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Wednesday, August 24, 2016

Nifty chart: a midweek technical update (Aug 24 '16)

Quietly, FIIs have turned net sellers of equity this week - though their net selling in three days was only worth Rs 340 Crores. DIIs were net buyers on Monday and today (worth Rs 180 Crores), but were net sellers of equity (worth Rs 450 Crores) on Tue. Aug 23.

So, if both FIIs and DIIs were net sellers, who have been buying? In a clear case of history repeating itself, retail investors are getting sucked into the stock market at exactly the wrong time - again! 

With no fresh bullish triggers for the market - at least till the 7th Pay Commission awards start showing up as credit entries in the bank accounts of government employees - the much awaited correction may be around the corner.


The daily bar chart pattern of Nifty has been consolidating sideways within a 'symmetrical triangle' pattern since the beginning of the month.

Triangles are unreliable patterns because a break out can occur in either direction. Since the index is trading well above its rising 200 day EMA in a bull market, the expected break out should be upwards.

However, as pointed out last week, the index may be in the process of forming a bearish 'rounding top' pattern. The pattern will be confirmed if the index drops below 8500.

FIIs have been buying on every dip - till this week. If they continue to sell, the index can drop down to fill the 54 points 'gap' (between 8353 and 8407) formed on Jul 11 '16.

Whether the 'gap' gets filled partly or fully, the index should resume its up move thereafter. So, do not sell in a panic. No one knows if the correction will occur or not.

But no harm in being prepared for it. If the correction does happen, use it to add to existing holdings - or even make fresh entries. 

Daily technical indicators are in bullish zones but looking bearish. MACD and Slow stochastic are showing downward momentum. RSI is moving sideways.

Nifty's TTM P/E has inched up to 23.78 - well above its long-term average. The breadth indicator NSE TRIN is inside its overbought zone.

An index can remain overbought for long periods, and hoping for a correction doesn't trigger one. But with FIIs selling for the first time this month, downside risk has increased.

No need to stop your monthly SIPs, but refrain from making huge bets for short-term gains. 

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