Nifty could test resistance in a range-bound market; investors need to protect their profits and stay stock-specific

After forming a potential top and extending weekly losses, markets finally took a breather and ended the week on a positive note. It was a shortened week as August 15 was a trading holiday due to Independence Day. During the last four trading days, markets remained choppy; however, they remained within a defined range and held above the 50-DMA. The trading range remained slightly higher; the Nifty fluctuated in a range of 464.20 points during these four trading sessions before ending towards its top. Volatility cooled down a bit; the India VIX fell 6.08% to 14.40 during the week. The benchmark index closed with a weekly gain of 173.65 points (+0.71%).

The markets are still range bound; however, they are currently trading near the upper end of the defined trading range. According to the derivatives data, there is a significant accumulation of call OI at the strikes between 24,500 and 24,800. Moreover, on any upward move from the current levels, the Nifty will test the extended resistance of the trend line pattern; this is the pattern support that the Nifty violated on its way down.

This support has now turned into resistance and is expected to resist any upside move in Nifty from the current levels. On the downside, the 50-DMA is at 24,407. Since the maximum PUT OI is at 24,000 strikes, the 24,000-24,100 zone is now the most immediate and key support zone for the markets.

Monday is likely to see a stable start to the week, with the 24,700 and 24,850 levels likely to act as resistance points. Supports lie lower at 24,250 and 24,050.

The weekly RSI is at 69.71; it remains neutral and shows no divergence from the price. The weekly MACD is bullish; however, the narrowing histogram shows fading momentum while the index is moving higher.

The pattern analysis of the weekly chart shows that the all-time high of 25,078 continues to remain an intermediate high for the markets. No trend move is likely unless this level is convincingly broken. The main point that draws attention is the market breadth.

The cumulative AD line of the broader Nifty 500 index is diverging negatively. This would mean that fewer and fewer stocks are participating in the upside move.

All in all, the markets could remain stable in the coming week. However, even if the uptrend continues, the markets remain vulnerable to corrections from higher levels. Now more emphasis needs to be placed on securing profits at higher levels.

While new purchases will be kept highly stock-specific, it would be wise to focus on stocks with strong and improving relative strength.

Leveraged positions must be limited and kept to a reasonable level. A cautious outlook is advisable for the coming week.

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

Relative Rotation Graphs (RRG) show no major changes in the sector structure. Lack of leadership remains a cause for concern with only the Nifty Midcap 100 index in the leading quadrant.

The Nifty PSE and Realty Index are in the weakening quadrant. Moreover, the Consumption and Auto indices are also in the weakening quadrant. The PSE and Consumption indices are expected to improve their relative momentum.

The Nifty Bank Index has fallen into the lagging quadrant. It is expected to underperform relatively than the broader markets. The Nifty Metal Index has fallen into the lagging quadrant. The Nifty Commodities, Energy, PSU Banks and Infrastructure indices are also in the lagging quadrant. Some of them are expected to improve their relative momentum against the broader markets.

The Nifty Services, Pharma, Media, Financial Services, FMCG and Media indices are in the ascending quadrant and are expected to further improve their relative performance in the coming week.

(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 (broader markets) and should not be used directly as buy or sell signals.)

(The author, CMT, MSTA, is a consulting technical analyst and founder of EquityResearch.asia and ChartWizard.ae.)

(You can now subscribe to our ETMarkets WhatsApp channel)