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Saturday, April 18, 2009

Sensex Chart Pattern - Week ending Apr 17, '09

While discussing last week's chart pattern, I had mentioned that the Sensex had come to an interesting fork on the road. Unlike a more decisive Yogi Berra, the Sensex took three steps forward and a long step back on another holiday-curtailed week.

Let us take a look at the 6 months bar chart pattern to find out what happened on the 4 days of trading:-


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

On Apr 13, '09, the Sensex moved up to pierce through the upper level of 10945 of the rectangular consolidation pattern of the past 6 months and closed 22 points above it - but failed to touch the 200 day EMA. After the holiday on Apr 14, the Sensex charged up with renewed vigour above the long-term average on Apr 15, '09 and managed to close above it.

On Apr 16, '09 the Sensex opened higher than the previous day's high but profit booking on heavy volumes caused a drop below the 200 day EMA, with the close below the previous day's close and almost at the upper level of the rectangular consolidation pattern. This higher-high-lower-close on high volumes is a typical 'reversal day' pattern often seen at the end of a longish upmove.

On Fri. April 17, '09, the index opened below the 200 day EMA, soon crossed it without any problems but then faced heavy headwinds and closed below it, 75 points above the previous day's close.

So three days in a row, the Sensex crossed the 200 day EMA, but closed above it only on one day. That still leaves us at the fork on the road, with the Sensex unable to decide whether to take the high road or the low.

What do the technical indicators say? The slow stochastics continues in the overbought zone, though the %K has just dipped below the %D line. The MACD has stopped rising. But both the ROC and the RSI have turned down from overbought zones. Friday's higher close was on lower volumes. The Sensex seems to be hesitating, much like the Hang Seng, after reaching the 200 day EMA .

What do the experts say? Anthony Bolton, the respected fund manager at Fidelity, recently gave a call that this is not a bear market rally but the start of a new multi-year bull market. Nouriel Roubini, Professor of Economics at NYU who had correctly predicted the economic downturn way back in 2006, has mentioned in an article that this is nothing but a bear market rally and the light at the end of the tunnel that many optimists are able to see is actually very faint.

A quick look at indices around the globe reveals that Bovespa (Brazil), Venezuela and Chile in South America and Shanghai, TSEC (Taiwan) and Kospi (Korea) in Asia are the only six that have closed above their 200 day EMA, but the upward rally is slowing. All the other world indices are below their 200 day EMAs.

Bottomline? Wait and watch till the Sensex makes up its mind. My hunch is that we are still in a bear market rally, which the 'reversal day' on Apr 16, '09 may bring to a halt. But the possibility of a trend change remains. When the 20 day EMA and the 50 day EMA both rise above the 200 day EMA a new bull market will be confirmed.

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