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Sunday, November 27, 2016

Sensex and Nifty charts have formed intermediate bottoms (Nov 25 '16)

Selling by FIIs abated a little during the week gone by. Their total net selling in equities was Rs 54.1 Billion, as per provisional figures. DIIs bought heavily. Their total net buying in equities touched Rs 61.9 Billion.

Both Sensex and Nifty breached their previous lows (the possibility was mentioned in last week's post), but recovered to gain about 0.5% on a weekly closing basis.

Demonetisation of bank notes continued to roil both houses of Parliament. Opposition parties joined forces in a desperate bid to project themselves as pro-poor when they were really protesting against the loss of their 'slush' funds.

In a surprising move, RBI has temporarily increased CRR to 100% in a bid to suck out excess liquidity from banks that was being parked in govt. bonds. Yields are expected to rise and bank share prices may take a hit.

BSE Sensex index chart pattern


The Daily bar chart pattern of Sensex dropped to an intra-day low of 25718 on Mon. Nov 21, and closed below its Nov 9 'panic bottom' of 25902 - proving once again that 'panic bottoms seldom hold'.

After consolidating sideways around the support level of 25900 for the next three days, the index bounced up strongly to close above the 26300 level.

The index is trading below its three EMAs in bear territory and is well below the blue down trend line. The 20 day EMA has crossed below the 200 day EMA. The 'death cross' of the 50 day EMA below the 200 day EMA, which technically confirms a bear market, appears imminent.

The down trend that started after Sensex touched a high of 29077 on Sep 8 continues. Bears definitely have the upper hand.

However, there are technical signs that the index has found an intermediate bottom and a pullback rally has started.

All four technical indicators are looking oversold, but are showing slight upward momentum as they try to emerge from their respective oversold zones. 

ROC is showing positive divergence by not falling lower with the index. MACD and Slow stochastic have formed small 'rounding bottom' reversal patterns inside their oversold zones. RSI has formed an 'inverse head and shoulders' like reversal pattern inside its oversold zone.

Since touching the 'panic bottom' on Nov 9, the index had formed a small 'falling wedge' pattern, from which it broke out upwards on Fri. Nov 25.

By touching a low of 25718 on Nov 21, the index retraced 61.7% of its entire rally from 22495 (Feb 29 low) to 29077 (Sep 8 top). That is almost the same as the 61.8% Fibonacci retracement level.

A combination of value buying and short-covering can propel Sensex towards its 200 day EMA (at about 27000). That can be a trigger for bears to strike again. Bulls may try to wrest control with a convincing rally above 27600. 

The market appears to have discounted most of the likely adverse fallouts of the demonetisation drive. Lengthy queues in front of banks and ATMs have been shrinking.  

Time to take out your 'buy list'. Accumulate slowly instead of buying in bulk. Some more consolidation or correction can't be ruled out. 

NSE Nifty index chart pattern


The following comments appeared in last week's post on the weekly bar chart pattern of Nifty: "The index had formed a high-volume 'panic bottom' in the previous week. A 'panic bottom' seldom holds. A drop below 8000 seems likely."

The index touched an intra-week low of 7916 before bouncing up to close above 8100. 

In the process, Nifty formed a 'reversal week' bar (lower low, higher close) - as well as a 'hammer' candlestick pattern. Both can be bullish reversal patterns.

Of the four weekly technical indicators, MACD is falling below its signal line and looks poised to enter negative zone. ROC, RSI and Slow stochastic are looking oversold.

A pullback rally towards 8300 is likely. Bears will probably use the opportunity to sell. A convincing move above 8570 is required if bulls wish to regain control.

Bottomline? Sensex and Nifty charts may have formed intermediate bottoms. Valuations have improved, but weak earnings growth of India Inc. may continue for a quarter or two more. Be cautiously optimistic that the worst is over. Any pullback rally can trigger bear selling.

4 comments:

Nirmal said...

With due respect, Both of your trend line drawn are faulty.

Subhankar said...

@Nirmal

It will be nice if you can share your knowledge and explain why you think so.

Nirmal said...

sir, any trend line should have minimum clean three points. zig zag trend lines are faulty unless complex analysis done.

Subhankar said...

@Nirmal

Two points are enough to draw a line. Three or more touch points may strengthen a trend line, but is not a requirement.

Not sure which 'zig-zag' trend line you are referring to. Please elaborate.

There is only a single down trend line drawn on the chart, plus a small 'falling wedge' pattern.

It is my endeavour to make technical analysis as simple as possible. The more 'complex' the analysis, the more confusing and open to different interpretations it becomes.