Wednesday, October 19, 2016

Nifty chart: a midweek technical update (Oct 19 '16)

FIIs were net sellers of equity worth Rs 4 Billion during the first three days of trading this week, as per provisional figures. DIIs were net buyers of equity worth Rs 11.3 Billion.

Q2 (Sep '16) results declared so far have been more or less as per expectations. There has not been any indication of significant earnings improvements.

The news of Essar Oil's sale to Rosneft has come as a boost for the beleaguered banking sector, which has been reeling under the weight of mounting NPAs. Hopefully, a major portion of the sale proceeds will be used to retire debt.

The ongoing 7 weeks long correction on the daily bar chart pattern of Nifty now appears to be forming a 'flag' pattern, which has bullish implications.

Why bullish? Because 'flag' patterns are 'continuation' patterns that move in a direction opposite to the previous price move. Since the previous move was a bull rally, the 'flag' is a small pause before the rally can resume.

What happened to the bearish 'descending triangle' patterns that were being discussed in previous posts? 

The expected breakdown below 8650 on Sep 29 was immediately followed by an upward bounce - negating the first (smaller) 'descending triangle'. The expected breakdown below 8550 on Oct 17 was also followed immediately by an upward bounce, which negated the second (larger) 'descending triangle'.

Chart patterns evolve continuously and do not always play out as expected. The 'flag' pattern appears to be more plausible now - so we will stay with it till a breakout occurs. 

The fact that Nifty received support from the 8500 level without testing the lower edge of the 'flag' on Oct 17 also raises the possibility of an upward breakout.

Can the index drop below 8500 and fall below the 'flag'? Nothing can be ruled out on price charts. If it does fall, support can be expected from the 'gap' formed on Jul 11 and below it, from the rising 200 day EMA.

Since 'flag' patterns are quite reliable 'continuation' patterns, a fall below the 'flag' has low probability. However, the index may continue to correct within the 'flag' for a while longer.

A 'flag' has measuring implications, since it often forms in the middle of an up (or down) move. Since the rally from the Feb '16 low covered about 2150 points to the Sep '16 top, the index has an upward target of 2150 points from the upward breakout level.

Remember that an upward breakout should be accompanied by a significant increase in volumes for the breakout to be technically valid.

Daily technical indicators are in bearish zones, and not showing any upward momentum - except Slow stochastic, which has recovered sharply from its oversold zone.

Nifty's TTM P/E remains high at 23.35. The breadth indicator, NSE TRIN (not shown), has dropped sharply towards its overbought zone - hinting at a correction.

Any dip should be used to buy. 

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