Wednesday, May 22, 2019

Nifty chart: a midweek technical update (May 22, 2019)

FIIs turned net buyers of equity on Mon. and Tue. (May 20 and 21), but were net sellers today. Their total net buying was worth Rs 19.5 Billion. DIIs were net sellers of equity on all three trading days. Their total net selling was worth Rs 17.9 Billion, as per provisional figures.

According to the World Economic Situations and Prospects (WESP) 2019 Mid-Year Update released by the United Nations, strong domestic consumption and investment will continue to support India's GDP growth, which is projected at 7% in 2019 and 7.1% in 2020.

The debt crisis in IL&FS translated into higher borrowing costs and reduced market access for other NBFCs, adversely impacting the growth of the NBFC sector - as per a report by Fitch Ratings.

Exit polls predicting a comfortable victory for the NDA in the recent general elections encouraged FIIs to go on a buying spree. The daily bar chart pattern of Nifty formed a 165 points upward 'gap' on Mon. May 20, and closed above 11800 for the first time ever.

FII buying continued on Tue. May 21. The index touched a new lifetime high of 11883.50 during early trading, but dropped down to close at 11709 - forming a 'reversal day' bar (higher high, lower close) that often terminates an intermediate up move.

Today's trading formed a 'doji' candlestick - which indicates indecision among bulls and bears - and a Nifty close below 11750 for the second straight day. The index traded well above its three rising EMAs in a bull market.

Nifty had broken out below a 'diamond' reversal pattern on May 6. The subsequent correction had found support near the upward 'gap' formed on Mar 12. A convincing move above 11750 - the level corresponding to the right apex of the 'diamond' - is necessary for bulls to regain control of the chart. 

That should be a foregone conclusion if the actual general election results correspond to the exit poll predictions of a comfortable NDA win.

Daily technical indicators are looking bullish. MACD has crossed above its signal line to enter bullish zone. RSI is moving sideways above its 50% level. Slow stochastic has risen sharply to enter its overbought zone

All three indicators are showing negative divergences by failing to touch new highs with the index. Some consolidation or correction may follow.

Nifty's TTM P/E has moved up to 29.22, which is in overbought zone and much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is falling inside its oversold zone, hinting at some near-term consolidation/correction.

The opposition parties are trying to put up a brave face despite the adverse exit poll predictions. However, the writing seems to be on the wall. Even if NDA misses out on a clear majority, many of the smaller opposition parties are likely to be lured to the NDA fold before government formation.

Monday's buying euphoria was overdone. The large upward 'gap' of 165 points, with strong volume support, has the trait of an 'exhaustion gap'. There may be some more profit booking after election results are announced on Thu. May 23. Stay on the sidelines till the dust settles.

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