Wednesday, May 2, 2018

Nifty chart: a midweek technical update (May 02, 2018)

For the month of April '18, FIIs were net sellers of equity worth Rs 99.6 Billion. DIIs were net buyers of equity worth Rs 85.1 Billion, as per provisional figures. Nifty gained 6.2% on a monthly closing basis.

Many car makers had double-digit YoY growth in sales during April '18. Tata Motors (34%), M&M (22%), Maruti Suzuki (14%) led from the front. Hyundai (4.4%), Honda Cars (-35%), Ford (-40%) were the laggards. 

Nikkei India's Manufacturing PMI rose to 51.6 in Apr '18 against 51.0 in Mar '18 (a number >50 indicates growth). However, export orders slipped to a 5-month low.

On Mon. Apr 30, the counter-trend rally on the daily bar chart pattern of Nifty had completely filled the 33 points downward 'gap' formed on Feb 5. After a day's holiday, the index rose further to touch an intra-day high of 10785 today

However, it corrected and dropped below the 'gap' to an intra-day low of 10690 before recovering to close at 10718 - right in the middle of the 'gap' - and formed a 'reversal day' bar (higher high, lower close).

Note the following comment from last week's update: "As per 'gap theory': even if the 'gap' is filled partly or completely, the down move should resume thereafter." 

Will the 'reversal day' bar, which often signals an intermediate top, trigger the expected resumption of the down move? The next two days' trading should give us a clear hint.

All three EMAs are rising, and the index is trading above them in a bull market. The (purple) up trend line from the Mar 23 low is intact. Daily technical indicators are in bullish zones. Bulls have been successful in following a 'buy the dip' strategy.

There are a couple of warning signals that have been flashing red for a while. The up trend line - typical of a counter-trend rally - is a bit too steep and unlikely to sustain much longer. Daily technical indicators are looking overbought. RSI faced resistance from the edge of its overbought zone, and is turning down.

Nifty's TTM P/E has moved up to 26.60 - which is much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is treading water in neutral zone. Some consolidation or correction is possible, but a deep correction appears unlikely.

Macro signals aren't conducive to a sustained rally either. Rising oil prices, falling exports and a depreciating Rupee has led to a widening of India's trade deficit. High bond yields are another concern.

Outcome of Karnataka state elections may also have a negative impact on market sentiment if BJP fails to form a government. 

Regular flow of liquidity into domestic mutual funds has given a vote of confidence to the market, and may continue to do so in the near term. If India Inc's Q4 (Mar '18) earnings do not show expected growth - results have been mixed so far - the market will start behaving like a weighing machine. 

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