Friday, March 6, 2009

Sensex Chart Pattern - Week ending Mar 6, 2009


Instead of the usual gloomy Sensex Chart Pattern, let us look at a famous symbolic painting by George Frederick Watts called "Hope". A blindfolded young woman is sitting on a globe and leaning with her ear close to the last unbroken string of her lyre. It seems to symbolise last week's Sensex Chart Pattern.

It may be worthwhile to revisit the discussion on last week's chart pattern - specially the first paragraph about 52 week closing lows. So far, the lowest daily close was on Nov 20, '08 at 8451 and the lowest weekly close was on Jan 23, '09 at 8674. Both were penetrated on the downside.

We saw a new 52 week daily closing low of 8198 on Mar 5, '09 and a new weekly closing low of 8326 on Mar 6, '09. Much has been made in the business media about the 8198 level as a 'three year closing low'. But what many people may have missed was the real significance of that level.

A 52 week low made some time ago during a rectangular sideways consolidation chart pattern became a level  of  'resistance'.  To be considered a valid breakdown, it needed to be penetrated by about 3%, to avoid misleading moves called 'whipsaws'.

Now, this is where the true beauty of technical analysis shows up. Take away 3% from 8451 (the previous 52 week daily closing low) and what do you get? 8451 - 253 = 8198! Voila!! By the width of a lyre's last unbroken string, the Sensex failed to penetrate the 52 week closing low. So we can hope against hope that the Sensex won't go down further and will continue to consolidate within the rectangular range. That's the good news.

Now the bad news. On a weekly closing low basis, Friday's close at 8326 has penetrated the previous low of 8674 by more than 3%. The number of declining stocks exceeded the number of advancing stocks by nearly 50%. FIIs are continuing to sell and the buying by domestic institutional investors will probably not be enough to stem the rot - more so because we are less than 6 weeks away from the general elections.

The stochastics are showing that the Sensex is oversold, with some confirmation from the RSI. Friday's volumes were some what higher than Thursday's, so the pullback from the day's low of 8047 was probably due to a combination of short covering and some buying interest in index stocks.

Bottomline? The last string - or should I say, last straw? - will break the market's back soon, if not next week, and the Sensex should test and break the 7700 intra-day low of Oct 27, '08.

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