Sunday, September 24, 2017

Sensex, Nifty charts (Sep 22, 2017): bulls forced to retreat after strong attack by bears

FII net selling in equities touched a huge Rs 54.5 Billion during the week. DII net buying in equities was worth Rs 35.8 Billion, as per provisional figures. Both indices closed lower - Sensex by 1.1%, Nifty by 1.2%.

Despite the heavy selling by FIIs in equities, India's foreign exchange reserves rose by $1.8 Billion to $402.5 Billion - thanks to heavy inflows into debt.

A recent spate of infrastructure project announcements by the government - like bullet train and industrial corridors - is expected to kick-start the credit and investment cycle that will benefit the banking sector, as per a statement by the SBI chairperson.

BSE Sensex index chart pattern

The following warning bell was sounded in last week's post on the daily bar chart pattern of Sensex: "Some more consolidation within the 'flag' and a breakout below it are possibilities."

The index faced strong resistance from the upper edge of the 'flag' pattern on Mon. & Tue. (Sep 18 & 19). On Tue, it formed a small 'reversal day' bar (higher high, lower close) that triggered a sharp correction.

The index closed below its 20 day EMA but above its 50 day and 200 day EMAs in a bull market. More importantly for bulls, it closed within the 'flag' pattern.

Daily technical indicators are in bullish zones but turning bearish. MACD is falling towards its signal line. ROC has crossed below its 10 day MA. RSI and Slow stochastic have fallen down from their respective overbought zones. 

Bulls may try to prevent a fall below the 'flag', but selling by bears may overwhelm them. Expect support from the 30700 level, and below it from the rising 200 day EMA.

The NDA government has admitted its failure on the economic front by announcing a fiscal stimulus. Recent IPOs have absorbed surplus cash that could have been invested in the secondary market.

The index recovery after the correction is likely to be 'U' shaped rather than 'V' shaped. In other words, there is no need to rush in to buy the current dip.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched a new high of 10179, but closed 120 points lower for the week, forming a 'reversal' bar. The previous 8 weeks' trading has formed a large 'rising wedge' pattern from which the likely breakout is downwards.

The 20 week and 50 week EMAs are rising, and the index is trading above them in a bull market. However, with FIIs selling heavily, a fall below the 'wedge' and the 20 week EMA appears likely.

Weekly technical indicators are in bullish zones but showing downward momentum. MACD is sliding below its signal line inside overbought zone. ROC has dropped towards its neutral zone. RSI and Slow stochastic are below their overbought zones and drifting down.

Nifty's TTM P/E has slipped a bit from last week to 25.95, which is still much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is trying to emerge from its overbought zone and can trigger some more correction.

Bottomline? Sensex and Nifty charts have been consolidating sideways within bearish patterns, and look poised to breakout below the patterns. DII buying has been overwhelmed by FII selling. Any fiscal stimulus may further stoke inflation and widen the fiscal deficit. This may be a good time to stay away and let the correction play out.

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