Sunday, May 20, 2018

Sensex, Nifty charts (May 18, 2018): bears on the warpath

FIIs were net sellers of equity on four of the five trading days. Their total net selling during the week was worth Rs 15 Billion. DIIs were net buyers of equity on all five trading days. Their net buying was worth Rs 20.3 Billion, as per provisional figures.

Sensex and Nifty both lost 1.9% on a weekly closing basis. What can be more worrisome for bulls is that both indices closed below the downward 'gaps' formed on Feb 5.

India's import bill could bloat by $25-50 billion in the current financial year due to spike in crude oil prices, but the government sees no reason for panic. However, a report by Goldman Sachs says that India's Current Account Deficit (CAD) may increase to 2.4% of GDP in FY 2018-19.

BSE Sensex index chart pattern

Negative divergences visible last week on overbought technical indicators on the daily bar chart pattern of Sensex had hinted at a likely corrective move.

A hung Karnataka assembly provided bears with just the trigger they were looking for. The index touched an intra-day high of 35994 on Tue. May 15 - its highest level in more than 3 months - as initial results showed a BJP majority.

However, as the day progressed and more results came in, it became clear that BJP will fall short of a simple majority. Profit booking ensued. The index dropped to close near its opening level - forming a 'shooting star' candlestick pattern that often marks an intermediate top. 

Bears went on the warpath. The index corrected for three straight sessions, falling below its 20 day EMA and closing just below the downward 'gap' formed on Feb 5.

The index touched an intra-day low of 34822 on Fri. May 18, falling below its previous (May 4) low of 34848 which can lead to further downside. However, by closing exactly at 34848, the index has kept open the possibility of a technical bounce.

Daily technical indicators are looking bearish and showing downward momentum. MACD has crossed below its signal line in bullish zone. ROC has dropped below its 10 day MA to its neutral zone. RSI has also dropped to its neutral zone. Slow stochastic is falling below its 50% level.

Resignation of Karnataka's BJP CM before the floor test on Sat. May 19 - as he failed to engineer defections from the opposition Congress and JD(S) - will give bears added incentive to sell.

Small investors need not be in a rush to 'buy the dip'. As mentioned in several previous posts, filling of the Feb 5 downward 'gap' was expected to be followed by a resumption of the corrective down move from the Jan 29 top. 

The 'support-resistance zone' between 32500 and 33800 can come back into play. Note that the rising 200 day EMA is in the middle of the 'support-resistance zone' and is likely to provide strong support should the index fall that far.  

NSE Nifty index chart pattern

Small investors were advised caution in last week's post on the weekly bar chart pattern of Nifty because of fundamental and technical headwinds. The index touched a 3 months high of 10929 but closed at a 3 weeks low of 10596 - forming a 'reversal' bar (higher high, lower close) with good volume support that can lead to further correction.

The previous 3 weeks' trading has formed a bearish 'broadening top' pattern (higher high, lower low) from which a downward breakout is likely.

Weekly technical indicators are in bullish zones, but their upward momentum have stalled. The index is trading above its two rising weekly EMAs - so the bullish structure of the chart is intact.

Nifty's TTM P/E has decreased to 26.27 - which is still much above its long-term average. The breadth indicator NSE TRIN (not shown) has risen sharply to enter its oversold zone, and can limit near-term index downside.

Bottomline? Counter-trend rallies on Sensex and Nifty appear to have ended. Some more correction or consolidation will help improve the technical 'health' of both charts. Don't rush to 'buy the dip'. Better entry points may become available with a bit of patience.

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