In Charts: What Technicals Are Saying About Indian Markets
India’s equities snapped their six-week gaining streak as investors preferred to book profits amid lack of positive global cues and credit risk woes among Indian banks.
“This week, the global markets were in a consolidation mode and a similar thing played out in India as well,” said Sanjeev Zarbade, vice president (PCG research) at Kotak Securities. “The market mood remained cautious due to insufficient progress on the next round of the U.S. fiscal stimulus, worries about credit risks in Indian banks and valuation-related concerns.”
In the week ended July 31, the BSE Sensex and the Nifty 50 Index declined more than 1% each. The broader markets, however, outperformed the benchmarks as the Nifty Midcap and Smallcap indices ended with marginal gains. While the Nifty Bank Index was one of the biggest losers during the week, pharma and information technology stocks stood out.
“The global risk-on environment is now showing signs of cooling off. While this does not mean equities will see a major downside, this certainly paves the way for some consolidation at current levels,” said Milan Vaishnav, CMT, MSTA, technical analyst and founder of Gemstone Equity Research. “We reiterate the need to refrain from aggressive longs unless the Nifty takes out 11,300-11,350 levels on a closing basis. Until this happens, we will find the index vulnerable at higher levels.”
As the headline indices look overstretched at higher levels, technical analysts focus on specific stocks and sectors going into the next week.
The Relative Rotation Graph, used to gauge relative strength of equities against a common benchmark and each other, suggests State Bank of India, ICICI Bank, Infosys Ltd. and Bharat Petroleum Corp. may relatively outperform the Nifty 50 Index.
“Infosys has seen a sharp rise in its relative momentum and is heading directly toward the leading quadrant. SBI and ICICI Bank are comfortably placed in the improving quadrant, while BPCL has rotated positively and moved into the leading quadrant,” Vaishnav said.
Bharti Airtel Ltd., Adani Ports & Special Exonomic Zones Ltd., Britannia Industries Ltd. and Bharti Infratel Ltd., however, may relatively underperform the Nifty 50.
“Bharti Infratel and Adani Ports have witnessed a sharp drop in its relative momentum and have rotated into the weakening quadrant. Britannia and Bharti Airtel continue to lose their relative momentum and appear to be moving toward the lagging quadrant,” Vaishnav said.
Gold’s Rally Intact
The price of gold has nearly doubled from its low in December 2015. Yet, the rally may continue and prices may advance further from current levels to record highs over the coming months, Abhishek Chinchalkar, CMT, head of education at Fyers Securities, said as he highlighted the relationship between gold and the U.S. 10-year TIPS yield and the dollar index.
“There is a strong inverse correlation between gold prices and the U.S. 10-year TIPS (treasury inflation-protected securities) yield. One reason for the existence of this inverse correlation is because gold, a non-interest-bearing asset, often competes with interest-bearing assets such as bonds. When inflation-adjusted bond yields decline, the attractiveness to hold bonds reduces and that to hold gold increases and vice versa,” Chinchalkar told BloombergQuint.
“Currently, the 10-year real yield in the U.S. is negative 1%, meaning investors are earning negative periodic returns on bonds when adjusted for expected inflation. This is a perfect environment in which gold thrives.”
Also, a weak dollar strengthens the case for gold prices to move higher.
“As gold is priced in dollar terms, it tends to move in the opposite direction of the U.S. dollar. That is, a weakening dollar is bullish for gold, and vice versa. The best way to monitor the performance of the dollar is to track the U.S. Dollar Index, which measures the dollar’s relative performance against a basket of six major currencies of the world,” Chinchalkar said. “Currently, gold has broken its prior life-time high. At the same time, the U.S. Dollar Index is trading right at a crucial support line that connects the 2011 and the 2014 lows. If the current decline in the U.S. Dollar Index fails to halt at this trendline, gold would continue benefiting from the dollar’s softness.”