Wednesday, January 10, 2018

Nifty chart: a midweek technical update (Jan 10, 2018)

During the first three days of trading this week, FIIs were net sellers of equity worth Rs 1.8 Billion. (They were net buyers during the previous week.) DIIs were net buyers of equity worth Rs 9.2 Billion, as per provisional figures.

Nifty touched new intra-day (10659) and closing (10637) highs on Tue. Jan 9 before facing some profit booking today.

India has “enormous growth potential” compared to other emerging economies, the World Bank said today, as it projected country’s (GDP) growth rate to 7.3% in 2018 and 7.5% for the next two years. 

The daily bar chart pattern of Nifty had broken out above a large 'flag' pattern (FLAG 1) on Dec 18 '17, only to consolidate within a smaller 'flag' pattern (FLAG 2).

The index broke out above 'FLAG 2' on Fri. Jan 5 '18 with a 7 point 'gap'. On Mon. Jan 8, Nifty formed a 23 points upward 'GAP' - which has thrown up some interesting bullish and bearish possibilities.

Since the index is trading well above its three rising EMAs in a bull market, let us look at the bullish possibilities first.

The breakout above 'FLAG 2' with a 7 points 'gap' on Jan 5 is a bullish sign. The index rose to touch new highs three days in a row, which is another bullish sign. Daily technical indicators are in bullish zones - though they are looking overbought.

Now, some bearish possibilities. The wider 'GAP' on Jan 8 has to be looked at with suspicion, since it has formed so close to a new high. It can turn out to be a bearish 'exhaustion gap'.

Today's trade formed a bearish 'hanging man' candlestick pattern that tested support from the 'GAP'. In case Thursday's (Jan 11) trade opens and stays below the 'GAP', a bearish 'island reversal' pattern can get formed.

Note that daily technical indicators are showing negative divergences by failing to touch new highs with the index on Tue. Jan 9. Slow stochastic is showing downward momentum after forming a 'double top' like reversal pattern inside its overbought zone.

Nifty's TTM P/E has moved up to 27.18 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is moving up inside its overbought zone - hinting at some more correction.

After being net buyers during the first 6 trading days in the New Year, FIIs have turned bears during the past 2 days.

On balance, the bearish possibilities are outweighing the bullish ones. Some more correction appears to be the likely outcome.  

No need to sell in a panic. A low base effect should lead to earnings growth for India Inc. in Q3 (Dec '17). That will add fuel to the bullish fire.

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