Saturday, May 23, 2009

BSE Sensex Index Chart Pattern - May 22, '09

Last week's analysis of the BSE Sensex index chart pattern was concluded with the following comment:-

'The BSE Sensex index chart pattern shows that the upward thrust can continue some more - but this isn't the correct time to enter. Investors should stay calm and use a rapid up move on election results to book some profits.'

Monday, May 18, '09 created a history of sorts. A huge gap up opening made the BSE Sensex hit two upper circuit limits, followed by a shut down in trading for the rest of the day. The volumes were very low due to the extremely short trading session. The rise was largely due to short covering.

What happened during the rest of the week was quite interesting. Let us look at the 3 months bar chart pattern of the BSE Sensex:-


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

The Sensex hit an intra-day high of 14930 on Tue. Mar 19, '09 but closed at 14300. This is very near the level of 14450 - which is the 50% Fibonacci retracement level of the entire fall from 21200 to 7700.

Some experts opine that up to a 50% retracement can happen in an intermediate rally without changing the primary trend. In simple English, that means that by the proverbial whisker's width, this remains a bear market rally.

Technically, the crossing of the Sensex above its 200 day EMA was the first sign of trend change. This was followed by the long-term down trend line from the Jan '08 top getting pierced. Next the 20 day EMA went above the 200 day EMA. That makes it three out of three for a trend change from bear market to bull market.

For the 'uber' bears, one last straw remains. The crossing of the 50 day EMA above the 200 day EMA. The bears' back should get broken next week. But bears should not throw in the towel yet. There is one more intriguing possibility left.

The BSE Sensex dropped on profit booking on Wednesday and Thursday. Friday's close was higher than Thursday's, but on lower volumes. End result? The week's trading failed to close the gap made on Monday. This has created an 'island' above the gap.

If, by any chance, a gap down opening happens on Mon. Mar 25, '09 and the BSE Sensex moves further down during the week, then that would cause an 'island reversal', which is very bearish. What is the probability of such an event happening? Very low.

The MACD is moving up and has made a new high. The ROC is also moving up but made a lower high. The slow stochastic has just slipped below the overbought zone. The RSI has also moved down from the overbought zone.

Bottomline? The BSE Sensex index chart pattern seems to be taking a well-deserved rest after a huge up move. Some more correction isn't ruled out. The more likely move may be a sideways consolidation till the budget. Investors should monitor Q4 results and take stock-specific decisions.


ekamber said...

dear subhankar ji
As is usual with you a nice presentation of your view, as per the interpretation of the date. One thing I wish to understand is that are there any confirmations that we may go back to lower levels from 200WMA, the volumes are good, the euphoria and the fund flow is also good. But still I am unable to convince myself that we are out of the woods yet, as the consolidation, which is mush required to take off is missing.
my feelings only
with regards

Subhankar said...

Appreciate your feedback, Ekamber.

The Sensex reflects the collective aspirations of market participants. It mostly defies logic. The trick to investment success is not to try and outguess the market, but identify trends and follow them.

Identify good stocks in sectors that you know about, and invest in them when you have the cash. I set a limit to the amount invested per share. That way I neither become a king, nor a pauper.

There are no confirmations that the Sensex is going much lower. The possibility exists - however remote. Don't fret about a correction. It will happen at some time or the other. When aspirations don't get fulfilled.

LovelyGuy said...

Very Impressive analysis Subhanker.

Subhankar said...

Thanks, Spandan.

I just write what I see on the charts. Mr Market has a will of his own.

Eswar Santhosh said...

Though I am not qualified to talk about TA, I will go ahead with my doubt.

In the last bear market, there are two instances where 50EMA and 20EMA crossed over 200EMA: Feb 2002 to Apr 2002 and Dec 2002 - Mar 2003. Of course, the bull market began soon after the second one.

So, my question is this - Is there anything that's different from those instances?

Though I do not mind Bulls helping me make money, I do have a special liking for the Grizzly ;-)

Subhankar said...

You don't need any qualifications to comment on a blog post, Eswar.

One of my favourite proverbs is: discussion leads to education.

Just remember that technical indicators are just that - indicators. So you need to look at several to form an opinion.

The underlying sentiment and volume indicates that investors are collectively ready for the bull market to continue.

The whole purpose of investing is to make money. You make money when you can sell! Bull markets give you many opportunities to do so.