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Saturday, February 27, 2010

BSE Sensex Index Chart Pattern - Feb 26, '10

The index chart pattern of the BSE Sensex meandered between the 16000 level and the 20 day EMA for the first four days of the week as the DIIs and FIIs worked at cross purposes. When one group was a net seller, the other became a net buyer.

Even as the Finance Minister was reading the budget speech on Friday, the index moved in a range with an upward bias. As soon as the increase in the personal income tax slab rates were announced, there was buying euphoria. As if, all the tax savings of individuals were likely to get channeled into stock investments.

No such thing is likely to happen. The bulls were just looking for an opportunity to trap the bears after taking it on the chin for almost two months. Short covering caused a sharp jump all the way to 16669 - the first time in over a month that the index ventured above the 50 day EMA.

Bears started to play strong defense as profit booking pushed the index down towards the 20 day EMA. Finally, the index closed the week and the month just above the 20 day EMA on strong volumes. The 72 points higher close month-on-month should encourage the bulls.

Let us look at the 3 months bar chart pattern of the BSE Sensex index:-

Sensex_Feb2610_3m

The 200 day EMA continues to rise and the Sensex is about 1000 points above it. There is no immediate threat to the long term bull market. On the way up, the levels of 16721 and 16973 could provide resistance. Those levels correspond to the 50% and 61.8% Fibonacci retracement levels of the fall from the Jan '10 high of 17790 to the Feb '10 low of 15652.

On the way down, 15652, the Nov '09 low of 15331 and the 200 day EMA should provide support. Since technical analysis is not a science, it is better not to deal with exact numbers. Investors should watch the 16700 - 17500 zone for resistance and the 14900 - 15600 zone for support. It is possible that the index may consolidate within the two zones till all the budget provisions are digested.

The technical indicators have improved marginally. The slow stochastic has moved above the 50% level and looks to be heading for the overbought zone. The MFI is just above the 50% level. The RSI is exactly at the mid-point. The MACD is moving up above the signal line, but remains in the negative zone.

At the first reading, the budget seems as good as was possible under the circumstances of high deficit, increasing inflation and the UPA government's professed socialistic tilt towards the common man. A closer reading may reveal some of the negatives. The roll back of excise duties and custom duty on petrol and diesel will stoke inflation.

Bottomline? The BSE Sensex index chart pattern shows that the bulls haven't yet extricated themselves from the bear hug. Remember that the bull rally is now almost a year old and we haven't yet had a strong correction. A double-dip recession in the western world remains a possibility that will have negative implications for our markets. Be very selective in buying, and use up moves to get rid of junk.

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