Wednesday, February 7, 2018

Nifty chart: a midweek technical update (Feb 07, 2018)

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.   

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