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  • Milan Vaishnav, CMT, MSTA

Week Ahead: Time To Put Prudence Before Greed; Current Levels To Be Dealt With Very Cautiously

The markets remained in striking contrast to what was expected in the week that went by. The markets were consolidating near their 50-Week MA for nearly 15 weeks and were showing all signs of impending consolidation. That being said, contrary to what was expected, the markets ended up putting up a very strong show. The headline index piled up strong gains and ended the week with net gain of 391 points (+3.55%) on weekly basis.

This is the time when both traders and investors alike, need to put prudence before greed. NIFTY has ended near very important pattern resistance points on the weekly chart; on the daily chart, it remains steeply overbought and evidently prone to consolidation.

By the time when the session on Friday ended, the NIFTY had come off nearly 60-points from the high point of the day displaying some signs of taking a breather. Though we expect a stable start to the coming week, the behavior of the NIFTY against the levels of 11500 will be important to be watched. We do not expect the NIFTY to post any significant runaway rise beyond this point.

We expect the levels of 11500 and 11625 to act as immediate resistance points for the markets. Supports will come in much lower at 11210 and 10950 levels.

The weekly RSI is 63.7457; it has marked a fresh 14-period high which is bullish. RSI does not show any divergence against the price. The weekly MACD continues to trade above its signal line. A big white candle appeared. This candle has emerged following a congestion zone and in the process, it has lent credibility to the up move.

The pattern analysis of the weekly chart presents an interesting picture. On one hand, the current up-move, which is being chased by gush of liquidity shows strong momentum in place. On the other hand, the NIFTY has halted just below the lower trend line of the 30-month long upward rising channel that it breached on the downside in the first week of October 2018. This level, though for a short-term, may pose some resistance to the markets at higher levels.

The NIFTY has closed above the upper Bollinger band. Though the prices have broken the upper band, the most likely scenario is for the current range to continue. Usually if supported by other pieces of evidence present on the chart, any close above the upper Bollinger band may signal a fresh breakout. However, in the present context, the chances of the NIFTY getting pulled back inside the band are much higher. The index remains grossly overbought on the daily chart and any unabated rise, despite the liquidity chasing the markets, will be unhealthy if it comes without any consolidation which looms imminent.

All in all, we reiterate once again that for the immediate short term, it is now extremely important to place prudence before greed. The over-heated parameters on the daily charts are enough advance signals that the markets may slip into consolidation at any time and such moves might remain violent and equally sharp on the downside. Even if the downside may remain limited, they will bring considerable volatility in the trade. We strongly suggest continuing to remain extremely light on the exposures and continue to utilize up moves to protect profits at higher levels. Greedy chase to the momentum should be avoided while adopting a highly cautious view for the coming week.

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.

While reviewing Relative Rotation Graphs (RRG), it is seen that the BANKNIFTY has halted its decline and loss of momentum given the very strong weekly performance this week. It remains in the leading quadrant and along with this group, the ENERGY, IT, CNX 100 and Services sector also remain in the leading quadrant. Out of these, ENERGY and IT continue to remain favorably placed. The CNX REALTY index has also crawled in the leading quadrant. These groups are collectively likely to post good relative out-performance in the coming week.

The MEDIA, FMCG, Infrastructure, NIFTY MID50, NIFTY Next 50 along with Auto remain in the lagging quadrant. The PSUBank index also remain in the weakening quadrant. This shows that the rally that we witnessed in this week is had contribution from just select sections of the markets.

Apart from this, PHARMA, Metals and CPSE indexes have continued to show improvement in their relative momentum. These groups may post stock specific out-performances in the coming week.

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)