The market had a phenomenal runup over the previous months. But, it chose to take a breather last week. There was relentless profit taking over the past few days and the trading range remained wider on the anticipated lines.
The past five sessions saw Nifty trade in a wide range of 895-odd points. The headline index ended with a net loss of 737.30 points, or 5.13 per cent, on a weekly basis. Even on a monthly basis, Nifty came off 347 points, or 2.48 per cent.
Going into next week, we approach one of the most important domestic external events, which is the Union Budget to be presented on Monday. Going by past data, the market has just seen one of the worst performances ahead of the Union Budget in 15 years.
Nifty has come off around 1,150-odd points from its high point, in a near-vertical decline. This means the market is approaching the Budget on a noticeably light note. So the slightest of positive development will trigger a sharp pullback.
In the same breath, any flirting with the STT, or LTCG, or any cess in the name of Covid, or any such expenditure that may be viewed as wasteful and an addition to the fiscal deficit, will not be taken in a good way by the market.
Volatility spiked over the week, with India VIX moving up another 13.02 per cent to 25.34. The 13,800 and 14,175 levels are likely to act as immediate resistance, while supports will come in at 13,500 and 13,050 levels. The trading range is expected to be wider than usual.
The weekly RSI stands at 63.15; it has moved below 70 from the overbought area, which is a bearish indication. It remains neutral against the price. The weekly MACD remains bullish and is now above its Signal Line. The narrowing slope of the histogram suggests a decelerating market momentum. A large black candle occurred following a Spinning Top and one with a large upper shadow. The occurrence of such a candle near the high point suggests a likely trend reversal. The market has marked the 14,650-14,750 zone as the intermediate top as well as a strong resistance zone.
Pattern analysis makes it evident that the market had deviated too much away from mean. Even the shorter 20-week moving average currently stands at 12,856 level; near the green rising trend line that Nifty penetrated to achieve the breakout. This shows the extent of deviation from mean that had occurred over the past many weeks.
It is an obvious that the Budget will infuse volatility on either side. It is, in a way, relatively good that the market is not so long-heavy going into the Budget Day. While it may not be possible to precisely predict what may be in store on Monday, the market may see some upside if there is no major negative proposals in the Budget.
However, from a larger perspective, the more concerning thing are the signs that point towards a likely end to the prevailing risk-on setup, as reflected in the global asset allocation on the RRG. In the given context and taking into account the current technical setup, we strongly recommend not chasing upmoves, if there are any, on the Budget Day and after that. There may be short-term momentum on the either side, but it would be more rewarding from a risk-return perspective to stay invested more in the low beta and defensive stocks.
A cautious approach is advised for the week ahead.
In our look at Relative Rotation Graphs®, we compared various sectoral indices against CNX500 (Nifty500 Index), which represents over 95 per cent of free-float market-cap of all the listed stocks.
The review of the Relative Rotation Graphs (RRG) showed continuation of the trend that was seen over the past two weeks; Nifty Financial Services Index, Commodities, Services sector indices and Bank Nifty are about to cross over into the weakening quadrant, indicating a likely end to their relative outperformance against the broader Nifty500 Index. Nifty Metal Index is also seen taking some breather. The only two indices that are firmly placed inside the leading quadrant are the PSU Banks and Auto. These are likely to relatively outperform the broader Nifty500 Index.
The IT index is the only one inside the weakening quadrant; it is showing a sharp improvement in relative momentum. Nifty Pharma is the only index s inside the lagging quadrant; it is also improving on the relative momentum front. However, it is yet to complete its retracement and consolidation process, which it had started after testing its recent peak.
The Energy Index is seen slightly faltering inside the improving quadrant, as is the PSE Index. Apart from this, Nifty Infrastructure, Media, FMCG and Consumption Indices are firmly placed inside the improving quadrant and appear to be maintaining their north-easterly rotation. They may relatively outperform the broader markets as well.
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@example.com)