BSE Sensex Index Chart Pattern - Oct 16, '09

The BSE Sensex chart pattern made a new high during the holiday shortened week, and closed absolutely flat after the special Diwali 'muhurat' trading session today (Sat, Oct 17 '09). This wasn't unexpected, as traders only make token purchases and sales during the auspicious first day of the business year.

Last week's analysis of the BSE Sensex chart pattern had the following observation, which proved quite prophetic:-

'Bull markets climb a wall or worry, and a large inflow of liquidity can nullify all technical analysis - as has happened a few times during this bull rally. So avoid shorting the market.'

FIIs pumped in a lot of cash last week. Strong selling by the domestic institutional investors could not stop the bull charge. But volumes were uninspiring, which remains a concern for the sustainability of the bull rally. But Q209 results announced so far have been quite encouraging, so the party may continue a bit longer.

There is anecdotal evidence about investors, waiting with cash for buying on the next correction, becoming impatient about redeploying the funds back into the stock market. When the last of the doubters join the bull band wagon is when the correction will happen in right earnest.

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

 

All three EMAs are moving up in tandem with the index. However, the upward momentum is slowing. Up days on Oct 12 and Oct 16 had lower volumes than the previous down day volumes.

The technical indicators are bullish, but showing negative divergences. The RSI and MFI are both above their 50% levels, but made lower tops. The slow stochastic has entered the overbought zone. The MACD has moved up to touch the signal line, but has also made a lower top.

Till the FII cash flow changes direction, the bulls will not give up their stranglehold on the market. As long as the FIIs keep buying, the dollar will remain weak against the rupee, making it worthwhile for them to keep investing more.

Bottomline? The stock chart pattern of the BSE Sensex index is less than 500 points below the near-term target of 17800. Caution is advised. Maintain stop losses, and keep booking partial profits.