Dalal Street week ahead: Market may cool down, return of FIIs will be key
100-week moving average, which currently stands at 10,921, will remain the most crucial support.
The headline Nifty on Friday saw its highest-ever single-day gain and ended 5.32 per cent higher. The pronounced shift in trend came in a reaction to the Finance Minister announcing hefty corporate tax cuts, doing away with the enhanced surcharge on capital gains tax, including in derivatives and scrapping of the tax on buyback of shares announced prior to July 5, 2019.
These were seen as a quasi-Budget-like events, and the market reacted with a string short-covering rally that took Nifty higher by over 600 points at one point of time. After mildly coming off the highs, Nifty ended the week in positive by gaining 198 points, or 1.79 per cent.
The move, which has made Indian corporate tax rates one of the most competitive in the world, is being touted as a very bold move and solid attempt at resetting the economy, which has been sluggish over the past couple of quarters.
It would be more meaningful to examine how Friday’s move altered the technical landscape of the market. The strong one-way move that occurred on Friday was nothing but the result of a ruthless short covering in the market.
Another interesting point to note is that FIIs just bought a measly net Rs 35 crore worth of equity in the cash market, while DIIs pimped in Rs 3,000 crore. For this move to sustain, we will require buying by FIIs, who have dumped stocks worth $4.5 billion over the past couple of weeks.
The market is likely to be volatile at the start of the week, as there may be some cooling off in the market and some profits may be booked when the announcements get digested fully.
The 100-week moving average, which currently stands at 10,921, will remain the most crucial support in the event of any consolidation in the market.
The coming week will see the 11,381 and 11,460 act as key resistance. Supports, in the event of any consolidation or cooling off, will come in at 11,100 and 10,920.
The weekly RSI stands at 50.15; it remains neutral and does not show any divergence against the price. The weekly MACD continues to be bearish as it trades below its signal line.
Pattern analysis on the weekly charts shows Nifty has not only held the 100-week MA but also crawled above the 50-week MA as well and survived the breach of the neckline support following the formation of a rounding top.
The fiscal stimulus has not included any demand boosters as yet, although the likelihood of such announcements cannot be ruled out; as of now, they are absent. Further, as a consequence of the stimulus, the government has forgone Rs 1.45 lakh crore in revenue on an annualised 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 11,381 and the 20-week MA, which is currently at 11,401, may be 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 on the forefront and are expected to relatively outperform 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 at moderate levels.
(Milan Vaishnav, CMT, MSTA is a Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at email@example.com)