Wednesday, August 16, 2017

Nifty chart: a midweek technical update (Aug 16 ‘17)

FIIs were net sellers of equity worth Rs 27.3 Billion on Mon. Aug 14 & Wed. Aug 16. The intervening Independence Day holiday on Aug 15 made no difference to their determination to book profits.

DIIs more than matched them. Their net buying in equities was worth Rs 29.6 Billion. Nifty recovered more than 200 points from last week's low, but is facing resistance from its 20 day EMA and the 9900 level.

Inflationary pressure is back after GST roll-out. CPI inflation rose to 2.36% in Jul '17 from the record low of 1.5% in Jun '17. WPI inflation doubled to 1.88% in Jul '17 against 0.9% in Jun '17.

The following comments were made in last week's update on the daily bar chart pattern of Nifty: "Some more correction is possible. Expect support from the 50 day EMA (at 9780), and stronger support from the 9700 level. A fall below 9700 seems unlikely as both FIIs and DIIs are buying."

The index received brief support from its 50 day EMA on Thu. Aug 10 and bounced up after getting much stronger support from the 'support-resistance' level of 9700 on Fri. Aug 11 - even though FIIs had turned sellers.

So, is the correction over? Technical indicators are hinting at some more upside.
Nifty's TTM P/E is at 25.28 - much higher than its long-term average, but that didn't prevent Nifty from moving higher during Jul '17. The breadth indicator NSE TRIN (not shown) is falling in its neutral zone (it usually moves in a direction opposite to the index).

MACD is below its signal line, but has stopped falling. RSI is in neutral zone, and showing upward momentum. Slow stochastic has emerged from its oversold zone. (The last time Slow stochastic emerged from its oversold zone was in end-Jun '17. A month-long rally had followed. Will the pattern repeat?)

The formation of a small 'diamond' pattern (which is like a head-and-shoulders pattern with a bent neckline) at the index top may prevent such a rally. The breakdown below the 'diamond' can lead to a deeper correction.

How will we know for sure? The index had corrected 452 points from its Aug 2 top of 10138. It has already retraced 48% of the fall (which is close to the 50% Fibonacci retracement level) by touching a high of 9904 today.

A 61.8% Fibonacci retracement will take Nifty to 9965. So, a convincing move above 9965 should send the bears packing, right? 

Here comes the catch about the 'diamond' pattern. The breakdown point from the 'diamond' is at about 10000 - which is likely to act as a resistance level to future up moves.

In other words, only a convincing index move above 10000 will negate the 'diamond' and bring bulls back to the fore. 

Remember that technical analysis is not a science. It only gives indications based on past investor behaviour following formation of different patterns. If FIIs decide to resume buying, the flood of liquidity can change all the analysis.

What should small investors do? Watch the 9700 and 10000 levels closely. A fall below 9700 will lead to a deeper correction. A move above 10000 should lead to new highs.

The index may just consolidate sideways between 9700 and 10000 for a while. May be till Diwali - by which time Q2 (Sep '17) results will give a better idea about the corporate health of India Inc.

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