Technicals for week ending – 28th August 2016.

Note : This is not a recommendation and I am not a registered analyst, these are just my observations and an assessment of the positives and negatives from a longer term point of view.

Nifty Weekly

On a longer term time-frame a lot of data still suggests to keep a positive stance on Nifty. However, the elevated PE ratio is troublesome but maybe we might consolidate for some time (weeks/months) before a trend sets in.

Observations (charts below):

First up, the PE ratio for the index – Yes, it is elevated as it is beyond 1SD of its long term average, but notice that in 2010 also the PE ratio was around the same level as it is today but we were range-bound for many months with small cuts along the way. The elevated PE does not necessarily mean a deep bear market is upon us, but just coming out of a greater than 20% cut, the odds of another big cut just don’t look high. Hence got to also think of another possibility – i.e. ranging with some intermittent 4-5% cuts.

Next up, some weekly charts and yes Nifty closed below that support zone and the next comes in at 8300 levels. BUT Banknifty is actually still above its support zone and so is the broader Nifty500 index while the Midcap index is in all time high territory. If Nifty falls to 8300 it would be important to see its reaction there and also check if these other indices are breaking down. If at all there is a bear market it will not be a straight line down, we will move between support and resistance and there will be time to evaluate and take a decision. For me still, exit from ETF holdings will be taken on a weekly close below the 40 week moving average (but that’s just me!)

Also, well..just thinking out aloud.. it took years to convincingly break the 2007/08 highs so my guess is it is not going to be so easy to break the 9k barrier albeit with PE ratios a bit elevated. Let it grind it out and build a base or if it just dives to that 40 week moving average then yes I am wrong..exit position..move on..

The Nifty to Bond ratio is above its 40 week moving average and we have a positive crossover as the 10 week moving average is above the 40 week MA. Thus, from a longer term perspective equities are in favor over bonds.

On intermarket strength we still have Metals and Realty in the lead followed by Autos. The defensive sector indices such as FMCG, Pharma and IT are at the bottom ranks so RS ratios sorted by they being above 40 week moving averages suggests that there is no flight to defensives yet. Since Metals and Realty have been the leading indices on a relative basis, keep an eye on these indices for any breakdowns – If they break past supports then would be a good time to evaluate and take some risk off the table.

As for the broader trend, all indices except IT are above their 40 week moving averages. Still supportive of the bullish stance.

Next – the average and median distance of the sectoral indices compared to their highest 52 weekly closing. You can see that on an average and median basis we are still around the highs and the readings are up..If we start to see any deterioration in the readings then that would be a warning..so far not there yet.

Last chart is short term in nature, the VIX projected closes for the next 30 sessions –the broad range implied by the VIX indicator suggests readings between 8250 to 8950 and as per the weekly chart of Nifty the lower supports also come in at 8300 so lets see if it gets there and how will it react.