Wednesday, November 16, 2016

Nifty chart: a midweek technical update (Nov 16 '16)

FIIs turned sellers with a vengeance after returning from a long weekend. In the two days of trading this week, their net selling in equities touched a whopping Rs 43.1 Billion. DIIs were net buyers of equity worth Rs 22.4 Billion, as per provisional figures.

On the first day of the winter session of Parliament today, opposition parties pilloried the government's mishandling of the fallout of last week's demonetisation of Rs 500 and Rs 1000 bank notes.

News on the macroeconomic front was mixed. Both CPI and WPI inflation declined in Oct '16, increasing the possibility of another interest rate cut by RBI. However, the trade deficit widened in Oct '16, as gold imports doubled from a year ago.  

The daily bar chart pattern of Nifty is still in the process of assessing the consequences of the bank notes demonetisation. So far, the assessment isn't good for bulls.

As per anecdotal evidence, buying and selling in wholesale and retail markets, shopping malls, jewellery and electronic stores have come to a grinding halt.

Consumption may not revive in a hurry even if the RBI can ensure adequate circulation of new bank notes to replace the demonetised ones.

The likely negative impact on the bottom lines of FMCG, Consumer Discretionary and Jewellery companies has sent their stocks on a free fall.

Nifty has sliced through the long-term 'support-resistance zone' between 8400 and 8300 like a knife through butter, and has closed below its 200 day EMA in bear territory for three consecutive days.

Daily technical indicators are looking oversold. Buying support that emerged today was used by bears to sell again. Some more correction is likely.

The bullish 'flag' pattern has been replaced with just a down trend line. Why? Because of the bearish 'rounding top' reversal pattern visible on the 50 day EMA. 

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. 

If that support zone also fails due to continued FII selling, Nifty can revisit the Apr-May '16 lows (7500-7700).

Nifty's TTM P/E has fallen below 22, and is entering fair valuation territory. The breadth indicator NSE TRIN (not shown) is rising in neutral zone, and hinting at some more correction.

The index has so far corrected about 11% from its Sep '16 top of 8969, and retraced 45% of its gains from the Feb '16 low of 6826. No need to hit the panic button just yet.

It may be prudent to stand aside and let the current volatile phase play out. If you have SIPs in place, continue with them. 

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