Dalal Street Week Ahead: Stay cautious; short-covering likely on account of F&O expiry

The market certainly remained highly volatile as it reacted to global markets’ reaction to the 75 bps rate hike by the Fed on Wednesday. However, on the weekly time frame charts, it is just one more week of consolidation near the upper edge of the trading range with the breakout getting just delayed.

The market found itself oscillating in a 628-point range. Despite this, the headline index Nifty ended with just a loss of 204 points (-1.16%) on a weekly basis.

From a technical perspective, the levels of 50-Week MA are in focus again. Nifty has delayed its breakout from the falling trend line that begins from the lifetime high point of 18,600 and joins the subsequent lower tops. Nifty has closed below this trend line pattern resistance, and this makes the level of 17,700 a significant resistance point for the index.

However, the focus is on the lower edge. The 50-Week MA is currently placed at 17125. This level is expected to play out as crucial support for the market on a closing basis. It means that any major slip below this level on a closing basis will invite incremental weakness for the market.

Agencies

While we looked at the technical structure of the chart, we need to keep a few data points in mind as well. FIIs have been shorting the market as per the derivatives data. Net shorts have been added in the last three sessions. As of now, the market is sitting with large amounts of shorts in the system. The coming week is likely to see the levels of 17,500 and 17,650 acting as resistance points. The supports come in at 17,100 and 16,920 levels.

The weekly RSI is 53.71. It stays neutral and does not show any divergence against the price. The weekly MACD stays bullish and above its signal line.

Regardless of the talks around us concerning fear of recession, the extent of the possible decline, and the kind of panic the current decline may trigger, we need to approach the market with a sane mind.

It is strongly recommended that one must not resort to blindly shorting the market given the extent of the shorts that exist in the system. On the other hand, as far as making purchases is concerned, one will need to stay highly selective in this approach.

While following the basics, it is strongly suggested that the highly-leveraged positions must be avoided and overall exposures should be kept at modest levels. A short-covering from the lower levels cannot be ruled out as we head into the monthly derivatives expiry week. A cautious view 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) continues to show Nifty Financial Services, Bank Nifty, and PSU Bank indices placed in the leading

while maintaining their relative momentum against the broader market. These pockets are likely to relatively outperform the market. Midcap 100 and Realty indices are also inside the leading quadrant. They too may outperform but they are also seen loosening up a bit on their relative momentum.

Agencies

Agencies

Nifty Consumption, FMCG, and Auto indices continue to advance further inside the weakening quadrant.

Along with Nifty Pharma, Energy, Media, Infrastructure, and PSE indices also continue to stay inside the lagging quadrant. However, they appear to be improving their relative momentum while staying inside this quadrant. This holds true for the IT Index as well.

The Nifty Metal index continues to stay firm inside the improving quadrant.

Important Note: RRGTM charts show the relative strength and momentum of a group of stocks. In the above Chart, they show relative performance against the Nifty500 index (Broader market) and should not be used directly as a buy or sell signal.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae.)