Wednesday, November 8, 2017

Nifty chart: a midweek technical update (Nov 08 ‘17)

During the first three days of trading this week, FIIs were net sellers of equity worth Rs 28 Billion while DIIs were net buyers of equity worth Rs 7.3 Billion, as per provisional figures.

Their roles had reversed during the first two days when FIIs were net buyers of equity worth Rs 10.4 Billion while DIIs were net sellers of equity worth Rs 23.1 Billion.

One year after demonetisation of Rs 1000 and Rs 500 notes by the Modi government, the benefits and demerits of the experiment are being assessed. Reduction of corruption, terror financing and currency in circulation have been some of the benefits.

More than 2% drop in India's GDP growth, loss of 1.5 million jobs in the unorganised sector and severe stress in the rural economy leading to Rs 880 Billion worth of farm loan waiver have been major demerits.

Only time will tell whether longer term economic gains will outweigh the near-term pain.

The daily bar chart pattern of Nifty touched a new high of 10490 on Mon. Nov 6, but formed a small 'reversal day' bar (higher high, slightly lower close) that often marks an intermediate top.

Heavy selling by DIIs on Tue. and FIIs on Wed. sent the index plummeting 200 points to seek support from its 20 day EMA. A combination of rising oil prices, falling Rupee and several IPOs seems to have taken the sheen off the secondary market.

Daily technical indicators have corrected overbought conditions, and are showing downward momentum in bullish zones. Some more correction is possible.

The index had rallied 802 points from its Sep 28 low of 9688. A 38.2% Fibonacci retracement of the entire rally will drop the index to 10184. A 50% Fibonacci retracement could see the index touch 10089.

Since an index doesn't understand arithmetic and technical levels are rarely precise, a reasonable estimate is that Nifty may find support from the zone between 10100 & 10200. 

The 50 day EMA is near the lower end of the support zone, and should provide additional support. What if the index falls below 10100? Strong support can be expected from the long-term 'support-resistance' level of 9700.

Nifty's TTM P/E has slipped down to 26.37 - still much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has risen almost vertically from its overbought zone to enter neutral zone, hinting at some more correction.

Sharp corrections - like the ones in Aug '17 and Sep '17 - are typical of bull markets and can be used for adding to existing positions. Choose fundamentally sound stocks that have faced corrections after declaring Q2 (Sep '17) results that disappointed the market. 

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