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Nifty gains 15%, India VIX eases 47% in April; volatility on cards for May, avoid these sectors

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By Milan Vaishnav

The financial markets across the globe have witnessed severe turmoil over the past two months following the outbreak of the Coronavirus pandemic. The month of March saw one of the worst monthly declines in the history of the capital markets; on the other hand, the month of April saw a significantly sharp technical pullback from the lows that were formed in the month of Markets.

The country is facing a nation-wide lockdown that has bought the economy literally on a standstill. The lockdown is expected to be lifted partially, and in phases beginning from May 04, however, its negative effect on the economy is expected to linger on for some time.

For an outlook for the coming month, looking at the present technical structure would be a prerequisite. It is evident from the long-term monthly charts that the 11-year old primary uptrend was violated with the NIFTY breached the long-term rising trend line in March. In the process, the index slipped below its 50-Month MA and took support atits 100-Month MA on a closing basis despite an intra-month breach of that level.

Applying the rule of classical technical analysis, any major support, if violated, becomes an equally strong resistance. This means that even if the current technical pullback continues, the markets may stop just below the upward rising trend line that the NIFTY has violated in March. This means that NIFTY may find resistance anywhere near the10000 levels in the coming month.

The PPO is negative. The Relative Strength Index (RSI) stands at 43.21 on the monthly charts; it stays neutral and does not show any divergence against the price. The monthly MACD is bearish as it trades below the signal line.

The India Volatility Index, INDIAVIX, has declined by over 47% to 33.98 in April. This paves some way for the volatility to increase and for the markets to undergo likely corrective more in the coming month.

In other words, if the technical pullback continues, the NIFTY will get highly vulnerable as it approaches the 10000-mark. If we look from a global perspective, the Indian equities are likely to underperform global peers relatively. This is because the Indian broader index, NIFTY 500, is placed in the lagging quadrant of the Relative RotationGraph (RRG) when benchmarked against MSCI World Index.

For the coming month, adopting a defensive approach would be a prudent way to approach the markets. It is best advised to remain invested in the Pharma, Consumption, and FMCG sectors. Some stock-specific outperformance from Infrastructure stocks can be expected. Still, largely speaking, the other sectors like IT, financials, financial services, banks, PSU banks, Metals, Auto, etc., are likely to underperform the broader markets on a month-on-month basis.

(Milan Vaishnav, CMT, MSTA is a Consultant Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. The views are the author’s own)