Wednesday, January 25, 2017

Nifty chart: a midweek technical update (Jan 25 ‘17)

FIIs were net sellers of equity on Mon. Jan 23 and token net buyers on Tue. Today they went on a buying spree. Their total net buying for the three days of trading crossed Rs. 11.8 Billion.

DIIs were net buyers of equity on all three days. As per provisional figures, their total buying was worth nearly Rs 14.4 Billion. Nifty gained a whopping 250 points in 3 days as shorts got badly trapped.

Q3 (Dec '16) results declared so far have not given many negative surprises, though adverse effects of demonetisation - particularly in the rural sector - is becoming clear.

The daily bar chart pattern of Nifty has provided almost a text book sequence of technical reversal signals that indicated the shifting of the trend from a bear phase to a bull phase. 

The index first formed a 'double bottom' reversal pattern after a 4 months long down trend (with positive divergences visible on MACD and RSI, which touched higher bottoms). This pattern was followed by a 'rounding bottom' reversal pattern visible on the 50 day EMA. 

Next came a breach of the down trend line with an upward 'gap'. Then the 'golden cross' of the 50 day EMA above the 200 day EMA (marked by grey ellipse) technically confirmed a bull market. 

An intra-day test of support from the upward 'gap' on Mon. Jan 23 ended with the formation of a 'reversal day' bar (lower low, higher close) that triggered a 200 points move during the next two days.

Note that the three EMAs had converged together. A sharp up move followed. The possibility was mentioned in last week's post.

The minimum upward target for the 'double bottom' reversal pattern is 8650. That is where the index should be heading next. 

Daily technical indicators are inside their overbought zones and showing upward momentum. But Slow stochastic is showing negative divergence by touching a lower top while the index moved higher.

Nifty's TTM P/E is almost at 23 - well above its long-term average. The breadth indicator NSE TRIN (not shown) is falling deeper inside its overbought zone. The index upside seems limited.

Don't worry if you missed buying on the breakout. The index may consolidate and pullback a bit. That will provide a buying opportunity.

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