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Thursday, June 17, 2010

Is the Sensex poised to touch a new high?

At today's close of 17617, the Sensex is 431 points (less than 2.5%) away from the 52 week high of 18048, touched on Apr 7 '10. The correction from the top to a low of 15960 on May 25 '10 (a drop of 2088 points) consumed 33 trading sessions.

In the subsequent 17 trading sessions since hitting the low, the Sensex has retraced 1657 points, i.e. 79% of the fall in just half the amount of time. A faster retracement of a correction is a sign of bullishness.

Though 100% retracement of the correction hasn't happened yet, technically the Sensex can spend another 15 trading sessions to reach the previous high and still meet the criterion of faster retracement.

The only possible resistance to the Sensex, on the way to test the previous high, is the Jan '10 top of 17790. That is just 173 points (less than 1%) away. With the FIIs resuming their buying with gusto, even substantial selling by the DIIs may not be able to stem the bullish tide.

If I was a gambling man, I would accept even poor odds to wager that the previous high will not only be tested, but may be even broken. Why? Because the transaction volumes have picked up quite a bit of late and the technical indicators are all bullish.

But a conservative long-term investor like me does not gamble with Sensex movements. That is best left to the traders and speculators. The other reason is that I don't invest in the Sensex, but in individual stocks.

There are important technical reasons as well. Traders and investors tend to remember previous highs and lows in the Sensex chart pattern. There is every possibility that the bears will resort to selling as the Sensex approaches 17790 (the Jan '10 top).

Bulls are likely to use the opportunity to book profits and thereby, strengthen the hands of the bears. Guess what happens in such an event? A dreaded topping pattern known as 'head-and-shoulders' can get formed - with the head at 18048, the two shoulders at 17790, and the neckline slanting upwards from 15652 to 15960.

If the bulls manage to breach the likely 17790 barrier, the previous top of 18048 may provide strong resistance. Should the bears resort to selling and the bulls start booking profits as well, another trend reversal pattern may develop at a market top - the 'double-top'.

These two reversal patterns haven't formed yet, and may not form at all. However, the possibility remains open for both, till the Sensex convincingly moves above the 18048 level.

That was the long answer. The short answer is: Yes. The Sensex is poised to touch a new high. Investors need to keep a very close watch on the Sensex levels from tomorrow onwards till the end of the month to avoid falling into a 'bull trap'. The denouement should be clear by then.


Anonymous said...

Hello Sir,

I think Sensex will not cross the previous high, and even if it crosses, valuations are much stretched so it will not move much higher, correction will be imminent. (Because I think bubble territory is not far away) Sensex PE is 21 or 17 times 1 year forward Earnings.


Earning must be upgrade significantly.


Suresh said...

Dear Subhankarji

I think Sensex is forming the right shoulder of the H&S, having formed the Left and the Head in Jan and Apr 10 respectively. Its going to be interesting time ahead.


Subhankar said...

@Titu: Appreciate your comment.

I partly disagree - the Sensex will surely cross the previous high; and partly agree - there is likely to be a deeper correction before 18048 is conquered.

I have learned from experience not to second-guess the Sensex. It will go where it wants to - whether we agree or disagree!

@Suresh: Thanks for stopping by and leaving a comment.

Any topping pattern takes a while to form. The left shoulder and head formation - if it is a part of a H-S pattern - took 4 months. Expect the right shoulder to form (if it does) over the next few days. One day's trading action can be misleading. said...

I see one dampener on the otherwise ongoing bullishness : Where are the leaders ? Almost all the heavyweights on the sensex, are at some kind of peaking points, real estate & metals are in the doghouse, HDFC is under a cloud, Autos, not very important in the indexes anyway, have limited upsides. Banking may actually decline and The tech sector has not been able to pull the broad market up in the past in any meaningful fashion. The Reliance and ADAG story has played out already. Midcaps on most counts have not really been a part of this upmove. So, while the bull fervor was great to watch, it is likely to be replaced by profit taking, and bulls could wait for the mkt. to go down another 8 - 10 %, before going into action again.

Subhankar said...

Appreciate your comments.

Your view is quite logical. But when the FIIs descend on the market and start buying, logic seems to go out the window!