Wednesday, December 6, 2017

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

During the first three days of trading this week, FIIs were net sellers of equity worth Rs 30.2 Billion. DIIs were net buyers of equity worth Rs 28.5 Billion, according to provisional figures. Nifty lost 78 points (~0.8%).

Low demand due to GST dropped the Nikkei India Services PMI to 48.5 in Nov '17 against 51.7 in Oct '17. (A number below 50 indicates economic contraction.) The Composite PMI (Manufacturing+Services) fell to a 3 months low of 50.3 in Nov '17 against 51.3 in Oct '17.

RBI Governor maintained status quo on interest rates at the MPC meeting today. Higher oil and vegetable prices and their effect on inflation were the main reasons for not reducing rates any further.

The daily bar chart pattern of Nifty had plunged below its 20 day and 50 day EMAs on Thu. Nov 30 & Fri. Dec 1 but had found support from the lower edge of the 'support/resistance zone' between 10200 & 10100.

Strong bear selling breached the support at 10100 intra-day on Tue. Dec 5. Today the index fell further to test support from its 100 day EMA. (Note that the index had earlier bounced up after receiving support from its 100 day EMA on Sep 27.)

Can the index bounce up from here? Technical signals (discussed below) are conducive, but a sharp rally - like the one during Oct '17 - seems unlikely.

Daily technical indicators are in bearish zones and showing downward momentum. Slow stochastic is inside its oversold zone and touched a slightly higher bottom while the index fell lower. The positive divergence can cause an upward bounce.

Nifty's TTM P/E has slipped to 25.7 - which is still much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has risen vertically inside its oversold zone - to a level slightly higher than its Sep 27 level - and can limit index downside.

F&O settlement and RBI's policy meeting are out of the way. But uncertainty about the outcome of Gujarat state elections is keeping bulls on tenterhooks.

A likely technical bounce could face resistance from the 'support/resistance zone' and consolidate a little. If the NDA wins more than 100 seats in the 182 seats Gujarat assembly - which they probably will - expect the index to resume its rally. 

If the NDA wins less than 100 seats, a deeper correction towards the rising 200 day EMA (now at the support level of 9700) may ensue. Either way, the bull market remains intact and corrections can be used to add to existing holdings.

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