Sunday, April 30, 2017

Sensex, Nifty charts (Apr 28, 2017): touch new highs in a flood of domestic liquidity

Net selling in equities by FIIs eased a little to Rs 19.2 Billion, as per provisional figures. DIIs were net buyers of equity worth a huge Rs 49.1 Billion. Both Sensex and Nifty touched new highs during the week gone by.

Q4 (Mar '17) results have been a mixed bag so far, but not as bad as some experts had expected. There were a few positive surprises as well - from Indian Bank, UPL and Ambuja Cements.

Thanks to demonetisation, advance tax and self-assessment tax collections in FY 2016-17 registered the highest growth rate in at least five years, suggesting many people regularised their unaccounted income by recording it in the books.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex touched a new high of 30184 on Apr 27, but formed a 'reversal day' bar (higher high, lower close) and corrected 265 points. The index closed 1.9% higher for the week.

The possibility of a 'head and shoulders' reversal pattern - mentioned in last week's post - may have been negated. However, bears haven't been vanquished yet. Why?

There is a confluence of technical headwinds. All four technical indicators are showing negative divergences by failing to touch new highs with the index. That has triggered a correction.

The index has already breached 'fan lines 1 & 2' with corrective moves. If Sensex fails to take support from 'fan line 3', it may signal the beginning of an intermediate down trend. 

There is also a possibility that the index is forming a more complicated 'head and shoulders' pattern with multiple shoulders, and a 'neckline' at about 29200.

The last two events haven't occurred yet - and may not occur at all - but it is better to be cautiously optimistic than be wildly euphoric at a market top.

Sensex is trading above its three EMAs in a bull market. All four technical indicators are in bullish zones, but not showing much upward momentum.

Some sort of a reversal pattern may be forming. Stay invested. Let the pattern play out before going 'all in' (as poker players often do - when they are trying to bluff their opponents).

NSE Nifty index chart pattern

The upward 'gap' formed in the week ending on Mar 17 '17 continued to provide good support to the weekly bar chart pattern of Nifty. The index rose to touch a new high of 9367 and closed just above the 9300 level during the week.

All four technical indicators are looking overbought. ROC, RSI and Slow stochastic are showing negative divergences by touching lower tops. Expect some correction or consolidation before the index can move higher.

Nifty's TTM P/E is at 23.63 - much above its long-term average. The breadth indicator NSE TRIN (not shown) is falling deeper into its overbought zone. Index upside appears limited in the near term.

The index is trading well above its two rising weekly EMAs in a bull market. A correction will improve the technical 'health' of the chart - but may not happen unless FIIs step up their selling.

Steady flows into domestic mutual funds have fuelled the index rally despite poor credit off-take and weak earnings of India Inc.

Bottomline? Despite touching new highs, Sensex and Nifty charts may be forming reversal patterns that can lead to deeper corrections. Both indices are overvalued. Earnings need to catch up with expectations, but that can take one or two quarters more. Stay invested and continue your SIPs.  

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