Sensex, Nifty charts (Jan 11, 2019): poised to breakout from ‘diamond’ patterns

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FIIs were net buyers of equity on Mon. and Wed. (Jan 7 and 9) but net sellers on the other three days during the week. Their total net selling was worth Rs 5.7 Billion. DIIs were net sellers of equity on Mon., but net buyers on the other four days. Their total net buying was worth Rs 11.3 Billion, as per provisional figures.

India’s IIP (Index of Industrial Production) dropped to a disappointing 17 months low of 0.5% in Nov ’18 from an upwardly-revised 8.4% in Oct ’18, due to a high base effect and a contraction in manufacturing growth. The previous low of 0.3% occurred in Jun ’17 (a month before GST introduction).

BSE Sensex index chart pattern

The bearish ‘rising wedge’ pattern (refer last week’s post) on the daily bar chart pattern of Sensex has morphed into a ‘diamond’ pattern, which usually has bearish implications. In other words, the likely breakout from the pattern is downwards.

Since a ‘diamond’ – a somewhat rare pattern – tends to be a reversal pattern that forms at a market top (refer this post), its formation was ignored earlier. But now it has become visibly obvious that Sensex has been consolidating within a ‘diamond’ during the past 10 weeks or so. 

Since a ‘diamond’ can sometimes be a continuation pattern, an upward breakout can’t be ruled out. The index has closed above its three EMAs in bull territory with a 0.9% weekly gain. That gives bulls a slight advantage.

Note that a ‘diamond’  can be viewed as a ‘head and shoulders’ reversal pattern with a bent ‘neckline’. In this case, the ‘head’ is actually a bearish ‘double top’ reversal pattern with two left and two right ‘shoulders’. 

A ‘diamond’ starts out as a bearish ‘broadening top’, which is followed immediately by a ‘symmetrical triangle’ pattern. The eventual breakout follows the ‘rules’ of a breakout from a ‘triangle’.

That means, all four possibilities are on the table – a downward breakout, an upward breakout, a ‘false’ upward/downward breakout, and a sideways move through the right ‘apex’ of the ‘diamond’ that negates the pattern. (Hope you are not thoroughly confused!)

Remember that the ‘height’ of the ‘diamond’ (~2300 points on Sensex chart above) should be added/subtracted to the breakout point to set the upward/downward target. Wait for the breakout before taking a buy/sell decision.

Daily technical indicators are giving conflicting signals, which is often the case during periods of consolidation. MACD is facing resistance from its gradually sliding signal line in bullish zone. ROC is about to cross below its 10 day MA in neutral zone. RSI has moved above its 50% level. Slow stochastic is rising towards its overbought zone.

Of the few Q3 (Dec ’18) results announced so far, TCS has met expectations but Infosys has slipped badly. IndusInd and Bandhan Bank have shown downward pressure on margins due to large provisions for IL&FS loans. 

The macroeconomic environment is favouring bears again. Oil’s price has started to rise. The Rupee is slipping against the US Dollar. After weak auto sales growth in Dec ’18, the shock of the dreadful IIP number in Nov ’18 may be the proverbial straw that breaks the back of bulls. 

NSE Nifty index chart pattern

The bearish ‘rising wedge’ pattern on the weekly bar chart pattern of Nifty has been replaced by a visibly obvious ‘diamond’ pattern. The ‘diamond’ is usually a ‘reversal’ pattern. That means the likely breakout from the pattern is downwards. (Read gory details about the ‘diamond’ pattern in Sensex post above.)

A ‘diamond’ has measuring implications. The ‘height’ of the ‘diamond’ (~700 points on Nifty chart above) should be added/subtracted to the breakout point to set the upward/downward target. Wait for the breakout before taking a buy/sell decision. 

Weekly technical indicators are giving conflicting signals. MACD has merged with its signal line, and is moving sideways just below its ‘0’ line. ROC has dropped sharply from its overbought zoneRSI has moved above its 50% level. Slow stochastic is rising towards its overbought zone. 

Nifty’s TTM P/E is at 26.00, which is well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is rising in neutral zone, hinting at near-term index correction.

Bottomline? Sensex and Nifty charts have been consolidating within ‘diamond’ patterns for the past 10 weeks. Breakouts from the patterns appear imminent. Remember that an upward breakout should be accompanied by a volume surge. A downward breakout doesn’t require volume support for confirmation. Wait for the breakout before initiating any buy/sell decisions.

(NoteMarkets fluctuate, but there are always opportunities if you know where to look. Learn how to choose fundamentally strong stocks. Become a paid subscriber of my Monthly Investment Newsletter. A limited number of new subscriptions are being offered till Jan 21, 2019. Enrollments have started. Contact me for details:

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