taken out convincingly.

We reiterate staying extremely stock-specific and selective while approaching the market, as market breadth continues to remain a concern.

In our look at the Relative Rotation Graphs®, we compared various sectoral indices against CNX500 (Nifty500 Index), which represents over 95% of free-float market-cap of all the listed stocks.

A review of the Relative Rotation Graphs (RRG) does paint a highly tentative picture for the market. Only Nifty PSU Bank Index is inside the leading quadrant along with Nifty Auto Index. However, both the indices appear to be taking a breather for now. Nifty Realty Index is inside the leading quadrant, but it is rapidly paring its relative momentum against the broader Nifty500 Index.

Nifty IT Index is in the weakening quadrant, but it is the only index continuing to improve its relative momentum sharply. Along with select banks, this index may show some relative outperformance against the broader market. Nifty MidCap100, Financial Services Index, Services Sector Index, Nifty Bank and Nifty Metal Index are all inside the weakening quadrant as well, and they all appear to be steadily giving up on their relative momentum.

Nifty Pharma Index is in the weakening quadrant. It has taken a turn for the negative and seems far from completing its bottoming out process. Strong underperformance may continue in this sector unless it reverses. Nifty Energy Index is taking a sharp turn for the better. It appears to be rolling over inside the improving quadrant.

Also inside the improving quadrant are the FMCG and Consumption, Nifty Media and Nifty PSE groups. They are faltering, and appear to be rolling over towards the lagging quadrant. Only Nifty Infrastructure Index, which is also in the improving quadrant, is 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 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)