Sunday, September 18, 2016

BSE Sensex and NSE Nifty charts (Sep 16, 2016): bulls fight back but bears stand their ground

FIIs and DIIs were both net sellers of equity in another holiday-shortened trading week. FII net selling was worth only Rs 65 Crores. They turned net buyers on the last two days of the week, as per provisional figures.

DII net selling was worth Rs 690 Crores. Both Sensex and Nifty closed about 1% lower for the week, but their up-trends from Feb '16 lows remain intact.

India's macroeconomic worries continue. WPI inflation rose to a two years high of 3.74% in Aug '16, against 3.55% in Jul '16 and -5.06% in Aug '15 - thanks to a spike in prices of pulses, potatoes and some manufactured items. 

Merchandise exports fell for the second straight month, contracting -0.3% in Aug '16 against -6.84% in Jul '16. There was some talk about a Rupee devaluation to boost exports - but the step would be ill-advised as cost of imports will go up.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex opened trading on Mon. Sep 12 with a big 274 points downward 'gap' and dropped below its 20 day EMA, but received support from the blue up-trend line (drawn from its Feb 12 '16 low).

The index continued to receive good support from the up-trend line during the next two trading sessions as it continued to hover near its 20 day EMA. 

Opening with a 40 points upward 'gap' on Fri. Sep 16 - thanks to strong FII buying - Sensex rose to touch an intra-day high of 28779. Monday's downward 'gap' got completely filled.

However, the index could not sustain near the day's high and dropped down to close just below the long-term 'support-resistance' level of 28600. What are the technical consequences of these downward and upward 'gaps'?

Note that in the previous week (on Tue. Sep 6), Sensex had opened trading with a 50 points upward 'gap'. The downward 'gap' of 274 points on Mon. Sep 12 overlapped the previous week's upward 'gap' - turning the previous week's trading into an 'island reversal' pattern.

Such a reversal pattern does not necessarily signify a change of trend, but can cause a retracement of the entire intermediate rally. When did the intermediate rally begin? From the 63 points upward 'gap' formed on Jul 11 '16.

How likely is it for Sensex to drop and close the Jul 11 'gap'? Not very - though the possibility can't be ruled out entirely. 

The blue uptrend line, the rising 50 day EMA and the 27600 level are expected to provide good support should the index fall further. Only if 27600 is breached convincingly can the possible filling of the Jul 11 'gap' be taken into consideration.

Daily technical indicators have corrected overbought conditions but remain in bullish zones. MACD is moving sideways below its signal line in positive territory. ROC crossed below its 10 day MA but bounced up after receiving support from its '0' line. RSI is rising towards its overbought zone. Slow stochastic has bounced up from its 50% level.

The index is trading above its three EMAs in a bull market. Bears are trying to stand their ground and prevent the index from rising to a new high. But they may be fighting for a lost cause.

NSE Nifty index chart pattern

Overbought technical indicators and high TTM index valuation had led to the following warning in last week's post on the weekly bar chart pattern of Nifty: "The index looks ripe for a correction."

The week's trading started with a big 133 points downward 'gap'. However, the index received good support from the blue uptrend line (drawn from its low from the week ending on Feb 12).

Though the index failed to overcome resistance from the 8850 level, it managed to fill the downward 'gap' by the end of the week's trading.

The index is trading above its two rising weekly EMAs in a bull market. Weekly technical indicators are inside their overbought zones. Only ROC is showing a bit of bearishness by crossing below its 10 week MA.

Nifty TTM P/E remains high at 24.07. The breadth indicator NSE TRIN (not shown) has corrected extreme overbought conditions and is rising inside its overbought zone - suggesting some more correction or consolidation around current levels.

A convincing downward breach of the blue uptrend line will tilt the balance in favour of bears. Otherwise, expect the bulls to resume their domination soon.

Bottomline? Bears almost wrested control away from bulls in their efforts to prevent Sensex and Nifty charts to rise to new highs. Bulls fought back strongly on Friday. As usual, FII fire power will decide the fate of the Indian market. Stay invested and stay patient. 

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