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Saturday, September 19, 2009

BSE Sensex Index Chart Pattern - Sep 18, '09

During last week's analysis of the BSE Sensex index chart pattern, I had made a couple of observations that require repeating. One was about the 61.8% Fibonacci retracement level of the entire bear market fall. This was indicated at 16524 (including the 3% 'whipsaw' lee way) and was the last resistance that the bulls needed to cross.

The other was about a 'rising wedge' bearish pattern that the Sensex had formed, and a downward break from the pattern below 15700 would have sent the index into the long-expected correction. Both points need more elaboration.

Let us first look at the 3 months bar chart pattern of the BSE Sensex index:-


A deluge of FII investments took the Sensex past the final hurdle of the 61.8% Fibonacci retracement level. Technically, there remains no further doubt that we are now in a bull market, and this rally can't be termed a bear market rally any more. Any corrections should now be used for buying.

Note the volume bars. Tue, Sep 15 '09 was an up day on lower volume. But volumes picked up noticeably on Wed and Thu (Sep 16 & 17 '09) as the index cleared the 16524 mark. The higher close of 16741 on Fri, Sep 18 '09 was a level not seen since May '08. But the new 52 week closing high was on reduced volume - indicating that this leg of the rally may be drawing to a close (finally!).

Also note that the distance between the 50 day and 200 day EMA is approaching 2000 points, and the index has moved about 1300 points above the 50 day EMA. There are negative divergences in the RSI, MFI and MACD. All these indications are bearish.

What about the bearish 'rising wedge' pattern? The 2 years weekly bar chart pattern may have some answers, and possible index targets:-


Last week's price action took the index above the 'rising wedge'. Does that mean a pattern failure? Not yet. The possibility of an 'end run' remains. That means, the upward break from the pattern can get reversed and the index can move down. The comparatively lower volume on the break out suggests this possibility.

Note how the previous top of 15600 in Aug '08 provided resistance to the Sensex up move for quite some time. The next resistance on the up side could come at 17600, the previous top in May '08. The 17600 level conforms with the 17800 level suggested earlier from the analysis of the gap in May '09. So, watch out for the 17600-17800 zone to provide good resistance to the first leg of this bull rally.

The maximum downside target on correction - when it eventually happens - would be the May '09 gap area. The 200 day EMA is at 13500, and the long-term average should provide support to a falling index. The Sensex may not go down that far. But it gives us an idea about the sell and buy levels.

Bottomline? The BSE Sensex index chart pattern is playing out the final stages of the bull market's first leg. This is not the time to enter - unless one finds compelling value in an individual stock. Book partial profits and conserve cash. Better buying opportunities may become available in the near future.


scorpio said...

why are you saying that this is not a bear market rally? and buy on dips... Is it because it has crossed the 61.8% retracement levels?

I was thinking that the 200 DMA acts like a bear phase and bull phase indicator, but we crossed that phase sometime back, so was wondering what is the basis of the bull phase.

Subhankar said...

Good questions, Ashish.

The short answer to your second question is: Yes.

The long answer: Several hurdles need to be crossed by the bulls, before a bear market reverses trend and can become a bull market.

The first is the 200 day EMA. Second, 20 day EMA moving above the 200 day EMA. Third, the 50 day EMA moving above the 200 day EMA.

In between are the 38.2% and 50% Fibonacci retracement levels. The final hurdle is the 61.8% Fibonacci retracement level.

Once the latter is crossed by the index (or stock), on the up (or down) side, a trend reversal is confirmed.

So, the strategy should change from 'sell-on-rise' to 'buy-on-dips'.

raj said...

Do u have to wait for 61.8 up move for conformation and then buy.

raj said...

In your profile u said taking contrarian view but u have not discuss any stock of contrarian type.also in your gayatari project u have given link to raajev blog. His analysis is not as professional as your.his recommed may have go up. But not because of inner value .people may take huge hit if market goes other way

Subhankar said...

Hi Raj

If you want to wait till the 61.8% Fibonacci retracement level is breached, you will miss the first part of a bull market. But you'll also be sure that it is a bull market rally and not a bear market correction. So, it depends on an individual's risk tolerance level - when (s)he wants to enter.

I wrote about Indian Hotels 3 months back (Jun 24 '09) - when no one was even talking about the hotel sector. Many of my blog posts have contrarian views - avoiding IVRCL, Punj Lloyd, Pantaloon and small cap stocks are not opinions that most small investors agree with! I've had a fair share of brickbats thrown at me in different investment fora for being 'without vision' and 'too negative'.

Rajeev's blog post on Gayatri Projects has a huge amount of fundamental information about the stock - and there was no point in duplicating it.

It may not be fair to compare his fundamental analysis with my technical analysis. Fact is, the stock has given 75% returns since our blog posts appeared 3 months back.