Analyzing India

Week Ahead: Weak Dollar Index May Continue Fueling Liquidity in Markets Unless It Pulls Up; RRG Chart Shows Strong Sectoral Setups

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In a relatively very stable week, the Indian equity markets continued with their up move and have ended yet another week with gains. The volatility that was witnessed in the week before this one was absent. Instead of a wide 700-point wild move that was witnessed, the past five days saw the NIFTY staying quite stable in the 270-odd points range with near-absence of any noticeable volatility. The volumes were a bit low given the year-end period; however, the headline index ended with a net gain of 269.25 points (+1.96%) on a weekly basis.

It has been over two months that the markets have been witnessing unabated up moves fueled by severe weakness in the US Dollar Index. The weak Dollar Index has seen strong FII inflows in the emerging markets in general and India in particular. Of the previous nine weeks, NIFTY has closed eight weeks with gains. (The one exception just saw some consolidation instead of any corrective move.) However, the NIFTY has again deviated from the mean too much; it stands overstretched and overextended. The volatility, which rose over 25% a week before this one, cooled off a bit, with INDIAVIX coming off by 2.04% to 19.56.

The coming week is crucially poised. Though it is now important to keep a close eye on any significant pullback, if it occurs at all, in the Dollar Index, as it is mostly responsible for FII inflows, the NIFTY has opened up a mild upside. Broadly speaking, it shall remain capped, with the levels of 14175 and 14320 acting as resistance points. The supports will come in at the 13850 and 13700 levels.

The weekly RSI is 77.33. It has marked a new 14-period high; it remains neutral and does not show any divergence against the price. The weekly MACD is bullish and trades above the signal line. A white body emerged on the candle; apart from this, no other formation was noticed.

Following the strong moves over the past couple of weeks, the NIFTY has now dragged its supports higher to 13000 levels. Even if a corrective move takes the index to this level, it will still keep the current primary uptrend intact as per the broader view on the markets.

Over the coming days, the possibilities of the NIFTY consolidating cannot be ruled out. The texture of the markets is likely to stay stock-specific and we will see relative outperformance coming in from select pockets of sectors. We recommend avoiding shorts; at present levels the NIFTY is not giving up despite being over-stretched. Fresh purchases, on the other side, should be kept at moderate levels as we chase the momentum on a highly cautious note.


Sector Analysis for the Coming Week

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (NIFTY 500 Index), which represents over 95% of the free float market cap of all the stocks listed.

The review of Relative Rotation Graphs (RRG) reflects very strong setup in the sectors, which are leading, and also within the sectors that are preparing to look up. The NIFTY Bank, Metal, Realty, Services Sector and Financial Services indexes are all placed in the leading quadrant. Although the Services and Financial services groups are mildly giving up on their relative momentum, all these sectors are set to relatively outperform the broader markets. The NIFTY Commodities Index has crawled inside the leading quadrant as well.

The Midcap100 Index has also crawled inside the leading quadrant following a strong rotation directly from the weakening quadrant. The NIFTY IT is the only incumbent of this quadrant, which also is attempting to consolidate its relative performance.

NIFTY Pharma, Media, Energy and Auto are inside the lagging quadrant. However, none of them are rotating in a south-west direction. They appear to be strongly improving their relative momentum. Stock-specific outperformance may not be ruled out from these groups.

The NIFTY FMCG, Consumption, PSU Banks, PSE and Infrastructure Indexes are inside the improving quadrant and appear to be steadily rotating while maintaining their relative momentum against the broader markets.

Important Note: RRG™ charts show the relative strength and momentum for a group of stocks. In the above chart, they show relative performance against 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 a qualified Independent Technical Research Analyst at his Research Firm, Gemstone Equity Research & Advisory Services in Vadodara, India. As a Consulting Technical Research Analyst and with his experience in the Indian Capital Markets of over 15 years, he has been delivering premium India-focused Independent Technical Research to the Clients. He presently contributes on a daily basis to ET Markets and The Economic Times of India. He also authors one of the India's most accurate "Daily / Weekly Market Outlook" -- A Daily / Weekly Newsletter,  currently in its 15th year of publication. Milan's primary responsibilities include consulting in Portfolio/Funds Management and Advisory Services. His work also involves advising these Clients with dynamic Investment and Trading Strategies across multiple asset-classes while keeping their activities aligned with the given mandate. Learn More
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