In all the hustle and bustle, stick to quality

Transcription

1 Bi a74 Technical Outlook Indices Snapshot % from 1-month Close Indices 200 DMA % chg Sensex CNX Nifty CNX Mid Cap CNX Small Cap CNX IT BSE Auto CNX Pharma CNX FMCG BSE Banking BSE Oil & Gas BSE Metal BSE Capital Goods BSE Power BSE Realty BSE PSU * Closing Price of Feb 06, 2018 Source: BSE India, NSE India, ICICIdirect.com Research * BSE has replaced IT, health care, FMCG, midcap and small cap indices with new ones. Due to lack of historical data, we have considered the CNX IT, pharma, FMCG, mid-cap and small cap indices for reference Research Analyst Dharmesh Shah dharmesh.shah@icicisecurities.com Nitin Kunte, CMT nitin.kunte@icicisecurities.com Pabitro Mukherjee pabitro.mukherjee@icicisecurities.com Ninad Tamhanekar, CMT ninad.tamhanekar@icicisecurities.com Vinayak Parmar vinayak.parmar@icicisecurities.com February 7, 2018 In all the hustle and bustle, stick to quality The benchmark indices turned volatile last week, after setting a record high (11171) in January 2018, which surpassed our projected target of 10836, mentioned in previous edition. Global market sell-off led by higher bond yields acted as a trigger for profit booking after a 12% gain in preceding two months. The broader markets, represented by Nifty mid cap (-1.65%) and small cap (-3%) indices, underperformed Nifty (+4.7%) in January 2018 as profit booking set in after a spectacular rally. Post budget price action further accelerated decline in these indices leading to cut of 15% and 20% respectively from their life time highs. The faster retracement of last rising segment (December 2017-January 2018) in these indices indicate a consolidation going forward What we expect The Nifty has displayed signs of a slowdown in momentum for the first time in the starting of year CY18. The break below Budget day panic low, which was identical to previous week s low (10880) signals a pause in the ongoing rally and implies a corrective phase as index formed first weekly lower low in eight weeks With two week s decline, the Nifty has approached its key support zone of amid global equity sell-off. The sharp recovery during current week s panic low of indicate presence of buying support at lower levels. Going forward, we expect Nifty to hold the key support zone of and lead a pullback towards levels in February Index is likely to consolidate in this broad range, which is likely to act as a foundation for next leg of rally in line with long term bullish price structure Historically, bull markets tend to undergo periodic phases of secondary corrections. This, in turn, creates fresh buying opportunities. We believe the current decline in index is of similar nature. Since the beginning of the upmove since 2017 Index has maintained a rhythm of 6-7 weeks of rally and 2-4 weeks of intermediate corrective phases. Index has already completed two weeks of decline in current scenario. Therefore, investors should utilise ongoing correction as an opportunity to accumulate quality stocks in a staggered manner Inter-market divergence suggests Nifty outperformance The Nifty staged resilience throughout January 2018 and outperformed mid and small cap indices. The substantial profit booking in broader markets after significant rally in CY17 has led those indices to overbought trajectory, resulting in deeper corrections. The faster retracement of last rising segment on midcap and small cap indices is a sign of consolidation in coming weeks whereas Nifty has held above its December 2017 lows so far signalling relative out performance Short-term hurdle at Index is likely to find resistance near as it is the confluence of following parameters Confluence of 50% and 61.8% retracement of recent decline ( ) is placed at The breakdown level and Budget low is placed at levels

2 Key support placed at We expect the Nifty to hold its key support zone of in current decline. The key support is marked by the confluence of: 80% retracement of December 2017 January 2018 rally ( ) at which was held in current week s panic decline The strong base formation in November-December 2017 and a panic low of Gujarat election result day is placed in the region Rising trend line connecting September 2017 December 2017 swing lows is placed at levels Long term 52-week rising moving average is placed at levels Momentum oscillators The weekly stochastic oscillator has eased from extreme overbought reading of 97 to the neutral reading of 54 in current week. The brief period of consolidation would help oscillator to ease out of overbought conditions which in turn would augur well for long term price structure NSE Nifty CMP Exhibit 1: NSE Nifty Weekly Candlestick Chart Current price/time correction augurs well within larger up trend and offers fresh entry opportunity Each corrective leg has lasted only for two to four weeks Double 9687 Support at week EMA Weekly stochastics has approached neutral reading after recent decline while RSI has approached its own support zone Page 2

3 The Nifty Bank index witnessed strong up move in January 2018 to form a fresh all time high of However, profit booking since the start of February 2018 owing to weak global cues saw the index gave up all its previous months gains and is currently trading near levels Nifty Bank (25811) Consolidation likely after recent sharp decline Exhibit 2: Nifty Bank Weekly Bar Chart The monthly Nifty Bank index form a sizable bullish candle during January 2018 and tested the upper band of the rising channel placed since CY 16 as can be seen in the adjacent chart which also coincides with the 123.6% extension of the previous up move ( ) as projected from the December 2017 low of placed around levels. A bearish engulfing candlestick pattern in the weekly chart in the first week of February highlighting emergence of profit booking at higher levels indicating a pause in the momentum and paves the way for a round of secondary consolidation, going forward Going forward, the index is likely to enter a healthy consolidation phase after the last four months sharp up move from to We expect the index to consolidate in the range of and in the coming month thus forming a base for the next leg of up move The index has major support at range being confluence of: i) The lower band of the channel ii) The low of December 2017 placed at levels iii) The long term 200 days EMA placed at levels Short term resistance is seen around levels as it is the confluence of the recent breakdown area and the bearish gap area of 2nd February 2018 The short term support base for the index is placed around regions as it is the confluence of following parameters: The lower band of the long term rising channel placed since CY 16 is placed around levels The December 2017 low placed at levels The long term rising 200 days EMA placed at levels Weekly stochastic has recently generated a bearish crossover below its three period s average and is in downtrend signalling corrective consolidation in the coming month Among oscillators, the week stochastic has recently generated a bearish crossover below its three period s average and is currently in a downtrend signalling a corrective bias and can lead to a corrective consolidation in the coming month Page 3

4 BSE sectoral merry-go-round Sector rotation monitor What each quadrant indicates Sectors in the top right quadrant indicate strong trending sectors The IT index top the relative rotation graph as it capitalised its position in the leading quadrant signalling continuance of relative outperformance of the IT stocks. In this section, we focus on the relative performance of the BSE sectoral indices. The adjacent scatter chart highlights the relative performance of the 11 major sectors of the BSE relative to the Sensex with the y-axis plotting the relative price momentum in the past 12 months and the x-axis plotting the relative price. The chart is then subdivided into four quadrants. Leadership quadrant: Top right is Leadership quadrant, which represents a sector that has strengthened in relative price and momentum vis-à-vis the Sensex. Weakening quadrant: Bottom right is the Weakening quadrant where the relative price of a sector has started to deteriorate and momentum has started to slow. Lagging quadrant: Bottom left is the Lagging quadrant where the relative price of a sector has become negative with momentum suggesting underperformance vis-à-vis the benchmark. Improving quadrant: Top left is the Improving quadrant where the relative price trend of the sector has started to rise with momentum. In summary, if a sector appears in the top right quadrant, it indicates the sector is trending higher and outperforming the benchmarks. If a sector appears on the bottom left it indicates it is trending lower. Sectors appearing on the bottom right indicate they are underperforming the benchmark while if they appear in the top left it suggests an improving price momentum. Note: BSE has replaced IT, health care, FMCG, midcap and small cap indices with new ones. Due to lack of historical data, we have considered the NSE IT, pharma and FMCG indices for reference Exhibit 3: BSE sectoral indices relative performance The Capital goods index have witnessed a marginal uptick in momentum and remained in the leading quadrants The banking index is poised near the neutral line implying an inline performance with the benchmarks BSE metal index has seen a pick-up in relative momentum and is at the cusp of re-entering the leading quadrant implying that the consolidation over last couple of months is approaching maturity. This sector has maintained its relative leadership in current decline Auto, Oil & Gas, Power, and PSU index have slipped into lagging quadrant suggesting loss of relative momentum and imply further consolidation in these sectors BSE healthcare has lost steam within the improving quadrant signalling loss of momentum on relative terms and points towards further consolidation in the sector BSE realty index continues to see deceleration in relative price and momentum suggesting further consolidation leading to relative underperformance vis-à-vis the benchmark amid stock specific action Page 4

5 Sectoral performance Relative to benchmarks In order to closely gauge the underlying strength in respective sectors vis-à-vis the benchmark, we analyse the Relative Strength Comparative (RSC) indicator. As the name suggests, it is a comparative measure of strength vis-à-vis a benchmark or a sector. Relative Strength Comparative: Evaluating the underlying strength While the RSC line is rising, the sector is outperforming the general market, i.e. it is either rising faster than the benchmark in an up trending market or going down less, in a down trending market or even rising. While the RSC line is falling, the sector is underperforming the broad equity market. If the market is going up, the sector is going up less or may be even going down. If the market is going down when the RSC line is falling, the sector is going down more than the market. A flat RSC line indicates in line market performance going up or down by the same magnitude. The purpose of this exercise is to identify those sectors that are outperforming and avoid sectors that are underperforming. A breather after a steller up move augur well for a healthy consolidation. BSE Auto Index and relative to Sensex Exhibit 4: BSE Auto Index Monthly Bar Chart Profit booking dragged index to retest earlier breakout levels BSE Auto Index The BSE Auto index has taken breather after couple of months outperformance, as auto components like Eicher Motors (down11%), TVS Motors (down10%) and Tata Motors (down8%) seen profit booking. The breach of long term trend line on RSC line indicate the outperformance of entire sector may take a pause while some stock specific action is preferred. Technically, we like Hero Motocorp, Maruti Suzuki. Exhibit 5: BSE Auto Index vs. Sensex Relative Comparison Ratio line between Auto index and Sensex has broken support level of major long term rising trend line Page 5

6 Set for relative outperformance after emerging out of major consolidation... BSE Capital Goods Index and relative to Sensex Exhibit 6: BSE Capital Goods Index Monthly Bar Chart The index continues to form higher peak and trough BSE Capital Goods Index The capital goods index surged to 52 weeks high after recording breakout from rounding formation thereby triggering a structural turnaround. In relative terms, the RSC line is also seen rebounding from its key trend line support. We believe the sector is set to relatively outperform the benchmark going forward. L&T, KEC International and ABB are positively poised on charts. Exhibit 7: BSE Capital Goods vs. Sensex Relative Comparison RSC line above the trend line support and likely to rise after a decent consolidation Relative Underperformance to continue... NSE Pharma Index and relative to Nifty NSE Pharma Index The Pharma Index has once again faced hurdles from two years long downward sloping trend line. A decisive move below key support of 8920 would lead to extension of consolidation. On the relative strength chart, stock negated double bottom formation, indicating continuance of underperformance. We believe the sector will continue to see stock specific action in the coming months until the reversal emerges on the price chart Exhibit 8: NSE Pharma Index Weekly Bar Chart Index reacted from the upper band of the falling channel Exhibit 9: NSE Pharma Index vs. Nifty Relative Comparison Relentless down move on RSC line indicates continuation of relative underperformance Page 6

7 Breather indicates pause in major uptrend. BSE Oil & Gas Index and relative to Sensex Exhibit 10: BSE Oil & Gas Index Monthly Bar Chart Sector is likely to take a breather near higher band of a rising trend channel BSE Oil & Gas Index Oil & Gas index extended its consolidation for the third consecutive month after a 20 month stellar up move. However, a move below consolidation low of would lead to extension of correction to levels according to change of polarity concept. In relative terms, the index is expected to continue its breather, as it has broken out of upward sloping channel. On price charts, Reliance industries is positively poised while OMC S may extend underperformance Exhibit 11: BSE Oil & Gas Index vs. Sensex Relative Comparison In relative term the index is likely to consolidate further Robust price action seen post channel breakout... NSE IT Index and relative to Nifty Exhibit 12: NSE IT Index Monthly Bar Chart Follow through action led formation of higher peak and trough NSE IT Index The price witnessed faster retracement as, IT index retraced its 21 months fall in just 14 months, indicating robust price structure. The relative comparison chart is also gaining momentum as it point upward after rebounding from the long term trend line support. We believe the index is likely to continue its outperformance in the coming month, wherein stock like TCS, Mphasis and Tech Mahindra should be in focus. Exhibit 13: NSE IT Index vs. Nifty Relative Comparison RSC line continues to show outperformance Page 7

8 Stock specific action likely amid earnings season NSE FMCG Index and relative to Nifty NSE FMCG Index The FMCG index continues to sustain above upward sloping trend line of the channel formation, indicating positive trend is intact. In last four years, multiple times on relative comparison charts, the stock has taken support from an upward slanting trend line suggesting elevated demand on every dips. We maintain our relative positive bias on the sector and remain relatively positive on ITC and Jubilant Food. Exhibit 14: NSE FMCG Index Weekly Bar Chart Consolidation is likely to continue as it sustains above lower band of the channel Exhibit 15: NSE FMCG Index vs. Nifty Relative Comparison Long term trend line remains intact, indicating valid positive trend Index is likely to take breather after three months sharp up move BSE Realty Index The price chart of the Realty index is likely to take breather as index formed an inverted hammer after three months spectacular rally. We believe the sector may undergo a round of healthy consolidation within the ongoing uptrend. The RSC line poised at an immediate hurdle also warrants a brief consolidation leading to relatively muted performance. BSE Realty Index and relative to Sensex Exhibit 16: BSE Realty Index Monthly Bar Chart The formation of inverted hammer indicates a round of consolidation Exhibit 17: BSE Realty Index vs. Sensex Relative Comparison RSC line has tilted downward, suggesting breather. Page 8

9 Metal index broken out of three month s consolidation BSE Metal Index and relative to Sensex Exhibit 18: BSE Metal Index Monthly Bar Chart BSE Metal Index The Metal index formed a higher peak and trough, resolving out of three month s consolidation which augurs well for next leg of up move. In relative terms, the index remains in an uptrend as it maintained rising peak and rising troughs. Stocks like JSW Steel, Vedanta remain in an uptrend. Any short term consolidation seems to be healthy from medium term to long term perspective. Exhibit 19: BSE Metal Index vs. Sensex Relative Comparison Metal Index reaches near upper band of the channel The RSC line is pointing downward, indicating breather. Page 9

10 Forthcoming Economic Events Calendar Date India 7-Feb 7-Feb 12-Feb 14-Feb 1 US 2-Feb 8-Feb 14-Feb 14-Feb Feb 21-Feb 22-Feb 26-Feb 26-Feb 27-Feb China 7-Feb 8-Feb 10-Feb 26-Feb UK 8-Feb 9-Feb 9-Feb 16-Feb 19-Feb 22-Feb 26-Feb Event Nikkei India PMI Services Nikkei India PMI Composite RBI Repurchase Rate RBI Reverse Repo Rate/CRR Industrial Production YoY Wholesale Prices YoY Trade Balance Eight Infrastructure Industries GDP Annual Estimate YoY Change in Nonfarm Payrolls Markit US Services PMI Markit US Composite PMI Initial Jobless Claims MBA Mortgage Applications CPI MoM Industrial Production MoM Manufacturing (SIC) Production Markit US Manufacturing PMI Markit US Services PMI FOMC Meeting Minutes New Home Sales MoM Dallas Fed Manf. Activity Wholesale Inventories MoM Personal Consumption GDP Annualized QoQ Caixin China PMI Composite Caixin China PMI Services Foreign Reserves BoP Current Account Balance Money Supply M1 / M2 YoY FX Net Settlement - Clients CNY Non-manufacturing PMI Manufacturing PMI Markit/CIPS UK Services PMI Markit/CIPS UK Composite PMI Bank of England Bank Rate Industrial Production MoM Manufacturing Production MoM Retail Sales Ex Auto Fuel MoM Rightmove House Prices MoM GDP QoQ/YoY UK Finance Loans for Housing Nationwide House PX MoM Page 10

11 Pankaj Pandey Head Research ICICIdirect.com Technical & Derivative Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC Andheri (East) Mumbai Page 11

12 Disclaimer ANALYST CERTIFICATION We /I, Dharmesh Shah, Nitin Kunte, Pabitro Mukherjee, Ninad Tamhanekar and Vinayak Parmar Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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