Nifty chart: a midweek technical update (Dec 05, 2018)

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FIIs were net buyers of equity on Mon. (Dec 3) but net sellers on Tue. & Wed. (Dec 4 & 5). Their total net selling was worth Rs 1.2 Billion. DIIs were net sellers on all three trading days this week. Their total net selling was worth Rs 21.2 Billion, as per provisional figures.

Nikkei India’s Manufacturing PMI rose to an 11 months high of 54.0 in Nov ’18 from 53.1 in Oct ’18. It was the 16th straight month of expansion (>50). Nikkei India’s Services PMI also rose to 53.7 in Nov ’18 from 52.2 in Oct ’18. The Composite (Mfg. + Services) PMI rose to 54.5 in Nov ’18 from 53.0 in Oct ’18.

RBI announced an expected status quo on interest rates at its policy meeting today, but kept its calibrated tightening stance intact. However, SLR will be gradually decreased from 19.5% to 18% @25 bps (0.25%) per quarter for the next 6 quarters to increase liquidity for lending in banks.

The following comments appeared in last week’s technical update on the daily bar chart pattern of Nifty: If FIIs continue to buy, expect the ‘gap’ to be completely filled. The down move may resume even if the ‘gap’ gets filled.”

On Thu. Nov 29, the index opened with a small upward ‘gap’ and rose to completely fill the downward ‘GAP’ of 89 points (formed on Oct 4) on the back of net buying by FIIs and DIIs.

On Mon. Dec 3, the index touched an intra-day high of 10941, but dropped to test support from the downward ‘GAP’ before closing at 10884. On the next two days, FIIs and DIIs turned net sellers. The index dropped below the ‘GAP’ intra-day, touching an intra-day low of 10748, but bounced up to close inside the ‘GAP’ today.

The index closed above its three EMAs in bull territory. So, did the index just pullback towards its 200 day EMA prior to resuming its up move? Or, has it resumed its corrective down move that started on Aug 29? 

Note that all three EMAs have converged together (marked by gray circle). A sharp move is likely to follow. Will it be upwards or downwards? 

Odds favour a down move. Why? Because, the index managed only a day’s (Dec 3) close barely above 10882, which is the 50% Fibonacci retracement level of the 1756 points fall from the Aug 28 top to the Oct 26 low. Many a retracement has been observed to flounder at, or near, the 50% level. 

Daily technical indicators are in bullish zones, but turning bearish. MACD is above its signal line but its upward momentum has stalled. RSI and Slow stochastic have formed ’rounding top’ reversal patterns. Slow stochastic is showing negative divergence by touching a lower top.

Nifty’s TTM P/E is at 26.09, which is much higher than its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is oscillating about the edge of its oversold zone – not giving any near-term directional indication.

The US-China trade war has not been resolved – only postponed for 3 months. The S&P 500 index had a huge fall on Dec 4. FIIs are unlikely to turn bulls if the US market continues to correct. 

RBI’s cautious stance – despite moderating CPI inflation – was apparently not liked by the Indian market. Expect bears to drive home their advantage till state election results are announced on Dec 11.

A test – and a possible breach – of the Oct 26 low may be on the cards. Small investors waiting to enter may get better entry points if they wait a little longer.

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