Saturday, July 13, 2019

Sensex, Nifty charts (Jul 12, 2019): look ready to correct some more

FIIs have stepped-up their selling. They were net sellers of equity on all five trading days. Their total net selling was worth Rs 28.5 Billion. DIIs were net buyers of equity on all five days. Their total net buying was worth Rs 33.6 Billion, as per provisional figures.

The Index of Industrial Production (IIP) slipped to 3.1% in May '19 against 3.8% in May '18. Power generation grew 7.4% against 4.2% a year ago. But mining and manufacturing growth reduced to 3.2% and 2.5% respectively, against 5.8% and 3.6% a year ago.

India's CPI-based retail inflation rose to an 8 months high of 3.18% in Jun '19 from 3.05% in May '19, but stayed below RBI's medium-term target of 4%. Rise in food inflation was the mean reason for increase in CPI.

BSE Sensex index chart pattern



Note the following comment from last week's post on the daily bar chart pattern of Sensex: "Sensex may correct down to completely or partly fill the 'gap' formed on May 20 (marked GAP2 on chart)."

On Mon. Jul 8, the index fell sharply below its 50 day EMA but stopped just short of GAP2. During the next two days, the index entered the 'gap' - partly filling it - but bounced up to close above the 'gap'.

On Thu. Jul 11, Sensex traded above the 'gap' throughout the day, raising bullish hopes. However, the index faced strong resistance from its sliding 50 day EMA on Fri. Jul 12, and formed a 'reversal day' bar (higher high, lower close).

The index appears to be forming a small, bearish 'flag' pattern that often forms midway during a sharp correction. If the pattern plays out, the index can completely fill GAP2, and test support from the up trend line and its 200 day EMA. 

The twin support from the up trend line and the 200 day EMA should hold - at least in the near term. In case the twin support gets breached - the possibility can't be ruled out - a deeper correction will ensue.

Daily technical indicators are looking bearish. MACD is below its falling signal line, and has entered bearish zone. ROC is below its 10 day MA in bearish zone. RSI has bounced up from the edge of its oversold zone, but its upward momentum has stalled. Slow stochastic is inside its oversold zone. Some more correction or consolidation is possible.  

The Finance Minister didn't get enough time to prepare the budget. A brave attempt has been made to keep a cap on fiscal deficit. However, the proposal for foreign-currency borrowing is ill-advised and can be disastrous in the long term. 20% tax on buybacks won't be able to force India Inc. to invest.

Small investors should get mentally prepared for a rough ride during the next couple of quarters. This may be a good time to park some money in bank FDs before interest rates are cut further in a bid to boost economic growth.

NSE Nifty index chart pattern



The inevitable happened. The weekly bar chart pattern of Nifty dropped inside the 165 points 'gap' (formed on May 20) and almost completely filled it. The index bounced up, but faced resistance from its 20 week EMA and closed inside the 'gap'.

Nifty is trading above its rising 50 week EMA in a long-term bull market. However, the index is below a downward-sloping trend line, and has formed a bearish pattern of 'lower tops, lower bottoms'. Some more correction and/or consolidation is likely. 

On the downside, the index should receive good support from the up trend line and its 50 week EMA. A breach of the up trend line and the 50 week EMA - should it occur - will be quite bearish.

Weekly technical indicators are looking bearish. MACD has crossed below its signal line, and fallen from its overbought zone. ROC is sliding below its falling 10 week MA, and has entered bearish zone. RSI has slipped below its 50% level. Slow stochastic is falling towards its 50% level

Nifty's TTM P/E has moved down to 28.33, which remains well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) has fallen sharply from its oversold zone. Near-term index upside may be limited.

Bottomline? Sensex and Nifty charts have started correcting on the back of FII selling. Budget proposals have failed to trigger 'animal spirits' of India Inc. Companies seem more interested in cleaning up their books than undertaking capex. Stick to sector/market leaders. Watch Q1 (Jun '19) results carefully to determine stock-specific actions.

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