FIIs were net buyers of equity during the first two trading days in Feb '18, but turned net sellers in the week gone by. Their total net selling - worth a whopping Rs 82.6 Billion, as per provisional figures - triggered sharp corrections in Sensex and Nifty.
Domestic mutual funds received large inflows during Jan '18, and has used the corrections to deploy the funds. Their net buying - worth a huge Rs 62.9 Billion - was not enough to stem the slide in both indices.
India's foreign exchange reserves rose by US $4.1 Billion to a new high of US $421.9 Billion in the week ending on Feb 2 '18 from $417.8 Billion in the week ending on Jan 26 '18.
BSE Sensex index chart pattern
The daily bar chart pattern of Sensex formed a 132 points downward 'gap' on Mon. Feb 5, and traded below the 'gap' for the rest of the week. It closed below its 50 day EMA with a loss of 3% on a weekly closing basis.
On Tue. Feb 6, the index fell sharply below its 50 day EMA into the 'support/resistance zone' between 32550 and 33800, but bounced up on bargain buying. On the next couple of days, Sensex attempted to close above its 50 day EMA but failed.
On Fri. Feb 9, the index dropped towards the 'support/resistance zone' but managed to close above it. It formed a 'doji' candlestick pattern that indicates hesitancy among bulls and bears.
Daily technical indicators are looking bearish and showing downward momentum. MACD is falling below its signal line, and is poised to enter negative zone. RSI and Slow stochastic are at the edges of their respective oversold zones. ROC has entered its oversold zone, and can trigger a pullback towards the 'gap'.
As per 'theory of gaps', the correction should resume even if the 'gap' gets filled partly or completely. So, don't be in a rush to buy if the Sensex shows some recovery next week.
A better option would be to get rid of non-performers in your portfolio instead of hoping to get back your 'buy price' if you entered at higher levels. Gradually deploy the proceeds into good large-cap stocks.
This correction is far from over. Expect investors to 'sell on rise' till Mar 31 '18 to lock-in tax free LTCG. A fall towards the lower edge of the 'support/resistance zone' and a test of support from the still rising 200 day EMA seems on the cards.
NSE Nifty index chart pattern
The weekly bar chart pattern of Nifty formed a 33 points downward 'gap' on Mon. Feb 5, and dropped below its 20 week EMA and the support level of 10490 to an intra-week low of 10276 the next day.
The index recovered somewhat by closing just above its 20 week EMA at 10455 by the end of the week, but lost 2.8% for the week.
The combination of a downward 'gap', which often acts as a resistance zone for future up moves, and a close below the support level of 10490 should be of some concern for bulls.
The index can attempt a pullback towards the 'gap' on bargain buying and short covering. Even if the 'gap' gets filled - partly or fully - the correction is likely to resume thereafter.
Despite defending re-introduction of LTCG tax from Apr 1 '18 by Finance Minister in Parliament, investors are surely going to book profits till Mar 31 '18 to avail of the current zero LTCG tax regime. That ought to keep the index depressed.
Weekly technical indicators are correcting overbought conditions. MACD, ROC, Slow stochastic are in bullish zones but showing downward momentum. RSI is seeking support from its 50% level. Some more correction/consolidation is likely.
Nifty's TTM P/E has decreased to 25.27, but is well above its long-term average. The breadth indicator NSE TRIN (not shown) has started to move down from its oversold zone, and can trigger an upward bounce towards the 'gap'.
Bottomline? Sensex and Nifty charts are undergoing decent corrections - thanks to strong selling by FIIs. The downward 'gaps' formed on Mon. Feb 5 can act as resistance zones. Any pullbacks towards the 'gaps' may induce more selling and likely lower levels in both indices. That will provide better buying opportunities.
Emerging markets have rocketed higher since Donald Trump's election in 2016, with many benchmarks gaining more than 50%.
The US Dollar's steady decline has driven the upside, raising the relative value of the Chinese Renminbi, Indian Rupee and other emerging currencies.
However, this week's mini crash may have been a game changer, marking the first stage of a long-term top for emerging markets and a bottom for the greenback.
Read more:
https://www.investopedia.com/news/emerging-market-funds-may-have-topped-out/#ixzz56gGhadC8
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.
FIIs have turned bears during the first three days of trading this week. Their net selling in equities crossed a huge Rs 46.1 Billion, as per provisional figures. DIIs were net buyers of equity worth Rs 33.2 Billion.
All gains made by Nifty since mid-Dec '17 got wiped out in the first 4 trading sessions in Feb '18. Such can be the severity of bull market corrections.
As was expected by market analysts, RBI Governor maintained interest rate status quo in the bi-monthly policy meeting today. Bears 'sold on news'.
The daily bar chart pattern of Nifty had started correcting after touching a lifetime high of 11172 on Jan 29. Overbought technical indicators and rumours of re-introduction of long-term Capital Gains tax (LTCG) in the budget led to nervousness and profit-booking.
The rumours turned out to be true when FM announced a 10% LTCG on gains effective Apr 1 '18 on budget day (Feb 1). Strong selling followed by a sharp recovery caused only an 11 points drop.
Worse was to come on Fri. Feb 2, as Nifty succumbed to a global sell-off in stocks. On Mon. Feb 5, the index opened with a downward 'gap' of 33 points but recovered from the day's low.
On Tue. Feb 6, the index opened with a huge downward 'gap' below 10300 but recovered well on bargain-hunting to close the 'gap' during intra-day trading.
Today, the index opened with an upward 'gap' above 10600, but faced strong resistance from the 50 day EMA, and closed near the day's low as follow-up buying petered-off.
The index is trading more than 400 points above its rising 200 day EMA in a bull market. By touching an intra-day low of 10276 on Feb 6, the index has corrected 8% from its Jan 29 top. So, is this a good time to start buying?
Well, yes and no. Yes, if you have a long-term investment perspective of 3-5 years (in which case, you will be in a very small minority). No, for most others who have shorter-term perspective. Why?
Daily technical indicators are looking bearish, but not oversold. MACD is falling in bullish zone. RSI and Slow stochastic are falling in bearish zones, with Slow stochastic at the edge of its oversold zone.
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.
A bull market correction can easily shave-off 10-15% from the top. A 15% correction - should it occur - can drop the index to 9500. A re-test of the Feb 6 low, or a test of support from the 200 day EMA may be more likely.
Nifty's TTM P/E has slipped down to 25.32 - still much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has risen sharply inside its oversold zone - and can limit index downside.
With FIIs in sell-mode, expect Nifty to correct/consolidate till the end of FY 17-18. A little patience may get rewarded with better entry points.
Gold chart pattern
The daily bar chart pattern of Gold rose above 1365 to touch a new 52 week high on Jan 25, but overbought technical indicators and a mild recovery in the US Dollar Index led to profit booking.
So far, the 20 day EMA has provided good downside support. Gold's Price is trading well above its rising 200 day EMA in a bull market. Bulls are likely to use the correction to buy.
Daily technical indicators have corrected overbought conditions and are showing downward momentum. Some more correction is possible. Note that RSI and Slow stochastic showed negative divergences by failing to touch new highs with gold's price.
On longer term weekly chart (not shown), gold’s price closed above its three weekly EMAs in long-term bull territory, but formed a 'shooting star' candlestick pattern. Weekly MACD and RSI are in bullish zones, but not showing much upward momentum. Slow stochastic is falling inside its overbought zone.
Silver chart pattern
The daily bar chart pattern of Silver touched an intra-day high of 17.70 on Jan 25 - its highest level in 4 months. But the sojourn into bull territory didn't last very long.
Daily technical indicators showed negative divergences by touching lower tops, which triggered a sharp correction below the three EMAs back into bear territory.
In a blow to silver bulls, the 'golden cross' of the 50 day EMA above the 200 day EMA - which would have technically confirmed a return to a bull market - was prevented.
Strong volumes on recent down-days suggest that bears are active. Some more correction is likely.
On longer term weekly chart (not shown), silver’s price closed below its three weekly EMAs in a long-term bear market. Weekly MACD and RSI are in neutral zones. Slow stochastic is falling towards its 50% level.
S&P 500 index chart pattern
Three alarm bells were sounded in last week's post on the daily bar chart pattern of S&P 500:
1. "Daily technical indicators are looking extremely overbought. Slow stochastic is showing negative divergence by failing to rise higher with the index."
2. "...the widening distance (nearly 250 points) between the 20 day EMA and the 200 day EMA is technically 'unhealthy'."
3. "A sharp fall towards the 50 day EMA can occur at any time...Strong volumes on the few recent down days indicate bears are active."
Profit booking started from Mon. Jan 29. The index formed a 14 points downward 'gap' the next day and fell further. On Wed. Jan 31, the 'gap' was partly filled when the index touched an intra-day high of 2839 - hinting at further downside.
The entire trading on Thu. Feb 1 occurred below the 'gap', though the index didn't fall much. Another small downward 'gap' of 4 points was formed on Fri. Feb 2. The index succumbed to a global sell-off and fell sharply towards its rising 50 day EMA - closing 110 points (3.8%) lower for the week.
The index is trading well above its rising 200 day EMA. So, this is a bull market correction, which can be used to add to existing holdings. However, formation of two downward 'gaps' and strong volumes on down-days should be of real concern for bulls.
Daily technical indicators have corrected overbought conditions and are showing strong downward momentum. MACD is still in bullish zone. RSI and Slow stochastic are falling below their 50% levels.
Some more correction, and a test of support from the 50 day EMA is possible. The correction will improve the technical 'health' of the chart. If the index falls below the 50 day EMA, expect good support from the zone between 2650 & 2700.
On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market despite the 110 points correction. Weekly technical indicators are correcting overbought conditions and showing downward momentum.
FTSE 100 index chart pattern
The following comment appeared in last week's post on the daily bar chart pattern of FTSE 100: "Slow stochastic has entered its oversold zone, and can trigger a technical bounce."
The technical bounce lasted all of one day, as the index closed 6 points higher on Mon. Jan 29. It then proceeded to fall off a cliff - closing below 7450 on Fri. Feb 2, with a loss of 222 points (2.9%) for the week.
(At the time of writing this post, the index has formed a 60 points downward 'gap' and is trading 80 points lower.)
Daily technical indicators are looking bearish and showing downward momentum. More downside and a drop below the 200 day EMA into bear territory is likely.
On longer term weekly chart (not shown), the index closed below its 20 week EMA but above its 50 week and 200 week EMAs in a long-term bull market - despite correcting for the past three weeks. Weekly technical indicators are showing downward momentum.
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.
