market outlook: Overstretched Nifty technical setup and precariously low VIX all raising red flags

While trading in a narrower range, Nifty continued its bounce and ended on a positive note for the fourth consecutive week. The index went on to mark its incremental fresh lifetime high, as it continued to trend higher on reduced and decelerating momentum. The trading range remained narrow of 268 points against 359 points in the week before. However, Nifty continued to close higher and posted gains of 129 points, or 0.82 per cent, on a weekly basis. With this, Nifty has gained 1,121 points over the past four weeks.

For the coming week, the main worry for the market will be its own overstretched technical setup. This, when read along with the precariously low VIX value, raises a red flat for the immediate short term. Although the trade setup on the weekly charts looks stable and strong, Nifty is bit overstretched on the daily chart. And the momentum seems to be decelerating over the past couple of days.

Volatility continued to decline unabated. INDIA VIX came off by another 11.53 per cent to 14.10 level. Options data suggested that Nifty has seen near-consistent and near-similar Call writing at 15,800, 15,900 and 16,000 levels. This would make another 200 points gain a very stiff resistance area for the market.

It is unlikely to be smooth sailing for the market in the coming week. The 15,865 and 15,945 levels will act as key resistance points, while supports will come in lower at 15,630 and 15,500 levels. Any corrective action is likely to widen the trading range on the downside.

The weekly RSI stood at 69.09 level. It has shown a strong bearish divergence against the price. While Nifty formed a new 14-period high, the RSI did not, and this resulted in a bearish divergence. The weekly MACD has shown a positive crossover. It is now showing a bullish setup and stands above the Signal Line. A candle with a long lower shadow has occurred. This exhibits fatigue for Nifty at higher levels.

There are no distinct signs that indicate outright weakness on the Nifty charts. The is undoubtedly a buoyant signal, as Nifty trades at its all-time high point in the uncharted territory.

However, that said, the VIX remains at its lowest level of recent time and this indicates a period of low volatility and complacency. Such periods are often followed by a spike in volatility and can lead to a period of high volatility. Such events may trigger measured corrective movement, and if not, can at least push the market again into a broad range-bound consolidation.

The market is moving towards becoming highly stock-specific and warrants a very efficient risk management by the participants. This is the time when one needs to keep trailing stop losses as vigilant protection of profit at current and higher levels would assume importance. We strongly suggest taking some profits off the table and putting trail stop losses to ensure optimal profit protection.

While remaining highly selective, fresh purchases should be kept at modest levels and one should maintain a cautious stance on the market.

In our look at the 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 although individual performance continued in the metal stocks, Nifty Metal Index, along with Smallcaps and the Commodities indices, continued to pare relative momentum while being placed inside the leading quadrant. Nifty Parma is steady inside the leading quadrant; while the PSE Index has rotated back inside the leading quadrant. One can expect stock-specific relative outperformance from these individual groups.

Nifty Midcap 100 Index stays inside the lagging quadrant and so does the Nifty Infrastructure Index. The PSU Bank Index also lies inside the lagging quadrant, but it is seen attempting to improve its relative momentum against the broader Nifty500 Index.

Nifty Services Sector, Realty and the Nifty Bank indices are inside the lagging quadrant. Nifty Auto and the Nifty Financial Services Indices are all inside the lagging quadrant. However, they appear to be consolidating and mildly improving their relative momentum. However, barring isolated stock-specific performance, these groups may relatively underperform the broader market.

Nifty Consumption and the FMCG indices are rotating southwest towards the lagging quadrant, although they are currently placed inside the improving quadrant. A similar rotation was also observed in the IT Index. Nifty Media is placed firmly inside the improving quadrant and appears to be maintaining its relative momentum against the broader market.

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 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)