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Sunday, July 16, 2017

Sensex, Nifty charts (Jul 14, 2017): at new highs after breakout from bullish ascending triangle patterns

FIIs and DIIs were both net buyers of equity during the week - worth Rs 12.6 Billion and Rs 10.4 Billion respectively, as per provisional figures. Sensex and Nifty rose to touch their highest ever levels - each gaining more than 2% on weekly closing basis.

India's WPI inflation eased to 0.9% in Jun '17 - its lowest level in 8 months - against 2.17% in May '17 and -0.1% in Jun '16. Pressure will now mount on RBI to reduce interest rates in its Aug '17 policy meeting.

India's exports grew 4.4% in Jun '17 to $23.56 Billion; imports grew 19% to $36.52 Billion. Trade deficit was lower at $12.96 Billion against $13.84 Billion in May '17, but much higher than deficit of $8.11 Billion in Jun '16. 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex broke out above the 'ascending triangle' pattern within which it was consolidating since May 24 '17, and rose to touch new intra-day and closing highs above the 32000 level.

The index is trading above its three rising EMAs in a bull market. The breakout from the 'ascending triangle' (the possibility was mentioned in last week's post) has an upward target of about 32670.

Daily technical indicators are looking overbought. Though an index can remain overbought for long periods (check the Jan-Mar '17 period), the possibility of a pullback towards the top of the 'triangle' can't be ruled out.

Recent SEBI strictures on use of P-Notes may have triggered short-covering by FIIs - which may continue during the next couple of weeks.

Initial Q1 (Jun '17) results show no great improvement in earnings by India Inc. It may take another couple of quarters before earnings start to catch up with Sensex valuation.

Stock markets have a tendency to 'discount' good news in advance. So, waiting for a big correction to invest may not be a good idea. A correction usually happens when it is least expected. Maintaining SIPs and looking for pockets of fair valuation can work better. 

NSE Nifty index chart pattern

The following remark was made in last week's post on the weekly bar chart pattern of Nifty: "For the past 7 weeks, the index has been consolidating sideways - forming a possible 'ascending triangle' pattern from which the likely breakout is upwards." 

Note that a 'symmetrical triangle' is often an unreliable pattern because a breakout can occur in either direction. But an 'ascending triangle' is more reliable because a price breakout typically occurs above the pattern. 

Likewise for a 'descending triangle' pattern, where the breakout occurs below the pattern. Being able to identify these 'triangle' patterns can be very useful as the breakouts can be triggers for entering (or exiting).

Weekly technical indicators are inside their respective overbought zones and showing negative divergences by failing to touch new highs with the index. (On the daily chart, Nifty has formed a bearish 'hanging man' candlestick pattern.) A pullback towards the top of the 'triangle' is a possibility.

Nifty's TTM P/E has moved above 25 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has dropped back into its overbought zone - which may limit index upside.

Bottomline? Sensex and Nifty charts rose to touch new lifetime highs on the back of combined buying by FIIs and DIIs. Caution is advised. Stay invested. Check Q1 (Jun '17) results to add good performers to your 'buy list'. 

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