Dalal Street Week Ahead: Will equities outperform other asset classes again?

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Markets had a truncated previous week, with Friday being a public holiday for Gurunanak Jayanti’s account. During the four-day trading week, NIFTY remained in corrective mode and finished on a negative note on all four trading days of the week. In the process, the index breached important supports on the daily and weekly charts. In a 521 point trading range, the NIFTY hasn’t swung much back and forth; instead, he maintained a downward directional consensus. Following sustained corrective pressure, the overall index closed with a net loss of 337.95 points (-1.87%) on a weekly basis.

Looking at the technical landscape, the NIFTY finally broke through the potentially bearish head and shoulders pattern on the daily chart. It did so by sliding below the neckline which also coincided with the 50-DMA which stands at 17850. On the weekly charts, the NIFTY violated a long uptrend line support by sliding below. This trendline starts from the low point created in March 2020 and joins the next higher lows on the weekly chart. Either way, in doing so, the NIFTY has dragged its resistance down to the 17900-18000 levels. Over the coming week, NIFTY will face strong resistance at this point if they attempt to organize a technical pullback.

Volatility has decreased; INDIAVIX was down 2.37% to 14.8600 on a weekly basis. A hectic start to the week is expected; options data shows that the 17,900 and 18,000 levels will act as potential resistance points. Supports are at the 17630 and 17510 levels. Weekly RSI is 63.28; it shows a slight bearish divergence from the price. The weekly MACD showed a negative crossover; it is now bearish and below the signal line. A bearish engulfing candle has appeared; subject to confirmation on the next bar, this may have bearish implications. It also reflects the directional consensus of market players.

Analysis of the models shows that the NIFTY violated the 20-month long uptrend line. This trendline starts from the March 2020 lows and joins the next higher lows. All in all, given the persistent selling pressure on the markets, we reiterate that we remain light on leveraged exposures. However, global asset allocation models show that stocks enter the main quadrant. This means that equities, as an asset class, can regain their relative outperformance against other assets. Even if the markets remain under corrective pressure, we will see few selected pockets performing well and relatively outperforming the broader markets. It is recommended to approach the markets in a very selective way; no excessively leveraged shorts should be created as short hedging is expected, and a cautious outlook should be maintained while protecting profits on either side of the trade. The behavior of market prices vis-à-vis the 18000-18150 zone will be decisive in the coming days.

In our review of Relative Rotation Graphs®, we compared various sectors to the CNX500 (NIFTY 500 index), which accounts for over 95% of the free float market capitalization of all listed stocks.

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Analysis of the relative rotation graphs (RRG) shows that the PSUBANK index has rolled inside the main quadrant. This index, along with the NIFTY Energy, Midcap 100, PSE, Realty, Media and Infrastructure indices which are also in the main quadrant, will relatively outperform the broad NIFTY500 index.

The NIFTY IT index remains in the weakening quadrant. NIFTY FMCG continues to languish inside the lagging quadrant. Apart from that, the commodities and metals index is also inside the lagging quadrant; however, they

seem to consolidate on their relative momentum. The NIFTY Pharma Index is also inside the lagging quadrant, but it is seen improving from its relative momentum. We see him putting an end to his relative underperformance.

The auto index moves steadily within the improvement quadrant. Apart from that, Bank Nifty and Financial Services Index are also found in the RRG improvement quadrant when compared to the broader markets.

Important note: RRGTM charts show the relative strength and momentum of a group of stocks. In the chart above, they show relative performance against the NIFTY500 index (wider markets) and should not be used directly as signals to buy or sell.

Milan Vaishnav, CMT, MSTA, is a consulting technical analyst and founder of EquityResearch.asia and ChartWizard.ae and is based in Vadodara. He can be contacted at [email protected]


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