Wednesday, July 17, 2019

Nifty chart: a midweek technical update (Jul 17, 2019)

FIIs were net sellers of equity during the first three trading days of the week. Their total net selling was worth Rs 6.8 Billion. DIIs were net buyers of equity on all three days. Their total net buying was worth Rs 14.4 Billion, as per provisional figures.

India's WPI-based inflation cooled to a 23 months low of 2.02% in Jun '19 from 2.45% in May '19 and 5.68% in Jun '18. Softening WPI has reinforced expectations of a further interest rate cut by RBI.

India's merchandise exports fell 9.71% YoY to US $25.01 Billion in Jun '19. Imports declined 9.06% YoY to $40.29 Billion - a 4 months low. Trade deficit narrowed 8% for the month to $15.28 Billion. Falling imports reflect weakness in demand and activity.

The following comment appeared in last week's technical update on the daily bar chart pattern of Nifty: "Slow stochastic has fallen sharply to enter its oversold zone, and can trigger a pullback towards the 50 day EMA." 

The index corrected and almost completely filled the 'GAP' (formed on May 20) as the stock market was disappointed with the budget provisions. The expected index pullback faced resistance from the 20 day EMA and closed just below the 50 day EMA today.

So far so good. What next? After touching a lifetime high of 12103 on Jun 3, Nifty has formed a bearish pattern of 'lower tops, lower bottoms'. If the pattern continues to play out, further upside ought to be limited. The next leg of the down move should follow.

Daily technical indicators are turning bullish. MACD is forming a 'rounding bottom' pattern below its falling signal line in bearish zone. RSI has moved up to its 50% level. Slow stochastic is rising after emerging from its oversold zone. Some near-term upside is likely.  

Nifty's TTM P/E has moved up to 28.58, which is well inside its overbought zone and much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is falling towards its overbought zone - hinting at limited near-term index upside.

Since Mar '19, Nifty has been trading above its rising 200 day EMA in a bull market. Which means 'buy the dips' should be the obvious strategy. However, there is nervousness in the market due to a slowing economy and a divergence in performance between the broader market and a few large-cap stocks.

Watch Q1 (Jun '19) results carefully. Be very selective and patient about what you buy. Near a market top, it is better to be cautious than adventurous.

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