Wednesday, September 21, 2016

Nifty chart: a midweek technical update (Sep 21 '16)

FIIs were net buyers of equity on Monday and Wednesday (worth Rs 400 Crores), but turned net sellers on Tuesday (worth Rs 1150 Crores). DIIs did the exact opposite. They were net sellers on Monday and Wednesday (worth Rs 480 Crores), but were net buyers on Tuesday (worth Rs 780 Crores).

The result of all this buying and selling? Nifty went nowhere - trading within a 70 points range, and closing just 3 points lower than Friday's close. Bulls and bears were kept on tenterhooks ahead of the US Fed's interest rate policy announcement.

India's Current Account Deficit for Q1 (Jun '16) was $300 Million (0.1% of GDP) against expectations of a surplus. The figure was much lower than the deficit of $6.1 Billion (1.2% of GDP) in Q1 (Jun '15).   

During the past 3 months, the daily bar chart pattern of Nifty has been quite active in forming different technical patterns. It formed a couple of 'runaway gaps' (marked 2&3) followed by a 7 weeks long consolidation within a 'rectangle' pattern.

The upward breakout from the 'rectangle' was followed by an 'exhaustion gap' on Sep 6 and then a downward 'breakaway gap' on Sep 12 - turning the four days of trading between Sep 6 & 9 into an 'island reversal' pattern.

After dropping and staying below the 20 day EMA for three consecutive trading sessions, the index bounced up with strong volumes (not shown) on Fri. Sep 16 and formed a 'long-legged doji' candlestick pattern (indicating indecision) that completely filled the 'exhaustion gap' of Sep 6 and the 'breakaway gap' of Sep 12.

Miles Davis would have said: So what? Here are three possible scenarios - two bearish and one bullish:

1. The 'island reversal' pattern raises the possibility of a retracement of the previous minor/intermediate up move. That means a likely filling of either 'Runaway Gap3' or 'Runaway Gap2' or both.
2. The filling of the downward 'breakaway gap' of Sep 12 should lead to a resumption of the corrective downward move.
3. The technical setup of the chart is bullish. All three EMAs are rising; Nifty is trading above them and receiving support from the 20 day EMA for the past four trading sessions. The up move may resume at any time. 

Confusing? You bet. Daily technical indicators appear confused too! MACD is falling below its signal line in positive zone, and showing negative divergence. RSI is moving sideways just above its 50% level. Slow stochastic is oscillating about its 50% level.

Nifty's TTM P/E remains well above its long-term average at 24.11. The breadth indicator NSE TRIN (not shown) is about to emerge from its overbought zone, and hinting at a correction.

The index is in suspended animation because FIIs are not sure whether the US Fed will announce an interest rate hike or not. This is typical of the short-term outlook of stock market participants. 

The hike won't be more than 25 bps (0.25%), which is unlikely to have much impact on the economy or the stock market but will indicate that the US economy is on a firm footing. Lack of a hike will indicate otherwise.

Nifty should not be affected either way - unless FIIs go on a profit-booking spree. In which case, use the dip to add. But don't be in a hurry to do so.

Sometimes, stepping back and watching events unfold is far better than hectic activity.   

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