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  • Milan Vaishnav, CMT, MSTA

Stable Start To The Week Expected; Cracks Might Appear If These Levels Are Not Defended

The previous week remained quite dismal for the markets as the it ended in the negative for all five days of the week. After a failed breakout on the daily charts, the NIFTY returned inside the broad trading range and drifted even lower. The index has been defending the 50-Week Moving Average for over eight weeks now but after the previous week’s decline, it has ended marginally below this important level. The NIFTY has ended the week with net loss of 219.20 points (-2.00%) on weekly basis.

The coming week is likely to define the texture of the markets for next couple of weeks. The index has ended marginally below the 50-Week Moving Average which is presently at 10780 and rests on a trend line support. On the daily charts, it has bounced off the 100-Day Moving average which is 10694.

A positive start for the week is expected as global cues remain positive. An immediate short-term technical pullback cannot be ruled out but if the markets fail to maintain certain important levels, it risks its texture being altered for the immediate short term. The level of 10780 and 10930 may act as resistance points on the upside while supports come in at 10620 and 10500 levels.

The Relative Strength Index (RSI) on the weekly chart is 48.1836; it remains neutral and does not show any divergence against the price. The weekly MACD remains bullish and trades above its signal line.

The pattern analysis of the weekly chart shows that after pulling back from near the 10000 level, the index halted its up move near the 50-Week Moving Average. The index penetrated this level and defended it for over eight weeks. However, it has shown a minor breach of this important support. Presently, it rests at a trend line support just below this level.

Overall, markets remain at a pattern support on the weekly charts and some technical pullback can be expected initially. However, it will be very important for the markets to move past the 50-Week MA subsequently move past the 10900 level to avoid any weakness. However, if this does not happen, then despite any short-term technical pullback that may be seen, we might see some cracks appearing in the overall texture of the markets. We recommend remaining extremely light on the overall exposure and adopt a selective and cautious approach to the markets.

In our look at Relative Rotation Graphs, we compared various sectors against CNX500, which represents over 95% the free float market cap of all the stocks listed.

In the study of Relative Rotation Graph (RRG), it is seen that the BankNIFTY, Consumption and Financial Services indexes remain in the leading quadrant but are seen steadily losing their momentum. They may remain resilient to any weakness, but may contribute just modestly to out-performance, if there is any. Whereas, CNX IT, Services Sector index and the Energy pack too remain in the leading quadrant, but they are seen improving their momentum firmly. They may out-perform the broader markets.

Importantly, the broader CNX100 index has crawled back in the leading quadrant and is being followed closely by the CNX200 index which presently remain in the weakening quadrant but moving up directionally towards the leading quadrant. If this improvement in momentum continues, we may expect improvement in the market breadth going ahead.

Apart from this, Nifty Next 50, Auto, Midcap, and Media have lost momentum and are in the lagging quadrant along with the Metal index. No noteworthy performance is expected from these groups.

The Pharma pack, though it remains in the lagging quadrant, is seen improving its relative momentum. This, along with the CPSE Index, can show stock specific out-performance within its components.

Important Note: RRG™ charts show you the relative strength and momentum for a group of stocks. In the above Chart, they show relative performance as against NIFTY500 Index (Broader Markets) and should not be used directly as buy or sell signals.

Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst Member: (MTA, USA / CSTA, Canada / STA, UK) | (Research Analyst, SEBI Reg. No. INH000003341)