Saturday, July 16, 2016

BSE Sensex and NSE Nifty charts (Jul 15, 2016): bearish patterns may trigger corrections

FIIs were net buyers of equity worth almost Rs 3900 Crores during the week - slightly less than their entire net buying during Jun '16. As per provisional figures, DIIs were net sellers of equity worth Rs 3050 Crores - more than their entire net selling during Jun '16.

Both Sensex and Nifty closed the week with identical 2.6% gains. However, bearish patterns have formed on both charts (as explained below), which can trigger corrections.

WPI inflation surged to a 20 months high of 1.62% in Jun '16 against 0.79% in May '16. With CPI inflation also inching up to a 22 months high of 5.77% against 5.76% in the previous month, RBI may have no alternative to maintaining status quo on interest rates.

Merchandise exports rose 1.3% in Jun '16 after declining for 18 months; imports declined 7.3% - compared to the figures for Jun '15. The trade deficit rose to $8.1 Billion from $6.3 Billion in May '16. However, the cumulative deficit for the Apr-Jun '16 quarter was 67.5% lower than the deficit in the same quarter last year. 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex touched an 11 months high of 28049 on Fri. Jul 15, but formed a 'reversal day' bar that often marks the end of an intermediate rally.

All three EMAs are rising, and the index is trading above them in a bull market. That means, any dips can be used to add to existing holdings.

Won't an investor miss out on profits by waiting for a dip to add instead of buying now? The answer will depend on an investor's investment horizon. For long-term investors, it won't make much difference. But short-term holders can maximise profits by buying the dips.

Note that all four technical indicators are showing negative divergences by failing to touch new highs with the index (marked by blue arrows). Also, ROC has already corrected down from its overbought zone, while RSI and Slow stochastic are well inside their overbought zones. MACD is rising towards its overbought zone.

These technical signals point to an imminent correction. It may be a deeper correction than the one at the beginning of the month. However, there is no need to fear a crash, because FIIs are in buying mood. 

Remember that an index can remain overbought for long periods, and strong inflow of liquidity in the market can toss technical warnings out the window. But it may be better to err on the side of caution by booking partial profits. 

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched an 11 months high of 8595 backed by strong volumes. The 20 week EMA has crossed above the 50 week EMA, and the index is trading above them in a bull market.

However, the index has been trading within a bearish 'rising wedge' pattern for the past 8 weeks. The expected break out from the pattern is downwards.

Weekly technical indicators are looking overbought and showing upward momentum. Nifty can rally for another day or two, but a correction may be just around the corner.

The breadth indicator, NSE TRIN (not shown), has started recovering from an extreme overbought condition - and is also hinting at a correction. It may be a good time to take some profits home.

Bottomline? Bears retreated last week due to a bull onslaught on Sensex and Nifty charts. But they are getting ready to fight back. Index valuations on a TTM basis look stretched. Look for companies that declare top and bottom line growth in Q1 (Jun '16).

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