BSE Sensex Index Chart Pattern - Jul 31, '09

The concluding observation in last week's analysis of the BSE Sensex index chart pattern was:-

'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.'

During the first three days - i.e. Jul 27-29, '09 - the bears did try to take back the initiative. Even selling by the FIIs could only put a temporary halt to the bull charge. By Friday, Jul 31, '09, the bulls had won the week's skirmish and confidently took the Sensex past its previous high of 15600.

The 6 months bar chart pattern of the BSE Sensex index has a couple of changes from the week before:-

First, the positives. The Sensex made a new high of 15733. All three EMAs are moving north with the index. The RSI has nicely moved up and is about to enter the overbought zone. The MFI has inched slightly above the 50% level. The slow stochastic is comfortably in the overbought zone, where it can stay for some time. Even the MACD is starting to move up, and is above its signal line.

Now, the negatives. Volumes remain a concern. On Wed. July 29, '09 the volume was higher on a down day, than on the next two up days. Both the MFI and MACD are showing negative divergence, making lower tops while the Sensex made a new high.

The break above the previous high of 15600 is not totally convincing. Till the BSE Sensex closes above 16068 - the 3% 'whipsaw' leeway will remain in force. In simple English, it means, the Sensex can go all the way to 16068 and then fall down again.

Interestingly, the 61.8% Fibonacci retracement of the entire bear market fall from 21200 to 7700, gives a level of 16043, which is tantalisingly close to 16068 and should be treated as identical for technical analysis purposes.

So what is the big deal about the 61.8% Fibonacci retracement? 61.8% is the maximum retracement allowed for the previous trend to remain alive. In other words, should the Sensex index fail to cross the 16043-16068 level convincingly and move down sharply again, the bear market from Jan '08 will technically still remain in force!

We ain't done yet. Let us have a look at the longer term 2 years bar chart pattern of the BSE Sensex index:-

Note the cup-and-handle formation that I've been discussing of late. The Sensex has broken out of the downward sloping 'handle' pattern, which is a bullish sign. Now it is consolidating at the level of the top edge of the 'cup'.

A sharp rise by the Sensex will increase the distance between the 50 day and 200 day EMA - currently 1600 points - to almost 2000 points. I have marked with double-headed arrows the previous two occasions when this happened. Both times we saw trend reversals.

Bottomline? The BSE Sensex chart pattern is still under the control of the bulls, and may remain so for a while. But there seems to be a confluence of various bearish possibilities - consolidation at the 'cup' edge, the 61.8% Fibonacci retracement level, increasing distance between the 50 and 200 day EMAs, the unfilled 'gap' created on May 18, '09.

Be cautious, but not fearful. Strict trailing stop losses should save the day if a big correction occurs.