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Wednesday, June 1, 2016

Nifty chart: a midweek update (Jun 01 '16)

For the month of May 2016, FIIs were net sellers of equity worth less than Rs 200 Crores, as per provisional figures. DIIs were net buyers of equity worth an impressive Rs 7100 Crores. Nifty gained more than 300 points (about 4%) on a monthly closing basis.

India's GDP growth in FY 2015-16 was 7.6%, making it the fastest growing large economy in the world. The GDP figure for the previous financial year was 7.2%. The number must have reassured the Finance Minister, who has been pitching to Japanese investors about investing in India. 

However, IIP grew only 2.4% in FY 2015-16 against 2.8% in the previous financial year. The Nikkei/Markit India Manufacturing PMI was 50.7 in May '16 against 50.5 in Apr '16. (A figure above 50 indicates growth.) These figures indicate that manufacturing growth is still sluggish.

The daily bar chart pattern of Nifty shows that bulls have managed to extricate themselves from a 15 months long bear stranglehold on the chart. 

After forming a 'double bottom' reversal pattern in Feb '16 and rallying strongly during Mar '16, the index faced strong resistance from its 200 day EMA.

For about 8 weeks - from Apr 11 to May 24 - the index consolidated sideways within a 'symmetrical triangle' pattern, as FIIs remained bears while DIIs were bulls.

Better Q4 (Mar '16) results and prediction by SkyMet of an above-average monsoon changed the market sentiment in favour of bulls. FIIs turned buyers. 

The index opened with a 'gap' above its 200 day EMA and broke out above the triangle on May 25. It continued its rally past 8000 but lost momentum near the 8200 level.

On May 31, the index formed a 'reversal day' bar (higher high, lower close) backed by a surge in volumes (not shown). That should have marked an intermediate top and started a pullback towards the top of the triangle.

Technical analysis is not a science, and is often overruled by fundamentals. The impressive GDP figures led to an extension of the rally today (Jun 1), as the index touched an intra-day high of 8215 - its highest level since Oct '15.

However, the index closed below 8180 (exactly at its opening level and very near its lowest level of the day), forming a 'gravestone doji' candlestick pattern - which has bearish implications when formed at a market top.

Combined with the previous day's high-volume 'reversal day' bar, it is giving an indication of a pullback towards the triangle.

Bulls should not lose heart - but use the likely dip to add to long positions. The 'golden cross' of the 50 day EMA above the 200 day EMA (marked by blue ellipse) is technically confirming a return to a bull market - though it hasn't been a convincing cross yet.

All three daily technical indicators are looking bullish and overbought - hinting at a possible correction. The breadth indicator, NSE TRIN, has started correcting its overbought condition.

All three EMAs are rising, and the index is trading above them in a bull market. Unless you are a very savvy trader, avoid shorting the index.

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