Feb 08 2019

Nifty – Buy the rumour, Sell the fact – 8Feb2019

The reaction of Indian equities’ to the repo rate cut by the RBI yesterday (positively surprised), is perplexing. It was a classic case of “buy the rumour, sell the fact” – the benchmark indices (NSE/BSE) posted handsome gains on the day before the MPC announcement – remained range-bound on the day of interest-rate cut declaration – and then plummeted substantially on the day after the big event.

On the Nifty’s daily candlestick chart, price pattern formation looks slightly disturbing. An Evening Doji Star# is formed at the recent high. Such a price pattern formation, at the end of an uptrend indicates bearishness. There is a trendline resistance around 11100 (pink line connecting the recent peaks). Momentum indicators (RSI and Slow Stochastic) have started to decline from overbought regions.

My bet is on a short term weakening of the Nifty. The target is towards 10600-10700. If the Nifty breaks above 11100 and forms a new peak, this assessment will be nullified.

# An Evening Doji Star is a three-day candlestick pattern. When formed at a peak, it gives a bearish reversal signal.

First day is a large white body (continuation of the existing uptrend).

Second day it opens higher, trades in a small range, then closes at/near its open (a Doji formation – first indication of indecision).

Third day it closes below the midpoint of the body of the first day.