Nifty chart: a midweek technical update (Jan 15, 2020)

FIIs were net buyers of equity on Mon. and Wed. (Jan 13 and 15), but were net sellers on Tue. (Jan 14). Their total net buying was worth Rs 1.9 Billion. DIIs were net sellers of equity on all three trading days this week. Their total net selling was worth Rs 24.2 Billion, as per provisional figures.

India's CPI-based retail inflation jumped to 7.35% in Dec '19 from 5.54% in Nov '19 due to soaring food prices. With most banks offering less than 7% interest on fixed deposits, real rate of return has turned negative.

WPI-based wholesale inflation has increased to 2.59% in Dec '19 from 0.58% in Nov '19. Prices of food and non-food items rose higher.

The daily bar chart pattern of Nifty touched a new high of 12374 on Jan 14th, but corrected a little bit after facing resistance from the second up trend line (marked TL 2). The index is trading above its three rising EMAs in a bull market.

Though the index appears to be climbing a wall of worries because of rising inflation and rapidly decelerating GDP growth, some bearish technical signals are visible on Nifty's chart.

Note that the first up trend line (marked TL 1) - drawn through the index lows touched on Sep 19th, Oct 9th and 25th - was breached on Nov 13th. The index continued to move higher till Nov 28th, before succumbing to profit booking and falling below its 20 day EMA.

The index bounced up after forming a 'reversal day' bar (lower low, higher close) on Dec 11th. A second trend line (TL 2) has been drawn through the Sep 19th and Dec 11th lows. Nifty touched a new high (12294) on Dec 20th. Following a few days of sideways consolidation, TL 2 was breached with a downward 'gap' on Jan 6th.

Nifty dropped below its 50 day EMA after three months, but subsequently bounced up with an upward 'gap' to rise to a new high (on Jan 14), but has been facing resistance from TL 2. 

As per 'Corrective Fan Principle', breach of two up trend lines is bearish. Breach of a third up trend line (not yet drawn) usually indicates a change of trend. This hasn't happened yet - and may not happen at all - but any bearish signal at an index top should be treated with caution and respect.

Daily technical indicators are in bullish zones. MACD has crossed above its signal line. RSI is moving sideways above its 50% level. Both MACD and RSI are showing negative divergences by forming bearish patterns (lower tops, lower bottoms) while Nifty has climbed higher. Slow stochastic is well inside its overbought zone and can trigger a correction or consolidation. 

After touching a high of 28.67 on Mon. Jan 13, Nifty's TTM P/E has moved down a bit to 28.63, which remains well inside its overbought zone. The breadth indicator NSE TRIN (not shown) is hovering near the edge of its oversold zone, hinting at some near-term index consolidation.

Q3 (Dec '19) results declared so far have not generated much hope of any improvement over disappointing Q2 (Sep '19) results. Small investors should remain circumspect and concentrate on preserving capital.

Nifty chart: a long-term outlook

After Monday's holiday, FIIs were net sellers of equity on both trading days this week. Their total net selling was worth Rs 37.5 Billion. DIIs were net buyers of equity on both trading days. Their total net buying was worth Rs 25.6 Billion, as per provisional figures.

The IHS Markit India Manufacturing PMI slipped to a 15 month low of 51.4 in Aug '19 from 52.5 in Jul '19, but remained above 50 indicating growth. The Services PMI also declined to 52.4 in Aug '19 from 53.8 in Jul '19. The Composite (Manufacturing + Services) PMI moved down to 52.6 in Aug '19 from 53.9 in Jul '19.

GST collection in Aug '19 slipped to Rs 98.2 Billion from Rs 1.02 Trillion in Jul '19, but was 4.5% higher than Rs 93.9 Billion collected in Aug '18.

The weekly line chart of Nifty has breached two up trend lines drawn from the Feb '16 low (also called Fan Lines - marked FL1 and FL2). This is a sign that the long-term up trend is getting weak, but is not yet over.

As per Corrective Fan Principle, downward breach of a third up trend line - that has not yet been drawn on the chart - will technically confirm the reversal of the long-term up trend.

The index is struggling to hold on to the support level of 10800, and may move lower. A test of support from the 200 week EMA appears increasingly likely.

Weekly technical indicators are in bearish zones. MACD is showing downward momentum. RSI and Slow stochastic are moving sideways - hinting at near-term index consolidation.

Nifty's TTM P/E has moved down to 26.61, but remains inside its overbought zone and much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is falling inside its oversold zone. Some near-term index up side is possible.

The market is hoping that a third round of economic booster 'package' - promised by the Finance Minister - will help stop the slide in the index. But the two earlier 'packages' have failed to revive bullish sentiment.

FIIs have intensified their selling after a weak Q1 GDP number and sliding auto sales. They may not turn buyers in a hurry.

Nifty chart: a midweek technical update (Aug 07, 2019)

FIIs were net sellers of equity on all three trading days this week. Their total net selling was worth Rs 45.1 Billion. DIIs were net buyers of equity on all three trading days. Their total net buying was worth Rs 46.9 Billion, as per provisional figures.

IHS Markit India's Services PMI rose to a 1 year high of 53.8 in Jul '19 from 49.6 in Jun '19. A figure above 50 indicates expansion. The Composite PMI (Manufacturing + Services) rose to an 8 month high of 53.9 in Jul '19 from 50.8 in Jun '19.

RBI cut the repo rate by 35 bps (0.35%) to 5.4% today, and kept the door open for lowering rates further but flagged worries over economic growth prospects. It was the fourth straight cut in repo rate since Feb '19.

An interesting pattern according to Corrective Fan Principle is developing on the long-term weekly bar chart pattern of Nifty. Note the effects of the two trend lines - TL1 and TL2 - which are also called fan lines.

TL1 has been drawn through the lows touched in Feb '16 and Dec '16. This up trend line was breached in Oct '18. Nifty found support at 10000, and resumed its up move. Though the index touched a lifetime high of 12103 in Jun '19, it faced strong resistance from TL1.

TL2 has been drawn through the lows touched in Feb '16 and Oct '18. This second up trend line was breached last week. A third up trend line - TL3 - will be drawn once the ongoing correction finds an interim bottom.

The Fan Principle states that a downward breach of (a not-yet-drawn) TL3 will signal the beginning of a bear market. Such a situation may not arise if the index bounces up from the support zone between 9700 and 10000 and moves above TL2. (Nifty's 200 week EMA is within this support zone.)

Weekly technical indicators are looking bearish. MACD is falling rapidly below its signal line and is poised to enter bearish zone. RSI is falling below its 50% level. Slow stochastic has fallen inside its oversold zone. Expect some support in the zone between 10500 and 10800.

Nifty's TTM P/E has moved down to 26.74, but remains inside its overbought zone and much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is well inside its oversold zone and can limit near-term index down side.

Thanks partly to heavy selling by FIIs, the Rupee is touching 71 against the US Dollar. That may negate any positive effect of the 35 bps interest rate cut by RBI. When sentiment turns bearish, even good news attracts selling.

Nifty is trying to find support at the 10800 level. But the support may not hold for long.

Sensex, Nifty charts (Mar 24, 2017): pause after touching new highs

FII net buying in equities was lower than the previous week at Rs 37.1 Billion, as per provisional figures. DII net selling in equities was higher than the previous week at Rs 25.9 Billion.

However, both indices closed lower for the week - Sensex by 0.8% and Nifty by 0.6%. Some profit booking after both indices touched new highs was only to be expected.

India's Current Account Deficit (CAD) for Q3 (Dec '16) rose to four-quarter high of 1.4% of GDP (at US $ 7.9 Billion) against 0.6% of GDP for Q2 (Sep '16). CAD for Q3 (Dec '15) was also 1.4% of GDP (at US $7.1 Billion). 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex shows how news can affect market technicals in the short term. 

There was a downward breach on Mar 8 '17 of the blue up trend line drawn from the Dec 26 '16 low (marked 1). An upward 'gap' on Mar 14 '17 - following announcement of state election results - took the index back above the up trend line '1'.

After touching a new 52 week high of 29825 (and closing at a lifetime high of 29649) on Mar 17 '17, the index corrected on profit booking. Trend line '1' was breached on the downside again - on Mar 21 '17.

Note that the mere breach of a trend line may not necessarily indicate a trend reversal. Some times it is a warning of an impending reversal.

A second up trend line (marked 2) has been drawn through the Dec 26 '16 and Mar 22 '17 lows. Any downward breach of trend line '2' may not indicate a trend reversal either. But it will be a second warning.

As per 'corrective fan principle', only a breach of a third up trend line - should it need to be drawn after a downward breach of trend line '2' - will confirm a reversal of the up trend (or a much deeper correction).

Since the index is trading above its three rising EMAs in a bull market, there is no need to panic and sell. Neither should any one go on a buying spree.

Daily technical indicators are in bullish zones but giving conflicting signals. MACD and Slow stochastic are showing downward momentum. ROC and RSI are showing upward momentum.

If you can't control your urge to buy, choose safer large-cap stocks. Better still, let your asset allocation plan be your guide.

NSE Nifty index chart pattern

Attention is being drawn to the following comments in last week's post on the weekly bar chart pattern of Nifty: "Nifty is trading more than 700 points above its rising 50 week EMA. The last time it did that - in the week ending on Sep 9 '16 - a sharp correction had followed." 

Therefore, last week's correction - albeit a small one - should not have come as a surprise to regular readers of this blog.

Has anything changed in the technical structure of the chart? Not yet. Last week's upward 'gap' has been partly filled. The index may correct a bit more to completely fill the 'gap'.

Either way - i.e. partial or complete filling of an upward 'gap' - should be followed by a resumption of the up move.

Since the index is trading well above its rising 20 week and 50 week EMAs in a bull market, a slightly deeper correction will improve the technical 'health' of the chart - enabling Nifty to climb to new highs. But wishing for a correction doesn't make it happen.

Weekly technical indicators are still looking overbought. ROC is showing the first sign of a correction by dropping down to its rising 10 week MA.

Nifty's TTM P/E remains much higher than its long-term average at 23.65. The breadth indicator NSE TRIN (not shown) has fallen sharply inside its neutral zone. Any further index upside may push TRIN inside its overbought zone.

Bottomline? Both Sensex and Nifty charts are pausing after touching new highs. Q4 (Mar '17) earnings need to catch up as both indices are looking overvalued. Downside risk appears higher. Investors should be thinking about booking profits and buying fixed income instruments.

Stock Chart Pattern - Tata Steel

Nearly a year back I had last discussed about Tata Steel (I'm learning not to say TISCO). It wasn't a stock chart pattern analysis, though some investment levels were discussed. The big Corus acquisition, as well as other investments in the Asia-Pacific region, were expected to be shareholder value destructive.

No one, including yours truly, expected a fall from 970 on Oct 29, '07 all the way down to 146 on Nov 26, '08 - a massive 85% drop from the peak. Excessive pessimism often allow smart investors to enter fundamentally strong and proven performers at mouth-watering levels.

The dark cloud of the huge debt for acquiring Corus has been broken some what through debt restructuring. Domestic sales have not been affected much, but Corus is still in dire straits. At 50% production levels currently, the losses continue. 75% production is needed for break-even - which is not likely to be achieved before the end of the year.

So 2009-10 will be a bad year overall. Things are likely to improve from 2010-11 onwards, but it won't be till 2011-12 that huge cash flows from the Corus operation will change the stature of Tata Steel in the global steel market.

We'll now have a look at the one year bar chart pattern of Tata Steel and introduce a new technical tool:-

The Tata Steel chart pattern shows a double bottom at the 146-150 level before the bull rally from Mar '09 took the stock to an intermediate peak of 496 on Jun 3, '09 - correcting 42.5% of the entire bear market fall.

Correction to a low of 330 on Jul 13, '09 broke the trend line marked 'OA'. This was a 47.5% correction of the bull rally rise. Note that both corrections - one upward and the other downward - fell short of the 50% Fibonacci level. Another indication that technical analysis is indicative and approximate - more art than science.

From 330, the Tata Steel stock again moved up to test the previous high, but fell short at 492 made on Aug 4, '09 - forming a double-top in the process. The ongoing correction for the past 4 weeks has broken below the 20 day and 50 day EMAs, as well as the second trend line marked 'OB'.

The third trend line, 'OC', hasn't actually formed yet, but has been drawn to indicate the last support possibility for the bull rally to remain in tact - by making the angle BOC the same as angle AOB. These three trend lines - which together look like a small hand fan - form the basis of the 'Corrective Fan Principle'.

The breaking of the yet-to-be-formed trend line 'OC' will signal the end of the bull rally. Before the stock chart pattern can do that, it will need to test the support of the 200 day EMA (currently at 380).

The trend line 'OC' is now at the 300 level, which also happens to be the previous tops made in Apr & May '09. Previous tops tend to act as support levels. That means a good possibility of the stock halting its fall at 300.

The technical indicators are pointing towards more correction. The MACD has entered negative territory. The RSI is about to enter the oversold zone. The MFI is below the 50% level and moving down. The slow stochastic is well inside the oversold region, where it can remain for a while.

Bottomline? The stock chart pattern of Tata Steel may be giving advance notice of what may happen to the BSE Sensex chart - a 10-15% correction. The zone between 300-380 may provide good opportunities for long term investors to enter, or top up existing holdings.