Saturday, September 12, 2009

BSE Sensex Index Chart Pattern - Sep 11, '09

During the previous week's discussion about the BSE Sensex index chart pattern, the bulls seemed to be still in control, and I had advised investors not to sell in a panic.

Hectic buying by the FIIs took the index to a new high of 16435 on Thur, Sep 10 '09. I had indicated that the 61.8% Fibonacci retracement of the entire bear market fall from 21200 to 7700 was at 16043. That hurdle has been almost crossed.

Why almost? Because technical analysis is imperfect, a 'whipsaw' lee way of 3% should always be added to any technical level. Adding 3% to 16043 gives us the final resistance to the bulls at 16524. That is the high water mark that the BSE Sensex index needs to cross to remove any further doubts about the bull market.

The DIIs initially joined the FIIs for the bull party last week. Interestingly, they turned net sellers on the last two days. Wonder why. Is it because the Oil India IPO went through smoothly by Thur Sep 10 '09, so they no longer needed to provide buying support?

Let us take a look at effect of last week's bull charge on the 3 months bar chart pattern of the BSE Sensex index:-


All three EMAs are up and running with the index. The volumes perked up a bit after the dismal show in Aug '09, but is still lagging the Jun and Jul '09 volumes. Unless the volumes pick up, the bull run may stall.

The technical indicators have improved quite a bit. The RSI touched the overbought zone before drifting down. The MFI is just below its overbought zone. No such problems with the slow stochastic, which stayed above the 80% level. The MACD has moved above the signal line.

Bullish readers must be thinking that I've finally exhausted all bearish signals. I've thrown up low volumes, increasing distance between the 50 day and 200 day EMAs, negative divergences, a possible 'broadening top', and even a rare 'island reversal'. The bull market has climbed every wall of worry.

Wait just a minute. There is one more bearish indicator up my sleeve. And this one - as the Yanks would say - is a real 'doozy'. I had pointed out this pattern in a recent post on the Dow Jones index. Last week's trading has formed one in the Sensex chart. The one year bar chart pattern of the BSE Sensex has formed a 'rising wedge':-


The 'rising wedge' is like a 'triangle' or a 'pennant' consolidation pattern, except the two trend lines connecting the tops and bottoms slant upwards. It typically takes 3 to 8 weeks to form, and reverses an intermediate top in a bear market. All the conditions seem to have been met (since the pattern started forming after the low of 13220 on Jul 13 '09), and a 'denouement' can be expected in the coming week.

The Sensex closed higher on Fri, Sep 11 '09 but had a lower top and a lower bottom than Thur, Sep 10 '09. Was it preparing for a fall? Look closely at the 15700 level next week. That level is at the lower trend line of the 'rising wedge'. If that breaks (don't forget the 3% lee way), the much awaited correction could follow.

Bottomline? The BSE Sensex index chart pattern continues to move up against considerable odds. Extreme caution is advised. Intrepid investors can keep trailing stop losses and wait for the index to make up its mind. The faint-of-heart can book profits.


Jackal said...

Nice post Subhankar. Saw something called as gravestone doji being formed on the Nifty on Thu / Fri by a post on the groups. Was observing some candlestick patterns before the big fall in Jan'08 and now and some similarities are visible. Additionally, the index has "broken" the ascending triangle marginally (saw it on the RSI) but did not follow up with higher volumes / price rise on Friday. I feel this indicates a "setting up" operation to trap the traders to go long on a false breakout (similar to Jan '08) and then go in for the kill by trapping them. Too many penny scrip discussions on the groups, media turning bullish / "liquidity" being the factor of rise, retail people thinking nothing can go wrong etc. etc. dont lead to a comfortable feeling. I feel it may be a fall than a rise of 2000+ points on the Sensex. My amateurish views and may be entirely wrong too. I am sitting out and watching the movie unfold.

Subhankar said...

Appreciate your comments, Venky.

I don't track the Nifty (because the authorities do not consider 'gaps' - which makes it unsuitable for technical analysis), so won't be able to comment on the Doji.

FIIs are continuously pouring in money. The liquidity is overwhelming technical signals. I've learned not to fight the trend - so have set trailing stop-losses and enjoying the ride, while it lasts.