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Wednesday, April 6, 2016

Nifty chart: a midweek update (Apr 06 '16)

The RBI Governor cut the repo rate by 25 bps (0.25%) to 6.5%. The move was widely expected and already discounted by the stock market, as per analysts. So, what was the reason for the big sell-off?

It was a classic case of 'sell on news' - led by FIIs. They were net sellers of equity worth Rs 800 Crores on Tue. Apr 5, and Rs 500 Crores today. Probably just routine profit booking after massive buying last month.

Adrian Mowat of JP Morgan Chase believes that measures to increase liquidity in the system by Dr Rajan - like increasing the reverse repo rate by 25 bps to 6%, cutting MSF by 75 bps to 7%, announcing OMO of Rs 15,000 Crores - will be game changers.  

In an earlier post on the 1 year closing chart pattern of Nifty, the importance of the 'support-resistance' level of 7550 was explained.

It is interesting to note how 7550 is continuing to play an important role. The index broke out above 7550, but pulled back - only to bounce up again.

It faced strong resistance from its sliding 200 day EMA and pulled back towards 7550 for a second time. The index is also receiving support from its 20 day EMA.

The two dips provided good opportunities to add/enter. Can Nifty fall some more? Sure it can, specially if FIIs continue to sell. Expect the 7550 level and the rising 50 day EMA to provide support on the downside.

Daily technical indicators have corrected overbought conditions and showing downward momentum, but remain in bullish zones. Since the beginning of Mar '16, bulls have been buying every dip - and may continue to do so.

Nifty is still trading below its 200 day EMA in bear territory. On longer-term weekly chart (not shown), the index has dropped to seek support from its 20 week EMA but closed almost 500 points above its 200 week EMA in a long-term bull market.

The near-term trigger for the market will be declaration of Q4 (Mar '16) results from next week. It is unlikely that India Inc. will show much improvement from Q3 (Dec '15) results.

Stock picking will take centre stage - so be careful about what you buy. If you are not sure, buy units of a good large-cap or balanced mutual fund with a proven track record.

A convincing move above 8000 will be the first indication that bulls are regaining control.

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