Market Condition and How to Approach the Markets this Week

Current Market Status

The Nifty shed 1.2% in the first week of 2019. It added a distribution day on Wednesday, taking the total count to four. Amid turmoil in developed market indices, FIIs sold stocks worth more than ~70,000 crore in 2018. Despite that, the Indian market showed resilience with DIIs emerging as net buyers with accumulation of more than 1 lakh crore.

The Nifty Midcap and Smallcap were down 0.9% and 0.3%, respectively, during the week. Poor sales figure for December dragged the Nifty auto index down by 4.5%. Nifty Metal (-3.5%), Nifty Energy (-2.3%) are among the top losers. On the flip side, only Banks (Private (+0.2%), Public (1.5%)) and Nifty Realty (+1.1%) were able to post gains.

According to MarketSmith India’s methodology, at the end of the week, Nifty Bank, Financial Services, IT, and FMCG are in a Confirmed Uptrend whereas Nifty Realty, Energy, Metal, and Auto are Under Pressure.

Looking ahead, what’s in store?

The Nifty’s distribution day count is at four and is trading below 200-DMA. Currently, the market is in an Uptrend Under Pressure. However, we may further downgrade the market status if, going forward, the following signs of weakness are exhibited:

1) Two to three more distribution days are added, or

2) The Nifty further breaches its key support levels of 50-DMA. The index currently trades ~1% from its 50-DMA.

On the other hand, the market will be back to a Confirmed Uptrend if the Nifty retakes the 10,985 level (its high during the recent rally).

Amid volatility in global equity markets and Q3 earnings starting next week, price-volume action in the next week will be important to watch, as these factors will help understand institutional activity.

What can investors do?

Investors are advised to be cautious about their exposure size till the market status is upgraded by additional follow-through days, breakout from important resistance at 10,985, and a lower distribution day count. Further, investors should be selective on sectors, and focus on defensive sectors like FMCG and Retail.

As the leading IT firms are announcing Q3 results next week, one should avoid taking any fresh position before convincing results are posted. They should steer clear of high beta stocks for some time, until the volatility subsides. Sectors leading in growth, like Financial Services, can be picked up once the market validates its Confirmed Uptrend status. Investors should shortlist stocks based on good fundamentals and growth story, and should limit their investments to technically strong stocks trading above their 50- and 200-DMA. Some good quality stocks are Aditya Birla Fashion and Retail, RBL Bank, HDFC Bank, and Asian Paints. On the other hand, technically weak stocks, which are unable to sustain above 200- or 50-DMA, should be avoided.