Budget 2020-21: The Union Budget 2020 is slated to be presented on Saturday, February 01, 2020. The NIFTY, which has had a solid performance over the past year, has been very interestingly poised.
- By Milan Vaishnav
Budget 2020 India: The Union Budget 2020 is slated to be presented on Saturday, February 01, 2020. The NIFTY, which has had a solid performance over the past year, has been very interestingly poised. If we review the past performance of the Index, the Index has returned over 13.30% over the past year and 1.30% on the Year-to-Date basis. Having said this, the NIFTY presently stays at its all-time closing high levels and remains in uncharted territory. With the NIFTY currently being crucially placed, it would be interesting to inspect it from the technical perspective, keeping the Union Budget in the view.
If we speak about the Budget, the Government has made a slew of the announcements over the past twelve months including the most important one of slashing the corporate income tax along with other measures. Given the present inflation levels and the economy showing little signs of any meaningful recovery, the Government has little elbow room this time in the budget. Further to this, several rate cuts and many supply-side measures have failed to yield any noticeable and meaningful results.
Coming to the technical perspective of the current market setup, the NIFTY is overextended on all the time frame charts. On the daily charts, the Index remains in the Broadening Formation, and if the index keeps tracking the upper line which is rising in nature, it may keep marking incremental highs but may not achieve a clean and clear breakout.
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Upon examination of the weekly charts, the pattern analysis tells us that the NIFTY has taken regular support at its 100-Week MA which presently stands at 11159; this 100-Week MA is also seen acting as a proxy trend line for the markets. On the higher side, the NIFTY is again marking some incremental highs. The bearish divergence of the RSI was there but it appears to be getting resolved, but on the other hand, the NIFTY remains overstretched again on the other lead indicators.
The examination of the long-term Monthly Charts shows NIFTY even more over-extended. The Bearish Divergence on RSI is not yet resolved, and this may adversely affect the momentum and strength that is required for any significant and sustainable up move. Another important indicator, other than the price action itself, is the India Volatility Index – INDIAVIX that needs to be examined from the medium-term perspective. INDIAVIX has been trading at one of its lowest levels over the past recent months. Persistent low levels of VIX reflects complacency of the market participants; they are also often associated with significant market tops.
If we take a cumulative view of the present technical setup of the NIFTY, if the Union Budget is given a positive reaction, the upsides in the NIFTY are likely to be limited in nature. In the best-case scenario, the NIFTY has the potential to test 12450-12500 levels. If the NIFTY is testing those levels much before and in the run-up to the Budget, any further upsides will stay very limited irrespective of the way Budget turns out to be over the coming days.
However, on the other hand, with the NIFTY trading near its upper band, the downsides, if any, is likely to stay much steeper as compared to any possible up move. Even if the NIFTY shows no structural breakdown on the charts and stays within the current primary trend, any corrective move has the potential to take the markets below the 11500-11400 levels going ahead.
If we analyze the macro-economical landscape, all the supply-side measures that the Government has taken has failed to bring any desirable outcome. It is expected to do something now on the demand-side, which would include cutting the personal income tax rates. However, this will affect the widening of the fiscal deficit. Some news is also doing the round that the Dividend Distribution Tax (DDT), which was now being paid by the corporates, will now be taxed in the hand of the individuals. This is unlikely to go well in the long run. Such measures will help the balance sheets of the corporates but will, on the contrary, reduce the spendable amount in the hands of the recipient.
Thus, from the current macro-economical landscape and the present technical setup of the markets, we can meaningfully conclude that the upside potential of the NIFTY stays limited to the levels of 12450-12500. Downsides, if any, can be steeper, which may see the NIFTY near 11500-mark. In the present circumstance, if we happen to witness a rally as a run-up to the Budget, it would be more prudent to keep protecting profits at each incremental level rather than building up excessively leveraged positions.
(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. The views expressed are the author’s own)