BSE Sensex Index Chart Pattern - Oct 2, '09

A trading week truncated by two holidays was expected to favour the bears. But the bulls, led by the FIIs, were in no mood to relent. The BSE Sensex index chart added another 2.5% for the week. But the volumes continued to remain on the lower side.

While the FIIs poured in a huge amount of money during Sep '09, the domestic institutions and funds have been selling. Anecdotal evidence suggests that retail investors have also been booking profits in the hope of buying at lower levels during a correction.

It appears that the FIIs are expecting Q209 results to be better than the previous quarter. The Asian markets, the European markets and the US market - all started their corrective moves last week. Can the BSE Sensex remain the odd one out?

Let us take a look at the 6 months bar chart pattern of the BSE Sensex index to try and ascertain any possible weaknesses:-

The 'gap' opening on May 18 '09, post election results continues to remain unfilled. The correction in Jul '09 to 13220 can be considered as a part-filling of the gap - and that level is unlikely to get tested in the near future because the 200 day EMA is now above it, and should provide support to any large correction.

In a post about analysing gaps, I had indicated a possible upside target during this bull rally at 17800. At the new high of 17196 made on Oct 1 '09, the Sensex is just about 3.5% short of the target. Since technical analysis deals with 'close enough' rather than exact levels, a correction could be starting any time - possibly even next week.

Are the technical indicators showing any weaknesses at all? Let's take them up one by one. All three EMAs are moving up steadily, and the Sensex is above them. No threat to the bull market there. But the distance between the 50 day EMA and 200 day EMA has now exceeded 2000 points. On earlier occasions, this had led to strong corrections.

The MACD is positive and above its signal line, but has failed to make a higher top. The ROC is in the positive zone and also failed to make a higher top. These are negative divergences. The RSI and MFI are both at the edge of their overbought zones, confirming the bullishness in the index.

Bottomline? The BSE Sensex chart pattern is looking quite bullish, thanks to the flood of dollars and euros. If the FIIs start booking profits, as they seem to be doing in other global markets, the much-awaited correction could finally materialise. Time to get rid of the dogs in your portfolio.