Dalal Street week ahead: Market to remain stock & sector specific; watch Dollar Index

The domestic stock market added more strength and piled up incremental gains during the week gone by. Nifty has not only stayed above the crucial two-year-long pattern resistance trend line, but also added some directional bias to it by moving higher.

The market stayed much less volatile than expected, which added consensus to the directional move. After staying in a 450-point trading range during the truncated week, the index ended with gains for the fifth week in a row.

The benchmark Nifty50 closed with net weekly gains of 289 points, or 2.23 per cent. As Nifty moves past the two-year-long trend line pattern resistance, it has shifted the support higher to 12,800 level. This means even if Nifty tests the 12,800 level in the near future due to profit taking, the trend would remain intact.


It would reverse only if Nifty slips below the 12,850-12,800 zone. However, this reading does not take away from the fact that the rally has been powered mainly by FII flows due to severe weakness in the dollar. Any pullback in the DXY (Dollar Index) has a potential to disrupt the rally.

Volatility has dropped as the India VIX has slipped 9.03 per cent to 18.03. The market is likely to see some consolidation at higher levels in the coming week. With the market now in the uncharted territory, the 13,300 and 13,485 levels are likely to act as resistance, while supports will come in at 13,100 and 12,850 levels.

There are high possibilities that the trading range may widen in the coming days. The weekly RSI stood at 72.21; it remains in the mildly overbought zone above the 70 mark. It has marked a fresh 14-period high, which is a bullish signal. However, it remains neutral and does not show any divergence against the price. The weekly MACD is bullish and remains above the signal line.

The slightly widening slope of the Histogram showed an acceleration in the momentum over the past couple of weeks. Apart from a white body that occurred, no other important formations were seen on the candles.

The coming week is likely to be crucial and will keep us on our toes. FII flows remain strong and that is causing an unabated rise in the market.

The Dollar Index has been miserably weak, and this is aiding FII flows to emerging markets in general, and India in particular. That said, it will now be important to keep a close eye on the Dollar Index, which is likely to remain oversold in the near term. There is a possibility of some technical rebound within the downtrend, which may cause a minor disruption in the ongoing trend.

Given the current technical setup, we do not recommend initiating heavy shorts, but to keep chasing the momentum in an extremely watchful way. The market will remain highly stock and sector specific and one should stick to those stocks and sectors which are exhibiting either strong or improving relative strength against the broader market. A cautiously optimistic approach is advised for the week ahead.

In our look at the 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) showed Bank Nifty, Financial Services and Services Sector Indices are placed in the leading quadrant. The Metal Index has entered the leading quadrant following a strong rotation from the weakening quadrant. The Realty Index has also entered the leading quadrant following strong rollover from the improving quadrant. These sectors are set to show strong relative outperformance against the broader Nifty500 index collectively.

Nifty IT and Auto Indices are in the weakening quadrant along with the IT and the Midcap100 Indices.

While staying in the lagging quadrant, Nifty Commodities and Energy groups trying to improve their relative momentum along with the Infra index. Nifty PSE and PSU Bank indices are getting rolled over strongly and moving in the improving quadrant. The FMCG and Consumption indices, however, seems to be taking a breather.

The Pharma and Media Indices are languishing in the lagging quadrant and may exhibit relative underperformance against the broader market.

Important Note: The RRGTM charts show relative strength and momentum in a group of stocks. In the above chart, they show relative performance against the Nifty500 Index (broader market) 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)