Thursday, September 7, 2017

Nifty chart: a midweek technical update (Sep 06 ‘17)

FIIs have continued to sell equity in the spot market. Their net selling during the first four days of trading in Sep '17 totalled Rs 34.4 Billion. DIIs were net buyers of equity worth Rs 12.1 Billion.

Nifty has been trading sideways with an upward bias in a range between 9700 and 10000 since correcting down from the Aug 2 top of 10138. However, it has formed a 'rising wedge' pattern from which the likely breakout is downwards.

The Nikkei India Services PMI for Aug '17 was 47.5 - higher than 45.9 in Jul '17 but below the 50 level which indicates contraction. Call it the 'GST effect'. The Services PMI was also below 50 in the Nov '16 to Jan '17 period - thanks to demonetisation.

The daily bar chart pattern of Nifty had broken out below a 'diamond' pattern after touching a lifetime high of 10138 on Apr 2. Read all about the 'diamond' pattern and its implications in an earlier post.

After receiving support from the 9700 level on Aug 11, the index bounced up to touch 9948 on Aug 17 but entered a sideways consolidation within a bearish 'rising wedge' pattern.

Daily technical indicators are in bullish zones but not showing any upward momentum. MACD is moving sideways above its signal line. RSI is seeking support from its 50% level. Slow stochastic has dropped from its overbought zone.

Nifty's TTM P/E is at 25.88 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has dropped sharply and entered its overbought zone - hinting at a correction.

A fall below the 'rising wedge' should receive some support from the 9700 level. If the support fails to hold, a deeper correction to test support from the rising 200 day EMA may follow.

Keep a close watch on the zone between 9700 and 10000. Bears will dominate below 9700. Bulls will rule above 10000. Where is the index headed first?

Don't place any bets, but the odds of a fall below 9700 first appears better. Why? Because a bull market requires earnings support to sustain and prosper in the long-term. And earnings of India Inc. has been disappointing to say the least.

DIIs don't have much choice but to keep buying as investors continue to pour money into mutual funds, because investments in realty and gold is no longer in fashion. But as long as FIIs keep selling, the index is not going to move much higher.

So, sit out the correction. Bravehearts can short the index if it falls below the 'rising wedge' (not a recommended strategy for novice investors).

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