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Wednesday, August 10, 2016

Nifty chart: a midweek technical update (Aug 10 '16)

RBI Governor kept interest rates unchanged, as was widely expected by economists and analysts. Dr Rajan's policies have kept inflation under control, helped to clean up balance sheets of PSU banks and put the economy back on the growth track.

Government's robust tax collections during the Apr-Jul '16 period is a clear sign of improved economic activity. Direct tax collections grew 24%. Indirect tax collections grew an even more impressive 29%.

During the first three trading days this week, FIIs were net buyers of equity worth Rs 1700 Crores, as per provisional figures. DIIs were net sellers of equity worth Rs 2200 Crores.

Nifty touched a new 52 week high of 8728 on Aug 9, but has once again corrected down to seek support from its rising 20 day EMA. Will the index bounce up again, or will it correct some more?

Note the following comments from last week's technical update on Nifty

"If the index falls below its 20 day EMA, it can drop quickly to the support zone between 8300-8400. Can Nifty fall even lower? Sure it can, but a couple of technical reasons may prevent a fall below 8300. The first is of course continued buying by FIIs on every dip. The second is a 54 points upward 'gap' between 8353-8407 formed on Jul 11. The 'gap' area can act as a support zone." 

The index had bounced up after receiving support from its 20 day EMA last week, but is once again on the verge of falling lower. Will it be different this time? 

Increase in DII selling, plus lack of any immediate bullish triggers can lead to some more profit booking. All the positives - like good monsoon, decent Q1 (Jun '16) results, passing of the GST bill in parliament - have already been 'discounted' by the index.

Note the 'gap' zone between 8353-8407 marked on the chart. The 50 day EMA has risen almost to the upper edge of the 'gap'. That suggests bulls may start buying aggressively on any dip towards 8400.

Daily technical indicators are still in bullish zones after correcting overbought conditions. But their downward momentum and combined negative divergences (marked by blue arrows) may lead to some more correction. 

Nifty's TTM P/E ratio is still high at 23.44. The breadth indicator NSE TRIN (not shown) is rising towards its oversold zone - hinting at more correction.

The current chart set-up does not suggest a deep correction towards 8000 - as suggested by a couple of fundamental analysts. However, the stock market has a knack of doing the exact opposite of expectations.

Nifty is trading above its three EMAs in a bull market. Any further correction will provide an adding opportunity.

So, stay invested, but keep a stop-loss at 8350.

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