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Dalal Street week ahead: Market at crucial juncture; stay highly sector & stock-specific

Indian equities continued a measured climb over the past five days, and have gone on to pile up some incremental gains. After a brief consolidation at the start of the week, Nifty has gone on to mark fresh lifetime closing highs each day, as liquidity continued to chase equities. The Dollar Index remained weak, which fuelled FII inflows to the emerging markets in general.
The headline index itself oscillated in a 326-point range and ended with a net gain of 246 points, or 1.83 per cent, on a weekly basis. This was the seventh straight week of gains for the index.

The coming week is a truncated one as the markets will be closed on Friday for Christmas. If we read the technical charts in isolation, the index is now highly overstretched on both daily and weekly timeframe charts. It is a different thing that a weak dollar is continuing to fuel FII inflows, and a surge in liquidity is helping the market momentum.

It will be crucial to keep a keen eye on these things, as the market is now overdue for some healthy consolidation, if not a major correction. Staying invested in the right sector would be the key thing to better handle this technical setup.

Volatility remained subdued: India VIX declined marginally by 0.89 per cent to 18.62. We may see some consolidation in the coming week, as a result of which, the trading range may widen. The 13,850 and 14,000 levels may act as key resistance points, while supports can come in at 13,600 and 13,480 levels.

The weekly RSI stood at 75.72 level. It has marked a new 14-period high, which is a bullish indication. It remains neutral and does not show any divergence against price. The RSI remains in the overbought territory. The weekly MACD is bullish and remains above its signal line. A white body emerged on the candles. It simply reflects a directional consensus among the market participants.
Pattern analysis of the weekly charts showed Nifty has taken out the two-year-old rising trend line, as it moved past the 13,000 mark. Although the index is clearly over-extended now, it has shifted its support higher to 13,000 level. Sectoral rotation in the market is quite evident now, with traditionally defensive sectors like FMCG, Consumption, Pharma and IT looking up. With liquidity fuelling market momentum, it would be prudent to approach the market in a highly sector- and stock-specific manner. Adopting such an approach will help mitigate the risks in the event of any broad consolidation.

While avoiding both shorts and excessive leveraged exposures, a highly selective approach is advised for the coming week.

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

A review of the Relative Rotation Graphs (RRG) shows some clear sectoral rotation in the market. With high beta still leading the way, the baton is clearly shifting to some defensive sectors.

Nifty Financial Services, Bank Nifty, Nifty Services Sector Index, Nifty Realty and Nifty Metal Indices are in the leading quadrant. Except for the Metal Index, the other four are slowing down slightly in terms of relative momentum. However, these groups will continue to stay relatively strong against the broader market.

Nifty IT index continues to be in the weakening quadrant. Nifty MidCap100 Index is also in the weakening quadrant, but it appears to be taking a U-turn to roll over again to the leading quadrant. Nifty Auto Index also remains in the leading quadrant, but is seen mildly improving on its relative momentum.

Nifty Energy, Nifty Pharma and Nifty Media indices are in the lagging quadrant. But they have started improving on their relative momentum. Nifty FMCG and Consumption Indices have rolled over inside the improving quadrant along with Nifty Infrastructure index. Along with these groups, PSU Banks and the PSE Index also remain firm inside the improving quadrant.

Important Note: RRGTM 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.

Credit: Stocks-Markets-Economic Times

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