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Wednesday, May 31, 2017

Nifty chart: a midweek technical update (May 31 ‘17)

For the month of May '17, FIIs were net sellers of equity worth Rs 4.5 Billion, which included today's net buying of equity worth Rs 10.5 Billion - as per provisional figures.

DII were net buyers of equity worth Rs 42.8 Billion, which included today's net selling worth Rs 9.4 Billion. Nifty gained more than 300 points (3.4%) for the month.

India's GDP growth in FY 2016-17 slowed down to a three year low of 7.1% against 7.9% (revised upwards to 8% due to revisions in IIP and WPI series) in FY 2015-16. Q4 (Mar '17) GDP growth fell to 6.1% against 7% in Q3 (Dec '16) - thanks to demonetisation

The daily bar chart pattern of Nifty received good support from its 20 day EMA and bounced up strongly. It rallied past the 9600 level for the first time ever on May 26, and touched a new high of 9649.60 today.

All three EMAs are rising, and the index is trading above them in a bull market. However, daily technical indicators are looking overbought, and showing negative divergences by failing to touch new highs with the index. 

The index is more than 800 points above its 200 day EMA - an empirical observation of an overbought condition that usually precedes a correction.

Nifty's TTM P/E ended the month at 24.35 - well above its long-term average - after rising to a high of 25.23 on May 17th. Decent earnings growth of Nifty component companies helped to moderate P/E growth.

(On a two years forward earnings estimate, Nifty's P/E is at a reasonable 15.5. But forward earnings estimate should be taken with a pinch of salt. It had to be revised downwards considerably for FY 2016-17.)

The breadth indicator NSE TRIN (not shown) has risen towards its oversold zone - giving an interesting contra-indication of more upside for the index.

So, will the index rally first and then correct? Or, will it correct first and then rally? 

For small investors, guessing market movements is a waste of time and energy. Don't fight the trend - which is clearly up. Stay invested, but maintain a stop-loss.

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