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  • Milan Vaishnav, CMT, MSTA

Week Ahead: Markets Placed On A Tricky Turf; Would Be Sensible To Stick To Defensive Stocks

The Indian equity markets had a volatile week as it ended on a flat note. In our previous weekly note, we had mentioned about possibilities of the markets stalling its up-move and showing some corrective tendencies. After trading volatile all through the week, it was the last hour trade on Friday which caused to week to end with minor gains. Had it not been for this last hour pullback on Friday, the week would have still ended flat, but on a negative note. The headline index NIFTY50 settled with a net weekly gain of 42.05 points (+0.36%).

As we look forward for the coming week, we find the markets placed on a very tricky turf. On one hand, the markets are simply refusing to correct despite all available ingredients; on the other hand, we deal with a high and usually unsustainable premium of 90-points on NIFTY futures which remain at 3-yr high, and persistent negative divergences on the daily chart.

Unless markets see some healthy correction over coming days, such unabated up-moves are getting unhealthier for the markets. As we approach the coming week, it would be necessary for the market participants to stick to traditionally defensive stocks like IT, Pharma, etc. We expect a stable start to the week, but also expect the markets continuing to remain vulnerable to profit taking bouts at higher levels. The level of 11760 still remain an all-important resistance point. Unless this point is taken out, we do not expect any run-away rally to occur.

The coming week is expected to see the level of 11760 and 11845 acting as likely resistance points. Supports come in much lower at 11510 and 11420.

The weekly RSI is 67.7869; it has marked a fresh 14-period high, but it does not show any divergence against the price. The weekly MACD continues to remain bullish while trading above its signal line. A Doji Star emerged on candles. It has emerged after an up-move and can have potentially bearish implications.

The NIFTY has ended above the upper Bollinger band. Though this may result in a continued up-move, the bands remain wider than normal. In the present case, the most likely scenario is that the present trading range that the NIFTY is in may continue. We may also see NIFTY pulling back inside the band.

We strongly recommend adopting a highly stock specific approach to the markets. Exposures should be kept modest and limited to traditionally defensive stocks. We might see limited out-performance of stocks and sectors from specific corners only. While continuing to protect profits vigilantly at higher levels, a highly cautious approach is advised for the coming week.

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

The review of Relative Rotation Graphs (RRG) shows that in the coming week, relative out-performance is likely to come only from limited pockets. BankNIFTY, the front-line NIFTY, Energy, FMCG, Consumption, Financial Services and Services sector are all losing relative momentum against the broader CNX500 index.

The CPSE, Pharma, Metal and Media groups have posted good performance and are seen improving its relative momentum. They are presently in the improving quadrant and likely to consolidate and improve their momentum going ahead. The Realty pack is also firmly place in the leading quadrant. All these groups, along with the Metal group which has also moved in the improving quadrant, are likely to post good relative out-performance against the broader CNX500.

The PSU Bank Index has moved back inside the weakening quadrant from the lagging quadrant. This sudden turn may suggest return of momentum, but it may also happen that the PSU Bank index shall consolidate offering some stock specific performance.

Important Note: RRG™ charts show you the relative strength and momentum for a group of stocks. In the above Chart, they show relative performance as against NIFTY500 Index (Broader Markets) and should not be used directly as buy or sell signals.

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