Wednesday, March 7, 2018

Nifty chart: a midweek technical update (Mar 07, 2018)

FIIs and DIIs were both net sellers of equity during the first four trading days of Mar '18. FIIs were buyers and sellers on alternate days. DIIs were net sellers on the first three days and net buyers today.

The upshot of all the buying and selling? FIIs were net sellers of equity worth Rs 2.2 Billion. DIIs were net sellers worth Rs 4.8 Billion. Nifty broke out below a 'triangle' pattern within which it had been consolidating since forming a 33 points downward 'gap' on Feb 5.

Nikkei India's Services PMI fell to 47.8 in Feb '18 from 51.7 in Jan '18. (A figure below 50 indicates economic contraction.) The Manufacturing PMI was 52.1 in Feb '18 against 52.4 in Jan '18. The Composite index (Services + Manufacturing) dropped to 49.7 in Feb '18 against 52.5 in Jan '18.

The following comments were made in the previous midweek technical update on the daily bar chart pattern of Nifty: "..the 20 day EMA is about to cross below the 50 day EMA after staying above it for almost 13 months. A test of support from the 200 day EMA may occur sooner than later."

Note that the 20 day EMA has already crossed below the 50 day EMA, and both EMAs are falling. The index moved down to test support from the 200 day EMA and touched an intra-day low of 10142 today before closing just above the 10150 level.

Daily technical indicators are showing strong downward momentum in bearish zones. MACD and RSI are on the verge of entering their respective oversold zones. Slow stochastic has entered its oversold zone. 

A technical bounce/pullback towards the lower edge of the triangle is possible. Such a pullback may be used by bears to sell again.

Nifty's TTM P/E has moved down to 24.79 - still much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has risen sharply towards its oversold zone, and can limit near-term index downside.

Will Nifty breach the 200 day EMA and fall into bear territory? With FIIs and DIIs in selling mode, the probability is very high. Where will be the next likely supports? See the 2 years closing chart of Nifty below:

The 'support/resistance zone' between 9700 & 9500 should provide strong support. Expect some value buying to emerge in the zone between 10000 & 9700. What if the index falls below 9500?

There is some support around 9300, and much stronger support at 9000. [Note that 9050 is the 50% Fibonacci retracement level of the entire bull rally from the Feb '16 closing low to the Jan '18 closing high.]

Can the index fall below 9000? It doesn't seem likely at this stage, but nothing is impossible when bears go on the rampage. If 9000 gets breached, a bear market will begin. Though the probability is low, one needs to know the worst case scenario.

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