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Sunday, August 17, 2008

Making sense of the Sensex

It is time to take another look at the Sensex technicals, as some interesting price movements happened last week. The sharp bear market rally seems to have come to a halt.

After a steep month-long rise from the low of 12500 made on July 16, the Sensex reacted from a level of 15600. This 3100 points up-move was almost an exact 61.8% Fibonacci retracement of the 5000 point fall from the previous top of 17500 (17500 - 12500 = 5000; 5000 x 0.618 = 3090; 12500 + 3090 = 15590; Q.E.D.).

Equally interesting is the behaviour of the 20 EMA and 50 EMA on the Sensex chart. The 20 EMA has moved up from below to touch the 50 EMA which has flattened out. The Sensex low for the week has touched the confluence point of the 20 EMA and 50 EMA.

Why is it interesting? This looks like an intermediate trend deciding situation. If the Sensex bounces up from the confluence point, then the 20 EMA will also penetrate the flattening 50 EMA. That will provide a short-term buy signal, which will be confirmed when both the 20 EMA and then the 50 EMA crosses the 200 EMA from below. 

What if the Sensex continues its downtrend? The 20 EMA will start moving down after touching the 50 EMA and both the 50 EMA and 200 EMA will continue downwards. All signals will be bearish again.

There are some more indicators in the chart which I will discuss on later posts. Both the Stochastics and MACD indicators are suggesting a downward movement. Last week's much higher inflation rate and depreciating Rupee may further aggravate the downtrend.

But Mr Market plays by its own rules. So watch the Sensex movements closely during the forthcoming weeks. If the Sensex moves below 13000, I am going to buy some more. Probably frontline Sensex stocks.

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