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Saturday, April 25, 2009

Sensex Chart Pattern - Week ending Apr 24, '09

In last week's discussion about the Sensex chart pattern, I had mentioned about the hesitation of the index near its 200 day EMA - as if it was finding it tough to make up its mind whether it wanted to remain below or move above the long-term moving average.

After two holiday shortened weeks, we had a full week of trading. The Sensex crept lower on the first three days, only for the bulls to resume control and move the Sensex up on Thursday and Friday.

Let us have a look at the 6 months bar chart pattern of the Sensex to find out if there is any indication of reversal of trend:-


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

Friday's (Apr 24, '09) near 200 point rise caused the index to close above its 200 day EMA for the second time this month. But can you see what were significant differences from the previous close above the long-term average on Apr 15, '09? No? That's because you haven't looked at the right places!

The close on Apr 24, '09 was 0.4% higher than on Apr 15, '09 - 45 points to be precise. Not clearly visible on the charts? Not that significant? You're excused for not noticing on both counts.

But what about the volumes? It was 35% lower on Apr 24, '09 compared to the volume on Apr 15, '09. A higher close on a significantly lower volume is a red flag. Are there other negatives as well? Yes.

Both the ROC and RSI continue to make lower tops as the Sensex moves higher - a 'divergence'. The MACD has flattened and is refusing to move up. (Only the slow stochastics is giving a positive spin with the %K moving above the %D in the overbought zone.)

Now compare the Sensex action with that of the KOSPI chart pattern discussed yesterday. Notice how the KOSPI had not only charged well above the 200 day EMA on significantly higher volumes, but its 20 day EMA had also nosed above the 200 day EMA - the first confirmation of a bull market.

No such luck for the Sensex - yet. The volumes are reducing, the indicators are giving negative divergences, and though the 20 day EMA and 50 day EMA are moving up, both are still below the 200 day EMA. Technically, we are in a bear market.

Bottomline? The Sensex rally is beginning to look like it is on its last legs. I won't be surprised if selling pressure sets in before settlement day on Thursday, Apr 30, '09. Extreme caution is the watchword. Fresh investments to be avoided.


Anonymous said...

thanks a lot subhankarji for your timely caution to retail investors. I hope they will follow your sage advice.Sensex at P/E of 15.5 is overvalued vis a vis other emerging markets BRAZIL has PE of 7 and RUSSIA has PE of 2.5.A correction is round the corner.
With regards,

Subhankar said...

You're welcome, Sujoy.

Hang Seng has already corrected quite a bit. Taiwan is starting to correct. Only Korea seems to be going up and away.