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Wednesday, September 14, 2016

Nifty chart: a midweek technical update (Sep 14 '16)

FIIs have been in profit-booking mode during the two days of trading so far this week. Their net selling in equities exceeded Rs 1070 Crores. DIIs were also net sellers of equity but worth only Rs 20 Crores, as per provisional figures.

FII selling on Mon. Sep 12 triggered a huge 112 points downward 'gap' on Nifty's chart, which overlapped the 24 points upward 'gap' formed on Sep 6. (Technical significance of this unusual pattern has been explained below.) 

There is little to cheer and lots to worry about the Indian economy. CPI inflation dropped to 5.05 in Aug '16 against 6.07 in Jul '16 - thanks to a good monsoon and falling food prices.

However, the IIP number dropped to its lowest level since Nov '15 at -2.4% in Jul '16 against 1.95% in Jun '16. Manufacturing output fell -3.4%. RBI may have no option but to cut interest rates.

The technical significance of a number of 'gaps' formed on the daily bar chart pattern of Nifty was explained in last week's post.

Runaway Gaps 2&3 (formed on Jun 30 and Jul 11) have been marked on the chart. The 24 points 'exhaustion gap' formed on Sep 6 - which had bearish implications to begin with - has now become even more bearish.

Why? Because the huge 112 points downward 'breakaway gap' formed on Mon. Sep 12 has created an 'island reversal' pattern: last week's four daily bars have been preceded by an 'exhaustion gap' and followed by a 'breakaway gap', creating an 'island' of trading.

By itself, an 'island reversal' may not be a major trend reversal pattern. In other words, the bull market should remain intact.

However, the previous minor/intermediate move is likely to get reversed. Question is: Where did the previous intermediate move start from? The answer is: Either from Runaway Gap2 or Runaway Gap3.

That means, there is a good possibility that either or both 'runaway gaps' may get filled before the index can resume its attempt to touch a new lifetime high.

What if the index rallies over the next few days to partly or completely fill the 112 points downward 'breakaway gap' formed on Sep 12? Such a possibility should not be ruled out.

Don't get fooled by such a rally. Fundamentally, nothing much has changed in the economy. Technically, a reversal pattern has clearly formed on the chart, and one should respect it. Q1 (Jun '16) results have shown that earnings of India Inc. have fallen well behind Nifty valuation. 

Daily technical indicators are still in bullish zones, but showing downward momentum. MACD has crossed below its signal line in positive territory. RSI and Slow stochastic are seeking support from their respective 50% levels.

The breadth indicator NSE TRIN (not shown) is looking extremely overbought, and hinting at more correction.

The index may be in the midst of the much-awaited 5-10% correction from the Sep 7 top of 8969. A little patience may enable investors to add at lower levels. 

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