Nifty chart: a midweek technical update (May 29, 2019)

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FIIs were net buyers of equity on Mon. (May 27), but were net sellers during the next two days. Their total net buying was worth Rs 4.1 Billion. DIIs were net sellers of equity on Mon. and Wed. (May 29), but were net buyers on Tue. Their total net selling was worth Rs 2.5 Billion, as per provisional figures.

The 2nd NDA government has its task cut out as India is facing one of the worst job crisis in several decades. According to an analysis based on data from Centre for Monitoring Indian Economy (CMIE), nearly 5 million people lost their jobs during 2016-18.

According to an ICRA report which analysed the Q4 results of 300 odd companies, weakness in consumer spending and lower commodity prices have led to a revenue growth of 10.7% during Jan-Mar ’19 – a 6-quarter low. 

After forming a 165 points upward ‘gap’ on May 20, the daily bar chart pattern of Nifty rose to touch a lifetime high of 12041 on May 23 (the day election results were announced). But it formed a large ‘reversal day’ bar (higher high, lower close), and dropped to test support from the ‘gap’ zone (shaded in grey).

Though the index bounced up, and touched a new closing high of 11929 on Tue. May 28, it has failed to test its May 23 top so far. The index is trading well above its three rising EMAs in a bull market – so rising to a new high may be just a matter of time.

Daily technical indicators are in bullish zones, but not showing much upward momentum. MACD is rising above its signal line in overbought zone. RSI is moving sideways above its 50% level, but appears to be forming a small ’rounding top’ reversal pattern. Slow stochastic is moving sideways after re-entering its overbought zone

All three indicators continue to show negative divergences by failing to touch new highs with the index. Some consolidation or correction may follow.

Nifty’s TTM P/E has moved up to 29.44, which is in overbought zone and much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has fallen sharply from its oversold zone, hinting at some near-term consolidation.

A correction that partly or completely fills the May 20 ‘gap’ will improve the technical ‘health’ of the chart, enabling Nifty to rise much higher. But corrections hardly ever happen if you wish for them.

There is a remote possibility of Nifty forming an ‘island reversal’ pattern – if it falls below the upward ‘gap’ of May 20 with a downward ‘gap’. In such an unlikely event, the outcome will be very bearish. Not saying such a rare reversal pattern will actually form – but forewarned is forearmed.

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