Sector indices losing relative strength

All major tops were made when the VIX was at a lower level, including the 2008 and 2020 crashes. In this scenario, if the Nifty makes a new all-time high, strongly bullish bias will emerge. In any case, if the Index fails to make a new high, it is better to be selective on new purchases

With huge price swings for three days, the equities rebounded and closed almost at the previous week’s high. As the geopolitical tensions eased, all the sectoral indices closed higher. The benchmark index Nifty gained 272.95 points or 1.23 per cent. BSE Sensex gained by 0.83 per cent. The broader market indices have outperformed the benchmarks, as Smallcap-100 and Midcap-100 indices gained by 4.37 per cent and 3.96 per cent. The PSU Bank index was the top gainer with 6.4 per cent, followed by the Realty index with 4.6 per cent. The advance-decline ratio is positive during the week. The FIIs sold Rs36,933.21 crore during this month. In this calendar year, they sold massively by Rs85,559.33 crore. The volatility index, India VIX, is down by 18.82 per cent to 10.92. On Wednesday, it tested 9.85, the lowest in recent history.

Despite the technical pullback and the Nifty closing at the prior week’s high, it’s important to note that the positive closing doesn’t necessarily reflect a strong bullish bias. The index has formed a long upper shadow and a small body candle, which typically indicates market indecisiveness. This could be a key factor in understanding the current market sentiment. Last Friday, the market came under selling pressure. On a monthly chart, the index is repeating the Doji candle after January. The monthly volumes have been declining for the last three months. For the last four months, the index has been trading in a thousand-point range, moving with higher lows in a rising channel. Interestingly, the price action is erratic within this rising channel.

The index’s movement out of the current thousand-point range could lead to a strong directional move. The 10-week average 22,313 is the immediate support for next week, and the 20-week average 21,993 is the strong support. If this support zone breaks with high volume, it could indicate a potential test of the prior major swing low of the 21,329-21,240 zone. On the upside, the index should at least register a high close on a weekly basis, which means the index must close above the 22,520 points. In any case, if the index closes above this level, it has the potential to test 23,200 level.

The Nifty closed on the 20-DMA support, and the Bollinger bands are narrowing on daily and weekly charts. This indicates range-bound action for another week or two before the event, risk (general elections). Expect a directional move. The other benchmark index, the BSE Sensex, is showing more bearish strength than bullish strength. It closed below the week’s opening and below the 20DMA. It formed more indecisive candles than the Nifty. The weekly and daily MACD are bearish. The daily RSI of Nifty is reacting from the 60 zone as it failed to shift its range into the strong bullish zone.

The volatility index, India VIX, tested below 10 level, which is the lowest in recent times. When VIX is at lower levels, expect an unexpected spike, as it has an inverse relationship. Low VIX levels are the result of lower volatility and reflect market traders’ reluctant participation. All major tops were made when the VIX was at a lower level, including the 2008 and 2020 crashes. In this scenario, if the Nifty makes a new all-time high, strongly bullish bias will emerge. In any case, if the Index fails to make a new high, it is better to be selective on new purchases. Be with good earnings and strong relative strength.

The Relative Rotation Graphs show that only the Metal and Auto sector indices are in the leading quadrant, losing momentum. The Banking and Financial sector indices are in the improving quadrant, but Friday’s decline may lead to momentum loss. The Consumer Durables are in the improving quadrant and may outperform the broader market. All other sector indices are losing their relative strength and momentum as well.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)