Sensex, Nifty charts (Nov 02, 2018): technical bounces from Fibonacci support zones face strong resistances

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For the month of Oct 2018, FII were net sellers of equity worth a huge Rs 292 Billion. Their previous highest net selling in a month was back in Jan 2008 (Rs 294.5 Billion), which had triggered a 15 months long bear market. As per provisional figures, DIIs were net buyers of equity worth Rs 260.3 Billion, perhaps their highest net buying ever in a single month.

Auto sales during Oct ’18 were quite good. Bajaj Auto, TVS Motor, HeroMoto, Escorts, M&M, Tata Motors, Ashok Leyland, Ford showed double-digit YoY sales growth. However, sales of Maruti, Toyota and Royal Enfield were flat. There are signs of moderation in heavy-duty truck sales.

GST collections crossed the Rs 1 Trillion mark in Sep ’18, against Rs 944 Billion in Aug ’18. The Finance Minister attributed the rise in collection to reduction in tax rates, higher compliance and negligible interference of tax officials.

BSE Sensex index chart pattern

The following comments appeared in last week’s post on the daily bar chart pattern of Sensex: All four indicators are showing positive divergences by touching higher bottoms while Sensex has dropped lower. Another technical bounce is likely.”

The bounce was quite strong – on the back of DII buying. The index crossed easily above its falling 20 day EMA, but is facing resistance from its 200 day EMA. The falling 50 day EMA is just above the 200 day EMA, and is likely to provide additional resistance.

The index corrected about 5700 points (14.6%) from its Aug 29 top of 38990 to its Oct 26 low of 33292. A 38.2% Fibonacci retracement of the fall will take the index to 35470 – which is in the zone between the current levels of the 200 day EMA and the 50 day EMA. Expect bears to start selling to protect this zone.

What if the index manages to cross above its 200 day and 50 day EMAs back into bull territory? Bulls would do well to curb their enthusiasm. A 50% Fibonacci retracement of the 5700 points fall will take the index to 36140. To get there, Sensex would need to cross above the support/resistance level of 36000.

Just below 36000 is the 91 points downward ‘gap’ formed on Oct 4. Even if the ‘gap’ gets filled (partly or fully), the index will be expected to resume its downward move. In other words, the next 1000 points from the current level is a strong resistance zone, which the index may find very difficult to overcome.

Daily technical indicators are turning bullish, and hinting at more near-term upside. MACD has crossed above its signal line, and emerged from its oversold zone. ROC has crossed above its 10 day MA, and is rising in bullish zone. RSI and Slow stochastic have crossed above their respective 50% levels into bullish zones, but the upward momentum of RSI has stalled. 

Despite the nearly 15% correction from the Aug ’18 top, index valuation remains well above its long-term average. If you have non-performers in your portfolios, don’t wait to recover your ‘buy price’. Use the rally to dump them, and wait for lower levels to enter better stocks.  

NSE Nifty index chart pattern

Oversold ROC, RSI and Slow stochastic technical indicators observed in last week’s post triggered the sharp 520+ points technical bounce on the weekly bar chart pattern of Nifty.

However, the index failed to overcome strong resistance from its 50 week EMA. About 200 points above the 50 week EMA is the current level of the 20 week EMA. Expect the index rally to falter at any time, as bears are likely to defend the zone between the two weekly EMAs. 

Weekly technical indicators are in the process of correcting oversold conditions. MACD is still falling below its signal line in bearish zone. ROC is trying to emerge from its oversold zone. RSI has bounced up from the edge of its oversold zone. Slow stochastic is also trying to emerge from its oversold zone.

Nifty’s TTM P/E has moved up to 25.40, which is well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is oscillating in neutral zone, suggesting near-term volatility.

Bottomline? Both Sensex and Nifty charts have bounced up from Fibonacci support zones. Drop in oil prices and some strengthening of the Rupee against the US Dollar provided tailwind to a counter-trend rally. Both indices are facing strong resistance zones. Bears are lurking in the shadows.

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