Sunday, May 6, 2018

Sensex, Nifty charts (May 04, 2018): ready to resume downward corrective moves

In a holiday-shortened week, FIIs were net sellers of equity on all four trading days. Their total net selling during the week was worth Rs 26.9 Billion. DIIs were net buyers of equity on three of the four trading days. Their net buying was worth Rs 9.3 Billion, as per provisional figures.

Both Sensex and Nifty have formed reversal patterns after 5 weeks long counter-trend rallies, and appear ready to resume their downward corrective moves.

Nikkei India's Services PMI improved to 51.4 in Apr '18 against 50.3 in Mar '18 (a figure >50 means expansion). The Composite (Manufacturing + Services) PMI rose to a 3-month high of 51.9 in Apr '18 from 50.8 in Mar '18.

BSE Sensex index chart pattern

Note the following comments from last week's post on the daily bar chart pattern of Sensex: "...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...a retreat from the 'gap' zone and some consolidation is quite possible."

The 132 points downward 'gap' formed on Feb 5 had been completely filled by the index on Apr 27. It had also retraced 61.8% of its entire fall from the Jan 29 top to the Mar 23 low. 

The 61.8% Fibonacci retracement level is often used by technical traders as a trend reversal signal. But bulls were advised not to celebrate the end of the corrective move too soon.

After touching an intra-day high of 35357 on Wed. May 2, the index started to retreat and closed lower for three straight trading sessions. In the process, it formed a bearish reversal candlestick pattern called 'three black crows'.

The index dropped below the 'gap' intra-day on Fri. May 4 and closed above the lower edge of the 'gap' but just below the (blue) up trend line drawn from the May 23 low.

Sensex is trading above its three rising EMAs in a bull market, but technical indicators are turning bearish. MACD is above its signal line, but forming a small bearish 'rounding top' pattern in bullish zone. ROC is below its sliding 10 day MA, and has dropped from its overbought zone. RSI and Slow stochastic have corrected overbought conditions, and are poised to fall from their respective overbought zones.

Some more correction is expected. A 'sell on rise' strategy ought to work well in the near-term. The 'support/resistance zone' between 32550 and 33800 may soon have an important role to play once again.  

NSE Nifty index chart pattern

The following remarks were made in last week's post on the weekly bar chart pattern of Nifty: "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."

The index touched an intra-week high of 10785 - completely filling the 33 points downward 'gap' formed on Feb 5 - but corrected and closed at 10618. 

A bearish weekly 'reversal' bar (higher high, lower close) got formed, signalling the end of the 5 weeks long counter-trend rally.

Weekly technical indicators are turning bearish. MACD is facing resistance from its falling signal line in bullish zone. ROC has formed a bearish 'rounding top' reversal pattern in bearish zone. RSI is falling below its 50% level after failing to move above it. Slow stochastic moved above its 50% level but its upward momentum has stalled.

The index is trading above its two weekly EMAs in a bull market, but a correction towards the 20 week EMA is likely. In case the 20 week EMA gets breached, expect stronger support from the 50 week EMA.

Nifty's TTM P/E has eased down to 26.36 - but remains well above its long-term average. The breadth indicator NSE TRIN (not shown) is oscillating in neutral zone, and hinting at some consolidation. 

Bottomline? Counter-trend rallies that completely filled downward gaps (of Feb 5) on Sensex and Nifty have ended. Some more correction is likely. High oil prices, a weakening Rupee, a widening trade deficit and uncertainty about outcome of Karnataka state elections have taken a toll on bullish sentiment. 

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