BSE Sensex Index Chart Pattern - May 28, '10

In last Saturday's analysis of the BSE Sensex index chart pattern, I had made some observations that may need repetition - specially for those investors who are left perplexed by the sudden upward spurt:

'Unless the index closes below 15900 it will not be considered a trend-deciding break technically.'

'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.'

Let us take a look at the closing chart pattern of the BSE Sensex index which has some support-resistance levels marked:

On Tuesday, May 25 '10, the Sensex made an intra-day low of 15960, but managed to close just above the 16000 level at 16022. Technically, the bulls were able to prevent a trend reversal since the index neither closed below 15900 nor decisively below the 50 week EMA.

I should have mentioned another important significance of the 16000 level. It happens to be the 61.8% Fibonacci retracement level of the entire bear market fall from 21200 to 7700. (A cross above the 61.8% Fibonacci retracement level is the final confirmation of a trend change from a bear market to a bull market.)

The strong fight back by the bulls was, therefore, not unexpected. The Sensex effortlessly pierced the 200 day EMA as well as the longer-term support-resistance level of 16700 from below. Bears failed to defend those levels vigorously. That was unexpected.

A combination of short-covering and buying by DIIs - who were net buyers all week - helped the bull cause. The FIIs were net sellers through the week, except on Friday. The index is at the level of the 20 day EMA (not shown in the chart above).

The 50 day MA and the down trend line that formed the bearish descending triangle pattern are both at around 17300. The zone between 17300-17400 should provide stronger resistance to a further up move. In case resistance from 17400 is overcome, a test of the previous high at 18000 is quite possible.

The action in global indices will have an effect on the Sensex chart pattern in the coming week. The European indices ended flat on Friday. The Dow lost more than 120 points and closed lower on a weekly basis. The so-so volumes (Tuesday's down-day volumes were higher than the volumes on the up days that followed) are a sign that the bullishness in the Sensex may be ending soon.

The technical indicators are giving somewhat mixed signals. The slow stochastic has moved above the 50% level. It had done so earlier in the month and in April, but changed directions quickly. The MACD has moved up to touch the signal line, but remains in negative territory. The RSI faced resistance at its 50% level.

Bottomline? The chart pattern of the BSE Sensex index has bounced up sharply from a long-term support level. Don't expect that the Eurozone problems and the associated uncertainty have been priced in already. The index may just consolidate in the broader band between 16000 and 17400 for a while. Be stock specific and buy only if the valuations are compelling.