Sunday, October 14, 2018

Sensex, Nifty charts (Oct 12, 2018): find some support at Fibonacci retracement levels

FIIs were net sellers on all five days of trading last week. Their total net selling was worth Rs 83.3 Billion. DIIs were net buyers on all five trading days. Their total net buying was worth Rs 85.7 Billion, as per provisional figures.

In Sep '18, India's CPI inflation inched up to 3.77% compared with a 3.69% increase in Aug '18 due to higher food and fuel prices. The figure was less than RBI's medium-term inflation target of 4%.

The IIP number slipped to a 3 months low of 4.3% in Aug '18 from (downward revised) 6.5% in Jul '18 due to a sharp decline in mining sector output and poor offtake of capital goods. However, during Apr-Aug '18, IIP growth was 5.2% - up from 2.3% during Apr-Aug '17.

BSE Sensex index chart pattern

Note the following comments from last week's post on the daily bar chart pattern of Sensex

"...the index appears to be retracing the 13236 points rally from its Dec 26 '16 low (25754) to its Aug 29 '18 top (38990). The 38.2% and 50% Fibonacci retracement levels of the rally are 33934 and 32372 respectively (marked on chart)."

On Thu. Oct 11, the index dropped inside the support zone between 33934 and 32372 and touched an intra-day low of 33724, but bounced up to close just above 34000. A 700+ points rally on Fri. Oct 12 brought a collective sigh of relief to mauled bulls.

Is the worst over? Can Sensex start a pre-Diwali rally? Bulls would do well to keep their hopes on a tight leash. 

By falling to a low of 33724, the index has corrected 5266 points (13.5%) from its Aug 29 '18 top (38990). A 38.2% Fibonacci retracement of the fall will take the index up to 35736, which is the current level of its falling 20 day EMA. To get there, the index needs to overcome resistance from its 200 day EMA (at 35370). 

A pullback to the zone between 35370 and 35736, followed by a corrective move towards 32372 (lower edge of the support zone) seems like a possible outcome. 

What if the index falls below 32372? It can then correct further to 30800 (which is a Fibonacci 61.8% retracement of the 13236 points rally from the Dec '16 low).

A correction down to 30800 will be more than a 20% correction from the Aug 29 '18 top of 38990 and technically push Sensex into a bear market. It may or may not happen, but forewarned is forearmed.

Incidentally, on Fri. Oct 12, FII net selling (Rs 13.2 Billion) exceeded DII net buying (Rs 12.9 Billion) in equity shares. So, whose buying caused the 700+ points rally in Sensex? 

Daily technical indicators are in the process of correcting oversold conditions, but remain in bearish zones. Drop in oil prices and a slight Rupee gain against the US Dollar enthused bulls on Friday. But the stock price of TCS cracked despite declaring decent Q2 (Sep '18) results, which is a bearish sign.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched an intra-week low of 10139 - inside the Fibonacci support zone between 10283 and 9827 (38.2% and 50% Fibonacci retracement levels of the rally from the Dec '16 low of 7894 to the Aug '18 top of 11760). 

The index bounced up to close with a 156 points (1.5%) gain on a weekly closing basis. In the process, it formed a weekly reversal bar (lower low, higher close) that can trigger a rally towards the zone between its sliding 50 week and 20 week EMAs. Expect bears to 'sell on rise'.

Weekly technical indicators are looking bearish. MACD is falling below its signal line in bullish zone. ROC is inside its oversold zone, but has stopped falling. RSI has slipped below its 50% level. Slow stochastic is about to enter its oversold zone for the first time since Mar '18.

Nifty's TTM P/E has moved up to 25.33, which is well above its long-term average. The breadth indicator NSE TRIN (not shown) is falling in neutral zone, hinting at some near-term upside.

Bottomline? The corrections on Sensex and Nifty charts have found temporary support at Fibonacci support zones. Pullbacks towards long-term moving averages are likely. Macro headwinds like rising oil prices, a depreciating Rupee, widening trade and fiscal deficits, ongoing debt woes of IL&FS won't die down in a hurry. Perhaps better than expected Q2 (Sep '18) corporate results can bring some succour to bulls. 

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