Sunday, July 19, 2009

BSE Sensex Index Chart Pattern - Jul 17, '09

In last week's discussion about the BSE Sensex index chart pattern, I had written about three possible outcomes:

1. An 'island reversal'
2. The BSE Sensex taking support at the gap and moving up again
3. The BSE Sensex closing the gap first and then moving up

Island reversals occur infrequently - but the possibility still remains open, as a 'gap down' opening that remains unfilled for a while would cause such a reversal.

I had accorded a lower priority of the BSE Sensex chart taking support at the gap because of the bearish sentiments in the overseas markets, as well as at home.

But the FIIs had the last laugh as usual. A spurt of buying seemed to trap the bears, who resorted to short covering that made the index jump.

The Sensex hit a low of 13200, which was below the previous low of 13500 that defined the top of the gap.

Please remember that in technical analysis - which is an art and not a science - exact values should not be used to avoid 'whipsaws'. A 3% tolerance is supposed to take care of this problem, which gives a level of 13100 from the level of 13500.

Since the Sensex recovered before piercing the 13100 level, the gap remains unfilled as per technicals. The island of trading and the gap has been marked in the 2 years weekly bar chart pattern of the BSE Sensex index (top chart).

Let us now look at the 6 months closing chart pattern of the BSE Sensex (bottom chart) for some clues to future movements.

After a brief sojourn below the 20 day and 50 day EMAs, the index has jumped above both the moving averages and remains in a bull market. Volumes have supported last week's up move. The slow stochastic has risen sharply from the oversold region and gone above the 50% level. That's the good news for bulls.

The MACD is marginally negative and touching its signal line. The MFI has remained at the 50% level, while the Sensex moved up - a negative divergence. But look at the RSI. It has moved down after touching the 50% level.
Looks like the bears will hardly give up without a fight.

In the 2 years chart, the RSI is still in the overbought zone. The slow stochastic is just below its overbought zone and the %K is below the %D line. The MACD is positive, but moving down towards its signal line.

Bottomline? The BSE Sensex index chart pattern is looking bullish again, but the technical indicators are giving conflicting signals. The Sensex may try to break above its previous high of 15600 to reach the immediate target of 16000. Keep taking partial profits home, and suppress the urge to jump in.


Sujatha said...

In 6 months chart, slow stoch has not yet given breakout am i right? It's n 50 levels only, and RSI showing touched 50 and moving down...

So bears may attack any time? but still expecting your Island reversal... apart from bullish views

Please post your views on short term also which will be enable us to learn something better novice like me...

Thanks in advance...

Anonymous said...

Thank you subhankarji for a well researched and timely article.
With regards,

Unknown said...

Silly doubts follow...

For Daily Charts,

1) If one is interested only in the long term, what should be the suggested time frame for the charts? 2-year chart? 1-year chart? Longer, the better?

2) Can some indicators give a different picture in say, 1 month, 3 month charts when compared to a longer term chart?

3) If yes to [2], as a long term investor, should one be concerned only with long term charts (or) also need to take stock of the short term charts?

Subhankar said...

@Sujatha: Please read my post of May 8, '09 for an explanation of the stochastic oscillator. Any time it emerges from the oversold zone (below 20% level) it is a bullish sign.

As a long term investor, I will advise you not to get swayed by the short-term market movements. (If you are really keen, use a 10 day or 13 day EMA to compare with the Sensex movements.)

@Sujoy: You are generous with your comments, as usual. Thanks.

@Eswar: Doubts are never silly! They need clarifying.

1. I look at 3m, 6m, 1 yr, 2 yrs, 5 yrs daily/weekly/monthly charts

2. I also look at 20 day (short), 50 day (medium) and 200 day (long term) EMAs. One can be going up while the other is flat while the third is moving down. That may mean short-term bullish, medium term neutral and long-term bearish.

3. See answer to 1 above. The idea is to look for identifiable patterns dispassionately. It may occur in a short-term daily chart, or a medium term weekly chart or a long term monthly chart.

If you try to find a pattern to fit your bullish hunch or bearish gut feel, you will be courting trouble.

Unknown said...

Thanks for the clarification.

Confirmation bias always seems to be a bad thing - soothing for the ego and sour for the returns :-)