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Wednesday, December 7, 2016

Nifty chart: a midweek technical update (Dec 07 '16)

FIIs were net sellers of equity on Mon. Dec 5, while DIIs were net buyers. The roles reversed during the next two days, as FIIs turned net buyers and DIIs became net sellers. For the three days, FII net buying was worth only Rs 0.38 Billion and DII net selling was worth only Rs 0.57 Billion.

Nikkei India's Manufacturing PMI for Nov '16 slipped to 52.3 from 54.4 in Oct '16, while the Services PMI for Nov '16 dropped to 46.7 from 54.5 in Oct '16 - thanks mainly to reduced activity following demonetisation of high-value bank notes. (A number below 50 indicates contraction.)

RBI Governor kept interest rates unchanged at today's policy meeting. The stock market had already priced in a 25 bps rate cut. The status quo came as a negative surprise that led to a sell-off during the last hour of trading. However, withdrawal of the 100% incremental CRR from Dec 10 will be positive for banks.

The daily bar chart pattern of Nifty continues to face resistance from its falling 20 day EMA. The index formed a 'reversal day' bar (higher high, lower close) due to a sell-off after the status quo on interest rates and a 50 bps lower GDP projection by the RBI.

All three EMAs are falling, and the index is trading below them - and well below the down trend line - in bear territory.

Daily technical indicators are giving conflicting signals. MACD and RSI remain in bearish zones and are not showing much upward momentum. However, Slow stochastic is rising above its 50% level in bullish zone.

Some more consolidation in the range between 8000 and 8300 is likely before a decisive move can occur. The fact that FIIs have been net buyers of equity during the past two days will raise bullish hopes.

Nifty's TTM P/E has varied between 21.25 and 21.56 during the first 5 trading days in Dec '16 - which is above Nifty's long-term average P/E. The breadth indicator NSE TRIN (not shown) has dropped down after briefly entering its oversold zone - suggesting some sideways consolidation.

Use the dip to slowly accumulate fundamentally strong stocks that have held their ground during the past month despite the chaos following demonetisation of high-value bank notes.

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