Saturday, December 23, 2017

Sensex, Nifty charts (Dec 22, 2017): break out above 'flag' patterns to touch new highs

FIIs were net sellers of equity worth Rs 26.2 Billion during the week. DIIs were net buyers of equity worth Rs 35.3 Billion, as per provisional figures. Sensex and Nifty broke out above 'flag' patterns to touch new highs.

IMF Economic Counsellor and Director of Research Maurice Obstfeld said that although demonetisation as well as implementation of the Goods and Services tax (GST) caused short-term disruptions, both measures would bring long-term benefits.

RBI has warned against further downside risk for the banking sector as asset quality concerns are far from over. Deleveraging in heavily indebted parts of the corporate sector and slow credit growth may delay country's economic revival. 

BSE Sensex index chart pattern

Note the following comments from last week's post on the daily bar chart pattern of Sensex: "An upward breakout above the 'flag' pattern appears inevitable. Whether the breakout will be followed by a pullback to the top of the 'flag' or not may depend on the margin of NDA's victory in the two states."

NDA's victory in Himachal was by a good margin, but it was touch and go for a while in Gujarat. Sensex did breakout upward from the 'flag' pattern, but the breakout was not a convincing one.

The index formed a 'reversal day' (higher high, lower close) bar on Wed. Dec 20, which led to a pullback to the top of the 'flag' on Thu. Dec 21. The index bounced up to touch (33964) and close (33940) at new highs on Fri. Dec 22 - but is less than 100 points above its Nov 7 '17 top of 32866.

Sensex is trading above its three rising EMAs in a bull market, and should continue to move higher on the back of liquidity inflows into domestic mutual funds. 

Daily technical indicators are in bullish zones. MACD is rising above its signal line in bullish zone. RSI is about to enter its overbought zone. Slow stochastic is inside its overbought zone, but its upward momentum has stalled.

ROC is looking a bit bearish by correcting inside its overbought zone. All four indicators failed to touch new highs with the index. The negative divergences can trigger some consolidation or correction during F&O expiry week.

Dec '17 is the 5th straight month of net selling in equities by FIIs. Unless earnings of India Inc. show improvement in the next couple of quarters, don't expect them to turn buyers. A runaway Sensex rally - like the one during the first 7 months of 2017 - is unlikely to be repeated in 2018.

NSE Nifty index chart pattern

As expected, the weekly bar chart pattern of Nifty broke out above the 'flag' pattern after 6 weeks of consolidation, and rose to touch new intra-week (10501) and closing (10493) highs.

Strong volume support technically validated the upward breakout. All three EMAs are rising, and the index is trading above them in a bull market. 

Note that the week's close was just 3 points above the previous top of 10490 touched 6 weeks back. Bulls still have some work left before bears can be sent away to hibernate.

Weekly technical indicators are in bullish zones, but only Slow stochastic is showing upward momentum. All four are showing negative divergences by failing to touch new highs with the index. A pullback to the top of the 'flag' may be on the cards.

Nifty's TTM P/E has increased to 26.86 - well above its long-term average. The breadth indicator NSE TRIN (not shown) has bounced up after briefly entering its overbought zone, and can limit index upside.

Bottomline? Sensex and Nifty charts have broken out above bullish 'flag' patterns within which they were consolidating for the past 6 weeks. The breakouts haven't been too convincing. Any pullbacks can be used to add to existing holdings.

No comments: