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Saturday, February 6, 2010

BSE Sensex Index Chart Pattern - Feb 05, '10

Last week, I had mentioned the importance of the 16000 level in the BSE Sensex index chart pattern. For the first four days of the week, the bulls managed to stave off the marauding bears and stoutly defended the 16000 level.

Friday's strong selling by the FIIs, despite equally strong buying by the DIIs, finally broke the support of the 16000 level. The fight between the bears and bulls will be quite evident from the 3 months bar chart pattern of the BSE Sensex index:-


The special trading session today (for testing a new software update at the NSE) was used by market players to cover their shorts. The Sensex moved up by 125 points, but could not move above the 16000 level.

For a valid penetration of a long-term support or resistance, we need to maintain a 3% 'whipsaw' lee way. That gives a level of 15500. A fall below will confirm the break. Till then, the bulls have some hope.

The bears will have their sights set on the 200 day EMA and the 15331 level (the low made in early Nov '09). Will the Sensex go even lower? The technical indicators seem to suggest a resounding 'YES'.

The 20 day EMA has crossed below the drooping 50 day EMA. The slow stochastic remains inside the oversold zone. The MACD is negative and continues to fall, dragging the signal line with it. The RSI and MFI seem ready to enter the oversold regions.

To set down side targets - should the 15331 and 200 day EMA supports break - one needs to revert to the Fibonacci retracement levels again. The intermediate rally covered 10100 points - from 7700 to 17800.

A 38.2% retracement gives a level of approximately 14000. Which will bring down the index almost to the top of the post election result 'gap' in the chart pattern. A more likely 50% retracement means 12750, and a filling of the 'gap'.

'Gaps' in chart patterns eventually get filled, so however unlikely the level of 12750 may seem now, investors need to stay prepared for the possibility.

Q3 results season is almost over. There are no positive triggers left. The next big event is the budget on the 26th. The bulls may attempt a pull back before then. It can be used to book profits.

Bottomline? The BSE Sensex index chart pattern is in the midst of the much awaited correction. Don't jump in to buy every time the Sensex drops a few hundred points. Much lower levels are likely. If you do see value, pick up a token quantity.

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