Wednesday, November 23, 2016

3 Reasons why Nifty has formed an intermediate bottom: a midweek technical update (Nov 23 '16)

Selling by FIIs has eased a bit. Their total net selling in equities during the first three days of the week was worth Rs 30.3 Billion. DIIs were net buyers of equity worth Rs 35.4 Billion, as per provisional figures.

Opposition parties increased the decibel level of their protests both inside and outside Parliament against the demonetisation of high-value bank notes. Reminds me of a Bengali proverb: 'Chor-er Ma-er boro gola' (A thief's mother shouts the loudest about his innocence).

Deep-rooted transaction processes in a largely cash-based economy have received a severe shock that brought some activities - like goods transportation by road, payments to migrant farm labour during harvesting season - to a virtual standstill. 

The following comments appeared in last week's technical update on the daily bar chart pattern of Nifty: "The chart is turning bearish by the day. A deeper correction may be in the offing. The zone between 7900-8000 is the next likely support."

The index dropped below the 8000 level and touched an intra-day low of 7916 on Mon. Nov 21, before closing at 7929 - its lowest closing level in nearly 6 months. 

It has since bounced up a little to close above the 8000 level, but is trading below its three falling EMAs in bear territory.

Has Nifty entered a bear market? Should long positions be liquidated? How much lower can Nifty fall?

Those are questions bothering many small investors. Let me try to answer them - in reverse order.

If the 'Support-Resistance zone' between 7900-8000 gets convincingly breached on the downside, Nifty can fall to the 7500-7700 zone. But that may not happen just yet. Why? 

Because of three technical reasons that suggest that an intermediate bottom is in place:

1. The previous intra-day 'BrExit' low of Jun 24 '16 was 7927. Since price charts have 'memory' (i.e. the collective memory of market participants), the index dropped lower to 7916 on Nov 21, but closed a tad bit higher at 7929.
2. The 50% Fibonacci retracement level of the entire rally from the Feb 29 low of 6826 to the Sep 7 top of 8969 (of 2143 points) is 7898. The index dropped close to that level before bouncing up.
3. All three daily technical indicators are looking oversold - hinting at a rally.

Note that MACD and RSI are showing negative divergences by falling lower than their Feb 29 lows. Some more correction or consolidation is likely.

Bears (read FIIs) are selling at every rise. So, short-term long positions can be liquidated if the next rally moves up towards the 8300-8400 'Support-Resistance' zone. Long-term investors should stick to their asset allocation plans.

Nifty hasn't technically entered a bear market despite trading below its three daily EMAs for seven trading sessions in a row. Why? Because it hasn't yet met three additional technical conditions of a bear market. These are:

  • A correction of 20% or more from the top - Nifty has corrected about 12% so far.
  • A fall below the 50% Fibonacci retracement level - Nifty bounced up before doing so.
  • The 'death cross' of the 50 day EMA below the 200 day EMA - it hasn't happened yet.

Nifty's TTM P/E has remained between 21 and 22 for the past 7 trading sessions. The breadth indicator NSE TRIN (not shown) is showing upward momentum in neutral zone - hinting at some more correction or consolidation.

Wait and watch while the RBI announces new measures to alleviate the cash shortage situation. While new Rs 2000 bank notes are readily available in cities, their usage is restricted because of non-availability of smaller denominations. New Rs 500 bank notes are conspicuous by their absence.

Continue with your SIPs. But don't jump in to buy in large quantities.

1 comment:

Subhankar said...

Emerging Markets Have Found Support And Are Headed Higher