Saturday, April 10, 2010

BSE Sensex Index Chart Pattern - Apr 9, '10

The BSE Sensex index chart pattern flirted with the 18000 level throughout the week. Except for a brief test on Wed. Apr 7 '10 when it made an intra-day high of 18048, it didn't quite manage to clear the long-term support-resistance zone between 18000-18500.

Interestingly, the 3% whipsaw level for the Jan '10 top of 17790 lies smack in the middle of the support-resistance zone. The bears, whose cause seems all but lost, may try to make a last stand there. But please don't try to go short in a bull market.

The unabated FII buying has been responsible for the rise in the value of the rupee. This is not necessarily bad for the economy. The bottom line of exporters, including the software services sector, will get affected. But a rising rupee will help mitigate our bloated fiscal deficit by cushioning the burgeoning oil bill.

A young reader asked me where the Sensex was headed next. If the answer to such a question was readily available, millions could be easily made! The best answer I could give was: wherever the FIIs wish to take the index. That may sound like a cop-out. But the fact is that it is the unending flow of money from the FIIs that is setting the market direction in the near term.

The WPI and CPI are both in double digits. Oil price is rising. Steel prices have been hiked. Like wise with auto prices. Surely the RBI can't allow things to meander much longer, and another dose of monetary tightening could be around the corner. Those are negatives that positive Q4 results should overcome. Bulls will hope that the results will not be below the consensus positive expectations.

From a technical viewpoint, a bout of correction will help the market to rise higher. Otherwise, this slow upward grind may continue for some more time. Let us see what the 6 months bar chart pattern of the BSE Sensex index has in store:-


All the three EMAs are moving up with the index above them. The bulls continue to call the shots. But have a look at the RSI and slow stochastic. From the middle of Mar '10 onwards, the Sensex has been rising in a channel, making higher tops, whereas the slow stochastic and RSI has not made higher highs. A negative divergence.

Also worth noting is what happened after the Sensex made a lower low in Feb '10 (below the Jan '10 low). Both the RSI and slow stochastic made higher lows. The positive divergence heralded a 2400 point bull rally.

The MACD is well inside positive territory and marginally above the signal line. No negative signals have come from it yet.

Bottomline? The chart pattern of the BSE Sensex index is very near a long-term support-resistance zone. Without volume pressure it may find it difficult to go past the 18500 level. The downside risk seems higher. Stay invested but book part profits - particularly in mid and small cap stocks that have seen a sharp rise.


scorpio said...

you said "The positive divergence heralded a 2400 point bull rally."

I was thinking this positive divergence would be telling us to sell rather than buy?

Subhankar said...

A positive divergence is a bullish sign (indicators positive, index negative). A negative divergence (index positive, indicators negative) is a bearish sign.

When two or more indicators flash similar signs, it becomes a call to action.

scorpio said...

That makes sense. Thanks :)