Consolidation with bullish bias will define 2018
Market breadth will remain strong for the most part of this year, driven by domestic flows

After a gain of more 28 per cent in 2017, how much can the Nifty gain in 2018? This is one question bothering all the hopefuls in the market. Back to back gains of this magnitude have never been seen in the market. Then, there is always a first time. Probably 2018 would bring many firsts to the equity market.

Few doubts that the role of domestic flows will increase this year. Paradoxically, the value of foreign investors would also remain high, given that they have significant holdings in large-cap companies. But their investment in equity may slow down this year.

The combined effect of this would be that the market breadth would remain positive on most trading days in 2018. There will be phases when it would appear that foreign investors are on a holiday. But their behaviour will no longer send shivers down the spine of investors, as long as domestic funds are there to support the market. That means local market makers and mid-cap stocks will continue to party, at least through the first quarter of 2018.

News flows, both macro and micro numbers, would continue to play a significant role. Earnings will be watched more carefully, as valuations are stretched. If there is disappointment, then the market will be pushed down much more than in 2017.

After a long gap, a significant domestic macro event has happened when the government announced an increase in its borrowing programme. The equity market’s reaction to the event was rather surprising. It did not fall at all, that too, given that the Nifty is trading at record highs and any negative news could exert pressure on it.

There are two reasons for such muted reaction. One, enough hints were present in the system, which had indicated that this was bound to happen sooner than later. The yield had been inching up for some time and even the RBI monetary policy committee minutes had given an indication that this would happen.

Two, the market has faith that if the government borrowing is increased and fiscal targets compromised, it is being done to give the economy a required impetus. That is why the market hasn’t bothered much about the borrowing programme.

The currency market, which should have been the most worried, also did not react, which means that we are unlikely to see any reaction to this news when the market opens for trading in the new year.

What has happened last week is likely to get repeated in 2018. Till the time the market has faith in the quality of government spending, it will ignore some fiscal slippage. The only factor that will trouble the market is a spike in oil prices. If the oil prices sustain at elevated levels, that would bring serious currency risks also.

While there is little probability of any major negative news emerging in 2018 from the US economy, there could be noises of geopolitical tensions, probably them getting a bit louder. Instead of making any guess, it would be better for traders to keep a portion of their positional trades hedged through the next year.

Coming to oscillator charts, the long-term charts are in the buy mode but most have reached overbought territory and move in sideways direction. Probably, on the weekly MACD charts, though this oscillators continue to move in sideways direction, if a break-out happens, the probability of which seems high at this point, that would probably signal a move in which the Nifty would form a new high and raise the market momentum. Though the Nifty has formed a new high at this point, the gap between the current high and the earlier highs is not much wide.

As for short-term support and resistance levels, the first serious resistance to the Nifty in its current phase of upward movement will come at 10,680, after which 10,800 would be another range where profit booking might emerge, leading to some consolidation.

The first support to the Nifty comes at 10,380. A much stronger support in terms of moving averages comes in the range of 10,250 to 10,300.

As far as long-term support is concerned, for the next couple of quarters, 9,500 would be a long-term support for the Nifty and the long-term resistance comes at 11,800, a level where the index would face relative and absolute pressure both from bulls and bears.

rajivnagpal@mydigitalfc.com