Wednesday, August 2, 2017

Nifty chart: a midweek technical update (Aug 02 ‘17)

For the month of Jul '17, FIIs were net buyers of equity (worth Rs 14.6 Billion) after three straight months of net selling. DIIs were also net buyers of equity (worth Rs 47.8 Billion) for the 4th month in a row. Nifty had its first ever monthly close above the 10000 level.

Passenger vehicle sales picked up in Jul '17 - thanks to price cuts after GST implementation. Maruti (22.4%), Honda (21.7%), M&M (21%), Ford (18.9%), Tata Motors (10.2%), Toyota (43%) showed double-digit sales growth over Jun '17. Two-wheeler and Commercial vehicles also had good growth in sales. 

In a widely expected move, RBI cut both the repo and reverse repo rates by 25 bps (0.25%) each during today's monetary policy meeting. Nifty corrected 33 points, as the interest rate cut had already been 'discounted' by the market.

The daily bar chart pattern of Nifty touched a new high of 10138 prior to RBI's policy announcement, but slipped 56 points to close at 10082 - forming a 'reversal day' bar (higher high, lower close) that may temporarily halt the bull rally.

The index is trading well above its three rising EMAs in a bull market. All three daily technical indicators are in their respective overbought zones. Slow stochastic is showing negative divergence by touching consecutive lower tops.

The index is almost 950 points above its 200 day EMA - a sign of extremely overbought condition. Nifty's TTM P/E is at 25.63 - considerably higher than its long-term average. The breadth indicator NSE TRIN (not shown) is trying to emerge from deep inside its overbought zone.

In the near term, large liquidity flows can keep an index overbought for long periods. Eventually, there will be a correction if earnings fail to catch up with index levels. Aug '17 may well turn out to be a month of correction or consolidation. 

Stay invested. Maintain SIPs. But no need to go on a buying spree just because the index is touching new highs. Partial profit booking may be a better idea.

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