Saturday, May 30, 2009

BSE Sensex Index Chart Pattern - May 29, '09

In last week's analysis of the BSE Sensex index chart pattern, I had mentioned about the following possibility:-

'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.'

The 50 day EMA smoothly moved above the 200 day EMA as expected. All three EMAs are now moving up along with the Sensex - which closed higher for the 12th straight week. Must be a record of some kind.

One last glimmer of hope remains for the bears, but it is a very, very faint hope. I had mentioned about the possibility of an 'island reversal' because the big gap on the Sensex chart created on Mon. May 18, '09 remained unfilled. Last week's trading came no where close to filling the gap.

The 3 months bar chart pattern of the BSE Sensex will clearly show that the last two weeks' trading has been at a significantly higher level leaving the gap untouched:-


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

The slow stochastic, MACD, ROC and RSI are all moving up. The one-day's correction on Tue. May 26, '09 did bring the slow stochastic below the overbought zone, but looks like it is ready to go back.

Notice how the slow stochastic remained in the overbought zone right through the month of April '09 and it looks like it will remain overbought for a while longer. The bullish sentiment is too strong and may last till the budget presentation in the first week of July '09.

Those who have missed the rally and are feeling desperate about jumping in - don't. Keep watching the slow stochastic for a proper correction. (More about how to use the slow stochastic indicator can be found in this post.)

At some point - may be after the budget belies some of the high expectations of market participants - the bull surge will wane and the Sensex will come down to levels which will be more conducive for a re-entry.

The Sensex is now consolidating around the 50% Fibonacci retracement level (of about 14450) of the entire fall from 21200 in Jan '08 to 7700 in Oct '08. Once it clears this hurdle - and there is no reason why it should not - the next stop will be about 16500. That is the 61.8% retracement level of the entire fall.

Why and how does the BSE Sensex index retrace by these specific percentage levels? Good question. Technical analysis tends to be self-fulfilling. Because many market participants know about these levels, they tend to take profits near these levels. If any one has a logical answer, I would like to hear it.

Bottomline? Enjoy the bull ride, but maintain trailing stop losses and remember to book some partial profits on those stock investments that have gained appreciably during the rally. Remain stock specific, and buy them on dips.

(Next week I plan to write the third installment of the mini-series: 'How to pick stocks for investment'. The first part on general guidelines appeared in this post. The second part was about the top-down approach to stock picking. The third part will discuss the bottom-up approach for stock selection.)


Eswar Santhosh said...

Right post at the right time - just when I am about to prepare my sell list for the next week and beyond :-)

It is difficult to predict the exact turning point, as it seems (from your post) that indicators can remain irrational longer than investors can remain patient.

This may not be a good time to buy stocks. But it certainly is a good time to show the door to "Oops! why did I buy THIS?" stocks.

Hope it corrects well (whenever it may be) as I am finding it increasingly difficult to find potential portfolio stocks at juicy valuations :-)

Subhankar said...

There you go, Eswar. You're getting a hang of this game fast.

The time to sell is when every one is talking of buying. As good a time as any to get rid of your non-performers.

(There was a small nugget in the FTSE 100 analysis post on Friday, May 29, '09. Guess you missed it.)

Eswar Santhosh said...

Thanks for the nugget :-)

I read this post and moved on to preparation of sell list. It's only after your comment that I read the FTSE post.

Anyways, my sell list has the following items:

Stock Name, How much to Sell, Around what Price and Priority

High Priority - Sell with eyes closed whatever be the price (any price +/- 10% from Friday close is OK).

Normal - Sell, but no hurry.

Low - No requirement for selling immediately, but if it moves up 10%+ from here, consider selling.

It's on paper. Hope I do execute it correctly.

Poor execution has been my bane in the past :-(

Subhankar said...

You're welcome, Eswar.

The first step to investing success is to have a written plan. I have an Excel spreadsheet with a list of my portfolio stocks, and on a weekly basis I put add/book profits/hold comments against them. (It is mostly 'Hold' in my case!)

But greed or fear takes over some times - and that is what causes poor execution. It is a discipline you learn with experience.

Once you've decided a stock selection was a mistake, be ruthless about getting rid of it. Take the loss to avoid a bigger one.

ssharma said...

ankarji,Thanks for a very timely and thought provoking article. Subhankarji if you see last 3 days NSE TURNOVER ,DELIVERIES ARE ONLY 20 to 30%.This is nothing but IRRATIONAL EXUBERANCE GUIDED BY FIIs STEROIDS.I have already utilized this to get rid of sole real estate stock in my portfolio NAGARJUN CONST at profits.I intend to book partial profits tomorrow on some shares which have risen by 100% and more.

Subhankar said...

Thanks for your feedback - particularly about the NSE deliveries, Sujoy.

You are looking at the right pieces of information and doing the right thing by booking profits partially.

Lock those profits away in an FD while interest rates are still 8%+. Opt for quarterly interest and deploy the interest back in the market.