D-Street Week Ahead: Market to remain jittery; defensive sectors may shine

The Indian equity markets were just consolidating and trying to find a base for themselves in the first four of the last five trading sessions. However, the final session on Friday did much of the undoing for them. While there were no cues from the US following a Thanksgiving Holiday on Thursday, the Asian markets tanked on renewed Covid fears. The Indian markets were no exception. The Nifty50 gyrated in an 800-point trading range during the week to finally close with a net loss of 738 points or 4.16 per cent.

In its one of the worst weekly performances over the recent past, the index not only dropped off the 20-month rising trend line, which began from the lows of March 2020 and joined the subsequent higher bottoms but also marked and confirmed 18,600 as a top for the markets.

The fear and the extent of knee-jerk reaction was visible as volatility surged through the roof. The India VIX spiked by a massive 40 per cent on the weekly basis to 20.80.

The technical landscape stays precarious. On the daily chart, Nifty tested its 100-DMA while On the higher weekly time frame it tested the 20-period MA. In either case, this may not have distinctly disrupted the primary trend, but has certainly pushed the markets in a broad trading range.

The coming week is expected to be jittery, with the trading range likely to stay wider than usual. The levels of 17,300 and 17,480 will act as immediate resistance levels. And the supports will come in at 16,900 and 16,750.
The weekly RSI is 52.38. It has marked a new 14-period low and shows a bearish divergence against the price. Meanwhile, the weekly MACD is bearish and trades below its signal line. A large black candle has emerged and reflects a directional consensus of the market participants on the downside.

The pattern analysis shows that after slipping below the upward rising trend line drawn from the lows of March 2020, the index resisted this pattern resistance for two weeks and has finally resumed its downtrend. This rising trend line will act as a strong pattern resistance for the markets whenever a technical pullback occurs. The broader pattern analysis reveals that unless taken out convincingly, the Nifty has 18,600 as a potential top in place.

Without any doubts, there are greater chances that the coming week may stay jittery as the markets grapple to find a bottom for themselves.

Stocks and sectors with improving Relative Strength may show resilience, but at the same time, we are likely to see renewed interest in the traditionally defensive sectors like Pharma, FMCG, and consumption. It is recommended that leveraged positions on either side should be avoided. A highly cautious and very selective approach is advised for the coming week.

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (Nifty 500 index), which represents over 95% of the free float market cap of all the stocks listed.

The analysis of Relative Rotation Graphs (RRG) does not show any noticeable change in the sector setup that existed in the previous week. PSU Bank index, along with Nifty Energy, Midcap 100, PSE, Realty, Media and Infrastructure continue to remain inside the leading quadrant and are set to relatively outperform the broader Nifty500. SmallCap100 index and Nifty IT index remain inside the weakening quadrant. Nifty Services sector index has also slipped inside the weakening quadrant.

Nifty FMCG continues to languish inside the lagging quadrant. Apart from this, the Commodities and Metal indices are also inside the lagging quadrant although they appear to be consolidating on their relative momentum. Nifty Pharma, despite being in the lagging quadrant, appears to be sharply improving its relative momentum against the broader markets.

The Auto index and Bank Nifty are inside the improving quadrant of the RRG. Financial Services, though is in the weakening quadrant, appears to be rapidly paring its relative momentum against the broader markets.

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 Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae and is based at Vadodara. He can be reached at [email protected]