Chase any Nifty bounce with caution now; Metals, Pharma, FMCG look better placed

Despite intermittent hiccups, the week gone by turned out to be much better than expected for the Indian market. Nifty not only averted the bearish consequences for the violating the Rising Trend Line, but also went on to end the week with decent gains. Compared with the previous week, this time Nifty traded in a wider range, oscillating in a 465-point band, mostly with a bullish bias. In between, it saw two days of consolidation and throwback.

The headline index closed with net gains of 497 points (+3.39%) on a weekly basis to finish on a broadly strong note.

From the technical perspective, Nifty has once again survived the breach of the Rising Trend Line. This Trend Line begins from the lows of March 2020 and joins the subsequent higher bottoms. Given the surge witnessed in the past five sessions, the index is once again above this important pattern support. On the other hand, volatility has declined significantly over the past five days. India VIX came off another 5.86% to 19.08 and now trades very close to its lowest point seen over many months.


Although Nifty has once again attempted to break out of the Falling Channel, it continued to show lack of internal strength as measured by the lead indicators. However, market breadth data remains strong. Nifty PCR stood at 1.38 across all expiries.

The index will step into the coming week with some likely consolidation; and the 15,250 and 15,325 levels may act as key resistance points, while supports will come in at 15,000 and 14,880. The trading range is likely to remain a bit wider than usual.

The weekly RSI stood at 63.64. It shows a mild bearish divergence against price. While Nifty marked a new 14-period high, the RSI has not, and this resulted in a bearish divergence. The weekly MACD remains bearish and is below the Signal Line.

Pattern analysis on the weekly chart shows the index has once again attempted to break out of the Falling Channel that was created after Nifty marked its lifetime high of 15,431. There are few contradictory signals which show Nifty is showing negative divergences against the lead indicators. On the other hand, market breadth data remains strong.

In the current technical setup, as long as the upward momentum continues, it needs to be chased cautiously. From now on, despite the secular upmove — if at all we see one — the quality of stocks that one holds will be of prime importance.

We recommend chasing the market bounce, if any, on a highly selective basis. The current technical setup also requires market participants to stay highly vigilant at higher levels and guard profits. A highly selective approach is advised for the coming week.

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

A review of the Relative Rotation Graphs (RRG) shows just like the previous weeks, Nifty Metal Index continues to make strides inside the leading quadrant. Also, Pharma, FMCG and Consumption indices are firmly placed inside the improving quadrant, even as they maintained their relative momentum against the broader Nifty500 Index.

Nifty IT Index has rolled inside the leading quadrant. It is likely to relatively outperform the broader markets. Nifty Smallcap, Midcao100 and Commodities indices are inside the leading quadrant as well. They may relatively outperform, but only on a selective basis, as they are seen paring their relative momentum.

Nifty PSE Index has slipped inside the weakening quadrant. Nifty Infrastructure Index also remains inside the weakening quadrant along with the PSU Bank Index. Nifty Services Sector Index, Bank Nifty, Realty, Financial Services and Nifty Auto Indices are all placed inside the lagging quadrant. Nifty Energy Index has also slipped back inside the lagging quadrant, after sharply paring its relative momentum.

Important Note: RRGTM 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 [email protected])

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