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Dalal Street week ahead: Keep protecting profits, wait for confirmation of breakout

The risk-on global setup that emerged towards the end of the week saved the Indian market from ending on a net negative note. After a weak performance in the early days of the week, the Indian market picked up in the second half of the week.

Nifty pulled itself back from after testing the lower end of the consolidation range that it had formed and moved towards the upper end of that zone. The overall volatility declined over the past couple of days, and the headline Nifty index closed the week with a net gain of 162.20 points, or 1.39%.

The market has again come to a crucial point where it will still attempt a breakout. The shorter timeframe charts may support some incremental moves on the upside, but the higher timeframe charts show bearish divergence continuing to persist on the lead indicators. Apart from this, the market will react to the GST Council meet, where an upward revision of rates is being speculated. Though much is supposed to have been discounted by the market, volatile reactions cannot be ruled out.

The market has ended again at a Double Top resistance level at 12,103. The 12,100-12,160 zone of Nifty now becomes crucial for the market once again. In the event of any retracement, the trading range is expected to remain broader than usual.

Nifty 50  milan
Weekly market outlook from Dec 16 through Dec 20, 2019

The Relative Strength Index (RSI) on the daily chart stands at 63.18. The RSI has not marked a fresh 14-period high along with Nifty, and this shows a bearish divergence against price. The MACD stays bullish and trades above its signal line. No significant patterns were formed on the candles. Pattern analysis on the weekly charts showed Nifty is again testing the
upper end of the trading zone, which it had formed over the past couple of weeks. A clean breakout has continued to elude the market despite Nifty marking incremental highs in the recent past.

India Volatility Index, INDIA VIX, has further cooled off during the week by 2.49% to 13.30. It is trading near one of its lowest levels observed over the past couple of months. Prolonged periods of low volatility in the market reflects complacency among market participants; this is the time when one needs to maintain strict vigilance at higher levels. We recommend not taking the occurrence of a breakout for granted. It would be prudent to wait for a breakout to actually happen and then get it confirmed subsequently. Until that happens, it would be prudent to keep protecting profits at
higher levels while maintaining a cautiously positive bias.

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 listed stocks. A review of the Relative Rotation Graphs (RRG) showed strong rotations in the PSU Bank, Metal, Bank Nifty and Financial Services segments. The PSU Bank and the Metal indices have advanced further while staying in the improving quadrant. Bank Nifty and the Financial Services indices have crawled into the leading quadrant. These groups are likely to relatively outperform the broader market. The Auto and the Energy indices are also in the leading quadrant; they seem to be slowing down a bit but may still continue with their relative outperformance.

Relative Rotation Graph 1

Relative Rotation Graph 2

The IT group continues to remain a dominant outperformer, lying far away in the lagging quadrant. Besides IT, Infrastructure and Nifty PSE indices also remain in the lagging quadrant. The FMCG and Consumption groups along with commodities are also seen heading southward. These groups, along with IT, Infrastructure and PSE, may potentially
underperform the broader market on a relative basis.

Important Note: RRG™ charts show the relative strength and momentum for a group of stocks. In the above Chart, they show relative performance against NIFTY500 Index (broader market) 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

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