Saturday, November 28, 2009

BSE Sensex Index Chart Pattern - Nov 27, '09

In last week's analysis of the BSE Sensex index chart pattern, I had mentioned some concerns about the continuation of the bull rally, even as the technical indicators were looking bullish. These included:-

  • low volumes that indicated lack of follow-up buying
  • slowing momentum near the 17000 level
  • double-whammy of settlement day in India and the Thanksgiving holiday in the USA that could lead to FII selling

All of the above contributed to the sharp correction on higher volumes on Thursday and Friday (Nov 26 and 27 '09). But the real trigger for the world-wide selling was the Dubai World loan repayment re-scheduling. A classic case of the 'butterfly effect'!

The question is: Will the FIIs continue with their profit booking due to end-of-year considerations, or will they use this dip to start buying? Let us have a look at the 6 months bar chart pattern of the BSE Sensex index to find the answer:-


Observe the volume bars in Jun '09 and Jul '09, and compare them with those of Oct '09 (when the Sensex made a new high of 17493) and Nov '09 (the high last week was 17290 on Wed, Nov 25 '09). Bull markets can't sustain on low volumes.

Remember that the BSE Sensex index had broken downwards from a bearish 'rising wedge' formation in Oct '09. A pull-back attempt in Nov '09 failed to reach the previous high, and provided an excellent opportunity to sell. FIIs and smart investors did exactly that by using the Dubai fiasco as an excuse.

The correction dropped the index below the 50 day EMA but short covering ensured a close above the medium-term average. For the week, the BSE Sensex closed 390 points (2.3%) lower. The 200 day EMA is still moving up and the Sensex is more than 1100 points above it, so the bull market remains in tact.

The technical indicators have turned a lot weaker. The RSI has fallen from its overbought zone. So has the slow stochastic. The MFI has dropped to the 50% level. The MACD is falling but remains positive and just above the signal line.

Bottomline? The BSE Sensex index chart pattern looks poised for a deeper correction. Watch out for the previous low of 15331. If that gets broken, the index may fall to the Jul '09 low of 13220. Likely support will be at the 200 day EMA. Those levels will provide good opportunities to re-enter.


harsha said...

It will touch 5200 and above,
If rsi is low who has to make it high...
Not always Technical analysis helps...

Ramchandra said...

Dear Sir,

Any reason for market went up/did not go down as per the technical? Though the week ending may not be so encouraging for the investor, Sensex could manage to hold 17000 mark. However this move from the market against your prediction....sorry, the correct word might be against to technical chart is bit confusing.
I am following your advice and learning a lot in reading technical charts. It would be nice to analyze why and where the market did not follow the chart…!!!
When I observe the FII activity with just FOUR days they did lots of buying. This might also be due to the strong growth rate which presented from govt. It seems that world market is not supporting that much to cross above 17200 level.

I kindly request you to give your valuable comments in this week of your study to understand the market direction. Do you still believe that market is fully poised for correction?

Kind Regards,

Subhankar said...

@harsha: Don't think the Sensex is going to touch 5200 any time soon, if ever! Or, did you mean the Nifty?

@Ramchandra: The FIIs have been in control of our markets for quite some time. But all their buying has not been able to take the Sensex past the Oct '09 high of 17493 yet.

The technicals are still looking weak, and a good correction will help the market reach newer highs. A lot of new issues are in the pipeline. That will divert cash from the secondary market. Any new high in the present market may be short-lived.