market outlook: Dalal Street week ahead: Stay with defensive stocks, cut leveraged trades

In our last weekly notes, we had mentioned that the market was getting overstretched and overextended for the immediate short term. It was a matter of concern, as some form of consolidation or a corrective move looked imminent; and the absence of it was making the present uptrend highly risky and unhealthy.

On the expected lines, the market started the week with a very sharp and violent correction, which saw Nifty slip below the 13,200 mark. However, the following four days saw Nifty recoup all of those losses to end the week flat with a net loss of 11.30 points, or 0.08%.

Regardless of the sharp pullback that the market saw in the subsequent four sessions, Nifty has flashed the first warning sign. Without disputing the underlying buoyancy and liquidity chasing the market, the sharp violent correction has shown that unless the current uptrend is not followed up with some breather for the market, the current setup has again turned unhealthy.

Volatility has also risen sharply and increased over 25% on Monday. On a weekly basis, INDIA VIX moved up 7.22% to 19.97.

The market is expected to see a rangebound movement with limited upsides in the week ahead. If the market sees some corrective action, the range is expected to widen just like the previous week. The 13,850 and 14,065 levels will act as resistance, while supports will come in at 13,500 and 13,360 levels.

The weekly RSI stood at 75.48. It remains overbought and neutral, as it does not show any divergence against price. The weekly MACD remains bullish, as it stays above the signal line. A long-legged Doji occurred on the candle. When this happens near the high point as in case of Nifty, it is once again seen as a warning signal of a potential disruption of the current uptrend.

Pattern analysis showed that after taking out the two-year-long rising trend line, Nifty has reached the highly overbought zone. The current rise has got overstretched as it heavily deviated from the mean. However, in the process of this breakout, Nifty has dragged its near-term support higher to 13,000 level.

All in all, the market has shown a highly tactical shift in the form of sectoral rotation over the past couple of days. We have seen defensives like FMCG, consumption and pharma staying relatively strong along with the IT sector, which has relatively underperformed the broader market over the past quarter. We reiterate avoiding the high-beta stocks and those sectors which have run up rapidly. We recommend staying put in the defensive stocks while keeping leveraged exposure at moderate levels and maintaining a cautious view on the market.

In our look at Relative Rotation Graphs®, we compared various sectoral indices against CNX500 (Nifty500 Index), which represents over 95% of the free float market-cap of all the listed stocks.

A review of Relative Rotation Graphs (RRG) showed a strong sectoral rotation over the past couple of weeks. Nifty Bank, Metals, Realty and Financial Services indice are in the leading quadrant and appear to be mainraining a strong momentum relative to the broader Nifty500 Index. Nifty Services Sector index is also in the leading quadrant.

However, this index and the Nifty Bank are taking some breather and mildly giving up on their relative momentum. However, all these sectoral indices are likely to put up a reasonably resilient show.

Nifty IT index remains in the weakening quadrant. Without showing any sign of improvement I its relative momentum, the index continues to rotate in the south-west direction. Nifty Auto index has crawled inside the lagging quadrant while Nifty MidCap100 has rotated back inside the leading quadrant from the weakening one.

Nifty Energy Index has continued to show a near-vertical improvement in the relative

momentum.

Although it is in the lagging quadrant, the index is making a strong rotation towards the improving quadrant. Nifty Pharma and Media indices are inside the lagging quadrant, but all of them are showing mild improvement in their relative momentum against the broader market.

Nifty Consumption and FMCG indices have advanced inside the improving quadrant. Along with them, Nifty PSE, PSU Bank and the Infrastructure indices continue to rotate favourably inside the improving quadrant.

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 is a Consultant Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)