Wednesday, August 31, 2016

Nifty chart: a midweek technical update (Aug 31 '16)

After last week's selling (probably on concerns of an interest rate hike by the US Fed), FIIs have been net buyers of equity this week - worth Rs 1530 Crores. As per provisional figures, DIIs joined the buying spree with net buying worth Rs 1350 Crores.

For the month of Aug '16, FIIs were net buyers of equity of nearly Rs 8800 Crores, whereas DIIs were net sellers of equity worth Rs 4400 Crores. Nifty closed at a 52 weeks high and gained almost 500 points (6%) for the month.

In a new worry for the NDA government, Indian economy grew at the slowest pace in last six quarters at 7.1 per cent in the April-June period of current fiscalGDP had recorded 7.5% growth in Q1 (Jun '15) and 7.9% in Q4 (Mar '16).

Tuesday's upward breakout with a 'gap' above the 20 day EMA on the daily bar chart pattern of Nifty should not have come as a surprise to the followers of this blog because of the following comments in last week's update

"Since the index is trading well above its rising 200 day EMA in a bull market, the expected break out should be upwards...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."

Note that the index received support from the 8540 level and did not even come close to breaching the 8500 level. By crossing and closing above its previous (Aug 9) top of 8728, the bearish 'rounding top' pattern was negated.

Where is Nifty headed from here? The next known resistance zone is between 8790-8850 (previous bottoms in Feb-Mar '15). The index retreated from this resistance zone during today's trade and closed just below 8790.

If and when this resistance zone is crossed with good volume support, Nifty should go on to touch a new lifetime high.

A few technical reasons may motivate bears to put up a fight to defend the resistance zone. These are:

1. Daily technical indicators are looking bullish and showing upward momentum. However, all three are showing negative divergences by failing to touch new highs with the index. 
2. Volumes (not shown) were very strong today as both FIIs and DIIs were heavy net buyers of equity. But that can be a sign of a 'buying climax'.
3. In candlestick parlance, the index formed a 'shooting star' pattern that often signals a change of trend.
4. Nifty's TTM P/E has touched 24.09 - well above its long-term average, and the first time it has crossed above 24 this month.
5. The breadth indicator NSE TRIN (not shown) is well inside its overbought zone.

Bull markets are supposed to climb a wall of worries, and Nifty has been doing precisely that.

However, the higher it climbs in the near term, the harder it may fall when a correction does happen. The downside risk is increasing by the day, which means one should remain cautious but optimistic.

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