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Sunday, August 13, 2017

Sensex, Nifty charts (Aug 11, 2017): bears use North Korea's war threats as an excuse to sell

FIIs were net buyers of equity on Tue. Aug 8 but net sellers on the other four days of the week. Their total net selling was worth Rs 26.2 Billion. DIIs were net buyers of equity on all five days - their total net buying was worth Rs 45 Billion.

However, bears ruled the roost - in global and local stock markets. Sensex lost more than 1100 points (3.4%) and Nifty lost more than 350 points (3.5%) on a weekly closing basis.

Three reasons can be cited for the sharp sell-off: (1) geopolitical tensions between US/North Korea and China/India; (2) SEBI restrictions on 331 'shell' companies; (3) disappointing Q1 (Jun '17) results.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex had already started correcting after touching a lifetime high of 32686 on Aug 2 (refer last week's post). 

Technically overbought conditions, negative divergences on three of the four technical indicators, and index valuation well above its long-term average had combined to trigger the correction.

FIIs got spooked by the heightened war rhetoric from USA and North Korea and decided to book profits in global markets.

The index has fallen below its 20 day and 50 day EMAs, but is trading above its rising 200 day EMA in a bull market. The overdue correction will improve the technical 'health' of the chart. 

Daily technical indicators are showing strong downward momentum and looking oversold. MACD is falling below its signal line and about to drop into bearish zone. ROC, RSI and Slow stochastic have entered their respective oversold zones.

The selling appears a bit overdone. A technical bounce can occur at any time. However, some more correction or consolidation can't be ruled out. 

If the index falls more, expect support from the zone between 29220 and 30040 (which happen to be the 50% and 38.2% Fibonacci retracement levels of the entire rally of 6932 points from the Dec 26 '16 low to the Aug 2 '17 top). Note that the 200 day EMA is inside the support zone between 29220-30040.

It is possible that a technical bounce from current level will face resistance from the falling 20 day or 50 day EMA, and the index will then correct towards the support zone.

So, don't be in a tearing hurry to buy. Let the correction play out.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty corrected sharply during the week, but found support at the 9700 level (which had acted as a resistance level during Jun '17).

The index is trading above its two weekly EMAs in a bull market. So, dips can be used to add/buy.

Weekly technical indicators have started to correct overbought conditions, and are showing downward momentum in bullish zones. Some more correction or consolidation is likely. If the 9700 level gets breached, the rising 20 week EMA may provide support. 

Expect stronger support from the zone between 9015 and 9285 (which happen to be the 50% and 38.2% Fibonacci retracement levels of the entire rally of 2244 points from the low touched in the week ending Dec 30 '16 to the high touched in the week ending on Aug 4 '17). Note that the 50 week EMA is inside the support zone between 9015-9285.

Nifty's TTM P/E has come down to 24.8 - still much above its long-term average. The breadth indicator NSE TRIN (not shown) has moved up sharply inside its neutral zone, and is likely to limit index downside.

Bottomline? Along with global stock indices, Sensex and Nifty charts faced sharp corrections as FIIs got spooked by the war rhetoric of USA and North Korea. DIIs are continuing to buy, so the correction may not be too deep. This is a bull market correction, which means it is providing an opportunity to buy. Be selective.

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