Possible Nifty retracement levels

First the bad news. FIIs were net sellers of equity worth a huge Rs 127 Billion during the previous five trading sessions (Jan 22, 25, 27-29). That is the main reason for Nifty shedding 1150 points (7.8%) from its Jan 21 lifetime top (of 14753.5) to close just below its 50 day EMA.

Now the good news. Despite the sharp correction, the index is trading well above its rising 200 day EMA. That means the bull market is alive and kicking.

So, is this index dip a good time to buy? That would depend on an investor's risk tolerance and investment time horizon. The best time to buy is when you have money to spare. 

While timing the market is always difficult, it helps not to buy near market tops. Experienced investors have the patience to wait months (sometimes even years) for better buying opportunities.

For those not so experienced, having some idea of index (or stock) retracement levels can help to decide about entry points. 

Typically, Fibonacci retracement levels of 38.2% and 50% seem to work on technical charts. What are these levels for Nifty?

Let us make a couple of assumptions. The first assumption is that the index is correcting the gains made from its Sep '20 low (of 10790). A 38.2% retracement gives a figure of around 13250; a 50% retracement means about 12800. By touching a low of 13600 on Fri. Jan 29, Nifty has almost retraced 38.2%.

Note that the index has penetrated the lower Bollinger Band. Also, the Slow stochastic indicator is well inside its oversold zone. So, a technical bounce is very much within the realm of possibilities. 

Question is: Will the likely bounce rise to a new high, or get terminated at the 20 day SMA (middle Bollinger Band, marked by green dotted line)? In the latter case, the correction may resume and the index can drop to lower levels.

That leads us to our second assumption - that Nifty is actually in the process of correcting all gains made since its Mar '20 low (of 7511). A 38.2% retracement gives a figure of around 12000; a 50% retracement can drop the index to 11150.

That leaves the door open for a test of support from the 200 day EMA - currently at 12200. What if the 200 day EMA is breached and the index does fall to 11150 (however unlikely it may seem now)?

Then we may need to reassess the sustainability of the current bull phase. The annual budget on Feb 1 can have some short-term effect on the market. Long-term, it is profitability and earnings growth of India Inc. that will decide the winners and losers.

Sticking to large-cap market leaders won't hurt.

Sensex, Nifty charts (Nov 27, 2020): soaring to new highs on a tsunami of FII liquidity inflow

A tsunami of FII liquidity inflow boosted Sensex and Nifty to new highs past 44000 and 13000 levels respectively. During Nov '20, FIIs were net buyers of equity worth Rs 653.2 Billion - their highest ever monthly net buying. DIIs were net sellers of equity worth Rs 483.2 Billion - their highest monthly net selling ever. 

The situation on the economic front is improving, but remains grim. India's Q2 (Jul-Sep '20) GDP contracted by a less-than-expected 7.5% following an unprecedented decline of 23.9% in Q1 (Apr-Jun '20). GDP had expanded by 5.2% in previous Q2 (Jul-Sep '19).

India's fiscal deficit during Apr-Oct '20 came in at Rs 9.5 Trillion, which is almost 120% of the FY 2020-21 annual target of Rs 7.96 Trillion. The lag in revenues continues to outpace the government's efforts at expenditure compression.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex touched a new intra-day high of 44825 on Wed. Nov 25, but formed a large 'reversal day' bar (higher high, lower close) and closed nearly 1000 points lower. The index recovered a little to close at 44150 by the end of the week - gaining more than 4500 points (11.4%) for the month.

All three daily EMAs are rising, and the index is trading above them in a bull market. Sideways consolidation during the past two weeks have helped to correct overbought conditions of technical indicators.

Daily technical indicators are turning bearish. MACD has slipped below its signal line in bullish zone. RSI has dropped from its overbought zone. Slow stochastic has fallen below its 50% level. Some more consolidation or correction is likely.

Q2 (Jul-Sep '20) corporate results were a pleasant surprise, though top line growth was minimal and bottom line improvement was helped by tax cuts and cost curtailments. Q3 (Oct-Dec '20) results will either confirm that business recovery is for real or that the improvement in Q2 was due to pent-up demand following the long lock down.

Strong bullish sentiment in the market may be hinting that business recovery is in full swing. Anecdotal evidence suggests otherwise. The larger and more established companies are grabbing market share from MSMEs. 

That is not conducive for a broad-based economic growth and employment generation in the long run. Small investors who prefer mid-cap and small-cap stocks may face rough times unless they realign their portfolios towards large-cap stocks.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty rose for the fourth straight week to breach the 13100 level intra-week before closing at a new high of 12969. Huge buying by FIIs ensured that the index continued to soar in blue-sky territory. 

Bulls remain in total control of the chart. The index is trading well above its three rising weekly EMAs in a long-term bull market. However, caution is advised as the index has gained a whopping 75% in just 8 months (from its Mar '20 low to the Nov '20 high).

Such a strong rally is unlikely to sustain much longer. Expect year-end profit booking by FIIs, which will help improve the technical 'health' of the chart.

Weekly technical indicators are looking overbought. MACD is rising above its signal line inside its overbought zone. RSI is hovering at the edge of its overbought zone. Slow stochastic is inside its overbought zone but showing slight downward momentum that is hinting at likely consolidation or correction.

After touching a new high of 35.9 on Tue. Nov 24, Nifty's TTM P/E has slipped down a bit to 35.66 - which is way above its long-term average and well inside its overbought zone. The breadth indicator NSE TRIN (not shown) has dropped and remained inside its overbought zone since Nov 11. Some near-term index consolidation or correction is possible.

Bottomline? Sensex and Nifty charts are climbing to new highs on a tidal wave of FII liquidity inflow. Year-end considerations can lead to some profit booking by foreign fund houses. Upside risk is increasing by the day. Hold existing positions with trailing stop-losses, or take some profits home. 

Sensex, Nifty charts (Nov 06, 2020): soaring on the back of FII buying

FIIs were net buyers of equity worth a huge Rs 134 Billion - almost equalling their entire net buying during Oct '20. DIIs were net sellers of equity worth Rs 67.9 Billion. Both indices gained nearly 5.5% for the week.

Nikkei/IHS Markit India Manufacturing PMI for Oct '20 rose to 58.9 - its highest level since mid-2008 - from 56.8 in Sep '20. The Services PMI climbed to 54.1 in Oct '20 from 49.8 in Sep '20 - its highest level since Feb '20 and well above the 50 mark that separates growth from contraction.

The Composite PMI (Mfg. + Serv.) rose to 58 in Oct '20 - its highest level since Jan '12 - from 54.6 in Sep '20.

India's merchandise exports declined 5.4% to US $24.82 Billion in Oct '20. Imports fell 11.56% to $33.6 Billion, narrowing the trade deficit to $8.78 Billion against $11.76 Billion in Oct '19. 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex bounced up sharply after receiving good support from its 50 day EMA in the previous week. The index opened with an upward 'gap' on Thu. Nov 5, thanks to a flood of FII money. The next day, it rose higher to close within 60 points of its lifetime closing high of 41945 (touched back in Jan 17 '20).

The index is trading above its three rising daily EMAs in a long-term bull market. However, proximity to a previous high, and combined negative divergences visible on all four daily technical indicators (which failed to touch new highs with the index) calls for caution.

Daily technical indicators are looking bullish. MACD has crossed above its signal line in neutral zone. ROC has moved above its 10 day MA in neutral zone. RSI is climbing above its 50% level. Slow stochastic has bounced up sharply to re-enter its overbought zone. Some more near-term index upside is possible, but avoid entering the market now.

Aggregate Q2 (Jul-Sep '20) results of 1000 companies show top line pressure but bottom line improvements (thanks to tax cuts). Pharma companies declared good numbers. ITC results were a disappointment, because the pandemic has affected its cigarettes, hospitality and stationery products businesses. 

Small investors would do well not to get caught up in bullish euphoria. Good stocks are becoming more expensive. Tendency to look for hidden gems among junk stocks can be injurious to wealth. Sometimes, doing nothing is a good strategy.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty rose sharply to close within 100 points of its lifetime closing high of 12352 - touched in the week ending on Jan 17, '20. Strong FII buying negated technical headwinds. The index closed above its three rising weekly EMAs in a long-term bull market for the 18th straight week. 

Bulls are in total control of the chart. A new lifetime high seems just a hop, skip and jump away. However, caution is advised near a lifetime high. Everyone remembers the sharp correction after the index touched its previous top in Jan '20.

What is the reason for the sudden rush of FII buying? Wasn't a win for Biden in the US elections considered bearish for the stock market? According to experts, since Democrats failed to get a majority in the US Senate, Biden will be unable to push through any new taxes. Sometimes, stock markets use any excuse to go up (or down)!

Weekly technical indicators are in bullish zones, and looking overbought. MACD is rising above its signal line in overbought zone. RSI is moving sideways above its 50% level. Slow stochastic has bounced up from the edge of its overbought zone. RSI and Slow stochastic are showing negative divergences by failing to touch new highs with the index, and may trigger some consolidation or correction.

Nifty's TTM P/E has moved up to 33.09 - which is well above its long-term average and well inside its overbought zone. The breadth indicator NSE TRIN (not shown) is still in neutral zone - hinting at near-term index consolidation.
 
Bottomline? Sensex and Nifty charts have soared to their highest levels since touching their lifetime highs back in Jan '20. Negative divergences in technical indicators, and proximity to lifetime highs may lead to profit booking. Stay invested, but avoid fresh commitments.

Sensex, Nifty charts (Dec 27, 2019): slip down a bit after touching lifetime highs

In a holiday-shortened trading week, FIIs were net sellers of equity on Tue. and Thu. (Dec 24 and 26) but net buyers on Mon. and Fri. (Dec 23 and 27). Their total net buying was worth Rs 9.3 Billion. DIIs were net sellers of equity on Mon. and Tue., but were net buyers on Thu. and Fri. Their total net selling was worth Rs 20.5 Billion - as per provisional figures.

With tax and non-tax revenues lagging way behind targets, along with weaker private consumption and investments, RBI expects a threat to overall fiscal numbers - even as India's financial system remains resilient.

Despite the economic slowdown and weak consumer sentiment across consumer goods, retail and other industry sectors, the Indian eCommerce industry grew 38% to US $76 Billion in 2019.

BSE Sensex index chart pattern

After touching a lifetime high of 41810 on Dec 20, the daily bar chart pattern of Sensex slipped down to test support from its rising 20 day EMA, and bounced up to close just around 100 points (0.25%) lower on a weekly basis. The index is trading above its three rising EMAs in a bull market.

Daily technical indicators are in bullish zones but not showing much upward momentum. MACD is seeking support from its rising signal line. ROC has bounced up after receiving support from its rising 10 day MA. RSI has risen to the edge of its overbought zone. Slow stochastic has slipped down from its overbought zone.

FII trading activity usually slows down during Christmas-New Year holiday season. So, volatility may reduce next week, as the stock market tries to anticipate Q3 (Dec '19) results.

The index can attempt to move higher, but without FII buying and broader market participation the rally may not make much headway. Stay invested, but maintain trailing stop-losses in case there is any sudden market turnaround.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty has been trading within a large 'rising wedge' pattern for the past 14 weeks. Such a pattern has bearish implications - particularly when it forms at an index top. Falling volumes during the past few weeks is another concern for bulls.

Weekly technical indicators are looking bullish and overbought. MACD is rising above its signal line and is poised to enter overbought zone. ROC has crossed below its 10 week MA and dropped to the edge of its overbought zone. RSI has also dropped to the edge of its overbought zone. Slow stochastic is moving up inside its overbought zone. Bulls seem to be in complete control.

Nifty's TTM P/E has slipped down to 28.48 - which remains well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) has risen sharply to enter its oversold zone, and can trigger some near-term index consolidation.

Bottomline? Sensex and Nifty charts have slipped down a bit on year-end profit booking after touching lifetime highs. Rising CPI inflation, poor GDP and IIP numbers, a crisis of confidence among consumers and nationwide protests against the Citizen Amendment Act (CAA) do not justify a soaring stock market. Stay invested, but maintain trailing stop-losses.

[Wishing all blog readers, followers, and subscribers a happy and prosperous New Year.]

Nifty chart: a midweek technical update (Jul 10, 2019)

FIIs were net sellers of equity during the first three trading days of the week. Their total net selling was worth Rs 16.8 Billion. DIIs were net buyers of equity on all three days. Their total net buying was worth Rs 17.0 Billion, as per provisional figures.

The Finance Minister defended her decision to impose higher Income Tax surcharge on incomes above Rs 20 Million and Rs 50 Million per year that will affect about 40% of FIIs who do not have a corporate structure.

The Union Cabinet seeks to approve a bill that seeks to merge 13 central labour laws into a single code that would apply to all establishments employing 10 or more workers.

The following comments appeared in last week's technical update on the daily bar chart pattern of Nifty: "The 165 points upward 'gap' (formed on May 20) has remained unfilled. At some point, the index is likely to fall to partly or completely fill the 'gap'." 

The budget on Jul 5 provided just the opportunity for bears to fill the 'gap'. The increased surcharge on Income Tax for people in higher income brackets - including some categories of FIIs - dampened bullish sentiment.

Nifty is trading above its rising 200 day EMA in a bull market. However, it has formed a bearish pattern of 'lower tops, lower bottoms' and is in a down trend (marked by green down trend line).

A complete filling of the 'gap' (it has been partly filled) and a test of support from the 200 day EMA is now a definite possibility - specially if FIIs keep selling.

Daily technical indicators have turned bearish. MACD is falling below its signal line in bearish zone. RSI has dropped below its 50% level. Slow stochastic has fallen sharply to enter its oversold zone, and can trigger a pullback towards the 50 day EMA.  

Nifty's TTM P/E has moved down to 28.20, which is well inside its overbought zone and much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is moving up in neutral zone. Some near-term index consolidation is possible.

Bulls will be looking for some cheer from Q1 (Jun '19) results that have started hitting the market. Chances are they will find little to cheer about. Get ready for trying times if you entered the market to quickly double your money. 

Wealth building is a process that requires patience, discipline and diligence. Your investment mettle will be sorely tested during the next few months.

Nifty chart: a midweek technical update (Mar 14, 2018)

FIIs and DIIs were net buyers of equity during the first three days of trading this week. FII net buying was worth a whopping Rs 71.4 Billion. DII net buying was worth Rs 7.2 Billion, as per provisional figures.

FIIs were net buyers on Mon. Mar 12 & Tue. Mar 13 but net sellers today. DIIs were net sellers on Mon. & today but net buyers on Tue. TCS share divestment may have caused Tuesday's large buying by FIIs and DIIs.

There was some good news on the macroeconomic front. IIP grew 7.5% in Jan '18 against 7.1% in Dec '17. Cumulative IIP growth during Apr '17 to Jan '18 was 4.1%.

CPI inflation eased to 4.4% in Feb '18 from 5.07% in Jan '18 on lower food prices. WPI inflation dropped to a 7 months low of 2.48% in Feb '18 from 2.84% in Jan '18.  

Oversold technical indicators had hinted at a technical bounce in last week's update on the daily bar chart pattern of Nifty. Thanks to FII buying, the technical bounce on Thu. & Fri. (Mar 8 & 9) turned into a bit of a rally on Mon. & Tue. (Mar 13 & 14).

Resistances from the falling 20 day EMA (on a closing basis) and the 50 day EMA appears to have stalled the rally.

The 33 points downward 'gap' - formed on Feb 5 '18 - is looming like a dark cloud on bullish aspirations. The index has formed a bearish pattern of 'lower tops and lower bottoms' below the 'gap'.

Daily technical indicators are looking mildly bullish. MACD has crossed above its signal line, but remains in bearish zone. RSI is again facing resistance from its 50% level. Slow stochastic has managed to move above its 50% level.

Nifty's TTM P/E has moved up to 25.41 - which is much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has dropped sharply from its oversold zone, keeping bullish hopes alive.

Despite strong buying by FIIs three days in a row (on Mar 9, 12, 13), Nifty failed to make much headway. Reintroduction of LTCG tax in the budget, followed by a series of frauds and scams in PSU banks have turned market sentiment bearish.

BJP's election reverses in recent by-polls in UP and Bihar will further dampen market sentiment. The index may revisit and possibly breach last week's low of 10142.

Nifty chart: a midweek technical update (Feb 14, 2018)

FIIs were net sellers of equity worth Rs 15.4 Billion during Mon. Feb 12 and Wed. Feb 14 (Feb 13 was a holiday). DIIs were net buyers of equity worth Rs 11.9 Billion, as per provisional figures, but were net sellers today.

The Index of Industrial Production (IIP) at 7.1% showed good growth in Dec '17, but was lower than 8.8% in Nov '17. Low base effect was partly responsible for the growth. However, IIP was only 3.7% during Apr-Dec '17, compared to 5.1% during Apr-Dec '16.

India's retail (CPI) inflation fell a little to 5.07% in Jan '18 against 5.21% in Dec '17, as food inflation softened.

The following comments appeared in the previous midweek technical update on Nifty: "The 33 points downward 'gap' formed on Mon. Feb 5 can act as a resistance zone for future up moves. Also, any attempt to rally by the index will induce profit-booking by investors wishing to lock-in tax-free LTCG till Mar 31 '18."

The 'gap' is looming like a dark cloud for bulls. The 6 days of trading - after formation of the 33 points downward 'gap' on Feb 5 - has not only occurred below the 'gap' but also below the sliding 50 day EMA.

The falling 20 day EMA has slipped below the 'gap' today, and can also act as a resistance to any near-term rally. A re-test, and possible breach, of the Feb 6 intra-day low of 10276 seems quite likely.

Daily technical indicators are in bearish zones. MACD is showing downward momentum. RSI and Slow stochastic are moving sideways - hinting at more index consolidation below the 50 day EMA.

Nifty's TTM P/E has inched up to 25.37 - which is much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is oscillating at the edge of its oversold zone - hinting at some more consolidation or correction. 

Near-term bearish sentiment is increasing by the day as misfortunes keep befalling the market. First came the shock of the 10% LTCG tax. Then, news of Indian exchanges stopping data services to overseas stock exchanges in a misguided effort to tie down FIIs from fleeing.

Today's news of a Rs 110 Billion fraud involving at least four banks may be the proverbial straw that will break the camel's (FIIs?) back. [Warren Buffett had once commented: "There's never just one cockroach in the kitchen" about a scandal in Wells Fargo bank].

Small investors need not panic. Don't stop your SIPs. But refrain from bottom fishing because Nifty is nowhere near bottoming out yet.

Is the Sensex going through a Correction or a Trend Reversal?

That is a question asked most often by small investors whenever there is a correction after Sensex touches a new high (or low). Like, now. 

The short answer is: probably a correction. 

Why not a trend reversal? We need to look at a long-term Sensex chart to try and find an answer to the question.

The weekly Sensex bar chart has two bear phases (in 2015 and second half of 2016) and two bull phases (first half of 2016 and 2017).

The first (year-long) bear phase started after the formation of a 'diamond' reversal pattern during Q4 (Mar '15). The reversal pattern gave a trend-change signal from bullish to bearish.

The index dropped below its 200 week EMA into long-term bear territory, but formed a 'double bottom' reversal pattern during Q4 (Mar '16). Again, the reversal pattern gave a trend-change signal - from bearish to bullish.

The first (two quarters long) bull phase topped out without forming any reversal pattern in Q2 (Sep '16). That gave a hint that a correction (2nd bear phase) and not a trend reversal was to follow.

The index touched a higher bottom and formed a 'double bottom' reversal pattern in Q3 (Dec '16), indicating the start of the second bull phase.

What happened in Jan '18? Sensex topped out after a 13 months long bull phase without forming a reversal pattern, but did form a large weekly 'reversal' bar (higher high, lower close).

Is it necessary that a reversal pattern has to form to indicate a trend-change? Usually, yes. Can a large weekly 'reversal' bar trigger a trend reversal? Also, yes.

So, why am I voting for a correction, and not a trend reversal? Let's put it down to an educated guess.

A raging bull phase can be compared to a large ocean liner moving at a good speed in mid-sea. Changing direction can't happen suddenly. It takes a while for the strong hands to liquidate and weak hands to give up completely.

Can the correction turn into a trend reversal? Yes, if FIIs continue their selling. (Finance ministry officials are in denial by opining that the 10% LTCG will have very little effect on FII inflows because Indian economy is growing.)

When will the correction turn into a trend reversal? A 20% correction from the Jan '18 top (shaded) will be regarded as the start of a bear market. For Sensex, that level is around 29150.

The Sep '16 Sensex top (shaded) was 29077. So, the zone between 29100-29150 is likely to be defended strongly by bulls. Any breach of that support zone would mean all bullish bets should be off.

What should small investors do? Don't be in a hurry to buy. No use trying to catch a falling knife. Weekly technical indicators are showing downward momentum and hinting at more correction. Wait for signs of bottom formation.

Sensex, Nifty charts (Feb 02, 2018): budget throws cold water on bull party

During Jan '18, FIIs were net buyers of equity worth Rs 95.7 Billion as per provisional figures - after five straight months of net selling. DIIs were also net buyers of equity (as they have been since Apr '17), but worth only Rs 4 Billion.

FIIs were net buyers of equity worth Rs 20.5 billion during the first two trading days of Feb '18. DIIs were net sellers of equity worth Rs 8.7 Billion, as per provisional figures.

Reintroduction of long term Capital Gains tax on equity shares and a 10% tax on distributed income from equity-oriented mutual funds in the recent budget threw cold water on the bull party in the Indian stock market.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex touched new intra-day (36444) and closing (36283) highs on Mon. Jan 29 on the back of net buying in equities by both FIIs and DIIs.

Hugely overbought technical indicators, proximity to the budget and rumours of introduction of long-term capital gains tax (LTCG) in some form led to profit booking by FIIs on the next two days.

The rumours of  LTCG turned out to be news on budget day (Thu. Feb 1). DIIs and small investors started selling heavily to lock-in tax-free long-term profits. FIIs turned contrarian and bought the dip - otherwise the index would have fallen more.

By touching an intra-day low of 35006 on Fri. Feb 2, Sensex has retraced 37% of the 3879 points gain made from the low of 32565 (on Dec 6 '17) to the high of 36444 (on Jan 29 '18). 

That is close to the 38.2% Fibonacci retracement level of 34962, where the Sensex may find some support and bounce up. Will it?

Daily technical indicators are correcting overbought conditions, and showing strong downward momentum. ROC has already entered bearish zone. Some more correction can't be ruled out. Expect stronger support in the zone between 34050 & 34300.

The much-awaited correction is finally here. Are you going to welcome it with open arms and use the opportunity to add? After all, Sensex is in a long-term bull market. Or, are you more interested in saving 10% LTCG by booking profits till Mar 31 '18?

Will you continue to keep faith in mid-cap and small-cap stocks? Or, will you reinvest booked profits in 'more expensive' large-cap stalwarts?

The answers to those questions will determine how your portfolio fares during the next few years. (No one likes to pay tax. But remember that tax is paid from profits.)

NSE Nifty index chart pattern

The following comments from last week's post may be worth repeating: "The weekly bar chart pattern of Nifty touched a new high for the 8th week in a row. Since 8 is a number in the Fibonacci series, technical traders may use it as an excuse to book profits next week."

The Finance Minister gave a better excuse in his budget speech by re-introducing LTCG on equity shares. The index formed a large 'reversal' bar (higher high, lower close), which can lead to some more correction.

By touching a low of 10736 on Fri. Feb 2, Nifty has retraced 38.2% of the 1138 points gain made from the low of 10033 (in week ending Dec 8 '17) to the high of 11171 (in week ending Feb 2 '18).

Since the index has touched the Fibonacci retracement level of 38.2%, some short covering by technical traders may follow. The likely technical bounce may induce more profit booking in the near term.

Weekly technical indicators are in the process of correcting overbought conditions. If the index corrects more, expect stronger support from the zone between 10490 & 10600. 

Nifty's TTM P/E has decreased to 26.04 - which is still well above its long-term average. The breadth indicator NSE TRIN (not shown) has risen sharply towards its oversold zone, and can limit index downside. 

Bottomline? Sensex and Nifty charts are undergoing much-awaited corrections - triggered by re-introduction of LTCG. The correction will improve the technical health of the chart, but may go on for a while longer. No need to try and 'catch a falling knife'. A bit of patience may be rewarded with better entry points.

Why a rising Stock Market isn't Risky (as long as earnings continue to grow)

The New Year has started off in a sensational note for Indian stock market bulls. Both Sensex and Nifty indices have surged upwards - touching new highs on a regular basis.

Most market experts had predicted more moderate stock portfolio returns in 2018 after huge gains made in 2017 on the back of strong liquidity flows into domestic mutual funds.

Instead, bulls have jumped off the block, and been on a buying spree as if there will be no tomorrow. What has caused the sharp parabolic rise in both stock market indices? 

In a post last week, a probable technical reason why FIIs have turned bulls after 5 straight months of net selling in Indian equities was put forth.

There is a fundamental reason as well. After several quarters of muted earnings growth, India Inc. appear to have hit the fast forward button in Q3 (Dec '17) - albeit on a lower base due to the disastrous demonetisation exercise in Nov '16.

Have the bulls over-reacted to the improved Q3 corporate results announced so far? Is the market getting riskier by the day?

In a recent article in investopedia.com, Michael Kramer has argued that a rising stock market isn't risky as long as corporate earnings continue to grow.

Stock market players have a habit of looking ahead. Index P/E can look expensive based on last year's earnings, but may not look so expensive based on projected one year forward earnings.

Read the full article here. 

To know why FIIs are buying, look at the Dollex-30 chart

After five straight months of net selling in equity shares (from Aug '17 to Dec '17), FIIs have turned net buyers in Jan '18.

They have been net buyers in 10 of the 14 trading days this month. Today's net buying was worth Rs 18.9 Billion.

What made them change their bearish stance? Anticipation of better Q3 (Dec '17) results of India Inc.? Overbought US and UK stock markets?

May be a bit of both. For a technical reason, take a look at the long-term Dollex-30 monthly chart (courtesy:investing.com) below:

For the uninitiated, Dollex-30 is the BSE Sensex chart in US Dollar terms. The blue horizontal line has been used to mark the Jan '08 top, which acted as a resistance level in Dec '17.

While Sensex has been conquering new highs on a regular basis, the Dollex-30 has just managed to cross above its Jan '08 top after 10 long years.

Remember that when a long-term resistance level gets breached, it usually turns into a support level for future corrections.

Nifty chart: a midweek technical update (Oct 25 ‘17)

The Finance Minister's announcement yesterday about a recapitalisation scheme for PSU banks energised FIIs no end. Their net buying in equities touched a huge Rs 35.8 Billion today - completely overwhelming DII net selling in equities worth Rs 1.6 Billion.

Nifty formed a small upward 'gap' and touched a new intra-day high of 10341 before closing just below 10300. (Sensex - not shown - closed above 33000 for the first time ever.)

The government has collected over Rs 920 Billion as GST in Sep '17. The number of registered GST assesees have crossed 10 million but so far, less than half have paid taxes.

The daily bar chart pattern of Nifty touched lifetime intra-day and closing highs today as FIIs went on a buying spree - particularly in PSU banks.

Small investors would do well to avoid jumping on to the bull bandwagon now. Market breadth was negative today as declining stocks outnumbered advancing stocks.

Daily technical indicators are looking overbought. ROC (not shown), RSI and Slow stochastic are showing negative divergences by touching lower tops as the index rose higher. 

The index formed a bearish 'hanging man'-like candlestick pattern today. The sharp volume surge today (not shown) may be a sign of 'buying climax'.

The index is trading well above its three rising EMAs in a bull market. A bull market is supposed to climb a wall of worries. Just because an index has touched a new high doesn't mean it can't go even higher. However, buying at a market top can be a ticket to disaster.

Nifty's TTM P/E has risen to 26.63 - much higher than its long-term average. Q2 (Sep '17) results of India Inc. declared so far are not showing much improvement over Q1 (Jun '17). That means index valuation will remain high till Q3 (Dec '17).

The breadth indicator NSE TRIN (not shown) has dropped like a stone inside its overbought zone, and may limit further index upside.

FII buying may have been triggered by short-covering in PSU banks. It remains to be seen if buying momentum is sustained on F&O expiry day tomorrow (Oct 26).

Booking partial profits, and getting rid of non-performers may be a very good idea.

Nifty chart: a midweek technical update (Sep 06 ‘17)

FIIs have continued to sell equity in the spot market. Their net selling during the first four days of trading in Sep '17 totalled Rs 34.4 Billion. DIIs were net buyers of equity worth Rs 12.1 Billion.

Nifty has been trading sideways with an upward bias in a range between 9700 and 10000 since correcting down from the Aug 2 top of 10138. However, it has formed a 'rising wedge' pattern from which the likely breakout is downwards.

The Nikkei India Services PMI for Aug '17 was 47.5 - higher than 45.9 in Jul '17 but below the 50 level which indicates contraction. Call it the 'GST effect'. The Services PMI was also below 50 in the Nov '16 to Jan '17 period - thanks to demonetisation.

The daily bar chart pattern of Nifty had broken out below a 'diamond' pattern after touching a lifetime high of 10138 on Apr 2. Read all about the 'diamond' pattern and its implications in an earlier post.

After receiving support from the 9700 level on Aug 11, the index bounced up to touch 9948 on Aug 17 but entered a sideways consolidation within a bearish 'rising wedge' pattern.

Daily technical indicators are in bullish zones but not showing any upward momentum. MACD is moving sideways above its signal line. RSI is seeking support from its 50% level. Slow stochastic has dropped from its overbought zone.

Nifty's TTM P/E is at 25.88 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has dropped sharply and entered its overbought zone - hinting at a correction.

A fall below the 'rising wedge' should receive some support from the 9700 level. If the support fails to hold, a deeper correction to test support from the rising 200 day EMA may follow.

Keep a close watch on the zone between 9700 and 10000. Bears will dominate below 9700. Bulls will rule above 10000. Where is the index headed first?

Don't place any bets, but the odds of a fall below 9700 first appears better. Why? Because a bull market requires earnings support to sustain and prosper in the long-term. And earnings of India Inc. has been disappointing to say the least.

DIIs don't have much choice but to keep buying as investors continue to pour money into mutual funds, because investments in realty and gold is no longer in fashion. But as long as FIIs keep selling, the index is not going to move much higher.

So, sit out the correction. Bravehearts can short the index if it falls below the 'rising wedge' (not a recommended strategy for novice investors).

Nifty chart: a midweek technical update (Aug 30 ‘17)

FIIs were net sellers of equity worth Rs 16 Billion during the first three days of trading this week. DIIs were net buyers of equity worth Rs 21.6 Billion.

Nifty made a couple of futile attempts to breach the (purple) down trend line on Mon. & Wed. (Aug 28 & 30). On Tue. Aug 29, it dropped to seek support from its 50 day EMA.

GST collection for the month of Jul '17 was Rs 922 Billion - exceeding the government's target of Rs 910 Billion - despite only 3.8 million of the 5.8 million GST registered entities paying up so far.

RBI has drawn up a second list of 40 bank loan defaulters against whom proceedings may be initiated under the Insolvency and Bankruptcy code. The cleaning up process of the NPA problem in the banking system continues.

The daily bar chart pattern of Nifty had corrected below its 20 day and 50 day EMAs to the 'support-resistance' level of 9700 on Aug 11.

Since then, the index has been consolidating sideways - alternatively moving above its 20 day EMA and falling below its 50 day EMA.

The entire trading for the month has occurred below the (purple) down trend line and the 9700 level - forming a 'descending triangle' like pattern.

A breakout above the down trend line will negate the 'descending triangle', but may not give bulls the upper hand because the 10000 level is likely to provide strong resistance. (The technical reason for the resistance at 10000 was explained in an earlier post.) 

A fall below 9700 may lead to a fall towards 9300, and a test of support from the rising 200 day EMA. Note that the index is trading well above its 200 day EMA in a bull market. 

Technical indicators are giving conflicting signals, which is often the case during periods of consolidation. MACD is in bearish zone - moving sideways below its falling signal line. RSI and Slow stochastic are facing resistances from their respective 50% levels.

Nifty's TTM P/E is at 25.54 - well above its long-term average. The breadth indicator NSE TRIN (not shown) is in neutral zone. The index can continue to consolidate for a while - may be till Q2 (Sep '17) results of India Inc. show earnings improvement.

North Korea's regular missile launches - undoubtedly at the behest of China, which is its closest ally - has kept FIIs in 'risk-off' mode. Unless they resume buying, Nifty is not going to move much higher.

Sensex, Nifty charts (Aug 18, 2017): Infosys CEO exit give bears another chance to sell

FIIs were net sellers of equity on all four days of a holiday-curtailed trading week. Their net selling was worth Rs 58.9 Billion. DIIs were net buyers of equity on all four days - their net buying was worth Rs 43.7 Billion.

However, both Sensex and Nifty gained (1% and 1.3% respectively) on a weekly closing basis despite being in down trends since touching lifetime highs in the first week of this month.

Both indices were in the midst of pullback rallies after the previous week's sharp corrections. The unexpected news of Infosys CEO Vishal Sikka's resignation on Fri. Aug 18 sent bulls running for cover.

BSE Sensex index chart pattern

Note the following comments from last week's post on the daily bar chart pattern of Sensex:

"The selling appears a bit overdone. A technical bounce can occur at any time. However, some more correction or consolidation can't be ruled out...It is possible that a technical bounce from current level will face resistance from the falling 20 day or 50 day EMA, and the index will then correct towards the support zone." 

The technical bounce occurred as expected. Sensex received strong resistance from its 20 day EMA and the (blue) down trend line (drawn through Aug 2 & Aug 8 tops) on Thu. Aug 17. Friday's heavy selling by FIIs triggered a close below the 50 day EMA for the 2nd week in a row.

Daily technical indicators are suggesting that some more correction or consolidation is likely. MACD is falling below its signal line in bearish zone. ROC, RSI and Slow stochastic emerged from their respective oversold zones, but are showing downward momentum.

The index is trading well above its rising 200 day EMA in a bull market. Any fall towards the 'support zone' between 29220-30040 (refer last week's post) will provide an adding opportunity.

With FIIs booking profits, a reversal of the down trend may take some time. Be very selective about what you buy. Companies with good fundamentals that faced top line and margin pressure due to de-stocking before GST implementation should be on the top of 'buy lists'.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty bounced up after receiving support from the 9700 level, but failed to cross above 9950 and closed below 9850 for the week.

Weekly technical indicators have corrected overbought conditions, but remain in bullish zones. MACD is about to close below its signal line. It did so in Sep '16 and triggered a 1000 points correction. 

RSI and Slow stochastic had corrected down from their respective overbought zones in Sep '16 as well. So, odds of a correction below the 20 week EMA towards the 'support zone' between 9015-9285 are getting better.

Nifty's TTM P/E has moved up to 25.1 - well above its long-term average. The breadth indicator NSE TRIN (not shown) is falling sharply in neutral zone, and can limit index upside.

Nifty is trading above its rising 20 week and 50 week EMAs in a bull market. A deeper correction towards the 'support zone' will be a good adding opportunity.

Bottomline? Sensex and Nifty charts are in down trends for the past two weeks. FIIs first got spooked by nuclear war rhetoric of North Korea and then by the sudden departure of Infosys CEO. DIIs are still buying, and providing downside protection to both indices. This is a bull market correction, hence an opportunity to add. Be very selective.