Saturday, March 27, 2010

BSE Sensex Index Chart Pattern - Mar 26, '10

A week that was shortened by a holiday and included the monthly F&O expiry seemed to have little effect on the bull rally. The BSE Sensex index chart continued to climb up, fed by strong FII inflows.

The Sensex closed higher for the seventh straight week, gaining more than 1850 points, and is only 145 points below its Jan '10 high of 17790. It is only a matter of days before the previous high is tested and crossed.

Till that happens, there remains a possibility - however remote - of the Sensex facing resistance at its previous high and correcting sharply. What is causing this circumspection? It is the low volume of transactions.

Ever since the election results back in May '09, the Sensex has been moving up on progressively lower volumes. Watch out for a sudden spurt in volumes as the index tries to make a new high. It could be an indication of buying exhaustion following which the index could plummet.

Technical analysis is not a science and therefore doesn't work according to formula. But it helps to provide a different perspective to the market situation. Just when investors get convinced about the continuation of the upward move, the bears usually strike hard.

There is no certainty that such a quick turnaround in sentiment will happen at all. But if it does, then you should not be the one holding high priced stocks at a market peak.

Let us have a look at the 6 months bar chart pattern of the BSE Sensex index:-


The technical indicators are looking strongly positive. All three EMAs are moving up with the Sensex well above them. The slow stochastic is comfortably inside the overbought zone. The MACD is positive and above the signal line, but the upward momentum has slowed down. The RSI dropped from the overbought zone but is trying to move back in again. The MFI bounced off the 50% level, but is not looking as strongly positive as the other indicators - reflecting the low volumes.

Bottomline? The chart pattern of the BSE Sensex index is getting close to its previous high. Stay invested, maintain tight stop-losses and enjoy the good times. But be prepared for a sudden bear attack - even if it seems unlikely from the chart pattern.

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