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Sunday, March 26, 2017

Sensex, Nifty charts (Mar 24, 2017): pause after touching new highs

FII net buying in equities was lower than the previous week at Rs 37.1 Billion, as per provisional figures. DII net selling in equities was higher than the previous week at Rs 25.9 Billion.

However, both indices closed lower for the week - Sensex by 0.8% and Nifty by 0.6%. Some profit booking after both indices touched new highs was only to be expected.

India's Current Account Deficit (CAD) for Q3 (Dec '16) rose to four-quarter high of 1.4% of GDP (at US $ 7.9 Billion) against 0.6% of GDP for Q2 (Sep '16). CAD for Q3 (Dec '15) was also 1.4% of GDP (at US $7.1 Billion). 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex shows how news can affect market technicals in the short term. 

There was a downward breach on Mar 8 '17 of the blue up trend line drawn from the Dec 26 '16 low (marked 1). An upward 'gap' on Mar 14 '17 - following announcement of state election results - took the index back above the up trend line '1'.

After touching a new 52 week high of 29825 (and closing at a lifetime high of 29649) on Mar 17 '17, the index corrected on profit booking. Trend line '1' was breached on the downside again - on Mar 21 '17.

Note that the mere breach of a trend line may not necessarily indicate a trend reversal. Some times it is a warning of an impending reversal.

A second up trend line (marked 2) has been drawn through the Dec 26 '16 and Mar 22 '17 lows. Any downward breach of trend line '2' may not indicate a trend reversal either. But it will be a second warning.

As per 'corrective fan principle', only a breach of a third up trend line - should it need to be drawn after a downward breach of trend line '2' - will confirm a reversal of the up trend (or a much deeper correction).

Since the index is trading above its three rising EMAs in a bull market, there is no need to panic and sell. Neither should any one go on a buying spree.

Daily technical indicators are in bullish zones but giving conflicting signals. MACD and Slow stochastic are showing downward momentum. ROC and RSI are showing upward momentum.

If you can't control your urge to buy, choose safer large-cap stocks. Better still, let your asset allocation plan be your guide.

NSE Nifty index chart pattern

Attention is being drawn to the following comments in last week's post on the weekly bar chart pattern of Nifty: "Nifty is trading more than 700 points above its rising 50 week EMA. The last time it did that - in the week ending on Sep 9 '16 - a sharp correction had followed." 

Therefore, last week's correction - albeit a small one - should not have come as a surprise to regular readers of this blog.

Has anything changed in the technical structure of the chart? Not yet. Last week's upward 'gap' has been partly filled. The index may correct a bit more to completely fill the 'gap'.

Either way - i.e. partial or complete filling of an upward 'gap' - should be followed by a resumption of the up move.

Since the index is trading well above its rising 20 week and 50 week EMAs in a bull market, a slightly deeper correction will improve the technical 'health' of the chart - enabling Nifty to climb to new highs. But wishing for a correction doesn't make it happen.

Weekly technical indicators are still looking overbought. ROC is showing the first sign of a correction by dropping down to its rising 10 week MA.

Nifty's TTM P/E remains much higher than its long-term average at 23.65. The breadth indicator NSE TRIN (not shown) has fallen sharply inside its neutral zone. Any further index upside may push TRIN inside its overbought zone.

Bottomline? Both Sensex and Nifty charts are pausing after touching new highs. Q4 (Mar '17) earnings need to catch up as both indices are looking overvalued. Downside risk appears higher. Investors should be thinking about booking profits and buying fixed income instruments.

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