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  • Milan Vaishnav, CMT, MSTA

A Special Note: Cooling Off Likely; Remain Selective A Vertical Rise May Make Risk-Reward Skewed

In a week that turned dramatic on the last day, pulled the markets that were over 3% down through the week into the positive territory in one single session. The headline index on Friday saw its highest-ever single-day gain and ended 5.32% higher. The pronounced shift in the trend came in a reaction to the Finance Minister announcing hefty corporate tax cuts, doing away with the enhanced surcharge on the capital gains tax including the derivatives by the FPIs and scrapping the tax on buyback of shares prior to July 05, 2019.

These announcements were seen almost as a quasi-budget-like event, and the markets reacted with a monstrous short-covering rally which took the NIFTY higher by over 600-points at one point of time. After mildly coming off from the highs, the NIFTY ended the week in positive by gaining 198.30 points (+1.79%).

The move, which has made the Indian tax rates one of the most competitive in the world, is being touted as a very bold move and solid attempt in resetting the economy which has been flagging off late over the past couple of quarters. It would be more meaningful to examine how the current move has attempted to alter the technical landscape of the markets.

The strong one-way up-move that occurred on Friday was nothing but a result of a ruthless short-covering in the markets. Another interesting point to note the FII just bought a measly net Rs. 35 Crores worth of equity in the Cash Segment, but it was DIIs who bought stocks worth Rs. 3000 Crores and propelled the Friday’s rally. Hopefully, if this move has to sustain, we will require buying by FIIs, who have otherwise dumped stocks worth USD 4.5 Billion over the past couple of weeks.

The start to the week is likely to be volatile as there may be some cooling off in the markets as some profits may be booked and contents of the announcements are digested fully. The levels of 100-Week MA, which currently stands at 10921, will remain the most crucial support point now in the event of any consolidation in the markets.

The coming week will see the levels of 11381 and 11460 as resistance. Supports, in the event of any consolidation or cooling off, will come in at 11100 and 109020.

The weekly RSI stands at 50.15; it stays neutral and does not show any divergence against the price. The weekly MACD continues to remain bearish while trading below its signal line.

While having a look at the pattern analysis on the weekly charts, the NIFTY has not only held the 100-Week MA but has crawled above the 50-Week MA as well and has survived the breach of the neckline following the rounding top formation.

The announcement of the fiscal stimulus has not included any demand boosters as yet though the likelihood of they being announced cannot be ruled out; as of now, they are absent. Further, as a consequence of the stimulus, the Government has forgone the amount of Rs. 1.45 lakh crore as revenue on an annualized basis. This may, in all probability, increase the fiscal deficit by 30 to 40 basis points.

It is very much likely that we see some cooling down of exuberance, otherwise chasing of the overheated markets may be risky. The previous week’s high of 11381 and the 20-Week MA, which is currently at 11401, maybe an important zone to watch. A rally may get extended if NIFTY moves past and sustains above these levels.

There are higher chances of some profit-taking at current levels. Even in the event of the rally being extended or some profits being taken, the Consumption, FMCG and IT will remain in the fore-front and are expected to relatively out-perform as indicated by Relative Rotation Graphs (RRG). We recommend not to chase the move from now on blindly as it may be hazardous to do so. While protecting profits at higher levels, a cautious view is advised while keeping overall exposures and moderate levels.

Milan Vaishnav, CMT, MSTA Consulting Technical Analyst Member: (CMT Association, USA / CSTA, Canada / STA, UK) | (Research Analyst, SEBI Reg. No. INH000003341)