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Wednesday, November 26, 2008

What is happening with the Sensex?

After Sensex hit the low of 7700 on Oct 27, we saw a sharp bear market rally that took the Sensex up to 10950 in 6 trading days. Thereafter the downward movement resumed again and we saw a higher low of around 8400 odd.

If we draw an upward sloping trend line connecting the two lows of 7700 and 8400, and a downward sloping trend line connecting 10950 with the next lower top of around 10500, we get a 'symmetrical triangle' pattern. Today's (Nov 26) trade penetrated this triangle's downward sloping trend line.

What does this imply? The bulls, grasping at straws, may think this is a sign of reversal and an up trend will follow. But the bears have several aspects on their side.

A triangle is a period of consolidation, caused by indecision amongst bulls and bears. It rarely indicates a reversal of trend. Also, the upward 'breakout' was on thin volumes (barely higher than Tuesday's low down day volumes). The advance-decline figure was negative. All these point to underlying weakness.

Since the previous trend leading into the triangle was down, the likely next movement will also be down. The up ward breakout looks like a 'false' move. After a few days, this rally ought to peter out. May be after Thursday's (Nov 27) settlement.

Technical analysis - as I keep harping - is an art and not a science. The same chart patterns are open to different interpretations, depending on the different methodologies used by the analyst. Ultimately, Mr Market knows best. We can only attempt to make some sense of his movements.

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