Sunday, April 29, 2018

Sensex, Nifty charts (Apr 27, 2018): poised at crossroads after filling downward gaps

FIIs were net sellers of equity on all five trading days. Their total net selling during the week was worth Rs 30.6 Billion. DIIs were net buyers of equity on all five trading days. Their net buying was worth Rs 26.5 Billion, as per provisional figures.

Counter-trend rallies on Sensex and Nifty charts have filled downward 'gaps' formed on Feb 5. Sensex gained 1.6% and Nifty gained 1.2% on a weekly closing basis - thanks to sharp gains in heavyweight TCS and RIL stocks.

India's economy faces a wider trade deficit, a worsening of stretched government finances, and slower economic growth if oil prices remain stubborn at the current level. That would challenge policy makers trying to strengthen the economy in time for elections next year.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex has reached an important technical crossroad. By touching an intra-day high of 35065 on Fri. Apr 27, the index completely filled the 132 points downward 'gap' formed on Feb 5.

The weekly closing level of 34970 means that the index closed above the 61.8% Fibonacci retracement level of the 3960 points fall from the Jan 29 top to the Mar 23 low. Despite macro headwinds, bulls have managed to overcome two important resistances.

However, bulls should postpone celebrations at least till next week. Why? Because filling a 'gap' is usually followed by a resumption of the previous move. In this case, the move before the 'gap' got formed was downward.

Technical 'rules' are not rules at all. They are based on empirical observations of what has happened on many such previous occasions. So, it may be a good idea to wait and see if this time will be different.

Daily technical indicators are looking bullish and overbought. MACD is rising above its signal line towards its overbought zone. ROC is about to re-enter its overbought zone. RSI and Slow stochastic are well inside their overbought zones. 

ROC, RSI and Slow stochastic are showing negative divergences by failing to touch new highs with the index. Continuous DII buying may be able to prevent a big correction, but a retreat from the 'gap' zone and some consolidation is quite possible.

Karnataka state elections on May 12 - expected to be a close contest - is a wild card in the near term. A BJP win will temporarily boost the stock market. A Congress win will not. 

NSE Nifty index chart pattern

Five straight weeks of gains took the weekly bar chart pattern of Nifty to an intra-week high of 10720 - partly filling the 33 points downward 'gap' formed on Feb 5.

The index closed the week at 10692 - just below the 'gap'. The 61.8% Fibonacci retracement level of the 1220 points fall from the Jan '18 top to the Mar '18 low is 10706. By failing to close above it, the door has been kept ajar for bears.

Part (or complete) filling of a 'gap' is usually followed by a resumption of the previous move - which was downwards. Lower tops on volume bars is also giving a hint that a correction or consolidation may follow.

Weekly technical indicators are giving mixed signals despite the strong counter-trend rally. MACD is trying to cross above its falling signal line in bullish zone. ROC has moved above its 10 week MA and entered bullish zone. Slow stochastic has risen to its 50% level in neutral zone. RSI is forming a bearish 'rounding top' pattern below its 50% level.

All four indicators are showing negative divergences by failing to reach their previous levels (marked by grey vertical line) touched in the week ending on Feb 9.

Bottomline? Counter-trend rallies have filled the Feb 5 downward gap on Sensex and partly filled the downward gap on Nifty. Some correction and/or consolidation is possible after 5 straight weeks of gains. High oil prices, a weakening Rupee and a widening trade deficit doesn't augur well for India's economic growth. Q4 (Mar '18) corporate results will determine how much further the rallies will go

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