Saturday, February 3, 2018

Sensex, Nifty charts (Feb 02, 2018): budget throws cold water on bull party

During Jan '18, FIIs were net buyers of equity worth Rs 95.7 Billion as per provisional figures - after five straight months of net selling. DIIs were also net buyers of equity (as they have been since Apr '17), but worth only Rs 4 Billion.

FIIs were net buyers of equity worth Rs 20.5 billion during the first two trading days of Feb '18. DIIs were net sellers of equity worth Rs 8.7 Billion, as per provisional figures.

Reintroduction of long term Capital Gains tax on equity shares and a 10% tax on distributed income from equity-oriented mutual funds in the recent budget threw cold water on the bull party in the Indian stock market.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex touched new intra-day (36444) and closing (36283) highs on Mon. Jan 29 on the back of net buying in equities by both FIIs and DIIs.

Hugely overbought technical indicators, proximity to the budget and rumours of introduction of long-term capital gains tax (LTCG) in some form led to profit booking by FIIs on the next two days.

The rumours of  LTCG turned out to be news on budget day (Thu. Feb 1). DIIs and small investors started selling heavily to lock-in tax-free long-term profits. FIIs turned contrarian and bought the dip - otherwise the index would have fallen more.

By touching an intra-day low of 35006 on Fri. Feb 2, Sensex has retraced 37% of the 3879 points gain made from the low of 32565 (on Dec 6 '17) to the high of 36444 (on Jan 29 '18). 

That is close to the 38.2% Fibonacci retracement level of 34962, where the Sensex may find some support and bounce up. Will it?

Daily technical indicators are correcting overbought conditions, and showing strong downward momentum. ROC has already entered bearish zone. Some more correction can't be ruled out. Expect stronger support in the zone between 34050 & 34300.

The much-awaited correction is finally here. Are you going to welcome it with open arms and use the opportunity to add? After all, Sensex is in a long-term bull market. Or, are you more interested in saving 10% LTCG by booking profits till Mar 31 '18?

Will you continue to keep faith in mid-cap and small-cap stocks? Or, will you reinvest booked profits in 'more expensive' large-cap stalwarts?

The answers to those questions will determine how your portfolio fares during the next few years. (No one likes to pay tax. But remember that tax is paid from profits.)

NSE Nifty index chart pattern

The following comments from last week's post may be worth repeating: "The weekly bar chart pattern of Nifty touched a new high for the 8th week in a row. Since 8 is a number in the Fibonacci series, technical traders may use it as an excuse to book profits next week."

The Finance Minister gave a better excuse in his budget speech by re-introducing LTCG on equity shares. The index formed a large 'reversal' bar (higher high, lower close), which can lead to some more correction.

By touching a low of 10736 on Fri. Feb 2, Nifty has retraced 38.2% of the 1138 points gain made from the low of 10033 (in week ending Dec 8 '17) to the high of 11171 (in week ending Feb 2 '18).

Since the index has touched the Fibonacci retracement level of 38.2%, some short covering by technical traders may follow. The likely technical bounce may induce more profit booking in the near term.

Weekly technical indicators are in the process of correcting overbought conditions. If the index corrects more, expect stronger support from the zone between 10490 & 10600. 

Nifty's TTM P/E has decreased to 26.04 - which is still well above its long-term average. The breadth indicator NSE TRIN (not shown) has risen sharply towards its oversold zone, and can limit index downside

Bottomline? Sensex and Nifty charts are undergoing much-awaited corrections - triggered by re-introduction of LTCG. The correction will improve the technical health of the chart, but may go on for a while longer. No need to try and 'catch a falling knife'. A bit of patience may be rewarded with better entry points.

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