Sensex Chart Pattern - Week ending Mar 27, 2009

The real challenge in studying and analysing the Sensex chart pattern is the fickle nature of Mr Market. When the consensus opinion was that the chart pattern indicated a possible down ward movement, Mr Market decided to surge upwards. And how!

What caused this buying frenzy last week? Did the economy suddenly turn for the better? Did the government's stimulus package create a change in sentiments? Did the FIIs get bored and decide to have some fun? The answer is: none of the above.

Far from getting better, the economy is likely to get worse in 2009 than it was in 2008. The stimulus package may have some effect eventually, but there is usually a lag between theory and practical results on the ground.

Yes, the WPI is almost down to zero. But that also indicates a drop in demand rather than just a drop in wholesale prices. And the CPI is still in double digits.

The FIIs definitely did some buying. The sudden spurt in HDFC - a favourite of the FIIs - bears testimony to that. What was their motive? My guess is that they want to sell some more. But with the market at near bottom, they would not get decent prices.

By sharply moving the market up - they have the money power to do so - the FIIs managed to squeeze out the short sellers, who had to quickly buy to cover their shorts. Some retail buying interest also added to the bulls getting the upper hand.

Another important factor to note is about the 'T+2' settlement in the market. Friday's transactions were the last for the financial year Apr '08 to Mar '09. Any transactions made from Monday, Mar 30, '09 onwards will get settled in the next financial year.

So DIIs probably used the opportunity to 'pad' their NAVs for the current financial year. I would venture to say that this up move is on its last legs. Just my gut feel.

Let us now look at the technicals of the 6 months closing chart pattern of the Sensex:-

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

The Sensex sharply pierced through the resistance of the 50 day EMA and closed above the psychological 10000 level. The 20 day EMA has turned up and merged with the flattening 50 day EMA.

The slow stochastics and ROC are both well into over bought zones. The RSI is about to enter the over bought zone. The MACD has turned positive for the first time since Jan '09. Even the volumes have picked up from last week.

All the indicators are confirming bullishness. So why am I not convinced about this up move? There are three specific reasons.

First, the Sensex is still well below the down ward sloping 200 day EMA. That indicates that we are still in a long term bear market. Second, the Sensex is yet to penetrate the upper level (of 10950) of the rectangular sideways chart pattern of the past 5 months. Last, but not the least, I've yet to see the hopelessness and capitulation of all market participants that signal the possible end of a bear market.

Bottomline? I will be closely watching the Sensex behaviour around the 10950 level mentioned earlier. Next, the 11300 or so level where the 200 day EMA should provide strong resistance. Till those two resistances are taken out with higher volumes, this up move will not indicate a change of trend from bear to bull.