Saturday, December 12, 2009

BSE Sensex Index Chart Pattern - Dec 11, '09

Two week's back, I had written about the possibility of a deeper correction in the BSE Sensex index due to the weakness in the technical indicators and the lack of follow-up buying.

Instead, the Sensex got into a sideways consolidation pattern that received excellent support from the 20 day EMA. The tussle between the bulls and bears remains inconclusive, with volatile daily trading.

World wide, indices are showing a similar indecision among market players. The global bull rally has continued for several months on dwindling volumes and weak fundamentals. The threat of a recession has subsided. But the stock markets have discounted that well in advance.

The time for reckoning has come. The Indian economy is getting back to its earlier growth path, but stock valuations in frontline companies are no longer reasonable. The tendency to shift to mid-cap and small-cap stocks with better valuations is apparent.

That is a sign that this particular rally is topping out. The fact that many market experts have started discussing higher targets is another sign. The 6 months closing chart pattern of the BSE Sensex index is still looking reasonably bullish:-


All three EMAs are moving up and the index is above them. That means the bulls are very much in control. But look at the volume bars. Newer highs without volume support remains questionable.

The technical indicators are a bit mixed - which isn't surprising because of the sideways consolidation. The slow stochastic is moving sideways at the border of the overbought zone. The MACD is positive but unable to move up. It is touching the flat signal line. The RSI has moved down form the overbought zone and is at the 50% level. The MFI has slipped below the 50% level and moving down.

A two year bar chart pattern of the BSE Sensex index gives a better perspective about why the index is struggling near the 17500 level despite several attempts to cross it:-


There is long-term resistance at the 17700 level, which was the high made in May '08. It is interesting to note how long-term supports and resistances come into play. The Aug '08 high of 15600 provided resistance during Jun and Jul '09. Once it was crossed in Sep '09 it provided support during the correction in Nov '09.

Bottomline? The 17500-18000 zone will be the level to cross before the BSE Sensex chart can rise to greater heights. The 17800 target mentioned in my gap-analysis falls right in the middle of the resistance zone. On the down side, the Nov '09 low of 15330 and the 200 day EMA at 15000 should provide support. Keep trailing stop-losses and book partial profits wherever available.


Jasi said...

For someone waiting to put in fresh funds, good time to enter now or wait for markets to acquire some direction?

Jasi said...

Subhankar Sir!

I would request you to write two separate posts on the following:
1) SmallCaps: There is so much action here :) Ofcourse with a fist full of salt. But I would love to know your take on how to narrow down on to small caps to invest. And why only invest but also trade. So basically your take on getting into the small cap world and also making sure we get out of it before things turn disastrous.
2) Mid-caps: It is said that from the mid caps of today emerge the large caps or blue chips of tomorrow. If you could jot down your experience and thoughts around picking or trying to judge such mid-caps that have the potential to make it BIG!

Im pretty sure the community would love to hear your thoughts on these two topics. :)
I'm already waiting anxiously! :)

Subhankar said...

Timing the market is always tricky. The best time to invest is when you have the money. If you want to enter equities, which have run up already, try to find undervalued stocks and invest 25% of available funds. Invest more when the market gets out of the consolidation mode.

Small caps can cause big losses for small investors. Please read about my concerns in the blog post of Sept 17 '09.

Mid-caps tend to be more liquid and better researched. Usual stock picking methods - enumerated in a short series of posts - apply.

I have written about several mid and small cap stocks. You may want to check them out from the "Stock Chart Patterns" links on the right panel of my blog.

Jasi said...

Subhankar Sir!
Thanks as always for your expert comments. I've got a few points
I read your article on small caps, an eye opener I must confess :)

1) "try to find undervalued stocks" ... what is your modus operandi ;) I mean its literally a sea of stocks out there. I know how you analyse once youve narrowed down to the co. you have covered those ratios etc. But ... where and how do you start?
2) About stock chart patterns, can you pls cover Techno Electric and Engineering?


Subhankar said...

Buy a copy of Capital Market magazine. Go through their company database and identify sectors about which you have some experience or knowledge (i.e. your 'Circle of Competence'). Then identify companies that are still trading at a decent 'margin of safety' (read my blog post of Jul 21 '09).

Techno Electric has been covered in last Sunday's BusinessLine.

Jasi said...

1) any online resource for company databases?
2) is there a way to directly reach a past blog? Say of Jul 21 '09
3) Right Techno electric was covered yesterday in BL. The reason why I wanted your thoughts on it was cos its a small cap. So what do you think of it? I mean info the analysis is based on, how reliable could it be?

Subhankar said...

1) Try moneycontrol, rediff money, Yahoo Finance, Capitaline from Capital Market (paid service)
2) There is a 'Blog Archive' link near the bottom of the right panel of my blog. You can get all the posts of a particular month
3) I find BusinessLine to be reasonable and unbiased in their analysis. In general, avoid small caps.