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Wednesday, June 3, 2015

Nifty chart: a mid-week update (Jun 03 ‘15)

The stock market had already discounted an interest rate cut of 25 bps by the RBI. It got what it had expected. That should have satisfied both bulls and bears. Instead, bears went on a selling spree. What is going on?

RBI Governor's hints that inflation may start increasing again and GDP growth may be lower than earlier expectations were not well received by the market. Coupled with the possibility of a deficient monsoon were enough reasons for bears to head for the exit door.

During the first three trading days of the month, FIIs have been net sellers of equity worth Rs 1200 Crores. DIIs were net buyers of equity worth Rs 730 Crores. Anecdotal evidence suggests that retail investors have sold heavily. That may explain today's huge volumes.

The daily bar chart pattern of Nifty broke out above its three daily EMAs on Jun 1, but lacked volume support and failed to cross above the May '15 top of 8490. Resistance from the blue down trend line also proved strong.

That was just the excuse that the bears may have been waiting for. Heavy selling has dropped the index below the 'support-resistance zone' between 8630 and 8180 and the 200 day EMA into bear territory. The May '15 low of 7997 may get tested, and broken.

How much further can Nifty fall? There is a support zone between 7700 and 7850. The index may test support from that zone if 7997 gets breached.

Is the bull market getting over? Not yet. The economy is still growing at a better rate than last year. Inflation has been contained. Interest rate is falling - though banks have been reluctant to pass it along to borrowers. These are bullish signs for the longer term. But the market is definitely under pressure in the near term.

Daily technical indicators are looking bearish but not oversold. MACD has crossed below its signal line in negative zone after facing resistance from its '0' line. ROC has fallen to the edge of its oversold zone. RSI and Slow stochastic have dropped below their respective 50% levels. Some more correction seems likely.

Stay invested. This may be a good time to start accumulating some good large-cap stocks that have corrected more than the index.

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