BSE Sensex Index Chart Pattern - Week ending May 1, 2009

Last week's BSE Sensex chart pattern discussion ended with the observation that selling pressure may set in before monthly settlement day. On another holiday-truncated week of trading, there was heavy selling on Tuesday, Apr 28, '09 with the Sensex dropping 370 points on high volumes.

But there was a strong bounce back the next day (settlement day), when the Sensex rose 400 points. In the process, the Sensex pierced through the long-term downtrend line drawn from the top made in Jan. 2008 through the tops made in May '08 and Sept '08. Have a look at the Sensex 2 years weekly candlestick chart pattern:-

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

As per trendline theory, once a trendline is penetrated, the previous trend is reversed. So one may infer that we are now in an uptrend and it is time to buy.

Now let us have a look at the 6 months bar chart pattern of the BSE Sensex:-

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

If you draw an uptrend line connecting the daily bottoms of the recent rally, you will see an upward sloping line which was broken on the downside by the three down days (Apr 20, 21, 22, '09) the week before. In last week's price action, the Sensex had a 'pullback' to this uptrend line but failed to go above it.

We have an interesting dichotomy here. A break of the long-term downtrend line, with a close above the 200 day EMA. This combination indicates the end of the bear market and the beginning of a bull market - like some experts have been saying. But a break of the short-term trendline followed by an aborted 'pullback' means an end of the recent uptrend.

Confusing, isn't it? No wonder technical analysis is often scoffed at! This makes technical analysis such an interesting challenge. Fundamental analysis is never this exciting - almost like a Hollywood thriller with everyone at the edge of their seats wondering what will happen next.

Let us analyse the 6 months chart. The Sensex has been moving in a sideways channel for the past 13 (unlucky for the superstitious?) days. In the process, it has started forming a 'rounding top' pattern which is bearish.

The 200 day EMA has been penetrated on 8 of those 13 days (Fibonacci enthusiasts will be delighted!), but the Sensex managed a close above the long-term average on only 4 days. The 200 day EMA has flattened but hasn't started rising yet.

Both the 20 day EMA and 50 day EMA are rising but remain below the 200 day EMA. Volumes have been OK at best. The slow stochastics is still in overbought zone. The MACD has stopped rising. But the ROC and RSI have started to drop off.

Bottomline? The BSE Sensex chart pattern shows that we are in a tantalising stage. My guess is that the recent rally might lead to some serious profit booking (finally!). If FIIs pull out because of continued weakness in Europe and USA, or the election results are unexpected, we may see a new lower bottom. However there is plenty of cash floating around - real and printed - that can prevent the market from falling too much. Either way, investors should stay on the sidelines for the next couple of weeks, and then start entering.