Sensex, Nifty charts (Nov 06, 2020): soaring on the back of FII buying ~ Market Updates Tips Tricks Recommendations

FIIs were net buyers of equity worth a huge Rs 134 Billion - almost equalling their entire net buying during Oct '20. DIIs were net sellers of equity worth Rs 67.9 Billion. Both indices gained nearly 5.5% for the week.

Nikkei/IHS Markit India Manufacturing PMI for Oct '20 rose to 58.9 - its highest level since mid-2008 - from 56.8 in Sep '20. The Services PMI climbed to 54.1 in Oct '20 from 49.8 in Sep '20 - its highest level since Feb '20 and well above the 50 mark that separates growth from contraction.

The Composite PMI (Mfg. + Serv.) rose to 58 in Oct '20 - its highest level since Jan '12 - from 54.6 in Sep '20.

India's merchandise exports declined 5.4% to US $24.82 Billion in Oct '20. Imports fell 11.56% to $33.6 Billion, narrowing the trade deficit to $8.78 Billion against $11.76 Billion in Oct '19.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex bounced up sharply after receiving good support from its 50 day EMA in the previous week. The index opened with an upward 'gap' on Thu. Nov 5, thanks to a flood of FII money. The next day, it rose higher to close within 60 points of its lifetime closing high of 41945 (touched back in Jan 17 '20).

The index is trading above its three rising daily EMAs in a long-term bull market. However, proximity to a previous high, and combined negative divergences visible on all four daily technical indicators (which failed to touch new highs with the index) calls for caution.

Daily technical indicators are looking bullish. MACD has crossed above its signal line in neutral zone. ROC has moved above its 10 day MA in neutral zone. RSI is climbing above its 50% level. Slow stochastic has bounced up sharply to re-enter its overbought zone. Some more near-term index upside is possible, but avoid entering the market now.

Aggregate Q2 (Jul-Sep '20) results of 1000 companies show top line pressure but bottom line improvements (thanks to tax cuts). Pharma companies declared good numbers. ITC results were a disappointment, because the pandemic has affected its cigarettes, hospitality and stationery products businesses.

Small investors would do well not to get caught up in bullish euphoria. Good stocks are becoming more expensive. Tendency to look for hidden gems among junk stocks can be injurious to wealth. Sometimes, doing nothing is a good strategy.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty rose sharply to close within 100 points of its lifetime closing high of 12352 - touched in the week ending on Jan 17, '20. Strong FII buying negated technical headwinds. The index closed above its three rising weekly EMAs in a long-term bull market for the 18th straight week.

Bulls are in total control of the chart. A new lifetime high seems just a hop, skip and jump away. However, caution is advised near a lifetime high. Everyone remembers the sharp correction after the index touched its previous top in Jan '20.

What is the reason for the sudden rush of FII buying? Wasn't a win for Biden in the US elections considered bearish for the stock market? According to experts, since Democrats failed to get a majority in the US Senate, Biden will be unable to push through any new taxes. Sometimes, stock markets use any excuse to go up (or down)!

Weekly technical indicators are in bullish zones, and looking overbought. MACD is rising above its signal line in overbought zone. RSI is moving sideways above its 50% level. Slow stochastic has bounced up from the edge of its overbought zone. RSI and Slow stochastic are showing negative divergences by failing to touch new highs with the index, and may trigger some consolidation or correction.

Nifty's TTM P/E has moved up to 33.09 - which is well above its long-term average and well inside its overbought zone. The breadth indicator NSE TRIN (not shown) is still in neutral zone - hinting at near-term index consolidation.

Bottomline? Sensex and Nifty charts have soared to their highest levels since touching their lifetime highs back in Jan '20. Negative divergences in technical indicators, and proximity to lifetime highs may lead to profit booking. Stay invested, but avoid fresh commitments.