Nifty chart: a midweek technical update (Apr 03, 2019)

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FIIs were net buyers of equity on the first two trading days this week, but booked profits today. Their total net buying was worth Rs 4 Billion. DIIs were net sellers of equity on all three days. Their total net selling was worth Rs 15.5 Billion, as per provisional figures.

Nikkei India’s Manufacturing PMI eased to a 6-months low of 52.6 in Mar ’19 from 54.3 in Feb ’19, due to slower increase in new orders, production and employment. (A figure above 50 indicates growth.)

Auto sales in Mar ’19 were mixed. However, for FY 2018-19 sales growth was decent. In passenger vehicles, M&M grew 2%; Maruti, Toyota, Honda grew between 2 & 8%; Tata Motors grew 12% (its highest in 6 years). In CVs, Eicher, Ashok Leyland, M&M, Tata Motors grew between 10 & 17%.

Bullish View

Note the following comments from last week’s post on the daily bar chart pattern of Nifty: It should be just a matter of time before the index rises to touch a new high. However, bears are putting up a stiff fight to defend the upper edge of the trading channel. Further upward progress may be slow.”

Nifty broke out above the trading channel on Fri. Mar 29, but struggled to rise higher after crossing above 11700 on Mon. & Tue. (Apr 1 & 2). It finally touched a new lifetime high of 11761 today, only to form a ‘reversal day’ bar (higher high, lower close) and pullback to the top of the channel.

Daily technical indicators are looking bullish and overbought. That doesn’t mean there will be an immediate correction, as an index can remain overbought for long periods.

An upward bounce from the top of the channel will provide a buying opportunity.

Bearish View

The last ten trading sessions have formed a bearish ‘rising wedge’ pattern, from which a downward breakout can be expected. 

Such a downward breakout will drop the index within an upward-sloping trading channel. The index can then correct below its rising 20 day EMA, and fill the 46 points ‘gap’ formed on Mar 12.

Daily technical indicators are looking overbought. RSI and Slow stochastic are showing negative divergences by touching lower tops while the index rose higher.

Some correction/consolidation is likely, which will improve the technical ‘health’ of the chart and enable Nifty to climb to the psychological level of 12000.

Nifty’s TTM P/E is at 29.06, which is way higher than its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) has emerged from its overbought zone and rising rapidly in neutral zone. Some correction or consolidation may follow.

Profit booking at a lifetime high is only to be expected. Whether it will remain a few days of profit booking or turn into a full-fledged correction will depend a lot on FIIs.

It is huge FII buying that propelled the index 1160 points from its Feb 19th low. If they start to sell – as they did today – a correction can ensue. 

Small investors should not get caught up in bullish euphoria. Stick to your SIPs and asset allocation plans, and all will be well.

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