Sensex, Nifty charts (May 03, 2019): forming ‘diamond’ reversal patterns?

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In a trading week with two holidays, FIIs were net buyers of equity on Tue. and Thu. (Apr 30 and May 2), but net sellers on Fri. (May 3). Their total net buying was worth Rs 3.1 Billion. DIIs were net buyers of equity on Tue. and Fri., but net sellers on Thu. Their total net selling was worth Rs 0.5 Billion, as per provisional figures.

Passenger vehicle sales dropped 17% YoY in Apr ’19 – the worst decline since Oct ’11. All the major OEMs showed declines between 9% (M&M) to 42.5% (Nissan). Honda bucked the trend with growth of 23%.

Nikkei India’s Manufacturing PMI fell to 51.8 in Apr ’19 from 52.6 in Mar ’19 (a figure above 50 indicates expansion). It was the slowest pace of expansion in 8 months. 

BSE Sensex index chart pattern

For the past 5 weeks, the daily bar chart pattern of Sensex has been consolidating sideways near the upper edge of a large upward-sloping trading channel.

In the process, the index appears to have formed a ‘diamond’ pattern – which can be looked upon as a ‘head and shoulders’ pattern with a bent ‘neckline’. Such a pattern is usually a trend reversal pattern, and should be treated with caution. (Read more about the diamond pattern here and here.) 

Daily technical indicators are looking neutral to bearish, and showing downward momentum. MACD is sliding below its falling signal line in bullish zone. ROC has slipped below its 10 day MA in neutral zone. RSI and Slow stochastic are seeking support from their respective 50% levels.

All four technical indicators had showed negative divergences by failing to touch new highs when the index touched its lifetime high of 39487 on Apr 18. That is often a warning of a possible change in trend.

Note that Sensex is trading above its three EMAs in a bull market. In a bull market, one makes money by going long. Formation of a ‘reversal pattern’ should be respected, but short the index if and when a downward breakout from the ‘diamond’ occurs.

If FIIs remain buyers, their liquidity flows can overcome technical and fundamental headwinds. They seem to have ‘discounted’ a second term for the NDA. If an unlikely upset occurs on May 23, all their bullish bets will be off.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty has been consolidating sideways near the upper edge of an upward-sloping trading channel for the past five weeks.

The index is trading well above its weekly EMAs in a long-term bull market, but appears to have formed a ‘diamond’ pattern, which usually acts as a trend reversal pattern at a market top.

All four weekly technical indicators are well inside their respective overbought zones. While an index can remain overbought for long periods, the formation of a ‘reversal pattern’ should be treated with respect and caution.

Lok Sabha election results are less than three weeks away. Corporate Q4 (Mar ’19) results declared so far have not shown much improvement. Economic fundamentals are turning weak. Investors would do well not to go bargain hunting now.

Nifty’s TTM P/E has moved down to 29.24, which remains well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is in neutral zone – hinting at some more consolidation or correction.

Bottomline? Sensex and Nifty charts are still hovering near the upper edges of their respective upward-sloping trading channels, but may be forming ‘diamond’ reversal patterns. Stay invested, follow your asset allocation plans and control any impulse to dive into a market near a lifetime high.

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