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Dalal Street week ahead: It’s still a bear market rally, lower your guard at own risk

The trading range is expected to remain wider just like the previous two weeks.

Last Updated: Jun 06, 2020, 03.17 PM IST
The Commodities Index, which is in the improving quadrant, is now moving firmly towards the leading quadrant.
For yet another week, we saw a gush of liquidity chasing equities, which gave the Indian market a lot of buoyancy and helped it end yet another week with solid gains. The trading range for the week remained wider as expected. The headline index oscillated in a wide range, but ended the week with a strong gain of 561.85 points, or 5.86 per cent.

What we are witnessing right now is one of the sharpest bear market rallies of our times amid a risk-on buildup.

Whenever a risk-on setup occurs and when liquidity starts to chase equities, typically two things happen: first, a seeming disconnect occurs between valuations and macro-economic reality; and secondly, major technical setups and levels get violated regularly. In the present case, where the index has gained in seven out of past eight sessions, Nifty effortlessly penetrated an 11-year-old pattern resistance without halting even once. Yet, it remains a bear market rally as of now, as the index trades below the 200-week moving average.

We may again start the new week on a positive note. The trading range is expected to remain wider just like the previous two weeks. The 10,200 and 10,375 levels will act as strong resistance for Nifty, while supports will come in at 10,000 and 9,810 levels.

The weekly RSI stood at 48.93. It remains neutral and does not show any resistance against price. The weekly MACD has shown a positive crossover; it remains bullish and trades above the signal line. The percentage price oscillator, which measures relationship between two moving averages in percentage terms, remains positive. A White Body has emerged on the candles, signalling the same direction trend prevailed through the week.

Pattern analysis shows some lagging indicators have turned bearish. The 50-week moving average, which now stands at 11,022, has cut the 100-week moving average, which is at 11,078, from above. The index trades below all its moving averages, and below the 200-week moving average, which stands at 10,353.

Volatility continued to decline through the week gone by. Volatility index INDIA VIX came off 5.10 per cent to 28.68. Given the current risk-on setup, we need to take note of a couple of things. There is a fair chance that the market will gain some more, and in the process, violate a few other technically-important levels.

In such a case, looking for targets would be irrelevant. Instead, traders should focus on having strict trailing stop losses if they choose to follow the rally.

Also, there are chances that the penetration of the 11-year-old pattern resistance that exists in the form of a rising trend line may remain temporary in case the market sees some consolidation. The current rally should not be construed as the beginning of a fresh bullish trend, until and unless Nifty moves above 100- and 200-week moving averages. As of now, the index trades below all of them. A cautious approach should be maintained as the bear market rallies can be sharp and equally deceptive.

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

A review of Relative Rotation Graphs (RRG) showed FMCG and Consumption indices are losing ground steadily despite being in the leading quadrant. This is evident from the rate of diminishing relative momentum that they showed while moving southward. A similar trend was observed in the IT sector index as well. The contribution of these groups in the relative outperformance against the broader market is expected to diminish. Nifty Energy and the Infra packs continued to stay firm in the leading quadrant. The Pharma group stays in the leading quadrant, but have mildly pared the momentum. However, it is likely to relatively outperform the broader Nifty500 index along with the Infra and the Energy groups.

The Commodities Index, which is in the improving quadrant, is now moving firmly towards the leading quadrant. Nifty Metal and the Media indices appear to have almost completed their bottoming out process and appear to have entered the improving quadrant.

The services sector pack continues to move further in the lagging quadrant. It will continue to relatively underperform the broader market. Bank Mifty and the PSU Bank index have halted downsides. While they are far from bottoming out, they may consolidate their performance against the broader market along with the Realty pack.

Important Note: RRG™ 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)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

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