Sensex, Nifty charts (Oct 16, 2020): pause after sharp two weeks long rallies

FIIs were net sellers of equity on Thu. and Fri. (Oct 15 and 16) but were net buyers during the first three trading days of the week. Their total net buying was worth Rs 11.86 Billion. DIIs were net sellers of equity during the entire week. Their total net selling was worth Rs 52.17 Billion.

India's Index of Industrial Production (IIP) contracted for the 6th straight month in Aug '20 to -8% against a downward revised -10.8% in Jul '20 and -15.8% in Jun '20. The contraction may continue in Sep '20.

After contracting for 6 months in a row, India's merchandise exports in Sep '20 rose by 5.27% YoY to US $27.4 Billion, while imports slipped 19.6% to $30.31 Billion. The trade deficit narrowed to $2.91 Billion against $11.67 Billion in Sep '19.

BSE Sensex index chart pattern

After a sharp rally from its 200 day EMA, the daily bar chart pattern of Sensex consolidated sideways just below the 41000 level during the first three trading days.

On Thu. Oct 15, the index breached the 41000 level intra-day, but fell sharply as both FIIs and DIIs resorted to booking profit. The index dropped below 40000 towards its 20 day EMA - forming a large 'reversal day' bar (higher high, lower close) that often marks an intermediate top.

Bears need not get too elated. All three daily EMAs are rising and the index is trading above them in a bull market. However, Friday's pullback ended with a close just below 40000, leaving the door open for some more correction.

Daily technical indicators are in bullish zones, but showing downward momentum. MACD is sliding down towards its rising signal line. ROC has crossed below its 10 day MA. RSI is turning down inside its overbought zone. Slow stochastic has dropped to the edge of its overbought zone.

Vedanta delisting failed. Couple of new share listings failed to generate much excitement. Bullish sentiment may be waning even as new investors are continuing to open demat accounts in large numbers (as per Zerodha).

Q2 (Jul-Sep '20) corporate results and festival season sales of  consumer discretionary and durables will now be in focus. Be very selective in choosing your investment vehicles. The easy money has already been made. Remember the 'Greater Fool Theory' - particularly near market tops.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty breached the psychological level of 12000 intra-week for the first time in 8 months but failed to test its lifetime high of 12430 (touched back in Jan '20). The index dropped below 11700 before closing above 11750, losing about 150 points (1.3%) on a weekly closing basis.

Bulls have nothing to worry about for now, as all three weekly EMAs are rising and Nifty is trading above them in a long-term bull market. However, caution is advised as the index formed a weekly 'reversal' bar (higher high, lower close) that sometimes mark an intermediate top.

Weekly technical indicators are in bullish zones. MACD is rising above its signal line in overbought zone. RSI is moving sideways above its 50% level. Slow stochastic has re-entered its overbought zone. Some index consolidation or correction is likely. 

Nifty's TTM P/E touched a new high 34.87 on Wed. Oct 14, before slipping down to 34.13 - which is well above its long-term average and deep inside its overbought zone. The breadth indicator NSE TRIN (not shown) is sliding down below the edge of its oversold zone - hinting at some near-term index upside.
 
Bottomline? Sensex and Nifty charts have reached close to their lifetime highs touched back in Jan '20. Mid-cap and small-cap stocks have started correcting. A handful of large-cap stocks fuelled the last leg of the rally. Exuberance should be curbed. Time for circumspection.