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Wednesday, August 17, 2016

Nifty chart: a midweek technical update (Aug 17 '16)

WPI inflation rose for the 4th straight month to a 23 month high of 3.55% in Jul '16 against 1.62% in Jun '16. In Jul '15, the index was -4%. WPI had hit a peak of 3.74% in Aug '14. Prices of potatoes, pulses, vegetables, sugar and fruits showed strong double-digit growth.

RBI Governor's decision to keep interest rates unchanged due to inflation concerns turned out to be correct. Rise in food inflation is due partly to a lower base effect, and is expected to come down due to ample rainfall. So far, about 93% of the country has received normal to excess rainfall.

After Independence Day holiday on Mon. Aug 15, activity has been slightly muted. Net buying in equities by FIIs was less than Rs 700 Crores. DIIs were net sellers of equity worth about Rs 200 Crores. Nifty drifted sideways with a slight downward bias.

The daily bar chart pattern of Nifty has been consolidating sideways within a small 'symmetrical triangle' pattern after touching a 52 week high of 8728 on Aug 9, and continues to trade above its three EMAs in a bull market.

FIIs have been buying on every dip to prevent a deeper correction. The 20 day EMA has provided very good downside support during the first half of the month. Will it continue to do so? 

Nifty may be in the process of forming a 'rounding top' reversal pattern, which will be technically confirmed only if the index falls below 8500. A deeper fall may not happen due to reasons mentioned in last week's post.

Daily technical indicators are in bullish zones, but giving contradictory signals. MACD and RSI are showing downward momentum and negative divergences by touching lower bottoms, while Slow stochastic is showing upward momentum.

Nifty's TTM P/E ratio is at 23.58 - well above its long-term average. The breadth indicator NSE TRIN (not shown) has slipped inside its overbought zone despite two days of index correction. 

Downside risk remains high, but excess global liquidity and FII appetite for Indian stocks is keeping the stock market in the firm grip of bulls. 

The index has rallied for more than 5 months without a significant correction. However, expecting a correction doesn't cause one. It may happen two days later, or only after Nifty touches a new high.

But happen it will. No need to panic and sell off. Be prepared with a 'buy list' to take advantage of any sharp correction. Also keep a 'profit booking list' ready should the index rise to a new high.

Either way, you will make money.

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