Nifty chart: a mid-week update (Jun 10 ‘15)

FIIs continue to be net sellers of equity in Jun ‘15. Their net selling, as per provisional figures, has touched Rs 3100 Crores. In contrast, DIIs have been net buyers of equity worth Rs 4400 Crores. Still, Nifty is trading below its three EMAs in bear territory.

A delayed monsoon has made investors jittery. Also, there may have been some front-ended FII selling on speculation about China ‘A’ shares getting included in the MSCI EM index. That would have meant increased allocation to China and lower allocations for other emerging markets, including India. But China ‘A’ shares have not been included in the MSCI index.

SIAM has indicated increased sales of commercial and passenger vehicles but lower sales of two and three wheelers in May ‘15. That is a positive sign for the overall economy but a negative one for the rural economy.

The daily bar chart pattern of Nifty has spent 6 consecutive trading sessions below its 200 day EMA. That is good news for bears. The longer the index stays below its long-term moving average, greater is the chance of the index falling into a bear market.

Bulls will take solace from the 3% ‘whipsaw’ rule. Only a close below 7950 will technically validate a break below the 200 day EMA. So far, bulls have defended the 8000 level well. However, bears will dominate as long as the index remains below the blue down trend line.

Is today’s pullback towards the 200 day EMA and the ‘support-resistance zone’ providing a selling opportunity? The answer is: not yet. Why? The thumb rule to follow is: upward pullbacks towards support zones are selling opportunities in bear markets. Not during bull market corrections. (See what happened in May ‘15 – the pullback turned into a rally.)

Daily technical indicators are also pointing towards a possible rally. MACD is below its signal line in positive zone, but has stopped falling. ROC has bounced up from the edge of its oversold zone, and is about to cross above its 10 day MA. RSI is trying to emerge from its oversold zone. Slow stochastic is inside its oversold zone, but has stopped falling.

Trading volumes will hold the key. If volumes pick up, the rally may test and breach the blue down trend line. Otherwise, expect the index to consolidate below the trend line.

Time wise, the current correction in Nifty has been the longest since the one during May-Aug ‘13. Those who had the courage to invest then are sitting on good profits. Being able to buy when most are selling in panic is the mark of a mature investor. But buying should be done prudently, and with appropriate stop-losses.