Cautious positive outlook amid rising volatility

The stock market ended the year 2021 on an optimistic note. During this year, The NSE Nifty gained by 24.15 per cent, from 13981 to 17355 points. In the last one month, it advanced by 380.40 points or 2.24 per cent after witnessing higher volatility in recent time. On the last day of the year, the benchmark index gained by 150.1 points and settled at 17354.05. During the last week, the Nifty Midcap-100 and Smallcap-100 are advanced by 2.8 per cent and 4.1 per cent, respectively. Nifty Pharma is the top gainer with 5.4 per cent and the Auto index up by 2.9 per cent. Barring Nifty Media (-1 per cent), all the sectoral indices ended in the green. FIIs sold Rs 35,493.59 crore worth of equities in the last month. The DIIs bought Rs 31,231.05 crore. In 2021, FIIs sold Rs 91,626 crores.

On a monthly timeframe, it is clearly bullish with all the key Moving Averages are trending upside and widening from one another, indicating good strength in the rally. The momentum indicators, RSI & ADX – DMI, are also quite bullish. However, the +DMI rising, showing the increasing power of bulls, is not able to breach the prior -DMI (red line on the same pane) peak of March 2020. That looks something of a blemish on the otherwise strong rally. On the weekly time frame, the short-term moving average had a second pinch last week (after the earlier one in May 2021), and the price has bounced from 40-week average support that is sloping up along with the 20-week MA indicating that the rally strength is still good. During late Sept and early October 2021, price and momentum showed a negative divergence indicated on the weekly chart. That negative divergence pushed the index down below its key moving averages of 20, 50, and 100.

A similar structure happened between January and February 2021 that also pushed the index down below the said three key MAs. That -ve divergence was negated when RSI broke above the down-sloping line (marked A & B on RSI) and simultaneously index moved back above the 20 & 10-week moving averages as well as breaking above the price trendline during May 2021. The current negative divergence is still in force and we need to wait till RSI crosses above the C-D trend line, and the price moving above the key moving averages and break above the price trendline that has been acting as resistance since mid-Oct 2021. However, as long as the slope of 20 & 40 moving averages does not tilt down my bias for a continued uptrend on this timeframe is unshaken.

For the fourth consecutive day, the index sustained above the 20DMA. After two consecutive Doji candles, the Nifty closed above the last three days of the sideways range is a positive for the market. As the global markets are closed, the first trading day in 2022 may start with a subdued note. As the Nifty retraced more than expected, it may consolidate with some volatility. The probability is it may oscillate between 50 and 20DMAs. A cautiously positive outlook is advised for the coming week.

(The author is a financial journalist and technical analyst)