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Wednesday, January 13, 2016

Nifty chart: a midweek update (Jan 13 ‘16)

The Indian economy seems to be taking one step forward and two steps back. Domestic passenger car sales during Dec '15 grew almost 13% YoY - its 14th straight month of growth. Sales of M&HCVs grew 19%, but two-wheeler sales declined 3%. 

However, IIP showed degrowth of 3.2% in Nov '15 YoY - its worst show in 4 years - against a revised 9.9% growth in Oct '15. CPI inflation inched up to 5.61% in Dec '15 YoY against 5.41% in Nov '15. Further interest rate cuts by RBI is unlikely any time soon.

This week, FII net selling in equities has crossed Rs 1930 Crores. DIIs were net buyers of Rs 1660 Crores, as per provisional figures. Month-to-date in Jan '16, FII net selling has crossed Rs 5200 Crores, while DII buying has touched Rs 3100 Crores.

The long-term closing chart pattern of Nifty 50 may be forming a 'rounding top' reversal pattern (more clearly visible on the 200 day EMA). Bulls have so far managed to defend the long-term support level of 7550 - despite a day's close below it on Tue. Jan 12 '15.

Today's price recovery late in the trading day, with strong volume support, may have brought some temporary respite for bulls. On the daily bar chart pattern of Nifty below, a 'reversal day' pattern (lower low, higher close) has formed. That may end the intermediate downtrend - like it did exactly a month ago.

Candlestick pattern experts (not me) may identify today's price bar as a 'dragonfly doji' or a 'hammer', both of which have bullish implications when formed at the end of a down move.

The importance and significance of the 7550 level was explained in last week's update. Lower support levels in case of a convincing breach of 7550 were also mentioned in last week's update.

Note that 7550 did get breached on a closing basis yesterday (Jan 12 '15). But it wasn't a 'convincing breach'. Why? Because of the 3% 'whipsaw' rule. What is that?

It is a simple rule that differentiates a token breach from a convincing one. A convincing breach - particularly of a long-term support (or resistance) level - requires a close beyond 3% of the actual support (or resistance) level.

In this case, a convincing breach would require Nifty to close below 7323 (i.e. 7550 - 3% of 7550). That gives bulls another 225 odd points to play with.

There is no guarantee that FIIs will stop selling - though their net selling today was overshadowed by DII buying. So, Nifty may very well close below 7323 and fall even further.

Daily technical indicators - which look oversold - are showing some signs of upward momentum. It will require considerable buying support to break the bear stranglehold on Nifty's chart.

So, are you getting paralysed by fear, or getting ready to jump into the market feet first? Do neither. Remain circumspect, but maintain your SIPs and/or accumulate good stocks with suitable stop-losses.

As I have been harping for a while, the long-term bull market is intact.

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