Wednesday, June 8, 2016

Nifty chart: a midweek update (Jun 08 '16)

A  delayed monsoon and an upside risk to CPI inflation were the probable reasons why the RBI Governor kept repo, reverse repo and CRR rates unchanged during yesterday's policy announcement.

Though the move was widely anticipated by economists and market experts, bulls treated it as 'no news is good news' and went on a buying spree. 

In the three trading days this week, FIIs have been net buyers of equity worth Rs 1050 Crores. DIIs were net sellers of equity worth Rs 440 Crores.

Passenger vehicle sales in May '16 rose 7.6% over May '15, against a YoY growth of 11% in Apr '16. Maruti, Hyundai, M&M, Ford and Renault showed good growth. Honda, Tata Motors, Volkswagen and Nissan showed decline in sales.

The daily closing chart pattern of Nifty shows a 3-step recovery from a 15 months long down trend after formation of a 'double bottom' reversal pattern in Feb '16.

Step 1 was a sharp rally during Mar '16 that faced strong resistance from the 200 day EMA. Step 2 was a 8 weeks long sideways consolidation within a 'symmetrical triangle' pattern.

Step 3 was a sharp upward breakout from the triangle into bull territory, followed by the 'golden cross' of the 50 day EMA above the 200 day EMA that technically confirmed a return to a bull market.

A 'doubting Thomas' may point out that Nifty has gained only 18.7% from its Feb 25 '16 closing low of 6971, whereas a 20% gain is required to confirm a bull market.

Also, the index is yet to close above the long-term resistance level of 8275, though the level was breached intra-day two days in a row.

But these may appear to be nothing more than technical nitpicking. The chart is firmly in the grip of bulls. All three EMAs are rising and the index is trading above them.

Does it mean that the index will continue to rally without a correction? Obviously not. 

All three technical indicators are in their overbought zones following the sharp rally after the upward breakout from the triangle. The breadth indicator, NSE TRIN, has dropped back inside its overbought zone.

A correction or consolidation may be around the corner.

A chart can look overbought for long periods during a bull market. Should you now chase the rally? Prudence requires waiting for a dip to enter/add.

A few market analysts have mentioned substantially lower levels for Nifty due to high valuations and global uncertainties. You should ignore them.

But don't throw caution to the wind. Do not try to short the index. If you decide to buy, pay attention to your asset allocation plan and maintain a suitable stop-loss.

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