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 (Aug 01, 2018)

FIIs were net buyers of equity on Tue. Jul 31, but net sellers on Mon. Jul 30 and today. Their total net buying was worth Rs 2.4 Billion. DIIs were net buyers of equity on Mon. and net sellers during the next two days. Their total net selling was worth Rs 8 Billion, as per provisional figures.

At the end of the three-day Monetary Policy Committee meeting, RBI hiked repo rate and reverse repo rate by 25 bps (0.25%) each today. The move was widely expected. Nifty closed just 10 points lower today after four straight days of rallying higher.

Revenue collection from GST rose to Rs 965 Billion in Jul '18 from Rs 956 Billion in Jun '18, thanks to increased compliance. However, it fell short of the Rs 1 Trillion per month target set by the government.

The daily bar chart pattern of Nifty touched a new high every day for five straight trading days. However, it closed lower today to form a small 'reversal day' bar (higher high, lower close).

All three EMAs are rising, and Nifty is trading above them, and above the (blue) up trend line, in a bull market. The index is in 'blue sky' territory with no known resistances.

Daily technical indicators are inside their respective overbought zones. MACD is rising above its signal line. ROC is above its 10 day MA, but has stopped rising. RSI and Slow stochastic are showing signs of correcting overbought conditions.

Nifty's TTM P/E has moved up to 28.14 - which is much higher than its long-term average and in overbought zone. The breadth indicator NSE TRIN (not shown) is oscillating just above its overbought zone. Expect some index consolidation or correction.

The index rally during the past 4 months has not been broad-based. A few large-cap stocks have propelled the index higher. Mid-cap and small-cap stocks have undergone profit booking, but their valuations still remain high.

If the index undergoes a correction - which is quite possible after a sharp rally - the mid-cap and small-cap stocks may correct even more. Any rally in mid-cap or small-cap stocks from here on can be used for partial profit booking.

Nifty chart: a midweek technical update (Jun 07 ‘17)

FIIs were net buyers of equity on all three days of trading this week. Their total net buying was worth Rs 6.1 Billion. 

DIIs were net sellers of equity worth Rs 3.6 Billion on Tue, but were net buyers worth Rs 1.8 Billion on Mon. and Wed. as per provisional figures.

RBI's monetary policy announcement today came as no surprise. Status quo was maintained for repo and reverse repo rates. CRR was also unchanged, but SLR was reduced by 50 bps (0.5%) to 20%.

The daily bar chart pattern of Nifty rose to touch a new high of 9709 on Tue. Jun 6, but closed near the low point of the day at 9637 - forming a 'reversal day' bar (higher high, lower close) that often marks an intermediate top.

All three EMAs are rising, and the index is trading above them in a bull market. However, overbought technical indicators that are showing negative divergences by failing to touch new highs with the index may be triggering a correction.

The rally from the Dec 26 '16 low features several corrective moves towards the rising 20 day EMA that has kept the chart technically 'healthy'. Another correction towards the 20 day EMA will provide Nifty the technical strength to move convincingly above 9700.

Nifty's TTM P/E is at 24.48, which is well above its long-term average. The breadth indicator NSE TRIN (not shown) has reversed direction from the edge of its oversold zone and dropped sharply into neutral zone - hinting at some more index upside.

With FIIs turning buyers again, any correction is likely to be a shallow one. 

The Indian Meteorological Dept has reconfirmed a normal monsoon this year. That should give a boost to rural consumption. 

Implementation of GST from July 1 should benefit the economy over the long term, but there may be a temporary slowdown due to teething problems. SME companies may not be ready yet with their systems and processes.

Stay invested, and think long-term. 

Nifty chart: a midweek technical update (Dec 21 '16)

FIIs have been in a strongly bearish mood, putting Nifty bulls at a severe disadvantage. Total net selling in equities by FIIs in three days of trading this week touched Rs 24 Billion. DIIs were net buyers of equity worth Rs 20.3 Billion.

Despite heavy selling by FIIs, Nifty has managed to stay above the 8000 level so far, though it has lost ground for six trading sessions in a row.

Demonetisation blues are still affecting the public at large. In another move to soften the blow, RBI has allowed depositing of demonetised notes of any amount in KYC-compliant bank accounts without asking any questions.

The Government is bringing an ordinance to amend The Payment of Wages Act, 1936 to allow businesses and industries to pay wages electronically or by cheques - with an option to pay by cash.

The following were the concluding comments in last week's mid-week update on the daily bar chart pattern of Nifty: "The balance is tilted towards bears continuing their domination for a while. The small up trend line may be the lower edge of a 'rising wedge' pattern, which has bearish implications."

On Thu. Dec 15, Nifty broke down and closed below the 'rising wedge' pattern. The next day it pulled back to the lower edge of the wedge - giving a selling opportunity. It has been gradually sliding down since then.

All three EMAs are falling and Nifty is trading below them. The imminent 'death cross' of the 50 day EMA below the 200 day EMA will technically confirm a return to a bear market. 

Daily technical indicators are looking bearish and showing downward momentum. Slow stochastic has dropped sharply into its oversold zone. Any technical bounce will provide bears another opportunity to sell.

Nifty's TTM P/E has remained between 21.16 and 21.87 in Dec '16, which is above Nifty's long-term average valuation. The breadth indicator NSE TRIN (not shown) is falling in neutral zone.

The Rupee is depreciating against the US Dollar. That means FIIs are going to remain sellers in the Indian stock market. "Now is the winter of our discontent (unlikely to be) made glorious summer ..." [with due apologies to William Shakespeare].

The down trend line continues to dominate Nifty's chart. Don't be in a rush to buy. Invest according to your asset allocation plan. 

Sensex and Nifty charts have formed intermediate bottoms (Nov 25 '16)

Selling by FIIs abated a little during the week gone by. Their total net selling in equities was Rs 54.1 Billion, as per provisional figures. DIIs bought heavily. Their total net buying in equities touched Rs 61.9 Billion.

Both Sensex and Nifty breached their previous lows (the possibility was mentioned in last week's post), but recovered to gain about 0.5% on a weekly closing basis.

Demonetisation of bank notes continued to roil both houses of Parliament. Opposition parties joined forces in a desperate bid to project themselves as pro-poor when they were really protesting against the loss of their 'slush' funds.

In a surprising move, RBI has temporarily increased CRR to 100% in a bid to suck out excess liquidity from banks that was being parked in govt. bonds. Yields are expected to rise and bank share prices may take a hit.

BSE Sensex index chart pattern

The Daily bar chart pattern of Sensex dropped to an intra-day low of 25718 on Mon. Nov 21, and closed below its Nov 9 'panic bottom' of 25902 - proving once again that 'panic bottoms seldom hold'.

After consolidating sideways around the support level of 25900 for the next three days, the index bounced up strongly to close above the 26300 level.

The index is trading below its three EMAs in bear territory and is well below the blue down trend line. The 20 day EMA has crossed below the 200 day EMA. The 'death cross' of the 50 day EMA below the 200 day EMA, which technically confirms a bear market, appears imminent.

The down trend that started after Sensex touched a high of 29077 on Sep 8 continues. Bears definitely have the upper hand.

However, there are technical signs that the index has found an intermediate bottom and a pullback rally has started.

All four technical indicators are looking oversold, but are showing slight upward momentum as they try to emerge from their respective oversold zones. 

ROC is showing positive divergence by not falling lower with the index. MACD and Slow stochastic have formed small 'rounding bottom' reversal patterns inside their oversold zones. RSI has formed an 'inverse head and shoulders' like reversal pattern inside its oversold zone.

Since touching the 'panic bottom' on Nov 9, the index had formed a small 'falling wedge' pattern, from which it broke out upwards on Fri. Nov 25.

By touching a low of 25718 on Nov 21, the index retraced 61.7% of its entire rally from 22495 (Feb 29 low) to 29077 (Sep 8 top). That is almost the same as the 61.8% Fibonacci retracement level.

A combination of value buying and short-covering can propel Sensex towards its 200 day EMA (at about 27000). That can be a trigger for bears to strike again. Bulls may try to wrest control with a convincing rally above 27600. 

The market appears to have discounted most of the likely adverse fallouts of the demonetisation drive. Lengthy queues in front of banks and ATMs have been shrinking.  

Time to take out your 'buy list'. Accumulate slowly instead of buying in bulk. Some more consolidation or correction can't be ruled out. 

NSE Nifty index chart pattern

The following comments appeared in last week's post on the weekly bar chart pattern of Nifty: "The index had formed a high-volume 'panic bottom' in the previous week. A 'panic bottom' seldom holds. A drop below 8000 seems likely."

The index touched an intra-week low of 7916 before bouncing up to close above 8100. 

In the process, Nifty formed a 'reversal week' bar (lower low, higher close) - as well as a 'hammer' candlestick pattern. Both can be bullish reversal patterns.

Of the four weekly technical indicators, MACD is falling below its signal line and looks poised to enter negative zone. ROC, RSI and Slow stochastic are looking oversold.

A pullback rally towards 8300 is likely. Bears will probably use the opportunity to sell. A convincing move above 8570 is required if bulls wish to regain control.

Bottomline? Sensex and Nifty charts may have formed intermediate bottoms. Valuations have improved, but weak earnings growth of India Inc. may continue for a quarter or two more. Be cautiously optimistic that the worst is over. Any pullback rally can trigger bear selling.

3 Reasons why Nifty has formed an intermediate bottom: a midweek technical update (Nov 23 '16)

Selling by FIIs has eased a bit. Their total net selling in equities during the first three days of the week was worth Rs 30.3 Billion. DIIs were net buyers of equity worth Rs 35.4 Billion, as per provisional figures.

Opposition parties increased the decibel level of their protests both inside and outside Parliament against the demonetisation of high-value bank notes. Reminds me of a Bengali proverb: 'Chor-er Ma-er boro gola' (A thief's mother shouts the loudest about his innocence).

Deep-rooted transaction processes in a largely cash-based economy have received a severe shock that brought some activities - like goods transportation by road, payments to migrant farm labour during harvesting season - to a virtual standstill. 

The following comments appeared in last week's technical update on the daily bar chart pattern of Nifty: "The chart is turning bearish by the day. A deeper correction may be in the offing. The zone between 7900-8000 is the next likely support."

The index dropped below the 8000 level and touched an intra-day low of 7916 on Mon. Nov 21, before closing at 7929 - its lowest closing level in nearly 6 months. 

It has since bounced up a little to close above the 8000 level, but is trading below its three falling EMAs in bear territory.

Has Nifty entered a bear market? Should long positions be liquidated? How much lower can Nifty fall?

Those are questions bothering many small investors. Let me try to answer them - in reverse order.

If the 'Support-Resistance zone' between 7900-8000 gets convincingly breached on the downside, Nifty can fall to the 7500-7700 zone. But that may not happen just yet. Why? 

Because of three technical reasons that suggest that an intermediate bottom is in place:

1. The previous intra-day 'BrExit' low of Jun 24 '16 was 7927. Since price charts have 'memory' (i.e. the collective memory of market participants), the index dropped lower to 7916 on Nov 21, but closed a tad bit higher at 7929.
2. The 50% Fibonacci retracement level of the entire rally from the Feb 29 low of 6826 to the Sep 7 top of 8969 (of 2143 points) is 7898. The index dropped close to that level before bouncing up.
3. All three daily technical indicators are looking oversold - hinting at a rally.

Note that MACD and RSI are showing negative divergences by falling lower than their Feb 29 lows. Some more correction or consolidation is likely.

Bears (read FIIs) are selling at every rise. So, short-term long positions can be liquidated if the next rally moves up towards the 8300-8400 'Support-Resistance' zone. Long-term investors should stick to their asset allocation plans.

Nifty hasn't technically entered a bear market despite trading below its three daily EMAs for seven trading sessions in a row. Why? Because it hasn't yet met three additional technical conditions of a bear market. These are:

• A correction of 20% or more from the top - Nifty has corrected about 12% so far.
• A fall below the 50% Fibonacci retracement level - Nifty bounced up before doing so.
• The 'death cross' of the 50 day EMA below the 200 day EMA - it hasn't happened yet.

Nifty's TTM P/E has remained between 21 and 22 for the past 7 trading sessions. The breadth indicator NSE TRIN (not shown) is showing upward momentum in neutral zone - hinting at some more correction or consolidation.

Wait and watch while the RBI announces new measures to alleviate the cash shortage situation. While new Rs 2000 bank notes are readily available in cities, their usage is restricted because of non-availability of smaller denominations. New Rs 500 bank notes are conspicuous by their absence.

Continue with your SIPs. But don't jump in to buy in large quantities.

Nifty chart: a midweek update (Apr 06 '16)

The RBI Governor cut the repo rate by 25 bps (0.25%) to 6.5%. The move was widely expected and already discounted by the stock market, as per analysts. So, what was the reason for the big sell-off?

It was a classic case of 'sell on news' - led by FIIs. They were net sellers of equity worth Rs 800 Crores on Tue. Apr 5, and Rs 500 Crores today. Probably just routine profit booking after massive buying last month.

Adrian Mowat of JP Morgan Chase believes that measures to increase liquidity in the system by Dr Rajan - like increasing the reverse repo rate by 25 bps to 6%, cutting MSF by 75 bps to 7%, announcing OMO of Rs 15,000 Crores - will be game changers.  

In an earlier post on the 1 year closing chart pattern of Nifty, the importance of the 'support-resistance' level of 7550 was explained.

It is interesting to note how 7550 is continuing to play an important role. The index broke out above 7550, but pulled back - only to bounce up again.

It faced strong resistance from its sliding 200 day EMA and pulled back towards 7550 for a second time. The index is also receiving support from its 20 day EMA.

The two dips provided good opportunities to add/enter. Can Nifty fall some more? Sure it can, specially if FIIs continue to sell. Expect the 7550 level and the rising 50 day EMA to provide support on the downside.

Daily technical indicators have corrected overbought conditions and showing downward momentum, but remain in bullish zones. Since the beginning of Mar '16, bulls have been buying every dip - and may continue to do so.

Nifty is still trading below its 200 day EMA in bear territory. On longer-term weekly chart (not shown), the index has dropped to seek support from its 20 week EMA but closed almost 500 points above its 200 week EMA in a long-term bull market.

The near-term trigger for the market will be declaration of Q4 (Mar '16) results from next week. It is unlikely that India Inc. will show much improvement from Q3 (Dec '15) results.

Stock picking will take centre stage - so be careful about what you buy. If you are not sure, buy units of a good large-cap or balanced mutual fund with a proven track record.

A convincing move above 8000 will be the first indication that bulls are regaining control.

Will the likely interest rate cut by RBI be a non-event? – a guest post

Will he, or won’t he? That seems to be the question. Experts of different hues are expecting a 25 bps (0.25%) interest rate cut by the RBI Governor. That means, there will be no positive surprise for the stock market if the rate cut does come through.

There is also a possibility that the RBI Governor maintains status quo. That will be a negative surprise for the market and initiate a sell-off.

What if the rate cut is 50 bps or higher? The probability of that – based on Dr Rajan’s track record so far – is low. But it will be a definite positive surprise for the stock market.

In this month’s guest post, Nishit explains why the three tranches of interest rate cuts by Dr Rajan has failed to stimulate the Indian economy, and why he doesn’t expect the RBI Governor to be dovish in his announcement.

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Over the past few weeks, the impression given in the media is that an interest rate cut by RBI will stimulate the Indian economy. This is a wrong picture being portrayed. Tweaking interest rates is just one of the tools for stimulating the economy. More important are tax reforms and simplifying ease of doing business in India.

Implementation of GST will be the single biggest factor for growth of the Indian economy. Now, let us look at the interest rate cuts. Since, January the RBI has cut rates by 75 basis points (0.75%) in three tranches. The Banks have passed on barely 30 basis points (0.3%) to the end customer, citing high cost of deposits. The only exception has been HDFC Bank which has passed on 0.5-0.6% rate cut to the consumer.

What interest rate cuts do is lower the cost of deposits for Banks (has anyone noticed how quickly Banks are lowering fixed deposit rates?), but banks are not passing on the benefit of lower rates to people who borrow from Banks. This will only lead to Banks making more profits.

Also, if the RBI Governor cuts rates at a faster pace and tomorrow inflation rises how does he deal with it? In US the rates are near to 0 and they can stimulate the economy by ‘Quantitative Easing’, i.e. injecting huge sums of money into the economy by printing Bank notes. Is India in a similar position to do so?

Instead, by cutting rates slowly and allowing Banks to first transmit the rate cuts to its borrowers there are two advantages. The Governor gets more time to evaluate the inflation scenario and rate cuts get fully passed on to borrowers.

Hence the drama dutifully played up by television anchors is actually harmful in the long term. Simply cutting rates is  not the solution to all the problems in the economy. If it was that simple the World economy would not be where it is now and the US would not look at raising interest rates.

On Tuesday (Sep 29 ’15) I expect a maximum 25 basis points (0.25%) cut and I would not be surprised if there is no rate cut also.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

Nifty chart: a mid-week update (Aug 05 ‘15)

RBI Governor kept interest rates unchanged during Tuesday’s policy meeting. A sell-off ensued as some market players were hoping against hope for a 25 bps rate cut.

The overall monsoon rainfall during Jun & Jul ‘15 have been deficient by about 5%. If rains during Aug ‘15 is also deficient, expect food prices to rise and stoke inflation.

As per provisional figures, FIIs have been net buyers of equity worth Rs 920 Crores during the first three trading days of Aug ‘15. DIIs have been net sellers of equity worth Rs 330 Crores.

Q1 (Jun ‘15) results continue to show bottom line pressure, though there have been a few exceptions. Manufacturing growth has just begun to pick up.

The daily bar chart pattern of Nifty dropped down below its 20 day EMA intra-day on Tue. Aug 4 but bounced up on strong volume support to close higher today.

The index is approaching the resistance zone between 8630 and 8670 (mentioned in a previous post). Expect bears to put up a fight. Once 8670 is crossed convincingly, the index may run away to touch a new high.

Daily technical indicators are painting a mixed picture. MACD has moved up to touch its falling signal line in positive zone – which is mildly bullish. ROC faced resistance from its sliding 10 day MA and failed to enter positive zone – which is slightly bearish.

RSI is also looking a bit bearish by slipping below its 50% level. Slow stochastic has climbed above its 50% level, which is a bullish sign, but its upward momentum is decelerating.

All three EMAs are rising and Nifty is trading above them in a bull market. The index appears to be forming a ‘rounding bottom’ or a ‘cup and handle’ pattern.

If either pattern plays out, Nifty can touch 10000 in the near future. Any fall below the Jun ‘15 low of 7940 can lead to a drop to 7500 – however remote the possibility may seem now.

In other words, be very cautious about betting the ranch on ‘sure shot’ or ‘can’t fail’ type of stocks.

Nifty chart: a mid-week update (Jun 03 ‘15)

The stock market had already discounted an interest rate cut of 25 bps by the RBI. It got what it had expected. That should have satisfied both bulls and bears. Instead, bears went on a selling spree. What is going on?

RBI Governor's hints that inflation may start increasing again and GDP growth may be lower than earlier expectations were not well received by the market. Coupled with the possibility of a deficient monsoon were enough reasons for bears to head for the exit door.

During the first three trading days of the month, FIIs have been net sellers of equity worth Rs 1200 Crores. DIIs were net buyers of equity worth Rs 730 Crores. Anecdotal evidence suggests that retail investors have sold heavily. That may explain today's huge volumes.

The daily bar chart pattern of Nifty broke out above its three daily EMAs on Jun 1, but lacked volume support and failed to cross above the May '15 top of 8490. Resistance from the blue down trend line also proved strong.

That was just the excuse that the bears may have been waiting for. Heavy selling has dropped the index below the 'support-resistance zone' between 8630 and 8180 and the 200 day EMA into bear territory. The May '15 low of 7997 may get tested, and broken.

How much further can Nifty fall? There is a support zone between 7700 and 7850. The index may test support from that zone if 7997 gets breached.

Is the bull market getting over? Not yet. The economy is still growing at a better rate than last year. Inflation has been contained. Interest rate is falling - though banks have been reluctant to pass it along to borrowers. These are bullish signs for the longer term. But the market is definitely under pressure in the near term.

Daily technical indicators are looking bearish but not oversold. MACD has crossed below its signal line in negative zone after facing resistance from its '0' line. ROC has fallen to the edge of its oversold zone. RSI and Slow stochastic have dropped below their respective 50% levels. Some more correction seems likely.

Stay invested. This may be a good time to start accumulating some good large-cap stocks that have corrected more than the index.

4 Rules You Must Know to Beat the Market

In a recent article in Daily Reckoning, Greg Guenthner discussed the first 4 of a set of investment rules followed by Ned Davis (of Ned Davis Research Group). During 35 years of a successful investment career, Davis has used these rules to beat the market.

If you want to succeed in the market – whether it is in a bull phase, or a bear phase or a sideways consolidation phase – you need to understand and master these set of rules.

Here are the first 4 rules:

1. Don’t fight the tape (i.e. the trend)

2. Don’t fight the Fed (i.e. RBI in our case)

3. Beware of the crowd at extremes

4. Rely on objective indicators

Read the comments by Guenthner on the above rules here.

Nifty chart: a mid-week update (Apr 08 ‘15)

RBI maintained status quo on interest rates, and nudged banks to lower their lending rates. Banks had been reluctant to pass on the benefit of RBI’s two earlier 25 bps interest rate cuts to borrowers.

SBI, HDFC Bank, ICICI Bank and Axis Bank have lowered lending rates by a modest 15 bps (0.15%) each. More banks are likely to follow suit. There are some signs of increasing capital expenditure activity – going by recent corporate announcements.

The government has been proactive with its share divestment plan for the new financial year. The REC OFS (offer for sale) went through smoothly. Expect more such offers in the near term.

FIIs have been net buyers of equity worth Rs 800 Crores during the first 4 trading days of this month (though they were net sellers today). DIIs have also been net buyers of equity worth Rs 80 Crores during the same period.

The daily bar chart pattern of Nifty corrected below its 20 day and 50 day EMAs and the Up trend line 2 to the lower edge of the ‘support-resistance zone’ during Mar ‘15.

It has bounced back spiritedly to retrace more than 50% of its 850 points fall. The 200 day EMA continued to rise during the correction – indicating that the long-term bull market was intact.

Nifty has managed to climb out of the ‘support-resistance zone’ with rising volume support – which is a bullish sign. However, Up trend line 2 has not been convincingly crossed yet.

Daily technical indicators have corrected oversold conditions, and are turning bullish. MACD has crossed above its signal line, but is still in negative zone. ROC has crossed above its 10 day MA to enter positive zone. RSI is facing some resistance from its 50% level. Slow stochastic has risen to the edge of its overbought zone.

Bulls still have a little work left. A strong move above 8850 should send the bears packing.

5 reasons why the stock market sold off after the surprise 25 bps interest rate cut by RBI today

The budget lacked any populist measures, and laid emphasis on fiscal consolidation. Inflation is on a downward slide. Many experts had expected a second interest cut after the budget. So, why did the stock market fail to celebrate? Here are five reasons:

1) It was a case of ‘sell on news’. Though the timing was a bit of a surprise – as was the earlier rate cut in Jan ‘15 - a second rate cut was expected around March-April. After the initial surge today, profit booking set in.

2) Nifty had touched the psychological 9000 mark on Tue. Mar 3. Today (Mar 4), Sensex touched the 30000 level. When an index is at lifetime high with no known resistances, there is a tendency for traders and investors to book profits when the index reaches a nice, round level (i.e. with several zeroes).

It happens for stocks, too. How often have you waited for a stock to touch 200, or 500, or 1000 in order to book profits?

3) Some more PSU divestments are lined up this month. Cash will be required – particularly by DIIs – to invest, and/or bail-out the issues in case of under-subscriptions.

4) The 25 bps rate cut in Jan ‘15 was immediately followed by a reduction in fixed deposit rates by banks, but the interest rate benefit was not passed on to borrowers. PSU banks in particular have a lot of NPAs/restructured assets on their books. They chose to utilise the rate cut to shore up their books. They may do so this time as well.

5) Last – but not the least – is the realisation by RBI that economic growth is still sluggish on the ground, despite the government’s ‘new formula’ of calculating GDP that indicated a higher growth. And investors didn’t like the confirmation about slow growth.

This is what L&T Chairman Anil M Naik said in an interview to Business Standard: “It’s too little, too late. For the economy to bounce back as against crawl back, you need a cut of another 50 basis points. Not just that, banks have to pass it on. If banks don’t pass on, consumer demand will not come back. Our infrastructure is high-cost because interest rates are as much as 12 per cent for some groups, which make projects unviable.”

Q. E. D.

Did the stock market over-react to the 25 bps interest rate cut by RBI?

The short answer to the question is: Yes. Why?

Low inflation during the past few months had increased the likelihood of an interest rate cut sooner than later. It was widely expected that RBI will start slashing interest rates from Feb ‘15 onwards.

While some experts were touting a 50 bps (i.e. 0.5%) cut, the consensus estimate was a 25 bps (i.e. 0.25%) cut in the repo and reverse repo rates to start with, followed by two or three more cuts - totalling 1% for the calendar year 2015.

In other words, a 25 bps rate cut in Feb ‘15 was already ‘discounted’ in the stock indices. But the surprise announcement by RBI of a rate cut before the stock market opened for trading today was a positive trigger for the market to get out of its consolidation mode.

It was definitely good news. But was it great news? I don’t think so. A 25 bps cut in the repo rate means that the rate will drop to 7.75% from 8%. That means the corresponding lending rate to companies by banks will drop from say 12.5% to 12.25%, and home loan rates may go down from 10.75% to 10.5%.

Will that cause a stampede towards banks by companies, or towards housing finance companies by home buyers, from tomorrow? Highly unlikely. Companies or home buyers don’t take decisions about large investments merely because interest rates go up or down by 0.25%.

Why then did Sensex gain more than 700 points, and Nifty move up by 200 points? Those holding shorts had to rush to cover. That gave the initial impetus to the market. Technically also, Sensex and Nifty were poised to break out from consolidations within ‘symmetrical triangle’ patterns. The surprising rate cut news provided a positive trigger to bulls.

So, did you miss buying today? Not to worry. Many others did too. And remember that one day doesn’t make or break your ability to make money.

When realisation dawns on market players that today’s buying was a bit overdone, profit taking will emerge. The likely dip can provide an entry point.

Things are getting in place for stronger economic growth. Today’s rate cut was a small step in the right direction. This bull market will be ascending new heights again.

Related Post 

How to use Financial News

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 05, 2014

Sensex and Nifty indices took a much-needed breather after rallying for six straight weeks. FIIs were net buyers of equity worth Rs 850 Crores during the week, but were net sellers on Monday and Friday. DIIs were net buyers on Friday, but were net sellers of equity worth Rs 1170 Crores during the week.

As expected by most market analysts, the RBI Governor left interest rates unchanged – but kept the door open for a rate cut early next year if inflation continues its downward trajectory. Some banks have reduced their longer term fixed deposit rates, as there seems to be adequate liquidity in the banking system.

A 5% equity disinvestment by the government in SAIL got oversubscribed by 2 times. More disinvestments are in the pipeline – including 10% in Coal India and 5% in ONGC – in the current fiscal year ending Mar ‘15. The divestments, and sliding oil price should help in considerably reducing India’s twin deficits.

BSE Sensex index chart

 

Sensex consolidated sideways and closed 0.82% lower for the week. Negative divergences in all four technical indicators – observed in last week’s analysis – had provided advance warning of a possible correction or consolidation. Some investors were disappointed by the lack of an interest rate cut by the RBI, and resorted to profit booking.

Daily technical indicators have corrected overbought conditions, and are still in bullish zones. But their downward momentum is hinting at a continuation of the consolidation. The index has formed a small ‘double top’ pattern that can lead to a test of support from (or a drop below) the rising 20 day EMA.

Sensex is trading above all three EMAs in a long-term bull market. Consolidations and corrections improve the technical ‘health’ of the market and enable adding or entry opportunities. Anticipating corrections and benefitting from them are part of the learning process of becoming a better investor.

NSE Nifty 50 index chart

 

Nifty closed 50 points lower for the week and formed a small ‘reversal week’ pattern (higher high, lower close) that stalled the 6 weeks long rally. The index is trading above its two weekly EMAs and the blue up trend line in a long-term bull market.

All four technical indicators are inside their respective overbought zones. However, three of them – MACD, RSI, Slow stochastic – are either moving sideways or starting to slide down. ROC is the only one showing increasing upward momentum.

Volumes were strong on a ‘down’ week, which means some more selling or profit booking may be on the cards. That may improve technical conditions for the sustainability of the bull rally.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices took a pause last week after soaring to touch new lifetime highs. No need to be afraid of a big crash. Take part profits, or set a trailing stop-loss – if that will help you to sleep better. Riding out corrections in bull markets will help to build wealth for the long-term.

A re-look at Gilt funds – a guest post

Both WPI and CPI inflation rates have been moving down. However, there are questions whether inflation is low because of a higher base effect. As the base effect wears off from Jan ‘15 onwards, inflation may rise again.

Industrial growth continues to be tepid. India Inc. have been clamouring for an interest rate cut to spur growth. The RBI Governor has so far left rates unchanged till inflation gets firmly under control.

If inflation stays low during Jan-Feb ‘15, then a 25 or 50 bps rate cut in Feb ‘15 is a possibility. That should provide impetus to the stock market and gilt fund returns. In this month’s guest post, Nishit suggests a re-look at gilt funds as a safe diversification avenue for your investments.

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The 10 year Government Security yield has come down to 8.15% from a peak of about 9.10% in April. So, should one invest in Gilt funds now?

Gilt funds offer an interesting diversification from equity and Gold investments. They work best when interest rates are coming down and bond prices go up. For example, if a Rs 100 bond is yielding 9% interest and if the interest rate comes down to 8%, then the same Rs 100 bond will cost Rs 112.50 to yield 8% interest.

So, one stands to make a return of say about 12-13% if the interest rate comes down by 1% in about 6 months.

Inflation is going down and so are fuel prices. An interest rate cut by RBI is expected - if not in December ’14 then definitely in February ‘15.

The Government prefers low interest rates as industry can borrow at lower rates and make more investments leading to more employment and growth in the economy. The Finance Minister has already tried nudging the RBI Governor to reduce interest rates. The fear of inflation re-emerging is what is holding back the RBI from reducing interest rates in a hurry.

Interest rate is expected to come down to 7.75% in the next 4-6 months. Currently it is at 8%.

For those who have already invested in Gilt funds, now is the time to enjoy the profits. Those with a horizon of 6 months also can look at Gilt funds as a measure of diversification. Over the last 3 years, gilt funds have given an annual return of about 10%.

In a complete cycle of top to bottom when the interest rates start falling, they typically give about 25% returns out of which 10-12% have been realised already.

Interest rates usually bottom around 7%. Gilt funds can be used to optimise returns from fixed income instruments and one can invest about 5-10% of total allocated funds for investment.

The risk to Gilt funds arises from interest rates going up and at such times, the funds give very low returns.  For those who want to play the interest rate cycle, gilt funds offer the perfect medium.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

Fundamentals are improving – why is the stock market still correcting?

Are the fundamentals really improving? The short answer is: Yes. Let us look at some facts:

1. WPI inflation dropped to its lowest level in 5 years. CPI inflation also dropped - below 6.5%. The primary reason for this drop is lower food prices – which is not due to any monetary action by RBI or fiscal action by the government.

However, there is no denying that inflation is moderating, which raises the prospect of an interest cut by RBI sooner than later.

2. Commercial vehicle sales have picked up in Sep. ‘14 after 16 months of decline. That is a clear sign of a turnaround in the economy.

Passenger vehicle sales dipped slightly in Sep ‘14 – but that is probably due to seasonal reason. Dussehra, Eid, Dhanteras, Diwali are being celebrated in Oct ‘14 – an ‘auspicious time’ for vehicle buyers. Purchases may have been postponed in Sep ‘14.

3. Oil prices have fallen significantly – due to oversupply in the international market. India’s oil import bill has come down. Petrol price has been reduced. Expect a cut in diesel price soon. This will help in curbing inflation.

4. The trade deficit has narrowed by 8.2% during the first half of the year (Apr to Sep ‘14) compared to the same period last year – despite a sharp jump during the month of Sep ‘14 due to a big increase in gold imports.

In US Dollar terms, exports grew by 6.5%, while imports grew by 1.6% during Apr to Sep ‘14.

5. Despite a surge in the Dollar index, the Rupee has been relatively stable in the 60-62 range against the US Dollar. Infosys has already declared good Q2 results. Expect other large IT players to also show improvement in top and bottom lines.

The macro fundamentals are definitely better than a year ago. To answer the larger question, one needs to remember the famous quote from Benjamin Graham, who is considered the ‘father’ of value investing:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

What it means is that sentiments rule the market in the near-term. Why are sentiments bearish now? The main reason is selling by FIIs. Despite record inflows into Indian mutual funds, DII buying hasn’t kept pace with FII selling.

Why are FIIs selling? There has been some disappointment with the lack of speed of the Modi government in implementing much-needed reforms in financial and labour sectors. Declining growth in China and Germany, and a likely hike in interest rate in the USA have also caused a more cautious approach by FIIs.

Eventually, the market will ‘weigh’ the improving fundamentals, and the stock market will resume its up move and touch new highs. The question is: When?

How about from Mon. Oct 20 ‘14? Exit polls indicate a possible sweep by the BJP in the just-concluded state elections in Maharashtra and Haryana. Results will be declared on Sun. Oct 19 ‘14.

Government formation by BJP in both states may be just the positive fillip the stock market is awaiting.

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 04, 2014

RBI maintained status quo on interest rates – as was widely expected by economists and analysts. The stock market treated it as a non-event. With predictions of El-Nino doing the rounds, a weak monsoon during Jun-Sep period is a possibility.

If the predictions do come true, food prices are going to move up. RBI may have no option but to raise interest rates once again to contain inflation. Whether an NDA-led government comes to power or not, a rapid turnaround in the economy is unlikely.

That is the bad news. The good news is that valuations are still at reasonable levels even though Sensex and Nifty are trading near life-time highs. FII buying has not only improved bullish sentiments, it has helped India’s forex reserves to cross the $300 Billion mark after many months.

BSE Sensex index chart

The daily bar chart pattern of Sensex met the upward target of 22500 (mentioned in last week’s post), and moved higher to touch a new intra-day high of 22621 on Apr 3 ‘14. But the index formed a ‘reversal day’ pattern (higher high, lower close) and started to correct.

Daily technical indicators are correcting overbought conditions, but remain in bullish zones. MACD is touching its rising signal line inside its overbought zone. ROC is about to cross below its 10 day MA in positive territory. RSI and Slow stochastic are inside their respective overbought zones, but have started falling.

A few more days of correction will be good for the technical ‘health’ of the Sensex chart, allowing it to move even higher.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty touched a new intra-week high of 6777 – meeting the upward target of 6750 – but formed a ‘reversal week’ pattern (higher high, lower close) on strong volumes. Some correction or consolidation is likely.

Weekly technical indicators are looking overbought. MACD has just entered its overbought zone. ROC is at the edge of its overbought zone. RSI has slipped down after failing to enter its overbought zone. Slow stochastic has been inside its overbought zone for 4 weeks, but showing signs of turning down.

The likely dip can be used to add selectively. It is also a good time to get rid of under-performing small-caps that have started to move up sharply.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are correcting overbought conditions after touching new highs. Both indices are in long-term bull markets – so avoid any impulse to short the indices.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 28, 2014

An appreciating Rupee, falling inflation, contracting Current Account Deficit, growing exports and concerns about economic slowdown in China and many emerging markets have turned India into a favoured destination for overseas investors.

RBI extended the deadline for implementation of Basel III capital raising norms by a year. PSU banks celebrated the news. With inflation coming under control, RBI is expected to maintain status quo on interest rates.

Both Sensex and Nifty indices are at life-time highs – in ‘blue sky’ territory with no known resistances. Does that mean they will continue to move higher? For how long? Till elections, or even after that? Let us see whether the price charts can throw some light.

BSE Sensex index chart

The daily closing chart pattern of Sensex shows an upward break out from the rectangular consolidation zone, followed by a further consolidation within a small ‘falling wedge’ pattern and another up ward break out from the wedge.

Rectangles have measuring implications: the height of the rectangle (about 1150 points) should be added to the top level of the rectangle (about 21350) to arrive at a minimum target of 22500. Sensex is just 160 points short of the target.

Technical indicators are bullish, but looking overbought. MACD has re-entered its overbought zone. ROC has crossed above its 10 day MA in positive zone. RSI has dropped to the edge of its overbought zone. Slow stochastic is inside its overbought zone.

All four indicators are showing negative divergences by failing to reach new highs with Sensex. A correction or consolidation can be expected. The pause will enable the index to move even higher.

With macro-economic conditions turning favourable, even a fractured mandate in the elections may not cause a huge fall.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty has thumbed its nose at all the naysayers to soar to lifetime highs. The 5 months long consolidation within a ‘rectangle’ had given a good opportunity to accumulate fundamentally strong stocks. Hope blog readers paid heed to my exhortations to buy.

The upward break out from the rectangle has measurement implications: the height of the rectangle (about 400 points) should be added to the top level of the rectangle (about 6350) to arrive at a minimum target of 6750. Nifty is just 50 points short of the target.

Technical indicators are bullish, but looking overbought. MACD is rising above its signal line towards its overbought zone. ROC has crossed above its 10 day MA and about to enter its overbought zone. RSI has reached the edge of its overbought zone. Slow stochastic is inside its overbought zone.

A correction or consolidation may be around the corner. Remember that markets can stay overbought for a long time – so don’t be surprised if Nifty continues to rise. Whatever you do, don’t try to short the index when bulls are in complete control.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in ‘blue sky’ territory with no known resistances. If you have invested at lower levels, enjoy the ride but maintain a trailing stop-loss to protect profits. If you have that ‘missed the bus’ feeling, suppress your impulse to jump in. Most of the low-hanging fruits have been plucked. Be very selective about the stocks you do choose to enter.

RBI’s liquidity squeezing – a guest post

Vote-bank politics with schemes like NREGA, food securities bill, and hugely hiking the pay of government employees – not to speak of fertiliser subsidy, oil subsidy – has led to a bloated fiscal deficit in India.

Slowdown in global economies – including in India – and rising oil prices have added to the Current Account deficit. Instead of taking pro-active steps to curtail the twin deficits and put GDP growth back on track, the government tried to coerce RBI into reducing monetary controls to re-energise growth.

Instead of succumbing to pressure, the RBI Governor stuck to his hawkish stance against inflation. He is paying the price by not getting an extension of his term in office. His latest step to stem the fall in value of the Rupee by tightening liquidity has not been well-received by the stock market.

In this month’s guest post, Nishit discusses the likely effect of RBI’s action on Gilt Fund yields.

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Recently, the RBI indirectly raised Interest Rates by squeezing liquidity to curb the pressure on the Rupee. This led to a spike in bond yields from 7.5% to 8.1%. Many of the debt funds lost 3-4% of their NAVs. Many must have panicked, as this had never happened before and can almost be called a ‘Black Swan’ event.

So what does it mean for Gilt funds going ahead? The basic objective of Gilt funds is that they are meant for long term investors when the interest rates are coming down, to capitalize on the increase in Bond Prices when yields come down. One is supposed to exit when the trend has changed and the bond yields are going up.

Was RBI’s intervention a signal that Interest Rates may be going up? I do not think so. The economy is in shambles and to simulate the economy, rates have to come down. RBI’s action was just a one-off blip as a desperate government tried to stop the Rupee from devaluing further.

Bond Yields, which had spiked to 8.1% towards the end of the week, came down to 7.9%. If there are no more unpleasant surprises, then the yields could touch the record low of 7.1% by December. The spike in yield was a buying opportunity for the long term investor.

The very fact that the yield rose from 7.56% to 8.10% and back to 7.94% means that the market had over-reacted and yields are coming down.

The RBI policy on the 30^th of July ‘13 will give further guidance on what the RBI intends to do. As I see it, they will maintain a status quo and will neither raise nor cut Interest Rates.

In real terms, home loan rates will not come down. The Auto or the Realty sectors’ hopes of a stimulus will have to keep waiting.

Long-term investors do not need to worry. Only short-term traders, and Banks who conduct treasury operations, will take a hit. Till the economy turns around, I do not see Interest rates rising.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)