Wednesday, April 19, 2017

Nifty chart: a midweek technical update (Apr 19 ‘17)

FIIs were net sellers of equity worth Rs 18.5 Billion during the first three trading days this week. DIIs were net buyers of equity worth Rs 13.5 Billion, as per provisional figures.

Nifty is sliding down towards the 85 points upward 'gap' formed on Mar 14 '17. The 'gap' had provided good support twice - on Mar 22 and Mar 27.

India's WPI-based inflation fell to 5.7% in Mar '17 from a two-and-a-half years high of 6.5% in Feb '17, mainly due to a fall in mineral and fuel prices, while food prices continued to rise.

The daily bar chart pattern of Nifty is bearing the brunt of FII selling. The index has corrected below its 20 day EMA, but managed to close just above the 9100 level.

Nifty is 40 points above the 'gap' that had twice provided support earlier - and may do so again. The index is trading well above its rising 200 day EMA in a bull market

If the index finds support from the 'gap' and bounces up, it may proceed to form the 'right shoulder' of a 'head and shoulders' reversal pattern. Such a pattern - when formed at an index top - should be treated with extreme caution.

Note that the 'left shoulder' has already formed, and the 'head' formation is nearly complete, with a 'neckline' at about 9020. Completion of the pattern may cause a downward breakout towards 8800.

Can the index fall even further? Sure it can - specially if FIIs continue to sell. Will it? That will depend on how Q4 (Mar '17) results pan out. They haven't been that great thus far.

Daily technical indicators are looking bearish. MACD is falling below its signal line in positive zone. RSI is seeking support from its 50% level. Slow stochastic is poised to enter its oversold zone. 

All three indicators have dropped lower than their Mar 27 lows, while the index has touched a higher bottom. The negative divergences can cause some more correction.

Nifty's TTM P/E is still above 23 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has fallen towards the lower edge of its neutral zone.

Bull market corrections provide buying opportunities. However, the likely formation of a reversal pattern means it is better to be circumspect than brave.

No comments: