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Saturday, March 14, 2009

Sensex Chart Pattern - Week ending Mar 13, 2009

Some interesting Sensex Chart patterns formed in a week of trading curtailed by back-to-back holidays on Tuesday and Wednesday. Global stock markets exhibited a relief rally, and the Sensex followed suit.

Let us take a look at the 6 months Sensex chart:


(You can right-click on the image above and open it in a new tab or window for a better view.)

Last week I had discussed why the closing low level of 8198 was significant, because it was within 3% of the previous 52 week closing low of 8451. Technically, that meant that the 8451 level was not 'broken'. We had hoped that the Sensex would not go down further and remain within the rectangular chart pattern defined by the levels of 7700 and 10950. Also, both the slow stochastics and RSI indicators had entered the 'oversold' zones (below the '20' line).

On Monday, Mar 9, '09 the Sensex had a 'flat' close of 8160. This was a new 52 week closing low - but is considered to be a 'flat' close because it was very near the closing low of 8198 made on Thursday, Mar 5, '09.

Now, some may consider this as stretching the truth to suit the analysis. That wouldn't be an unfair assessment. Why should 8160 be treated the same as 8198?

Experience shows that technical analysis isn't an exact tool. Like much of advanced mathematics and science, one has to often deal with approximations.

That is why, taking a buy or sell decision strictly on the basis of a particular calculated level could lead to problems and losses. One has to wait for a few days to ensure that the calculated level is indeed providing a support or a resistance.

There is also the issue of intra-day levels and closing levels. On a closing basis, 8160 was a new 52 week low, but it was well above 7700, the intra-day 52 week low. Such ambiguities cause many investors to dismiss technical analysis as worthless.

But I believe that technical analysis is like a diamond in the rough. Till it is cut and polished with the grinding wheel of experience, it won't sparkle and may be of little value to most observers.

So, what is interesting about last week's Sensex chart pattern? The Sensex jumped upwards on two days of decent volumes, supported by both the slow stochastics and RSI emerging out of oversold zones. But it found resistance almost exactly at the 20 day EMA.

How much further upwards can the Sensex go? Since Dec '08, the Sensex had made three attempts to cross the 50 day EMA, and failed all three times. Chances are that it will again get resisted at the 50 day EMA level of around 9100 or so.

The ROC is just below the neutral level, while the MACD is still in negative zone. We are in a bear market and this rally is unlikely to change the trend to a bull market. The Sensex is back in the rectangular consolidation range for the time being.

Bottomline? I have my buy list ready, but my wallet will remain firmly in the pocket till clear signs of a turnaround emerge.


Nikesh Goyal said...

could you please share your buy list if that doesn't harm your investment ego.....
second thing.... The slow stoch method. Please make a post on it for other users who may well use it in next BULL RUN.

Subhankar said...

Hi Nikesh

My investment ego got humbled a long time back. After 25 years of investing experience, it is probably beyond any harm!

Every investor should develop their own style and method for investing. Lists can be quite different from each other and still work for the respective investors.

I prefer not to share/discuss my buy list in an 'open' forum - except to say that it includes those Sensex stocks that are already in my portfolio. Bear markets provide good opportunities for topping up existing portfolios of large caps.

The write-up on the slow stochastics is overdue. Thanks for the reminder.

Lakshmi Ramachandran said...

good analysis. please visit my website and read my articles and do join the discussion forum
Lakshmi Ramachandran

Dev said...

re discuss your buying list

Subhankar said...

Hi Dev

The raison d'etre of this blog is to guide investors how to select stocks for their own buy lists. Sharing my buy list may defeat that purpose.

If you go through my blog posts, you will know what kind of companies I like - the ones that generate real cash profits, and not profits created through accounting jugglery.

Nikesh Goyal said...

Yes, I know this is your blog...
Yes, I know you have all rights to write any thing on your blog
Yes, I must not say anything about blog contents....

But..... I will say...

Your blog previously was very precise, concise and informative.. It's still now but the content on the blog is now too much to handle...

My request..... Please discontinue daily commentary... Keep only weekly commentary if required... we want to share your investment wisdom... daily noise is available in rest of the world.. you may well escape it

Subhankar said...

Appreciate the feedback, Nikesh.

Yes, it is my blog and I write what I feel should be written. But a blog can not exist without its readers. Readers have a right too - to comment on what they like or do not like. Without reader interaction the blog content can't improve.

I have a few international readers, and the news snippets and end-of-day market summary are mainly for their benefit. I'll try and reduce the volume of such posts.