Sunday, May 13, 2018

Sensex, Nifty charts (May 11, 2018): bulls regaining control?

FIIs were net sellers of equity on all five trading days. Their total net selling during the week was worth Rs 21.3 Billion. DIIs were net buyers of equity on all five trading days. Their net buying was worth a huge Rs 46.9 Billion, as per provisional figures.

Heavy DII buying ensured that Sensex and Nifty closed above the downward gaps formed on Feb 5 after previous week's corrections. Both indices gained 1.8% on a weekly closing basis.

India's IIP slowed to 4.4% in Mar '18 - a 5 month low due to contraction in capital goods and sluggish manufacturing output - against a downward-revised 7% in Feb '18. The cumulative figure for Apr '17 - Mar '18 was 4.3%.

BSE Sensex index chart pattern

Contrary to expectations, the daily bar chart pattern of Sensex resumed its counter-trend rally - proving once again that the stock market behaves like a voting machine in the near term.

DIIs were obviously voting for a rally despite macro headwinds - like high oil prices, weak Rupee, low IIP number, widening trade deficit and jobless economic growth.

All three EMAs are rising, and the index is trading above them in a bull market. The index has also moved above the Fibonacci retracement level of 61.8% of the entire corrective fall of 3960 points from the Jan 29 top to the Mar 23 bottom.

So, it should be 'all systems go' for bulls to take the index to a new high. However, daily technical indicators are looking overbought, and not showing much upward momentum. Three of them - ROC, RSI, Slow stochastic - are showing negative divergences by failing to move higher with the index.

Also, the index has closed below the (blue) up trend line twice - once on Fri. May 4 and again on Thu. May 10. Neither were convincing breaches of the trend line - so the up trend line remains intact for now.

Sensex is just 900 points (2.5%) below its lifetime Jan 29 high of 36444. Caution is advised. If Karnataka state election results are not favourable to BJP, a correction may ensue. Even if BJP wins, there could be 'selling on news'.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty shrugged off fundamental and technical headwinds to close above the Feb 5 downward 'gap' after closing below it for 13 weeks (3 months).

Weekly technical indicators are turning bullish. MACD is about to cross above its signal line in bullish zone. RSI is poised to move above its 50% level. ROC and Slow stochastic are rising towards their respective overbought zones.

The index is trading above its rising weekly EMAs in a bull market. Bulls are regaining control of the chart. Or, are they? The volume bars are touching lower tops. Steady or rising volumes are required to sustain a rally. 

Also, the number of advancing stocks were less than the number of declining stocks on Fri. May 11 - when the index rose to a 3 months high. Small investors should be cautious rather than feel euphoric.

Nifty's TTM P/E has increased to 26.82 - which is 2 standard deviations above its long-term average. That is a clear sign of an overbought index. The breadth indicator NSE TRIN (not shown) is oscillating above its overbought zone, and can limit index upside. 

Bottomline? Counter-trend rallies on Sensex and Nifty continued despite technical and fundamental headwinds. Some correction or consolidation will help improve the technical 'health' of both charts. Ride the rallies with trailing stop-losses. Alternatively, book partial profits. 

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