Saturday, June 13, 2020

Sensex, Nifty charts (Jun 12, 2020): correcting after profit booking by FIIs and DIIs

FIIs were net buyers of equity on Mon. and Tue. (Jun 8 and 9) but they turned net sellers during the next three trading days. Their total net selling was worth Rs 17.32 Billion. DIIs were net buyers of equity on Wed. and Fri. (Jun 10 and 12), but were net sellers on the other three days. Their total net selling was worth Rs 4.0 Billion, as per provisional figures.

India's industrial production in Apr '20 shrank a record 55.4%, with manufacturing crashing 64.3%. Government did not release the IIP growth number.

Government withheld the CPI inflation figure for May '20 due to lack of data owing to lockdown restrictions. However, retail food inflation rose 9.28% YoY.

BSE Sensex index chart pattern


Note the following comment in last week's post on the daily bar chart pattern of Sensex: "...technical headwinds may stall the rally soon." The 'headwinds' included the downward 'gap' formed on Mar 12th, the falling 200 day EMA and the 61.8% Fibonacci retracement level of 35920.

The downward 'gap' provided strong resistance. On Mon. Jun 8, the index rose well inside the 'gap' to an intra-day high of 34928, but corrected to close just below the 'gap'. The next day, it again ventured inside the 'gap' intra-day, but touched a lower top of 34811 and dropped to close below the 'gap'.

Sensex traded below the 'gap' during the next three trading days. On Fri. Jun 12, the index dropped below its 20 day and 50 day EMAs to an intra-day low of 32348 but formed a 'reversal day' bar (lower low, higher close) on the back of short-covering and some value buying.

Daily technical indicators are in bullish zones but not showing much upward momentum. MACD is moving sideways above its rising signal line. ROC has crossed below its 10 day MA and dropped down from its overbought zone. RSI has bounced up a bit from the edge of its overbought zone. Slow stochastic has slipped down from its overbought zone.

The index may make another attempt to test resistance from the 'gap' zone. Bulls would do well to curb their enthusiasm. Bear market rallies give the impression that the 'worst is over'. 

The prolonged lockdown has led to a sharp increase in retail participation. To counter looming recessions caused by the pandemic, global liquidity taps have been opened and is flowing into equity assets for short-term gains. The flow can reverse at the drop of a hat.

NSE Nifty index chart pattern


The weekly bar chart pattern of Nifty crossed above its 200 week EMA intra-week but corrected to close below all three weekly EMAs in long-term bear territory. 

The index lost about 170 points (1.7%) for the week - as FIIs and DIIs resorted to profit booking - and closed below its 200 week EMA for the 14th straight week.

Weekly technical indicators are looking bullish. MACD is rising above its signal line inside oversold zone. RSI has moved up to its neutral zone. Slow stochastic is rising above its 50% level. Some near-term index consolidation or correction is likely. 

After touching a high of 24.41 on Wed. Jun 10, Nifty's TTM P/E has slipped down to 24.08, which is above its long-term average and inside overbought zone. After diving deep inside overbought zone to touch 0.47 on Mon. Jun 8, the breadth indicator NSE TRIN (not shown) has risen sharply inside neutral zone. Near-term index consolidation or correction may be expected.

 
Bottomline? Bear market rallies on Sensex and Nifty charts can trap unwary and inexperienced investors. Short-term liquidity flows often give the impression that things will be back to normal soon. An already weak economy has been devastated by the pandemic. There is no need to jump into a market that has already gained 35% from its recent low. Remain patient for better opportunities to enter.

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