Sensex, Nifty charts (Jan 18, 2019): unconvincing upward breakouts from ‘diamond’ patterns

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FIIs were net buyers of equity on Tue. and Thu. (Jan 15 and 17) but net sellers on the other three trading days. Their total net buying was worth Rs 0.54 Billion. DIIs were net sellers of equity on Thu. and Fri., but net buyers during the first three days. Their total net buying was worth Rs 5.2 Billion, as per provisional figures.

As per data available till Sep ’18, the total debt of the Indian government has increased by more than 49% to Rs 82 Trillion during NDA’s 4.5 year stint – from Rs 54.9 Trillion in Jun ’14.

Volatility in crude oil prices has hit synthetic textile manufacturers hard, with frequent change in buying behaviour observed for both raw material and finished product segments.

BSE Sensex index chart pattern

In last week’s post on the daily bar chart pattern of Sensex, the following four possible outcomes of a breakout from the ‘diamond’ pattern was mentioned: a downward breakout, an upward breakout, a ‘false’ upward/downward breakout, and a sideways move through the right ‘apex’.

On Mon. Jan 14, the index dropped below the ‘diamond’ and its 50 day EMA intra-day, but recovered to close above its 50 day EMA inside the ‘diamond’. That negated the expected downward breakout possibility.

On Tue. Jan 15, the index had an upward breakout and a close above the ‘diamond’ – on the back of combined FII and DII buying – raising bullish hopes. However, trading volumes (not shown) was not significantly higher – which is required for technical confirmation of an upward breakout.

There was little follow-up buying during the last three days of trading, as the index consolidated sideways with a slight upward bias. The index pulled back to the top of the ‘diamond’ on Thu. and Fri, attracting some buying.

By failing to press home their advantage following the upward breakout, bulls have left the door open for a possible ‘false’ upward breakout. The index is above its three EMAs in bull territory. However, caution is advised as any correction from current levels can trigger the next leg of the down move from the Aug 29 ’18 top.  

Daily technical indicators are in bullish zones but not showing much upward momentum. MACD has managed to move above its signal line. ROC has turned down after facing resistance from the edge of its overbought zone. RSI is moving sideways above its 50% level. Slow stochastic has started to slide down inside its overbought zone.

Market fundamentals are not conducive for bulls. Inflation is falling due to lower food prices, which means agrarian distress is increasing. The Rupee is depreciating against the US Dollar while oil price is moving up – worsening India’s balance of payment situation.

Opposition parties are joining hands in a bid to counter the BJP in the upcoming general elections. If they manage to retain their alliance till voting time, an upset may be on the cards. The stock market doesn’t seem to have ‘priced in’ that possibility yet.

On the global front, uncertainty due to BrExit and US-China trade war will keep FIIs from committing to emerging markets in a big way. Without their buying support, the index can succumb to gravity.

NSE Nifty index chart pattern

After closing inside a ‘diamond’ pattern for 11 straight weeks, the weekly bar chart pattern of Nifty managed to breakout and close above the ‘diamond’, but only after an intra-week fall below it.

Note that there was no significant increase in trading volumes, which is required to technically confirm an upward breakout. The fact may encourage bears to mount an attack and turn the upward breakout into a ‘false’ one.

Weekly technical indicators are looking bullish but not showing much upward momentum. MACD has moved above its signal line to touch its ‘0’ line. ROC has dropped from its overbought zone, but is above its rising 10 week MARSI is moving sideways above its 50% level. Slow stochastic is poised to enter its overbought zone. 

Nifty’s TTM P/E has moved up to 26.19, which is well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) has bounced up sharply after falling almost to the edge of its overbought zone,  and can limit near-term index upside.

Bottomline? Sensex and Nifty charts have broken out above ‘diamond’ patterns, but the breakouts have not been convincing without accompanying volume surges. Both indices are trading above their long-term moving averages in bull territories. However, resumptions of corrective down moves from Aug ’18 tops can’t be ruled out. If you must buy, stick to the highest quality stocks.

(NoteLearn how to choose fundamentally strong stocks. Become a paid subscriber of my Monthly Investment Newsletter. A limited number of new subscriptions are being offered to blog visitors, followers and subscribers for two more days only – till Jan 21, 2019. Contact me for details:

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