BSE Sensex Index Chart Pattern - Apr 30, '10

BSE Sensex index chart pattern spent another volatile week heading nowhere in particular. The week began strongly enough, but there was a 300 points slump mid-week on the highest volumes during the week. A sign of distribution?

Two days of recovery on the back of FII buying ensured a higher close on a month-on-month basis, but could not prevent a lower weekly close for the Sensex.

The 50 day EMA provided good support to the mid-week fall, and the medium-term moving average is now becoming the battle line for the bulls and bears.

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

Note that the Sensex has made a lower top and a marginally higher bottom during the past two weeks of trading, indicating the formation of a triangular consolidation pattern. As long as the 200 day EMA keeps rising and support from the 50 day EMA holds, the bulls need not worry too much.

The technical indicators are not too encouraging. The slow stochastic remains below the 50% level. The MACD is still in positive zone, but below the signal line. The RSI is also below the 50% level. The MFI is trying hard not to fall below its half-way mark.

The bears have thrown a few good punches but the bulls are very much on their feet and ready to fight. Right?

For a slightly different perspective, let us also take a look at the 3 months closing chart pattern of the BSE Sensex index:-

Observant readers may note an interesting difference in the closing chart pattern. The Sensex has actually made a marginally lower bottom as well as a lower top. How do we resolve this apparent contradiction in the two chart patterns?

Simply - by treating the two recent bottoms as the same, since their levels are quite close to each other. That poses quite a problem for the bulls. Why? A lower top and a flat bottom forms a bearish descending triangle. The usual break out from a descending triangle is down wards. If it happens, the support from the 50 day EMA will be breached - opening up downside levels of 16500 and 15700.

The criterion for a break out from a triangle pattern is that there should be at least four reversal points - two at the top and two at the bottom. This criterion has already been met (by the two lower tops and two flat bottoms in April '10).

The global news flow hasn't been very encouraging either. The Shanghai Composite index has tanked big time and gone well below the 200 day EMA. Remember that the slide in the Chinese index had precipitated the fall in the global indices back in 2007.

The FTSE 100 index has dropped below the 50 day EMA as the UK market is feeling the tremors from the European upheaval. The Dow has so far managed to stay afloat by not falling below its 20 day EMA. But the question is: for how long?

Bottomline? The chart pattern of the BSE Sensex index continues its sideways consolidation in a broad trading range. The global bull rally is about to complete 14 months, and a proper correction is overdue. Keep your cool. Stay on the sidelines and watch. Leave the traders to do their daily buying and selling.