Saturday, May 15, 2010

BSE Sensex Index Chart Pattern - May 14, '10

The BSE Sensex index chart pattern spent yet another volatile week, with Monday's sharp pullback of 560 points taking many investors by surprise. The index ended the week below the psychological 17000 level but managed to close 225 points higher on a weekly basis.

That was the good news (for the bulls). Now the bad news. A close look at last week's index movements on the 6 months bar chart pattern of the BSE Sensex index will provide the clues:

SENSEX_May1410

Monday's sharp up move was resisted by the 50 day MA and stopped short of the longer-term support-resistance level of 17400. On Tuesday and Thursday, the Sensex again attempted to move higher (hitting highs of 17379 and 17389) - and faced resistance both times from the 50 day MA and the 17400 level.

Isn't it amazing how the 17400 level has acted as resistance and support time and again? Observant readers will notice a smaller descending triangle pattern that formed in Jan '10 from which the downward break was sharp and steep - down to the 15700 level. The recovery by the bulls was equally quick.

This time around, the descending triangle took a week longer to form, but the fall hasn't been as dramatic. The range between 16700 and 17400 is acting as a consolidation zone. Note the confluence of the 50 day MA, the 17400 level and the down trend line which will try to resist any up moves.

The Sensex may consolidate in this range for a few more days before  deciding its next move. The greater probability is a break below 16700 down towards 15700. The technical indicators have turned weaker and bearish.

The MACD is below the signal line and has resumed its down move in negative territory. The RSI faced resistance near its 50% level and has dropped down towards the oversold zone. Likewise, the slow stochastic has started to slip after reaching its 50% level.

For a different perspective, let us also take a look at the weekly bar chart pattern of the entire bull rally from Mar '09 of the BSE Sensex index:

SENSEX_bullrally_weekly_May1410 

Note that all technical indicators have been calculated on a weekly basis, and are not looking that bearish. The MACD is positive but has just dipped below the signal line. The RSI is trying to rise up towards its overbought zone. The %K line of the slow stochastic has bounced up from the 50% level and about to cross above the %D line - which will be a bullish sign.

Most importantly, the index is above the 50 week MA (equivalent to the 200 day MA on daily charts). That means the long-term bull market is still going strong. A drop below the 50 week MA will be the first real sign of weakness. The 15700 level should provide strong support to a further fall.

In case of a sell-off by the FIIs (who have been net sellers in May '10 so far), the Sensex can drop down to the post-election gap area between 12300 and 13200. An unlikely possibility at this stage. A convincing close below the 15700 level should be a signal to start selectively buying into fundamentally strong shares.

The Q4 results announced so far have not provided any significant positive surprises. The reform and PSU divestment processes are like action replays in slow motion. Early arrival of the monsoon may not provide much upward impetus.

Bottomline? The chart pattern of the BSE Sensex index is exhibiting weakness in the shorter-term. Use any up moves to book part profits. A summer sale of stocks with special monsoon discounts may be round the corner. Stay invested in fundamentally good stocks.

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