Sensex, Nifty charts (May 10, 2019): downward breakouts from ‘diamond’ reversal patterns

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FIIs were net sellers of equity on all five trading days. Their total net selling exceeded Rs 41.9 Billion. DIIs were net buyers of equity on all five trading days, but couldn’t match the pace of FII selling. Their total net buying was worth Rs 28.8 Billion, as per provisional figures.

India’s IIP contracted to -0.1% in Mar ’19 from 0.1% growth in Feb ’19. It was the lowest IIP number in 21 months. IIP in Mar ’18 was 5.3%. On annual basis, IIP slowed to a 3 year low of 3.6% in FY 2018-19 against 4.4% in FY 2017-18 and 4.6% in FY 2016-17.

According to CRISIL, operating margins of domestic cotton yarn spinners may shrink by 1-1.5% in FY 2019-20 due to lower cotton output, rising cotton prices and moderating demand.  

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex shows a sharp downward breakout from a ‘diamond’ reversal pattern, due to heavy selling by FIIs. Though the index has dropped below its 20 day and 50 day EMAs, it is trading above its 200 day EMA in a bull market.

Can the index fall even lower? Anything is possible when FIIs decide to turn bears. However, by touching an intra-day low of 37370 on Fri. May 10, the index has already corrected 50% of the last leg of its (2 months long, 4200 points) rally from the Feb 19th low to the Apr 18th top.

The 125 points upward ‘gap’ formed on Mar 12 can provide some support. The 61.8% Fibonacci retracement level of the 4200 points rally is at 36890 – which falls in between the ‘gap’ and the 200 day EMA.

In case the index falls below 36890, there is likely to be stronger support from the 200 day EMA and the (blue) up trend line. In other words, Sensex is just above a strong support zone, from where a technical bounce can be expected.

The level of the right apex of the ‘diamond’ (~39000) can act as a resistance if and when a likely technical bounce moves the index above the 50 day and 20 day EMAs. Sensex may consolidate within a 2000 points range (between 37000 and 39000) till election results are announced on May 23.

Daily technical indicators are looking bearish and oversold. MACD is falling below its signal line in bearish zone. ROC, RSI and Slow stochastic have entered their respective oversold zones, and are showing negative divergences by falling below their Feb ’19 lows. Some more downside is possible before a technical bounce occurs.

Finance Ministry mandarins are trying to ‘invent’ new arguments on a daily basis to put positive spins on negative data that are clearly pointing to worsening economic conditions (viz. unemployment, falling auto and FMCG sales, NBFC loan defaults, lower IIP and GDP).

What should small investors do now? What they should be doing at all times: follow a financial plan and asset allocation plan, and continue with monthly SIPs. Treat daily market gyrations as entertainment. 

NSE Nifty index chart pattern

The following comment appeared in last week’s post on the weekly bar chart pattern of Nifty: The index … appears to have formed a ‘diamond’ pattern, which usually acts as a trend reversal pattern at a market top.”

FIIs may not have read the post, but they sure respected the reversal pattern, and started selling heavily during the week. The index dropped sharply to seek support from its 20 week EMA – negating all gains made in the previous 7 weeks.

Below the 20 week EMA is a support zone between 11000 and 11230. The 50% Fibonacci retracement level of the 1270 points rally from the Feb ’19 low of 10586 to the Apr ’19 top of 11856 is at 11220 – which is just below the upper edge of the support zone.

If the support zone gets breached, expect stronger support from the 50 week EMA and the (blue) up trend line. As long as the index trades above its 50 week EMA, the bull market will remain in force.

Weekly technical indicators have started correcting overbought conditions. MACD has slipped down from its overbought zone, and is falling towards its rising signal line. ROC has crossed below its 10 week MA and fallen from its overbought zone. RSI has dropped from its overbought zone. Slow stochastic is about to follow suit. Some more correction is possible before a technical bounce can occur. 

Nifty’s TTM P/E has moved down to 28.14, which remains well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is rising towards its oversold zone and can limit near-term index downside.

Bottomline? Sensex and Nifty charts have broken out below ‘diamond’ patterns, which often signal trend reversals. Stay invested, follow your asset allocation plans and let the correction play out before jumping in.

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