BSE Sensex Index Chart Pattern - Jul 3, '09

Last week's discussion about the BSE Sensex index chart pattern had the following observation:-

'The short-lived corrections in the BSE Sensex index chart pattern is hinting towards an attempt to hit the 16000 level.'

The Sensex managed to stay above its 20 day EMA through the week. The late surge on Friday could not take it even to the 15000 level.

What is so great about the 16000 level? Just an arithmetical target. It happens to be at the 61.8% Fibonacci retracement of the entire bear market fall from 21200 (in Jan '08) to 7700 (in Oct '08). That is the 'last hope' level for the bears - to try and regain control of the market.

Before we take a look at the 3 months closing chart pattern of the BSE Sensex index (in blue), please note that the closing chart pattern of the Dow Jones (DJIA) index (in red) has been superimposed for comparison. The intention is not to prove that the emerging market economies are on a firmer footing than that of the USA (which they are!), but to warn investors that when the 'big brother' stumbles, the 'baby brother' can tumble.

To help in comparing the two indices, percentage values instead of absolute index levels have been used. The DJIA had a maximum gain of 10% since early April '09, most of which it has lost. Last Thursday's close has taken it below all its three EMAs.

The Sensex had a maximum gain of 50% in the same period, most of which has been retained. The index is above all its three EMAs. This divergence between the Dow and the Sensex is the primary reason for my concern.

Through most of the bear market between Jan '08 to Mar '09, the DIIs (Domestic Institutional Investors) were buying while the FIIs (Foreign Institutional Investors) were selling. The DII buying could not stem the rot.

From Mar '09 onwards, the FIIs re-entered the Indian market and started buying heavily. That was one of the main reasons why the Sensex marched up. If the Dow continues to fall, the FIIs may decide to pull out in a hurry. The sparks of the fledgling bull market in India may get extinguished.

If such a flight of capital happens - and I'm not saying that it will - the budget on Monday, July 6 '09 could provide just the trigger for it. Why? Because too many positive expectations seem to have been built in to the index level already. Some stocks have gone up 4 or 5 times from their recent low levels in less than 4 months.

A quick check of the technicals. The 20 day EMA remains flat. The 50 day and 200 day EMAs are moving up very gradually. The MFI has turned up, but is still below the 50% level. Likewise for the RSI. The MACD is positive, but below its signal line. The slow stochastic is below the 50% level as well, but there has been a bullish crossover of the %K line above the %D line. The volume is disappointing.

Bottomline? In spite of the huge post-election jump on May 18 '09, the BSE Sensex chart pattern has not been able to completely shake off the bears. Any budget-related up move can be used to book partial profits. This is not the time to enter.