Wednesday, December 27, 2017

Nifty chart: a midweek technical update (Dec 27 ‘17)

Trading activity remained at a low-key during the first two days of a Christmas holiday-shortened F&O expiry week. FIIs were net buyers of equity worth Rs 1.3 Billion, as per provisional figures.

DIIs were net buyers of equity worth Rs 3.4 Billion. Nifty touched a new high of 10552.40 today but closed lower at 10491 - just a point higher than its Nov 6 '17 top of 10490.

The Indian government plans to raise Rs 500 Billion during Jan-Mar '18 through dated government securities - a move that may put a burden on the fiscal deficit target of 3.2% of GDP.

Grant Thornton's International Business Report survey data showed that India's businesses are most positive (58%) in the Asia-Pacific region about the opportunities presented by increasing spending power of the middle class.

The daily bar chart pattern of Nifty had broken out last week above the 'flag' pattern within which it was consolidating since Nov 6 '17.  The index moved up to touch a new high today, but profit booking led to the formation of a small 'reversal day' bar (higher high, lower close) that can cause a pullback towards the top of the 'flag'.

Daily technical indicators are in bullish zones, but only MACD is showing upward momentum. RSI has started to move down. Slow stochastic is overbought. All three are showing negative divergences by failing to touch new highs with the index.

Nifty's TTM P/E is at 26.85 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is falling swiftly inside its overbought zone - and can trigger a correction.

The index is trading above its three rising EMAs in a bull market. 'Buy the dips' should be the strategy one should follow. But choose your stocks carefully.

Note that 'flag' patterns often form in the middle of an up (or down) move. The up move from the Dec '16 low to the Nov '17 top covered about 2500 points. That hints at a further rally of 2500 points from the 'flag' - giving an upward target of about 12500 for Nifty.

Already a couple of analysts have projected Nifty targets of 12000 by Mar '19. Now you know why. Just remember that an index doesn't understand logic or arithmetic. So, targets - whether upward or downward - are approximate at best, and are based on past patterns which may or may not repeat.

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