Saturday, August 15, 2009

BSE Sensex Index Chart Pattern - Aug 14, '09

Last week, some bearish possibilities were observed in the BSE Sensex chart pattern. The weakness in the index chart remains, despite the sudden 500 point jump on Thursday, Aug 13, '09. The volumes were lower than on the previous day, which was a 'down day'.

FIIs were net sellers on 4 of the 5 trading days last week. The only day that they were net buyers - which was also the day when the proposed tax reforms bill was made public - the BSE Sensex index jumped up.

Some observations made last week about a 'broadening top' formation, may be worth revisiting:-

'Such a formation is a distribution pattern, where the 'smart money' gets out and the 'weaker hands' (typically MFs and retail investors) jump in, trying not to miss the bus. Volumes tend to be uncertain, and price swings can be quite unpredictable.'

This week, let us look at the 3 months bar chart pattern of the BSE Sensex index that shows the entire post-budget trading:-


The trading pattern of the last 3 months has been confined within a broad range of 13200 to 16000. This consolidation, after a spectacular rise from the bottom of 8000 in Mar '09, has gone on long enough. A break out, either up or down, could happen in the near future.

The broadening top and sudden swings in levels and volumes indicates a possible break down wards. But a flood of liquidity from the FIIs can change the direction of the market and make it move up at least by 4-5%. That will take it to the resistance zone at the 61.8% Fibonacci retracement level of the entire bear market fall.

A small bit of trivia. The current Sensex level is the same as that in July '07 and Aug '08. In between, the index made an all time peak at 21200, and a bottom at 7700. For all the gyrations of the BSE Sensex, and the zillions of words written and uttered on business media, we have made zero progress in 2 years!

This is as good an example as any, that investors should concentrate more on individual stock movements and worry less about the index directions. Over the longer term, all that will count for wealth creation is how well you have selected individual stocks based on fundamental analysis, using Graham's concept of 'Margin of Safety'.

Finally, a look at the technical indicators. The 20 day EMA was broken briefly. The index took support at the 50 day EMA before jumping up above the 20 day EMA, which has flattened. So, the short term trend is neutral; the medium and long term trends remain up.

The RSI is at the 50% level. Likewise for the slow stochastic, but the %K line is below the %D. The MACD is positive, but is below its signal line and moving down. The MFI is below the 50% level and also heading down.

The strong grip of the bulls seems to be slipping. The below average monsoon isn't helping the situation. The bears are fighting hard, yet haven't quite regained control.

Bottomline? The BSE Sensex chart pattern is not inspiring the confidence required for a full-fledged bull market, in spite of the 100% rise from the bottom. Keep booking profits wherever available. Avoid entering questionable or high beta stocks.


scorpio said...

Sir when you say volumes are low - do you compare them to previous highs which were made for the same level. In your last post as well you mentioned the volumes were low on the up move of the sensex. Just a gaze at the volumes show that they are all the same. I have no info on technicals, i am learning all this from your blogs which is super interesting :)

Subhankar said...

As a general rule, volumes are supposed to rise when an index or a stock is moving up, and fall on a down move. When the opposite happens, it is a warning sign.

The volume bars may visually appear the same on the chart, but the actual figures are quite different.

For example, on Jun 11, '09 the Sensex closed at 15411 on a volume of 42 Crores but on Aug 14, '09 the Sensex closed at 15411 on a lower volume of 28.6 Crores.

On Jun 10, '09 the Sensex made a new closing high at 15466 on a volume of 42.4 Crores; on Aug 5, '09 a higher closing high of 15903 was made on a lower volume of 29.6 Crores; on Aug 6, '09 the Sensex fell to 15514 on higher volumes of 37.8 Crores.

Such volume action points to indecision among the bulls and a probable end to the up move from Mar '09 in the near term.