Wednesday, May 8, 2019

Nifty chart: a midweek technical update (May 08, 2019)

FIIs have decided  to 'sell in May and go away'. They were net sellers of equity on all three trading days this week. Their total net selling was worth Rs 22.9 Billion. DIIs were net buyers of equity on all three trading days. Their total net buying was worth Rs 11.4 Billion, as per provisional figures.

Nikkei India's Services PMI dropped to a 7 months low of 51 in Apr '19 from 52 in Mar '19. A figure above 50 indicates expansion. The Composite PMI (Manufacturing + Services) fell to 51.7 in Apr '19 from 52.7 in Mar '19.

Key data used for calculating India's GDP growth under the new method are faulty, as per NSSO, as 36% of the companies taken into account for the calculation are either untraceable or wrongly categorised. 



The daily bar chart pattern of Nifty shows a 'diamond' reversal pattern that has stopped the pre-election rally (from the Feb 19 low of 10586) on its tracks. Is this a sign that the stock market is worried about the outcome of ongoing general election?

A breakout with a 'gap' below the 'diamond' and a close below the 20 day EMA on Mon. May 6 rang a warning bell about a change of trend from bull to bear. Follow-up selling on Tue. and Wed. (May 7 and 8), and a close below the 50 day EMA after more than two months, should send bulls scurrying for cover.

Note that Monday's downward 'gap' was partly filled by Tuesday's bearish engulfing pattern (higher high, lower low). The 'gap' can act as a resistance for future up moves. Even if the 'gap' gets completely filled, expect the level of the right apex of the 'diamond' (~11750) to act as stronger resistance.

On the downside, there is an unfilled upward 'gap' of 46 points (formed on Mar 12). Expect Nifty to find some support at the 'gap' zone.

Daily technical indicators are bearish and showing downward momentum. MACD is falling below its signal line in bullish zone. RSI is falling below its 50% level. Slow stochastic has dropped inside its oversold zone, and can trigger a technical bounce

Nifty's TTM P/E has moved down to 28.38, which remains much higher than its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is rising towards its oversold zone - hinting at possible near-term index recovery.

Expect the market to remain volatile till election results are announced on Mar 23. Check Q4 (Mar '19) corporate results carefully for the odd few positive surprises. Those are the companies that can lead the market as and when the bull rally resumes.

As long as Nifty trades above its rising 200 day EMA, bulls should not worry too much. However, the possibility of a deeper correction can't be ruled out - in the unlikely event that the NDA fails to form a government. 

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