From a technical standpoint, the most important of the previous four sessions was Friday, as the Nifty and Nifty Bank indices were heavily overbought on the daily time frame. Other than that, they also appeared structurally overextended on the maps.
The previous session resulted in the formation of a large bearish engulfing candle. This may turn out to be even more significant and powerful as it emerged after a strong uptrend.
On top of that, the options data also indicates that looking at open interest on strike prices, Nifty and Nifty Bank may find strong resistance at the 18000 and 39500 levels respectively.
The coming week, which will also see the expiration of the current month’s spin-off series, should start off on a calm note. Nifty will face strong resistance at the 17950 and 18050 levels and support should come in at the 17650 and 17500 levels. The trading range should widen more than usual over the coming week.
The weekly RSI is at 60.57 and it has marked a new 14-period high but shows no divergence from the price. The weekly MACD is bullish and is trading above the signal line.
The week ahead will see the markets behave very hesitantly and in all likelihood the Nifty has formed a potential rally stop at the previous week’s high i.e. 17992. This means the 18000 level will act as a very strong resistance point for the markets going forward. It is strongly recommended that all upward moves are now used to reserve and protect profits at higher levels. New purchases should be made less aggressively and they should be limited only to pockets of stocks that show an improvement in their relative strength against the broader markets. A very cautious approach is advised for the coming week.
In our analysis of the Relative Rotation Graphs®, we compared various sectors to the CNX500 (NIFTY 500 Index), which represents over 95% of the free float market capitalization of all listed stocks.
Analysis of the Relative Rotation (RRG) charts show that, much like the previous week, the Bank Nifty, Nifty Consumption, FMCG, Auto and Financial Services indices continue to reduce their relative momentum against the broader markets. Additionally, while the NIFTY MidCap 100 index remains well inside the leader, PSU Bank has moved back inside the improving quadrant.
Nifty Energy also remains in the weakening quadrant this week; it appears to be about to roll inside the lagging quadrant.
The Nifty Infrastructure and NIFTY PSE indices rolled inside the lagging quadrant and may experience relative underperformance against the broader markets. On top of that, Nifty Pharma and Media also continue to languish in the lagging quadrant. Nifty Commodities and Metal Indexes are inside the lagging quadrant, but they continue to improve their relative momentum.
Nifty IT remains in the improving quadrant with the real estate index. These could continue to perform well over the coming week.
Important note: RRGTM charts show the relative strength and momentum of a group of stocks. In the chart above, they show relative performance against the NIFTY500 index (broader markets) and should not be used directly as buy or sell signals.
Milan Vaishnav, CMT, MSTA, is a consulting technical analyst and founder of EquityResearch.asia and ChartWizard.ae and is based in Vadodara. He can be contacted at firstname.lastname@example.org
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)