Nifty remains close to highs while record-low VIX signals loom among calm markets

In the past holiday week, markets largely traded in a parochial and lethargic manner with Nifty ending the week with small gains.The index fluctuated within a very narrow range of just 227.80 points, between a high of 26,236.40 and a low of 26,008.60. Given the lack of directional signals and participation, the action remained largely stock-specific and momentum was selective.

Meanwhile, India’s VIX fell further by 3.91% on the week to close at 9.15, the lowest level, indicating complacency in the system. Nifty ended the week with a modest gain of 75.90 points or 0.29%.

The current structure of the market indicates a state of stagnation rather than active trending. Despite trading just below lifetime highs, the Nifty appears to be in a zone of indecision, with visible pressure on momentum and continued weakness in the broader market; the Nifty 500 is lagging behind and remains almost 3% away from its own peak.

The index is trying to stay above the upper breakout zone, but follow-through remains weak. There is no clear bearish setup yet, but the upward movement is unconvincing. Importantly, the India VIX at multi-year lows calls for caution; a low VIX does not imply low risk; it often precedes volatility spikes. The markets are not trending strongly, and any negative trigger could leave the index vulnerable at higher levels.

Given the current construction, markets could see a cautious or flat start in the coming week. The two resistance levels to watch are 26,250 and 26,430, while supports are expected near 25,880 and 25,680. A targeted move requires a strong break above or below these reference points. Until then, the index may remain within a certain range and remain vulnerable to mean-reversion movements if sector leadership does not improve.

The weekly RSI stands at 60.84 and remains neutral and shows no divergence against the price. It is not overbought and continues to maintain its bullish range. The weekly MACD remains above the signal line, indicating a positive setup, but the histogram bars are narrowing, reflecting declining momentum. No classic candlestick formation has appeared on the weekly charts, indicating indecision and consolidation at higher levels.

From a pattern perspective, Nifty has broken out above a major symmetrical triangle in the longer term and is currently consolidating above its breakout zone. This zone is roughly between 25,600 and 26,200. The index continues to trade above its major moving averages, including the 20-week, 50-week and 100-week MA. However, the slightly narrowing Bollinger Bands reflect suppressed volatility, usually a precursor to a bigger move in either direction.Given the technical landscape, it would be wise to avoid aggressive index-level exposures at this time. Traders and investors should take a stock-specific approach, focusing on relative strength and risk-adjusted opportunities. With a lack of broad-based participation and extremely low volatility, protecting profits should take priority over pursuing comprehensive moves. The method to approach the week ahead is to remain cautiously optimistic, hold trailing stops, and wait for a decisive breakout or healthy pullback before investing fresh capital.

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) indicate that the Nifty Financial Services, Midcap 100, PSU Bank, Nifty Bank and Infrastructure Indices are in the leading quadrant. Despite some slowdown in relative momentum in sectors such as financial services and banking, the overall structure remains unchanged. These groups are likely to perform relatively better than the broader markets.

The Nifty Metal and Auto indices are in the weakening quadrant. The stock-specific show would go on; However, Auto may continue to see a slowdown in relative performance. However, the Metal Index is showing an improvement in its momentum versus the broader markets.

The Realty Index has entered the lagging quadrant. Nifty commodities, FMCG, energy, consumption, PSE and the media indices are in the lagging quadrant. The Media Index is starting to show a sharp improvement in its relative momentum, after a prolonged period of relative underperformance.

The IT index, the only sector index in the improving quadrant, is moving strongly towards the leading quadrant while maintaining relative momentum.

Important Note: RRG™ 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.

(Milan Vaishnav, CMT, MSTA Consulting Technical Analyst)

(Disclaimer: Recommendations, suggestions, views and opinions expressed by experts are their own. These do not represent the views of the Economic Times)