BSE Sensex Index Chart Pattern - May 21, '10

A late afternoon surge upwards on Friday, which was a combination of short covering before the weekend and buying by DIIs, saved the BSE Sensex index chart pattern from total collapse, at least technically.

To find out why, we will first take a look at the 3 years weekly bar chart pattern of the BSE Sensex index:

Note that the 50 week EMA (which I had discussed last Tuesday) has supported the Sensex fall. Some analysts like to look at the 200 day MA as a trend decider. That was broken intra-day on Monday followed by a close below it on the last 3 days of the week.

I prefer to look at the 200 day EMA, which gives a little more weightage to the more recent index levels. That was broken on intra-day basis on Friday though the index hasn't yet closed below it. Unless the index closes below 15900 (including the 3% whipsaw lee-way) it will not be considered a trend-deciding break technically.

The FIIs continue to sell in a big way - as they seem to be doing in all emerging markets. The recently concluded telecom 3G auction has brought in much more money than the Government expected. That should ease the fiscal deficit situation to a considerable extent.

The DIIs continue to buy, which is stemming a sharper fall. More and more PSUs are lining up to hit the market with FPOs and IPOs. The latest name being bandied about is Shipping Corporation. The question is: how long will the DII buying be able to stop the Sensex from slipping into a bear market?

Let us now look at the 1 year bar chart pattern of the BSE Sensex index, where I've once again marked some important support levels:

First comes the level of 16000 - which is a 20% correction of the rise from 8000 (Mar '09) to 18000 (Apr '10). Note that it also corresponds with the level of the 50 week EMA, and multiple tops made in Aug '09. Expect the bulls to put up some sort of a fight there.

In case the bears overwhelm them at 16000, the next support level is at 15650 - the previous low touched in Feb '10. There were tops made in Jun '09 at that level as well, and previous tops tend to provide support.

Below that is 15330 - where the Sensex made a low in Oct '09. That is more than a 1000 points away, so the bulls have a bit of breathing space. Observant readers may notice a small gap area created in Aug '09, which has not yet been filled and can act as a support.

Of course, the real gap of any consequence is much further down at 13200. If the higher levels marked get broken, then the Sensex may just decide to go down to fill the bigger gap. That has a low-probability as of now.

Even if the Sensex drops down that far, it is unlikely to do so in one go. There will be periods of buying - but up moves will face resistance from the downtrend line marked on the chart, and the falling 50 day MA.

The technical indicators are looking bearish. The MACD is below the signal line and sliding down in negative territory. The slow stochastic has re-entered the oversold zone. The RSI is bouncing around at the edge of the oversold zone.

Bottomline? The BSE Sensex index chart pattern is caught in the midst of a global correction in stock markets, in spite of improving fundamentals. Don't get too bogged down with Sensex levels. This is the time to start preparing your buy lists. There are always opportunities in individual stocks.