Tuesday, May 4, 2010

Is this finally the Sensex correction or is it another bear trap?

Last Saturday (May 1 '10), regular readers of this blog were forewarned about the possibility of a down ward break from the descending triangle formation that was developing in the BSE Sensex closing chart pattern.

This is what I had written:

"... 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."

Today's sharp slide has created the bearish possibilities that I had warned about:

Sensex_May0410_support break

The descending triangle pattern was formed by the down trend line connecting the recent (closing) tops and a horizontal line at the 17400 level that has acted as a longer term support/resistance line. The four supports - 1 each in Jan '10 and Mar '10, and two in Apr '10 have been marked with blue arrows.

Two days of combined selling by both FIIs and DIIs have broken the support of the 17400 level (17396 as per the chart - but we deal with approximate, and not precise, levels in technical analysis). There is more bad news for the bulls. The previous tops around 17200 could not support the fall, and even the 50 day EMA failed to prop up the index.

That opens up the first down ward target at 16500 as mentioned in Saturday's post. Note that 16500 is also a longer term support resistance level. So it may require some effort by the bears to breach it.

Today's down move was accompanied by good volumes. Remember that while upward break outs from a consolidation pattern require strong volume support, downward break outs do not. The twin combination of a descending triangle at a market top and good volumes on the downward break out from the triangle suggests more correction ahead.

Investors should be wary of buying into this dip. Why? Any pull back in the next few days is likely to face resistance from the pierced 50 day EMA and the 17400 level, as bears will use the pull back to sell.

Why should we even consider a pull back? The technical indicators provide some clues. The MACD has dropped to the '0' level but hasn't turned negative yet. Likewise, the RSI has dropped to the edge of the oversold zone but has not entered it. Even the %D line of the slow stochastic has stopped at the edge of the oversold zone, though the %K line has already entered it.

If you had not booked any profits in the hope of higher Sensex targets, the likely pull back may be a good time to take some money off the table. Keep your eyes glued to the recent lows of 15700 and 15300 for probable support in case 16500 is broken.


scorpio said...

Do we only look at volumes on the sensex or you look at both nse and bse volumes. Or the end of the day buying and selling figures of FII, DII

Subhankar said...

For analysing the Sensex, I only look at BSE volumes. FII and DII volumes give an overall picture of what the 'smart money' is doing.