Saturday, July 25, 2009

BSE Sensex Index Chart Pattern - Jul 24, '09

In the analysis of the BSE Sensex index chart pattern last week, I had mentioned that the Sensex may try to break above its previous high of 15600, but the bears won't give up without a fight.

The tussle between the bulls and bears continued - with the bulls getting an edge by the weekend, but the bears had the satisfaction of inflicting sufficient damage mid-week that left the 15600 level intact.

Let us take a look at the 6 months bar chart pattern of the BSE Sensex index and observe some of the developing possibilities:-


The entire trading from the gap-up opening of May 18, '09 to the 'reversal day' of July 6, '09 formed a head-and-shoulders topping pattern on the Sensex chart.

There was volume confirmation as well. Volumes were much higher on May 19, '09 when the left shoulder was formed; on July 6, '09, the right shoulder was formed on strong but lower volumes.

The gurus of technical analysis, Edwards and Magee, have stated that the head-and-shoulders pattern is a 'dangerously toppy situation' even without volume confirmation.

The Sensex broke the neckline and fell about 1000 points to 13220 on July 13, '09. Interestingly, a similar topping pattern was formed on the Dow chart as well as on several individual stock charts.

Just when every one and his brother-in-law were expecting a more severe correction, the market bounced strongly upwards, negating the head-and-shoulders pattern. So, is everything hunky-dory for the bulls?

Not yet. There are a few things that are bothersome about the new bull fervour. Let us consider them one-by-one.

** There is no doubt that the head-and-shoulders pattern had formed. Though the bulls managed to negate it, the underlying weakness that led to the pattern may not have gone away entirely. Bearish.

** Even after a 2000 point rise, from 13220 to 15380, the Sensex remains within a sideways rectangular consolidation pattern. Till it breaks above 15600 convincingly, the consolidation may continue. Neutral.

** If the Sensex does cross 15600 and goes to 16000 or so, and then turns back down and makes a low that is lower than 13220, we will get a higher high and a lower low. This would lead to a bearish 'broadening formation'. Bearish.

** The possibility of a bearish 'island reversal' remains open as long as the Sensex trades in a range and the gap remains unfilled. Bearish.

** If the Sensex drops from its current level, it may indicate a 'double top'. Bearish.

We have four bearish possibilities and one neutral possibility acting as brakes to an up move. That doesn't mean that the bulls won't win the battle.

Finally, the technical indicators. Both the RSI and MFI are at their 50% levels. But both have made lower tops while the Sensex may have made a 'double top'. The negative divergences and the possible 'double top' on the Sensex are bearish.

The MACD is slightly positive, but like the RSI and MFI, has made a lower top. The slow stochastic has made a dash towards the overbought zone and is showing strong bullishness. All three EMAs are moving up and the Sensex is above them, so the bulls are still in control of this market.

Bottomline? The BSE Sensex index chart pattern has thrown up several possibilities, and technically at least, the bears may try to wrest the initiative. But the bulls are in control for now. Wherever profits are available, take some home. Or, keep strict stop losses and enjoy the fight.


Sujatha said...

Thanks for posting the charts early..especialy for the brief comments..

Almost your last week target achieved..


Anonymous said...

thanks a lot for a very well written and timely article.Subhankarji sensex PE is at 20, a PE of 22 indicates the beginning of formation of bubble.Dont you think markets is overvalued.

Subhankar said...

Thanks Sujatha and Sujoy for your comments.

The search for a market turnaround signal is much like the quest for the "Holy Grail". Unattainable.

For the Sensex, I observe the difference between the 50 day and 200 day EMAs. As a thumb rule, the market turns around when this gap exceeds 2000 points.

We are not quite there yet. So I reckon we may see 16000-16500 before the correction begins. But as I keep mentioning, technical analysis is not a Gospel.

Unknown said...

Thanks for the chart and comments.

Do some NIFTY Chart also for everybody's benefit


Subhankar said...

Hi Mani

Appreciate your comment. I don't track the Nifty because the Nifty authorities do not consider 'gaps' - the previous day's closing rate is treated as the next day's opening rate. I find it unsuitable for technical analysis.

If you are interested in the Nifty, Devangshu Datta writes every Monday about Nifty technicals at