Nifty chart: a mid-week update (Nov 12 ‘14)

Nifty touched a new high of 8415 intra-day, but closed below 8400. The bullish sentiment in the stock market does not quite match the reality on the ground.

Commercial vehicle sales have started picking up, but capital goods sales – particularly heavy earth moving equipment sales that indicate a growth of the construction industry – are still stuck in a rut, thanks to high interest rates.

The Sep ‘14 IIP number was an encouraging 2.5%. In Aug ‘14, IIP was a paltry 0.4%. CPI inflation decreased for the third straight month to 5.52% for Oct ‘14 – thanks to a higher base effect. That may increase the clamour for an interest rate cut.

After touching an intra-day high of 8180 on Sep 8 ‘14, Nifty underwent a moderate 450 points (5.5%) correction that lasted almost 6 weeks. FII selling was the main trigger. The index dropped below its 20 day and 50 day EMAs for the first time in almost 10 months.

Election victory for the BJP in Haryana and Maharashtra encouraged FIIs to turn buyers again. A rally from the Oct 17 ‘14 intra-day low of 7724 hesitated only briefly near its Sep ‘14 top before climbing higher.

A number of holidays during Oct ‘14 and the first week of Nov ‘14 kept trading volumes relatively low. Of late, Nifty has been consolidating sideways with a slight upward bias.

Daily technical indicators are looking overbought. MACD is just below its overbought zone, but its upward momentum has slowed down. ROC has dropped to touch its rising 10 day MA inside its overbought zone, and showing negative divergence by failing to touch a new high with the index. RSI and Slow stochastic are moving sideways well inside their respective overbought zones.

Nifty is trading above all three EMAs in a long-term bull market that is now almost three years old. Periodic corrections have kept the index technically ‘healthy’. At some point, a bigger correction of 15-20% or even higher may occur. Be prepared for it. The index does not move in one direction.

If you are sitting on good profits on mid-cap and small-cap stocks, take some of that profit home. No need to jump on to the next stock idea. Keep the booked profits in a liquid fund. If and when a bigger correction happens, use the opportunity to add to existing holdings.