Dalal Street Week Ahead: Rising VIX Indicates Hedging; traders recommended a tactical approach

Markets traded markedly upwards last week, ending on a strong positive note. Nifty continued to rise and posted gains for the third week in a row. It fluctuated within a wider intraweek range of 720.95 points while trading between 25,060.55 and 25,781.50. But even as the overall index gained ground, market breadth remained relatively weak throughout the week – a key concern during the rise. Meanwhile, India’s VIX spiked 15.07% to 11.62, indicating a rise in near-term volatility expectations. Nifty ended the week with a net weekly gain of 424.50 points (+1.68%).

The major highlight of the week was the Nifty’s break above the symmetrical triangle pattern it had been meandering into for several months. This breakout came with a close near the upper Bollinger Band and has pulled the support levels significantly higher to the 25,300–25,400 zone. However, the rally is driven by weak market breadth, raising questions about the movement’s participation and sustainability.

Moreover, the sharp spike in the Indian VIX adds further caution as it reflects increasing hedging activity. While the price structure has turned bullish after the breakout, the lack of strong internals and the sharp rise in volatility suggest the rally could be vulnerable if not supported by broader market strength.

Given the technical breakout, markets may start the week ahead on a stable to positive note. However, traders should keep in mind that the week is shorter. Tuesday’s session will be limited to an hour-long Mahurat Trading in the evening, with Wednesday being a market holiday. Immediate resistance is expected around the 25,850 and 26,000 levels for the coming week. The supports have now shifted higher and are resting at 25,520 and 25,400 zones after the breakout.

The weekly RSI stands at 60.88. It has reached a 14-period high but remains neutral and does not show any divergence from the price. The MACD on the weekly chart is bullish and trading above its signal line. A bullish candle has formed near the breakout point, confirming the move out of the symmetrical triangle and validating the strength of the breakout for the time being.

From a pattern analysis point of view, Nifty has resolved a multi-month symmetrical triangle on a positive note. This breakout, which occurs above a strong confluence zone, adds strength to the medium-term setup. The Index is trading well above all of its major moving averages – the 20 week, 50 week, 100 week and 200 week – further supporting the bullish structure. The outbreak also opens up the possibility of a trend increase, provided broader participation improves. A cautiously optimistic approach is advised in the coming week. While the technical breakout gives the bulls an edge, rising volatility and limited market breadth call for a disciplined strategy. It is essential to protect gains at higher levels while selectively participating in power. Traders should avoid aggressive new buying and instead take a stock-specific approach with a strong focus on risk management. The method to approach the week: remain moderately bullish but tactically cautious. In our look at Relative Rotation Graphs®, we compared several sectors to the CNX500 (NIFTY 500 Index), which represents more than 95% of the free-float market capitalization of all listed stocks.

Relative Rotation Charts (RRG) show Nifty Pharma, Metal and Auto Indices retaining leadership. These groups are in the leading quadrant and are expected to perform relatively better than the broader markets.

The Nifty Midcap 100 Index remains the only index to be in the weakening quadrant. Relative momentum is also seen to improve slightly. Individual stock-specific performance may be observed, but the overall relative performance of the mid-cap sector may remain tepid.

The convenient consumption, commodities, services sector and media indexes continue to languish in the lagging quadrant. They may continue to underperform the broader markets relatively. However, other groups such as Realty, PSE, Nifty Bank, Infrastructure, Energy and Financial Services are also in the lagging quadrant, but
they are seen to improve significantly in terms of their relative momentum.

The Nifty FMCG Index is in the improving quadrant but is rapidly slowing down in its momentum. The IT and Pharma indices are also in this quadrant and are expected to continue to improve their relative performance against 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 (broader markets) and should not be used directly as buy or sell signals.