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Week Ahead: Weak Dollar Index May Continue Fueling Liquidity In Markets Unless It Pulls Up; RRG Chart Shows Strong Sectoral Setups

In a relatively much stable week, the Indian equity markets continued with its up move and have ended a yet another week with gains. The volatility that was witness in the week before this one was absent. Instead of a wide 700-point wild move that was witnessed, the past five days saw the NIFTY staying much stable in 270-odd points range with near-absence of any noticeable volatility. The volumes were a bit low given the year-end period; however, the headline index ended with a net gain of 269.25 points (+1.96%) on a weekly basis.

It has been over two months that the markets have been witnessing unabated up moves fueled by severe weakness in the US Dollar Index. The weak Dollar Index has seen strong FII inflows in the emerging markets in general and India in particular. Of the previous nine weeks, NIFTY has closed eight weeks with gains. The one week just saw some consolidation instead of any corrective move. However, the NIFTY has again deviated from the mean too much; it stands overstretched and overextended. The volatility, which rose over 25% a week before this one, cooled off a bit with INDIAVIX coming off by 2.04% to 19.56.

The coming week is crucially poised. Though it is now important to keep a close eye on any significant pullback, if at all it occurs in Dollar Index as it is mostly responsible for FII inflows, the NIFTY has opened up a mild upside. Though broadly speaking, it shall remain capped with the levels of 14175 and 14320 acting as resistance points. The supports will come in at 13850 and 13700 levels.

The weekly RSI is 77.33. It has marked a new 14-period high; it remains neutral and does not show any divergence against the price. The weekly MACD is bullish and trades above the signal line. A white body emerged on the candle; apart from this, no other formation was noticed.
Following the strong moves over the past couple of weeks, the NIFTY has now dragged its supports higher to 13000 levels. Even if a corrective move takes the index to this level, it will still keep the current primary uptrend intact as per the broader view on the markets. 

Over the coming days, the possibilities of the NIFTY consolidating cannot be ruled out. The texture of the markets is likely to stay stock-specific and we will see relative outperformance coming in from select pockets of sectors. We recommend avoiding shorts at present levels the NIFTY is not giving up despite being over-stretched. Fresh purchases, on the other side, should be kept at moderate levels as we chase the momentum on a highly cautious note.

In our look at Relative Rotation Graphs®, we compared various sectors against CNX500 (NIFTY 500 Index), which represents over 95% of the free float market cap of all the stocks listed.

The review of Relative Rotation Graphs (RRG) reflects very strong setup in the sectors which are leading also within the sectors that are preparing to look up. The NIFTY Bank, Metal, Realty, Services Sector and Financial services indexes are all placed in the leading quadrant. Although Services and Financial services groups are mildly giving up on their relative momentum, all these sectors are set to relatively outperform the broader markets. NIFTY Commodities Index has crawled inside the leading quadrant as well.

Midcap100 Index has also crawled inside the leading quadrant following a strong rotation directly from the weakening quadrant. NIFTY IT is the only incumbent of this quadrant which also is attempting to consolidate its relative performance.

NIFTY Pharma, Media, Energy and Auto are inside the lagging quadrant. However, none of them are rotating in south-west direction. They appear to be strongly improving their relative momentum. Stock-specific outperformance may not be ruled out from these groups.

NIFTY FMCG, Consumption, PSU Banks, PSE and Infrastructure Indexes are inside the improving quadrant and the appear to be steadily rotating while maintaining their relative momentum against the broader markets. 

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.  

This was first published by The Economic Times

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

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