Sunday, April 9, 2017

Sensex, Nifty charts (Apr 07, 2017): 'Trump'ed-up corrections or technical weakness?

Activity remained muted in a holiday-shortened trading week. FIIs were net buyers of equity worth Rs 7.55 Billion; DIIs were also net buyers of equity worth Rs 0.48 Billion, as per provisional figures. Sensex and Nifty gained marginally on weekly closing basis.

Nikkei India Services PMI rose to a 5 month high of 51.5 in Mar '17 against 50.3 in Feb '17. A figure above 50 indicates expansion. "(India’s) rapid recovery from the demonetisation-related downturn was accompanied by job creation and softer inflationary pressures.”

To check excess liquidity in the system, narrow down money market rates and control inflation in FY18, RBI on Thu. Apr 6 increased the reverse repo rate by 25 basis points to 6% from 5.75% earlier.

BSE Sensex index chart pattern

The following were concluding comments in last week's post on the daily bar chart pattern of Sensex: "Announcement of FY 16-17 corporate results is expected to start in about two weeks. Some hesitation among bulls is only to be expected till then."

On Apr 5, the index rose to touch a new 52 week intra-day high of 30007 - testing, but falling just short of, the lifetime intra-day high of 30025 touched in Mar '15. Sensex ended the day at a lifetime closing high 29974.

Three of the four technical indicators - MACD, ROC, RSI - showed negative divergences by touching lower tops. That was a signal for a corrective move. Trump's cruise missile barrage at a Syrian airport exacerbated the index slide.

Note that the index closed just below trend line 2 - within the 3% 'whipsaw' limit, but it should be treated as a second warning about a possible trend change. (The first warning was a close below trend line 1.)

Sensex has formed a small 'rising wedge' pattern from which the likely break out is downwards. It is also possible that the index has formed the left shoulder and head of a 'head and shoulders' reversal pattern.

The index is trading above its three EMAs in a bull market, but is more than 2000 points above its 200 day EMA (an empirical observation of an overbought condition). Daily technical indicators are showing downward momentum. Some more correction or consolidation may follow.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched a new high of 9274, but closed at 9198. For the 4th straight week, the index failed to close above the psychological level of 9200.

The index is trading well above its two rising weekly EMAs in a bull market. All four technical indicators are inside their overbought zones. ROC is showing signs of bearishness by crossing below its 10 week MA.

Nifty's TTM P/E remained above 23 during the week - well above its long-term average. The breadth indicator NSE TRIN (not shown) is rising in neutral zone - hinting at more consolidation or correction.

India's manufacturing and services PMI numbers are showing growth. Whether that growth will get reflected in India Inc's Q4 numbers or not may be keeping bulls on tenterhooks.

Bottomline? Sensex and Nifty charts are consolidating after sharp rallies triggered by hopes of better corporate earnings. Both indices are looking overvalued. Some more consolidation or correction is possible. Don't be in a rush to buy or sell. Try to look at the big picture.

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