Wednesday, October 5, 2016

Nifty chart: a midweek technical update (Oct 05 '16)

FIIs were net buyers of equity worth Rs 6.20 Billion during the first three days of trading in Oct '16. DIIs were net buyers on Mon. but turned net sellers thereafter - their total net selling in equity was worth Rs 3.20 Billion, as per provisional figures.

India's manufacturing activity slipped in Sep '16 as per Nikkei's Manufacturing PMI of 52.1 against 52.6 in Aug '16. The Services PMI dropped to 52 in Sep '16 against 54.7 in Aug '16. However, both figures were above 50, indicating growth.

In the monetary policy review on Oct 4, RBI's new Governor surprisingly cut repo and reverse repo rates by 25 bps (0.25%), leaving CRR unchanged. The news should have boosted bullish sentiment in the market but didn't.

In last week's post on the daily bar chart pattern of Nifty, a 'descending triangle' pattern was drawn with the support level at 8690. Surgical strikes by the Indian Army on terrorist camps across the Line of Control in J&K triggered a sharp fall below 8690 on Thu. Sep 29.

The index found good support at 8550, and the subsequent rally took the index above its 20 day and 50 day EMAs to an intra-day high of 8807 today. But it faced strong resistance from the blue downtrend line and dropped to seek support from its 20 day EMA.

The 'descending triangle' pattern has been redrawn - with the support level now at 8550 and a downward target at 8130. Between 8550 and 8130 are 'Runaway Gaps 2&3' and the rising 200 day EMA at 8250.

A likely breach of 8550 should lead to a filling of 'Runaway Gap3' but Nifty may find support from 'Runaway Gap2'.

Nifty closed above its three EMAs in bull territory today. But the bearish reaction to an interest rate cut and the formation of a reversal pattern means that bears have the upper hand in the near term.

Daily technical indicators are giving conflicting signals. MACD is below its falling signal line and just managed to remain in positive zone. RSI is seeking support from its 50% level. Slow stochastic has moved above its 50% level. Expect the index to consolidate within the redrawn 'descending triangle' for a while.

Nifty's TTM P/E remains well above its long-term average at 23.43. The breadth indicator NSE TRIN (not shown) is in neutral zone and moving down towards its overbought zone.

An upward breach of the 8800 level with good volume support can negate the 'descending triangle' pattern. The probability of that happening in the near term is low.

The longer term structure of the chart is bullish. Any correction should be used as a buying opportunity.

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