BSE Sensex Index Chart Pattern - Aug 21, '09

During the previous week's analysis of the BSE Sensex index chart pattern, I had observed that the bulls were beginning to lose control though the bears hadn't quite gained the upper hand. The Sensex continued its sideways consolidation, with the bulls and bears almost evenly matched.

The 'Butterfly Effect' of the big correction in the Shanghai Composite index led to a 626 point fall in the Sensex on Monday, Aug 17, '09. The index behaved like a yo-yo for the rest of the week, alternately going down and moving up, ending with a small week-on-week drop of 150 points.

Those who do not follow (or, do not wish to follow) technical analysis despite the constant barrage of charts and indicators on this blog, may think that a 150 points drop is no big deal and indicates nothing. They may be right - specially if one looks at price charts from a long-term point of view.

A closer look at the 3 months bar chart pattern of the BSE Sensex index will reveal that technical analysis can point out certain anomalies or divergences that help in forewarning about events to follow:-

 

Good support from the 50 day EMA saved the Sensex from a bigger fall. But note how the support has been tested 4 times in quick succession - on Aug 12, and then Aug 17, 18 and 19, '09. Supports (and resistances) get weakened by three or four tests, and may not be able to withstand the next one.

Also note that for 4 days in a row, the index closed below the 20 day EMA - which has flattened - before closing smartly above it on Fri Aug 21, '09. (Those little notches to the right of each price bar indicate the closing level each day; the notches on the left are the opening levels of each day.)

Such short term weakness is also confirmed by the other technical indicators. The volumes are petering off and making lower highs. The RSI and MFI are now both below their 50% levels. The slow stochastic has moved down more, but stopped short of entering the oversold zone. The MACD is below the signal line and barely positive.

Investors should watch the previous low of 13220, made on Jul 13, '09, closely. That level happens to be the upper end of the huge gap in the Sensex made on May 18, '09. The 200 day EMA is a couple of hundred points below it. The combination could prevent the Sensex from correcting into the gap area. 

Bottomline? The BSE Sensex index chart pattern looks ready for a 10-15% correction. Some times the stock market does the exact opposite of expectations. The index may just start an up move towards the previous high of 16000 - specially if the FIIs start to buy big. That should be used as an opportunity to sell. Otherwise, stay on the sidelines and research individual stocks (specially the ones that have been left out from the rally).