Sunday, July 24, 2016

BSE Sensex and NSE Nifty charts (Jul 22, 2016): consolidating, with slight advantage for bears

FIIs continued in 'buy mode' during the week. Their net buying in equities exceeded Rs 2200 Crores, as per provisional figures. DIIs were net sellers of equity worth Rs 1600 Crores. 

Sensex closed marginally lower, while Nifty closed flat for the week. Both indices consolidated sideways as there were no fresh triggers for bulls or bears.

Q1 (Jun '16) results have been a mixed bag so far. Positive surprises have been few and far between. All eyes and ears will be tuned to the likely passing of the GST bill in the current session of parliament.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex has been consolidating sideways within a 400 points range for the past two weeks. All three EMAs are rising, and the index is trading above them in a bull market.

The likely breakout from the consolidation zone is upwards. However, upside may be limited as Sensex P/E is at 20.34, which is above the long-term average level.

Daily technical indicators have corrected overbought conditions, but remain in bullish zones. Some more consolidation or correction may follow.

The index appears to be in a 'wait and watch' mode - waiting for more Q1 (Jun '16) results to be announced before making the next move.

Several mid-cap and small-cap stocks are making sharp upward moves. Don't chase them. If you are holding them, book partial profits, or hold with a suitable trailing stop-loss.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty spent its 9th week within a bearish 'rising wedge' pattern, from which the likely breakout is downwards.

Note that the 20 week EMA has crossed above the 50 week EMA, and both EMAs are rising. The index is trading well above them and looking overbought.

Weekly technical indicators are in their overbought zones, and showing some signs of correcting. The breadth indicator, NSE TRIN (not shown), is also inside its overbought zone, and hinting at some more consolidation or correction.

FII buying is preventing Nifty from falling sharply. But Nifty P/E is at 23.43 - well above its long-term average. At some point, FIIs will book some profit.

Bottomline? Sensex and Nifty charts show that bulls and bears were evenly matched last week, with just a slight advantage for the bears. Index valuations on a TTM basis are becoming expensive. Wait for Q1 (Jun '16) results season to play out.


jaycobb said...

Sir, basic question - the last nifty high on mar2'2015 came at p/e of 23.94. So each time the index is trying to cross its previous high and valuations are above long term average, then how will the index keep rising and keep making new highs in future?

Subhankar said...

Interesting question, jaycobb.

Note the two variables in the 'P/E' ratio. How will the value come down? Either 'P' (i.e. price) will need to fall - which means a price correction will bring down the ratio; Or, 'E' (i.e. earnings) will need to rise - which means the combined earnings of the Sensex/Nifty stocks will need to improve substantially.

There lies the problem. FII buying has inflated the 'P', but the 'E' is still lagging behind. In the longer term, it is earnings that determine price. If earnings fail to catch up over the next couple of quarters, upside on both Sensex and Nifty will be limited.

It is quite possible that excessive liquidity flows from FIIs can push Nifty's P/E ratio above 25 - in which case the index will touch a new high. That will be an opportunity to sell.

jaycobb said...

It is a little counter-intuitive - if finally E starts rising then it creates even more hope and P will start going up even further whereby the ratio can still climb up more. So are we at a stage where the markets can continue to remain at high P/E levels and not just hit the roof and collapse?

Subhankar said...

The market works a little differently. It first rises on hopes of earnings improvement. If earnings don't improve fast enough. P/E becomes high and leads to a correction. As 'P' falls and 'E' starts to improve, the P/E ratio comes down to more attractive levels. Buying starts again - and now that 'E' has moved higher, 'P' reaches new heights. Once P/E crosses a threshold value (usually above 22), Nifty becomes ripe for a correction again.

Yes, an index can remain at high P/E for long periods during bull rallies - specially if there is continuous inflow of liquidity from FIIs. The longer it stays at a high P/E, the more it becomes susceptible to a sharp correction.

Check the historical values of Nifty P/E at the NSE site - plot the weekly/monthly closing values using Excel - and you'll see the pattern.

jaycobb said...

Now it makes sense and thank you so much for your elaborate answers. Regards.

Subhankar said...

You are welcome. Feel free to ask questions.