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Sunday, May 21, 2017

Sensex, Nifty charts (May 19, 2017): rally to touch new highs, but bulls looking a bit tired

During the week, FIIs were net sellers of equity worth Rs 9.9 Billion while DIIs were net buyers of equity worth Rs 13.9 billion. Interestingly, during the first two days of the week, FIIs were net buyers and DIIs were net sellers.

Sensex closed about 0.9% higher, and Nifty closed about 0.3% higher on a weekly closing basis. Both indices touched new highs during the week.

Different slabs of GST rates have been finalised at a recent meeting of state Finance Ministers in Srinagar, and implementation from July 1 seems on the cards. However, the feisty West Bengal CM is trying to put a spanner in the works by claiming that small businesses are not yet ready to implement GST.

BSE Sensex index chart pattern

The following remark was made in last week's post on the daily bar chart pattern of Sensex: "... the bullish structure is looking a bit shaky as any downward breach of 'fan line 3' can bring bears to the fore."

The index rose to touch a new high of 30712 on Fri. May 19, only to drop lower and seek support from 'fan line 3' before bouncing up.

Bulls may heave a sigh of relief that 'fan line 3' was not breached. But if FIIs remain in selling mode, that support may get breached soon.

All three EMAs are rising, and the index is trading above them in a bull market. However, Q4 (Mar '17) results show that corporate earnings are lagging behind index valuation.

Technical indicators are in bullish zones, but giving conflicting signals. MACD is moving sideways. ROC and RSI have reversed their downward slide. Slow stochastic is about to drop from its overbought zone.

All four are showing negative divergences by failing to touch new highs with the index. Expect some consolidation or correction.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched a new high of 9533 but could not sustain above the 9500 level.

The index closed just below its opening level of the week (9434) to form a 'shooting star' candlestick pattern that often marks the end of an intermediate up move. (Note a similar pattern that formed in the week ending on Sep 9 '16.)

The index is trading well above its two weekly EMAs in a bull market. Weekly technical indicators are inside their respective overbought zones. Three of them - ROC, RSI, Slow stochastic - are showing negative divergences by failing to touch new highs with the index.

Nifty's TTM P/E is at 24.91 - much above its long-term average. The breadth indicator NSE TRIN (not shown) is falling deeper inside its overbought zone.

A correction towards the Mar '15 top of 9119 will improve the technical 'health' of Nifty's chart and provide a good adding opportunity. But hoping for a correction never caused one. It'll happen when it is least expected.

Bottomline? Sensex and Nifty charts continue to touch new highs. Both indices are looking overbought. Corporate earnings are far from catching up with market expectations. If FIIs and DIIs keep trading at cross purposes, upside for both indices will remain capped. Stay invested but maintain trailing stop-losses.  

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