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Saturday, May 6, 2017

Sensex, Nifty charts (May 05, 2017): pausing before correcting?

There was no let-up in FII selling in a holiday-shortened week. As per provisional figures, FIIs were net sellers of equity worth Rs 20.9 Billion. DIIs were net buyers of equity worth Rs 18.8 Billion.

Both Sensex and Nifty closed slightly lower for the week, but well above their long-term moving averages in bull markets.

The Nikkei India Services PMI slipped to 50.2 in Apr '17 from 51.5 in Mar '17 - growing at its slowest pace in three months. (A number above 50 indicates growth.) 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex tested its Apr 27 top of 30184 on Fri. May 5 but fell just short. Profit booking by FIIs dropped the index to seek support from its 20 day EMA and 'fanline 3'.

Note the following comment from last week's post: "If Sensex fails to take support from 'fan line 3', it may signal the beginning of an intermediate down trend." 

For almost two weeks, the index has been consolidating sideways within a 'rectangle' pattern. Since the index is in a bull market and entered the pattern from below, the probability of an upward breakout from the 'rectangle' is higher.

However, a 'rectangle' is an unpredictable pattern. That means a downward breakout can't be ruled out - specially if FIIs keep up their selling.

All four technical indicators are in bullish zones. MACD and Slow stochastic are moving sideways. ROC and RSI are showing a bit of downward momentum.

Some more consolidation, and a breach of 'fanline 3' seems on the cards.

Stay invested but remain watchful. Companies declaring good Q4 (Mar '17) results can be put on your 'buy list' for accumulation during corrections.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched a new intra-week high of 9377.10 but closed about 19 points lower for the week - forming a small 'reversal' bar.

Three of the four weekly technical indicators - MACD, RSI, Slow stochastic - are inside their overbought zones, but showing negative divergences by failing to touch new highs with the index. 

ROC is sliding below its 10 week MA, which is forming a 'rounding top' reversal pattern, giving advance warning of a correction.

Nifty's TTM P/E remains well above its long-term average at 23.59. The breadth indicator NSE TRIN (not shown) is deep inside its overbought zone - hinting at a likely correction.

If FIIs continue to keep up their selling, the much awaited correction may finally happen.

Bottomline? Sensex and Nifty charts have paused after touching new highs. Both indices are overvalued. Earnings have not yet caught up with expectations. Without FII buying support, upside for both indices will be limited. Stay invested and avoid any impulsive buying.  

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