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Saturday, June 26, 2010

BSE Sensex Index Chart Pattern - Jun 25, '10

Last week's analysis of the BSE Sensex index chart pattern explored two possibilities with bearish implications - a possible head-and-shoulders pattern, or a double-top pattern. The week's trading action kept both possibilities open, in spite of strong buying by the FIIs.

The hike in oil prices led to a spurt in oil marketing company stocks - but the hikes were not large enough to cover their huge losses. Opposition from within the UPA may lead to partial roll back of the price rise. Either way, the hike will lead to an increase in cost of transportation of goods - which fill further stoke the fire of inflation. 

The RBI may have little option but to increase interest rates. That will be a negative for the stock markets. Selling by both the FIIs and DIIs on Friday may be an indication of the smart money bailing out.

Time to have a look at the unfolding struggle between the bulls and bears in the 6 months closing chart pattern of the BSE Sensex index:

The index touched a high of 17922 on Monday, Jun 21 '10 backed by the highest volumes of the week, just 126 points short of the Apr '10 high of 18048. The FIIs were net buyers through Thursday, Jun 24 '10, but the index failed to move up any higher, as volumes dropped off.

Thursday's price action produced a 'reversal day' pattern (higher high, lower close) followed by Friday's 156 points drop. The Sensex barely managed to close higher on a weekly basis. So, is this a time to go short, or stay put?

All three EMAs are moving up, with the index above them. That means the index remains in a bull market, and will not be under any threat as long as it stays above the May '10 low of 15960. Why? Because moving below 15960 will have a combination of four bearish implications:

1. The Sensex will drop below the 200 day EMA
2. It will form a pattern of lower tops and lower bottoms
3. A double-top (or head-and shoulders) pattern will be confirmed
4. The index will fall below the 61.8% Fibonacci retracement level of the entire bear market fall 

Any one of those four will have bearish implications. A combination of the four may be devastating. It is imperative for the bulls to strongly defend the 15960 level, in order to prevent a deeper correction.

On the longer term charts, the Sensex has made a series of higher tops in Jun '09, Aug '09, Oct '09, Jan '10 and Apr '10. Higher tops (and higher bottoms in-between) were made every 2-3 months. This bullish series may have been interrupted when the Sensex failed to make a higher top last week.

The technical indicators are suggesting caution. The MACD, a lagging indicator, is positive and above the signal line. The slow stochastic is in the overbought zone, but about to drop below. The RSI and MFI are both above their 50% levels, but have started descending after touching their overbought levels.

So far I have only pointed out the bearish implications. Nothing of the sort may happen if the FIIs resume their buying spree. The Sensex can take support at the rising 20 day or 50 day EMAs and go on to make a new high in Jul '10. That will maintain the series of higher tops and higher bottoms. A convincing close above 18500 will negate the bearish possibilities.

Bottomline? The chart pattern of the BSE Sensex index is in the midst of a likely trend reversal pattern that is yet to play out. A close below 15960 will be bearish. A close above 18500 will be bullish. Till either happens, 'caution' should be the watch-word.


Maxware Technologies said...

thanks sir

Anonymous said...

Hello Sir,

I want to ask you about Valuations, as this is First time I am experiencing start of bull market, at this time I feel valuations are above fair value but not stretched and many individual stocks are also in expansive category and I don’t think that market will move much higher from here, but what I want to ask you is how bull market start in 2003, is that time also valuations are high and people are worried and suddenly companies give unbelievable performance and earnings growth eases the valuation problem.
Do you think that there is nothing like valuations, it’s only the flow of money.

Please guide

Thanking you in Advance…


Subhankar said...

@Maxware: Thanks for your comment

@Titu: Valuations do play an important role over the longer term. In the shorter-term, it is all about sentiments and the flow of money.

In 2003, the Sensex P/E ratio was below 15. The Sensex tends to correct after crossing a P/E ratio of 22. So one can use the 15-22 range as 'normal' with below 15 as a buy zone and above 22 as a sell zone. The current Sensex P/E is in the 'normal' zone.