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Saturday, July 3, 2010

BSE Sensex Index Chart Pattern - Jul 02, '10

In last week's analysis of the BSE Sensex index chart pattern, I had surmised that the hike in the oil prices may be followed by an increase in the interest rates by RBI. As if on cue, the already double-digit inflation (that keeps going up instead of falling) has led to a 25 basis points (0.25%) increase in repo and reverse repo rates.

The rate increases were announced after trading hours on Friday. Will there be a negative fall out in the market on Monday? The rate increase is small enough for the market to take it in its stride. Or, it may act as a trigger for the bears to press fresh sales.

Last week's trading saw alternate days of higher and lower closes till Friday's lower close of 17461 broke the pattern, as the Sensex closed more than 100 points lower on a weekly basis.

The index is poised on the 20 day MA. Bulls will hope for a bounce upwards. The Sensex has been an island of strength amidst collapsing Asian, European and US indices. How long will it be able to swim against the tide? A look at the 10 months bar chart pattern may give us some clues:


The Sensex continues to consolidate in the broader trading range between 15300 and 18000. Last week, I had mentioned about four bearish possibilities. A variation of the head-and-shoulders trend reversal pattern happens when multiple shoulders get formed - prolonging the agony of investors.

In the chart above, I have marked the Oct '09 top as 'LS1' (i.e. the first left shoulder) and the Jan '10 top as 'LS2' (i.e. the second left shoulder). The Apr '10 top is marked as 'H' (i.e. the head) and the recent Jun '10 top as 'RS1' (i.e. the first right shoulder).

If this pattern plays out, we may get to see a second right shoulder after 2 or 3 months. In which case, it is possible that the Sensex may bounce up from the 20 day, or 50 day, or 200 day MA, or even the 'neck line'.

The head-and-shoulders is usually a reliable trend reversal pattern. But like any pattern in technical analysis, there is no certainty - some times expected patterns, which appear to have formed, actually end up failing.

That means, there is a possibility of the Sensex moving up and making new highs from here. The technical indicators have turned bearish and the probability of an immediate up move is low.

The slow stochastic is below the 50% level and dropping fast. The MACD is in positive territory but has given a bearish cross below the signal line. The RSI has fallen sharply from its overbought zone to the 50% level. The bulls will take heart from the 200 day MA which is moving up with the index 400 points above it.

Bottomline? The chart pattern of the BSE Sensex index is poised at a crucial support, but looking weak. If the 'neck line' of the probable head-and-shoulders pattern is broken, there will be a much deeper correction. Till then, there is no cause for panic. Any buying should be on a very selective basis.

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