Saturday, July 10, 2010

BSE Sensex Index Chart Pattern - Jul 09, '10

The chart pattern of the BSE Sensex index rose up on a high tide of FII money. The IMF statement upgrading India's GDP growth rate didn't hurt either.

Last week, I had mentioned about the possible formation of a variation of the bearish head-and-shoulders pattern on the Sensex chart - one with multiple shoulders. We will stay with that possibility till a new high above 18048 (the current 'head') is formed.

The Sensex closed the week 2% higher at 17834 - just about 200 points from the 52 week high made in Apr '10. Continued FII inflows should take the index to a new high soon.

A look at the 1 year bar chart pattern of the BSE Sensex index makes it amply clear that the bulls are back on top:


The index took good support from the 20 day MA and started to rise. It is above all the three EMAs. The 20 day and 200 day MAs are rising and the 50 day MA has flattened after drifting down towards the 200 day MA.

The technical indicators are supporting the bulls. The MACD has moved up to touch the signal line in positive territory. The RSI dropped to the 50% level but didn't fall further. The slow stochastic has entered the overbought zone.

But have a look at the space between the 20 day and 50 day MAs. During the formation of the two left shoulders (marked 'LS1' and 'LS2') and the head (marked 'H'), the space between the two increased. This was followed by sharp corrections. If the pattern repeats, the bears may regain the upper hand quickly.

A drop below the 200 day MA will be a strong warning that a test of the neck line may follow. Investors should remember that this unresolved tussle between the bulls and bears has limited the Sensex movements to a range between 15300 and 18000 for more than 10 months.

A break above or below the range with a 3% 'whipsaw' lee-way will finally resolve the trend. Going by the state of the strengthening Indian economy, the Sensex should logically move higher.

But logic does not work well in the stock market. Any deterioration in the global economic environment, or a 'black swan' event may lead to an outflow of FII money, and pull the index down.

Bottomline? The chart pattern of the BSE Sensex index is on the verge of making a new high. Investors should wait for a convincing close above 18600 to turn bullish. Going by the past 10 months' experience, the Sensex may remain in the broad range for some more time. Stay invested, and rebalance your portfolio as per your asset allocation plan.


Sumit said...

I do not agree to the chart pattern to be called as Head and Shoulder. Yes, momentum is weak on upside and 5450 will be difficult to cross on closing basis. I recommend following a 8 EMA breakdown on closing basis on Nifty to initiate short position.

Subhankar said...

Thanks for your comments, Sumit.

The Sensex chart pattern looks like forming a head-and-shoulders pattern - which could get negated on a close above the previous top at 18048. Or, the new high, if formed, could become the new 'head', in which case the top marked 'H' would become 'LS3' (a third left shoulder). We won't really know till the pattern plays out. It could well be a double-top instead.

NSE authorities do not recognise gaps in charts, which makes it unsuitable for technical analysis. So, I don't track the Nifty and can't comment on Nifty levels.

I am an advocate of building wealth through patient long-term investing, and neither recommend following shorter-term EMAs nor shorting, for small investors.