Saturday, October 15, 2016

BSE Sensex and NSE Nifty charts (Oct 14, 2016): breakouts below descending triangles appear imminent

In a 3 day trading week (with holidays on Tue. & Wed.), FIIs were net sellers of equity worth Rs 24 Billion while DIIs were net buyers of equity worth Rs 17 billion. Both Sensex and Nifty closed about 1.3% lower for the week.

There was good and bad news on the macro-economic front. First the good. Both CPI and WPI inflation numbers in Sep '16 were lower than in Aug '16. Indirect tax collections grew 26% and direct tax collections grew 9% during the Apr-Sep '16 period.

Now, the bad. The IIP number in Aug '16 was -0.7% due to decline in manufacturing, mining and capital goods sectors. Stressed loans in India's banking sector increased by 15% in the Jan-Jun '16 period.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex shows a breakdown (marked by light blue circle) below the 'descending triangle' pattern. The breakdown is not technically valid yet. Why?

Two reasons. The index has closed within the 3% 'whipsaw' limit below the 27700 level (support level of the 'descending triangle' pattern). Also, the long-term support level of 27600 has not been breached on a closing basis.

The respite for bulls may be temporary. With FIIs in selling mood, a filling of the 'gap' formed on Jul 11 '16 (marked Gap1) and a test of support from the rising 200 day EMA seems almost inevitable.

Can the index bounce up from current level? The possibility can't be ruled out entirely. All four daily technical indicators are in bearish zones, with RSI and Slow stochastic looking oversold.

A likely scenario can be a drop to Gap1, followed by a pullback towards the 27700 level and then a bigger drop towards Gap2. (If such a scenario does play out, the pullback will be a shorting opportunity and the drop towards Gap2 will be a good buying opportunity.)

The long-term structure of the chart continues to remain bullish.

NSE Nifty index chart pattern

The following remark was made in last week's post on the weekly bar chart pattern of Nifty: "Some more consolidation within the triangle is likely till a downward break out can occur." 

Though the support level of the 'descending triangle' (at 8550) was breached intra-week, the index received good support from its 20 week EMA, and bounced up to close within the triangle.

Weekly technical indicators are turning bearish. MACD has crossed below its signal line and is about to drop from its overbought zone. ROC has slipped into its negative zone. RSI and Slow stochastic are falling towards their respective 50% levels.

A fall below the 20 week EMA appears imminent. Expect downside support from the 8350 level and the rising 50 week EMA.

Nifty's TTM P/E has dropped to 22.98, but is still above its long-term average. The breadth indicator NSE TRIN (not shown) is rising towards its oversold zone. Some more correction is likely.

Bottomline? Both Sensex and Nifty are poised to drop below bearish 'descending triangle' patterns. The likely dips will provide buying opportunities. Be stock specific. Accumulate slowly instead of jumping in feet first.

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