BSE Sensex Index Chart Pattern - Jan 22, '10

Last week's analysis of the BSE Sensex index chart pattern was concluded with the following remarks:-

'The BSE Sensex index chart pattern wants to move higher but is unable to do so. A likely outcome could be a break down wards. Maintain tight stop-losses and try to subdue your buying impulse.'

The FIIs sold heavily, and nearly overwhelmed the equally strong buying from the DIIs. A bout of short-covering before the weekend helped the Sensex recover from the low of the week hit on Friday.

The Q3 results declared so far haven't been bad at all, but were below market expectations. As often happens in such cases, the index took a dive. (In a post ten days ago, investors had been cautioned about such a possibility. In fact, it was suggested that investors book some profits in this post in the last week of Dec '09.)

The 3 months bar chart pattern shows that the BSE Sensex index is facing a strong bear attack and may be getting ready for a further fall:-

The selling pressure on increased volumes caused the Sensex to drop below both the short-term and medium-term moving averages, with two consecutive closes below the 50 day EMA.

The technical indicators have all turned weak. The RSI is below the 50% level and dropping fast towards the oversold zone. Likewise for the slow stochastic. The MFI has dipped below the 50% level. The MACD is barely positive and below the signal line.

All is not lost for the bulls. The 50 day EMA has stopped moving up but the 200 day EMA is still rising with the Sensex well above it. The index dropped to a low of 16608 on Friday, Jan 22 '10, but it stayed above the Dec 21 '09 low of 16578 and the Nov 27 '09 low of 16210.

There are previous tops at the 16000 level made in early and late Aug '09. Previous tops usually act as supports. In other words, the 16000-16600 zone should help the bulls to stage a comeback.

In case the bears are able to breach the resistance zone of 16000-16600, watch out for the low of 15331 made on Nov 3 '09. The 200 day EMA is quite close to that level, and should be a good support.

If that support gets broken - and I am not saying that it will - then the index can drop to the top of the gap at 13220 made on July 13 '09.

Bottomline? The BSE Sensex index chart pattern is in the midst of a sharp correction, along with most global indices. Investors should wait for it to play out before jumping in. But keep your buy-list ready and track it on a daily basis.