Dalal Street week ahead: Market momentum lost; smallcaps, PSU, auto, metal packs strong
The bearish divergence against price continues to appear on the RSI.
After giving up all the gains made over the previous days, Nifty ended the week on a flat note, gaining a negligible 17.55 points, or 0.15 per cent, on a weekly note. The coming week would be even more crucial than the previous one. The price action has reinforced the 12,000-12,100 zone as a stiff resistance area, as Nifty failed to break above it and came under pressure at those levels.
The bearish divergence against price continues to appear on the RSI. Unless the bearish divergence gets corrected, either it would prevent a breakout or keep the breakout devoid of potency and make it vulnerable at higher levels. We have a truncated week ahead, with Tuesday being a trading holiday on account of Guru Nanak Jayanti. The 12,030 and 12,150 levels are expected to act as key resistance, while supports are likely to come in lower at 11,850 and 11,700 levels. In the event of any downside, this range is expected to get wider.
The weekly RSI stands at 61.54. While it remains neutral, it continues to show bearish divergence against price as it appears to be making lower tops. The weekly MACD remains bullish above its signal line.
On a candles, a classic Shooting Star has emerged. For a candle to qualify as a Shooting Star, the upper shadow should be long enough to be of at least double the size of its real body. A Shooting Star appears when the price opens higher, gets stronger, but comes off the high to close near the opening level on either side.
Pattern analysis on the weekly charts clearly shows loss of momentum for the market. After breaking down from the 30-month-long upward rising channel in October, 2018, Nifty has created multiple resistance points in the area between 12,000 and 12,100 levels. While it made incremental highs after October 2018, it has encountered a bearish divergence from the lead indicators.
When the previous week started, it was a fingers-crossed-situation as Nifty could have attempted a breakout with or without confirmation from other indicators. However, with the previous run coming to an end, the overhead resistance in the 12,000-12,100 area has got stronger with a Shooting Star punctuating a rally.
For Nifty to have a sustainable breakout above the 12,000-12,100 area, the bearish divergence needs to get corrected first. If a breakout occurs without this condition getting corrected, it will raise direct question marks on the sustainability and health of the rally.
We recommend treading the market with caution and not making any aggressive purchases on the decline. Instead, one should be highly cautious in approaching the market and remain stock-specific.
In our look at Relative Rotation Graphs, we compared various sectors against CNX500 (Nifty500 Index), which represents over 95 per cent of the free-float market-cap of all the listed stocks. The review of Relative Rotation Graphs (RRG) shows that FMCG, Consumption, Infrastructure and Energy groups remain in the leading quadrant. Among these, while Energy and Infrastructure and building on further on their relative momentum, FMCG and Consumption groups appear to be in the process of topping out. Though cumulative outperformance may be expected from these groups, more should come from the Energy and Infrastructure over the coming week.
The Smallcaps, PSE, Auto and Metal groups are seen firmly advancing in the improving quadrant. Bank Nifty, too, is in the process of bottoming out and ending its recent underperformance. The Financial services pack is showing some resilient performance as well.
The PSU Bank sector is trying hard to bottom out, though it has some distance to cover yet. The IT sector, along with Realty, Services, and Pharma are the lagging quadrant while grossly underperforming the broader markets.
Important Note: RRGTM charts show you 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 email@example.com)