Analyzing India

Week Ahead: Markets Placed On Tricky Turf; Would Be Sensible To Stick To Defensive Stocks

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The Indian equity markets had a volatile week, ultimately ending on a flat note. In our previous weekly outlook, we had mentioned the possibility of the market stalling its up-move and showing some corrective intent. After volatile trading throughout the week, it was the last hour of trade on Friday which caused the week to end with minor gains. Had it not been for this last-minute pullback on Friday, the week would have still ended flatly, but with a negative note. The headline index NIFTY50 settled with a net weekly gain of 42.05 points (+0.36%).

As we look forward for the coming week, we find the markets placed in a very tricky spot. On the one hand, the markets are simply refusing to correct despite all available ingredients; on the other hand, we're dealing with a high and usually unsustainable premium of 90 points on NIFTY futures, which remain at a 3-year high, along with persistent negative divergences on the daily chart.

Unless markets see some healthy correction over coming days, such unabated up-moves will become very toxic to the markets. As we approach the coming week, it would be necessary for the market participants to stick to traditionally defensive stocks, such as IT, Pharma, etc. We expect a stable start to the week, but also expect the markets to remain vulnerable to profit-taking bouts at higher levels. The level of 11760 still remain an all-important resistance point; unless this point is taken out, we do not expect any run-away rally to occur.

The coming week is expected to see the level of 11760 and 11845 acting as resistance points. Supports come in much lower at 11510 and 11420.

The weekly RSI is 67.7869; it has marked a fresh 14-period high, but it does not show any divergence against the price. The weekly MACD remains bullish as it trades above its signal line. A Doji Star emerged on candles following an up-move, which could have potentially bearish implications. 

The NIFTY has ended above the upper Bollinger band. Though this may result in a continued up-move, the bands remain wider than normal. In the present case, the most likely scenario is that NIFTY's present trading range would continue. However, we could also see NIFTY pulling back inside the band. 

We strongly recommend adopting a highly stock-specific approach to the markets. Exposures should be kept modest and limited to traditionally defensive stocks. We might see limited out-performance of stocks and sectors from specific corners only. We advise continuing to protect profits vigilantly at higher levels and take a highly cautious approach over the coming week.


Sector Analysis for the Coming Week

In our look at Relative Rotation Graphs, we compared various sectors against CNX500, which represents over 95% of the free float market cap of all the stocks listed.

The review of Relative Rotation Graphs (RRG) shows that, in the coming week, relative out-performance is likely to come only from limited pockets. BankNIFTY, the front-line NIFTY and the Energy, FMCG, Consumption, Financial Services and Services sectors are all losing relative momentum against the broader CNX500 index.

The CPSE, Pharma, Metal and Media groups have posted good performance and are improving their relative momentum. They are presently in the improving quadrant; they are likely to consolidate and improve their momentum going forward. The Realty pack is also firmly placed in the leading quadrant. All these groups, along with the Metal group (which has also moved in the improving quadrant), are likely to post good relative out-performance against the broader CNX500.

The PSU Bank Index has moved back inside the weakening quadrant from the lagging quadrant. This sudden turn may suggest return of momentum, but it may also happen that the PSU Bank index will consolidate, offering some stock-specific performance.

Important Note: RRG™ charts show you the relative strength and momentum for a group of stocks. In the above chart, they show relative performance as against the NIFTY500 Index (Broader Markets) and should not be used directly as buy or sell signals.

Milan Vaishnav, CMT, MSTA
Consulting Technical Analyst
www.EquityResearch.asia

Milan Vaishnav
About the author: , CMT, MSTA is an Independent Technical Research Analyst at his Research Firm, Gemstone Equity Research & Advisory Services in Vadodara, India. With his experience in the Indian Capital Markets of over 15 years, he has been delivering premium India-focused Independent Technical Research and presently contributes on a daily basis to ET Markets and The Economic Times of India. He also authors India-focused "Daily / Weekly Market Outlook" - A Daily / Weekly Newsletter, currently in its 15th year of publication. Learn More
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