Dalal Street week ahead: Don’t try to ride any pre-Budget rally, stay defensive

In our weekly note last week, it was mentioned that market was showing the first signs of fatigue, as Nifty marked a high at 14,653. This was this point where bouts of profit taking have emerged. During the week gone by, the market did make some incremental highs, but failed to move past and sustain above the high of the previous week. This made the 14,653 level a potential intermediate top.

Also, on the expected lines, the trading range stayed wider as the market witnessed collective moves. Nifty oscillated in a 531-point range before it finally ended with a negligible loss of 61.80 points (-0.43%) on a weekly basis.

Regardless of any underlying buoyancy or liquidity-driven bounces, the market has sharply deviated from its mean. This was evident from the fact that even the 20-week moving average is currently at 12,747; some 1,624-odd points below the current level. Because of this, the Bollinger Bands have become wider-than-usual, indicating a high probability of limited upsides from the current level. There are high chances that Nifty will continue with its corrective activity within a broad range and with lower volumes.

As we approach the Union Budget, the volatility is likely to increase over in the coming days.

Over the previous week, though, volatility subsided a bit with INDIA VIX coming off some 6.61% to 22.42 on a weekly basis. Nifty is likely to face resistance at 14,450 and 14,530 levels in the coming week, while supports will come in at 14,250 and 14,000 levels. The trading range is expected to remain wider in the coming week as well.

The weekly RSI is at 78.38. It remains neutral and does not show any divergence against the price. However, the RSI is in the overbought territory. The daily MACD is bullish, as it remains above the Signal Line. A Spinning Top occurred for the second consecutive week. This has been formed out of a small real body; this is also a candle with a long upper shadow, which shows potential stalling of the current upmove.

Pattern analysis suggest following a breakout from the 13,000 mark, as Nifty penetrated and broke above the rising trend line resistance, it has probably marked a potential top at 14,653. For the next immediate medium term, the 14,650-14,750 zone will be a strong resistance area for the 50 pack.

Regardless of the approach of the Union Budget or liquidity fuelling the rally, it is time to avoid chasing high-beta stocks and those that have run up too much over the past few weeks. All upmoves from this point, if at all they occur, should be used to book profit and take some money off the table.

We strongly reiterate that even if some short-term momentum is seen over the coming days due to speculative buildup ahead of the Union Budget, it would be prudent to stay with the traditionally defensive IT, pharma, FMCG, and consumption stocks. In a way, any new purchase from this point should be extremely stock-specific and exposures should be kept at modest levels.

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 the Relative Rotation Graphs (RRG) shows Nifty Financial Services, Commodities, Banking, Services Sector and Metal Indices are sharply paring their relative momentum despite being in the leading quadrant. There are possibilities that these groups may gradually stop outperforming the broader market.

Nifty PSU Bank and Realty indices are still firmly placed in the leading quadrant accompanied by Nifty MidCap100 Index. These groups are likely to relatively outperform the broader Nifty500 index along with Nifty Auto, which has just entered the leading quadrant.

The IT Index is the only one in the weakening quadrant; that too, is seen sharply improving on its relative momentum against the broader markets. Nifty Pharma Index continues to falter inside the lagging quadrant, though it appears to be in the process of improving its relative momentum. Nifty Media Index has just entered the improving quadrant, pointing to a likely end to its relative underperformance.

Nifty PSE, Infrastructure, FMCG, Infrastructure and Energy groups are also placed inside the improving quadrant. These groups may put up a resilient show going ahead from here.

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.

(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)

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