BSE Sensex Index Chart Pattern - Jul 16, '10

In last week's analysis of the BSE Sensex index chart pattern, I had put forth the possibility of a reversal pattern with a head with multiple shoulders, till a new high above the April '10 top of 18048 was made.

The continuous inflow of FII money ensured that the inevitable happened. The Sensex made a new intra-day high of 18167 on Jul 15, '10 and closed about 1% higher on a weekly basis. A higher high and a higher close should delight the bulls.

The DIIs have been net sellers of late and have acted as a braking mechanism against the rampaging bullishness of the FIIs. The deeper pockets of the latter are gradually moving the Sensex higher. The 6 months closing chart pattern of the BSE Sensex index makes interesting viewing:

All the three EMAs are rising with the index above them - the sign of a typical bull market. The Sensex twice took support from the rising 20 day EMA before making the new high. Should you ignore all the negative news flows and plunge into the market with your buy list?

There are several technical reasons to keep your cheque book hidden - and they are worth noting.

1. Volumes have been decreasing for the past month as the Sensex has rallied. A bull rally requires volume support to sustain
2. All the four technical indicators - the slow stochastic, MACD, ROC and RSI, are showing negative divergence - made lower tops as the Sensex made a new 52 week high
3. On a closing basis, the Sensex chart has not quite made a new high and remains below the 'line of control' at 18000; even on an intra-day basis, the new high of 18167 is not a technically valid break-out yet, as it is within the 3% 'whipsaw' lee-way of the previous high of 18048.

The fundamental news isn't very encouraging, with inflation still in double digits. The PM's economic adviser, Kaushik Basu, has put a nice spin on it by saying the higher base effect will bring it down to single digit. Another round of interest rate hike may be the only alternative left for the RBI.

The monsoon has been below par, and the stock market is ignoring that. Q1 results declared so far have been better than expected. Even Infosys' slightly muted results was caused by steep salary hikes and not due to any deterioration in the business front.

The FII buying spree can push the Sensex up to test the 18500-18600 resistance zone. In which case, the 'head' at 18048 can become the third left shoulder (LS3), and the possible new high can become the 'head' of a head-and-multiple shoulders pattern.

If the Sensex reverses direction next week - the negative divergences in all four technical indicators is hinting that - then we may need to look at a 'double-top' with the two peaks at 18000 and the valley in-between at 16000 (with a down side target of 14000).

Bottomline? The chart pattern of the BSE Sensex index seems unable to generate upside momentum despite heavy FII buying. The down side risk is increasing with each passing day. But none of the technical indicators have turned bearish - so stay invested with trailing stop-losses.