A Sensex extra

Some interesting patterns happened in the Sensex on Monday, Sept 15, 2008 that prompted this extra edition to my weekly posts.

First, the EMAs. The 20 EMA had kept close contact with the 50 EMA while both averages were below the 200 EMA. Monday's price action has sent both the 20 EMA and 50 EMA downwards signalling the next (and last?) down wave of a 5 wave bear pattern.

Now the interesting part in the price action. The first up-wave of the three-wave bear market rally from the July '08 low of 12500 was resisted at 15100 or so. The second wave came down to 13700 and the third wave went up to about 15600. 

This was a lower top. The first down wave got supported at 14000. The next up-wave tried to cross the 15100 resistance twice and failed - thereby forming not only a double-top but a 'head-and-shoulders' pattern where the left and right shoulders are both near 15100, the head is at 15600 and the neckline is at a slight angle to the horizontal drawn through the 13700 and 14000 support points.

Last Friday, Sept 12 '08 the Sensex was tantalisingly perched near  the neckline at 14000. Monday's price action has decisively broken through the neckline, confirming the head-and-shoulders pattern.

So what happens next? This is where the true beauty of the art of technical analysis lies! The price implication of a head-and-shoulders pattern is that once the neckline is broken the Sensex will retrace at least the amount by which the 'head' is above the neckline.

The difference between the head and the neckline is around:

15600 -14000 = 1600 points.

The Sensex will, therefore, drop atleast 1600 points from the neckline; i.e. to:

14000 - 1600 = 12400.

This is close enough to where the last bottom of 12500 was made in July '08. So we are looking at a bottom testing situation as a first target. If 12500 does not hold, then we might see 10000 level.

A detailed reasoning for these levels were given in an earlier post. There is a possibility that the Sensex may not drop all the way down to 12500 or 10000 right away. Instead it may try to recover around 13100 levels and then meander along sideways for a while before testing or breaking the previous bottom.

The earlier advice of buying in small lots (either in 'A' group stocks or in diversified Equity funds) below the 13000 level is reiterated. In my next post, I plan to discuss if it is the time to Tisco!