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Saturday, April 17, 2010

BSE Sensex Index Chart Pattern - Apr 16, '10

In last week's analysis of the BSE Sensex index chart pattern, I had sounded ample warning about the long-term support-resistance zone of 18000-18500 which could provide resistance to the up move. The negative divergences in the RSI and slow stochastic technical indicators also helped the bear cause.

So, are we starting the long awaited correction or is this a ploy by the strong bulls to get rid of the last few bears and the weaker bulls? The jury is still out on that one. In the meantime, we can have a closer look at the evidence.

For a bull rally of more than a year's duration, we had three corrective moves - a 15% correction from 15600 to 13200 (in Jun-Jul '09); a 12.5% correction from 17500 to 15300 (in Oct-Nov '09); and a 13% correction from 17800 to 15500 (in Jan-Feb '10). None of these really qualify as a 'proper' bull market correction.

Anything more than 20% and up to 50% would be a 'proper' correction. (Anything more than that can push the Sensex back into a bear market. A low probability at this stage.) Without a 'proper' correction, the index will find it difficult to make new highs with good volumes. Why? Because stock prices need to fall to more attractive levels before wide-scale volume buying picks up.

For the long-term health of the bull market, we are overdue for a 'proper' correction - this one could very well be the start of it. Technically there is mounting evidence of a correction. Steadily receding volumes for the past month; a lower weekly close after nine straight higher weekly closes; also, the Sensex has dipped below the 20 day EMA after 7 weeks.

Let us look for more bearish evidence in the 6 months bar chart pattern of the BSE Sensex index:-


The 50 day and 200 day EMAs are still moving up, though four days of lower index closes has flattened the 20 day EMA. The long-term bull market is in no danger of capitulating.

But the technical indicators have weakened considerably. The slow stochastic has dropped quickly from the overbought zone and is about to go below the 50% level. The MACD has started to fall and is below the signal line. The RSI is headed down towards the 50% level. So is the MFI.

Things aren't looking up on the news front either. Food inflation continues to remain high. The rising Rupee is a concern for the exporters and IT services companies. No wonder Infosys gave a not-so-great guidance for Rupee earnings next year.

The news of the SEC fraud charges on Goldman Sachs has not been discounted yet by the Sensex. The US economic recovery is looking shaky, though FIIs are still pouring money into our markets. Selling by DIIs and retail investors have started the slide. If the FIIs start selling, the Sensex could drop like a stone.

Bottomline? The chart pattern of the BSE Sensex index is showing signs of weakness after more than 2 months, during which it gained 15%. If you haven't booked part-profits yet, now is a good time to do so. Be very stock specific. Don't cut the flowers. Chop off the weeds.


jugs said...

sir what makes technicals difficult to understand is that different learned men interpret it in different ways.According to me (a lay man in technicals)a correction can only start if FII's sell.. they move our markets. Nobody else has the strength.

Subhankar said...

Interesting point, Jugraj.

The problem is no different with economists, lawyers and doctors - they have different opinions and solutions for the same problem!

An investor has two options about technical analysis - either think it is too difficult and confusing and therefore avoid learning more; or, think that it is lack of knowledge that makes it difficult to understand, so make an effort to learn more.

I can assure you that the second option leads to more informed decisions. By the way, the FIIs were net buyers all of last week and still the Sensex has dropped 450 points from its top.