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.