Sunday, April 23, 2017

Sensex, Nifty charts (Apr 21, 2017): profit booking near lifetime highs stops bulls on their tracks

Net selling in equities by FIIs touched Rs 30 Billion, as global uncertainties and lacklustre corporate earnings cast a shadow over the market. DIIs were net buyers of equity worth Rs 24.9 Billion, as per provisional figures.

Q4 (Mar '17) results of HDFC Bank, IndusInd Bank and Yes Bank showed good bottomline growth but with rising NPAs and provisions. Credit growth has been at its lowest level in 60 years for the banking sector as a whole.

To counter visa restrictions being imposed by USA, UK, Australia, Singapore on Indian tech workers, the government is considering reimposing a ceiling on royalty payments to overseas principals by MNCs operating in India. 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex had formed an upward 'gap' on Mar 14 '17, but has failed to make much headway since then. 

The 'gap' has provided good support to the index so far; but the lower edge of the 'gap' may be turning into the 'neckline' of a 'head and shoulders' reversal pattern.

The 50 day EMA is just below the 'gap' zone, and can provide additional support if the index slips further.

Note that the right 'shoulder' of the 'head and shoulders' pattern hasn't formed yet - and may not form at all, if bulls manage to propel the index above the previous top of 30007 (touched on Apr 5).

However, the possibility of formation of a reversal pattern near an index top should be treated with respect and caution.

Daily technical indicators are looking bearish. MACD is falling below its signal line in bullish zone. ROC has dropped inside bearish zone but its downward momentum has stalled. RSI has slipped inside its bearish zone. Slow stochastic has entered its oversold zone.

There can be a technical bounce, but a resumption of the up move is unlikely in F&O expiry week. The index may rise to form the right 'shoulder' of the 'head and shoulders' pattern - providing short-term players an exit opportunity.

The index is trading well above its rising 200 day EMA in a bull market. If a 'head and shoulders' pattern does get formed and the index breaks down below it, the correction should end with a test of support from the 200 day EMA at worst.

Why? The 50% Fibonacci retracement level of the entire rally from the Dec 26 '16 low to the Apr 5 '17 top is at about 27880 - 20 points above the current level of the 200 day EMA. Bull market corrections often end near the 50% Fibonacci retracement level.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty failed to close above the psychological level of 9200 for the 6th week in a row. The index is trading above its two rising weekly EMAs in a bull market, with the upward 'gap' formed on Mar 14 '17 providing good support.

Three of the four weekly technical indicators - MACD, RSI, Slow stochastic - are inside their respective overbought zones, but have started to slide down. ROC has already slipped down from its overbought zone.

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

Some more correction, and a complete filling of the upward 'gap' are possibilities. The formation of a 'head and shoulders' reversal pattern is also a possibility.

In other words, waiting on the sidelines instead of rushing in to buy or sell may be a good idea.

Bottomline? Sensex and Nifty charts appear to be forming reversal patterns that may lead to deeper corrections. Both indices are overvalued. Unless earnings catch up with expectations, don't expect runaway rallies. Stay invested and continue your SIPs.  

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