BSE Sensex Index Chart Pattern - Jul 23, '10

After a valiant struggle, the BSE Sensex index chart pattern crossed the strong barrier at 18000 and had back to back closes above the 18000 mark on Thursday (Jul 22, ‘10) and Friday (Jul 23, ‘10).

Friday’s trade touched several milestones. The intra-day high of 18238 was a 2 year high. The closing level of 18131 was the highest daily and weekly close in 2 years. Volumes also picked up a bit.

The Sensex is above the 200 day MA and both are rising. It won’t be surprising if the bulls start celebrating. But one must be wary about joining them. A look at the bar chart pattern of the BSE Sensex index since the bull run began in Mar ‘09 may explain why:

From Sept ‘09 onwards, i.e. for almost 11 months, the Sensex has been moving sideways in a parallel channel of about 2300 points, with a slight upward bias. Four times - marked by arrows, it has bounced up from the lower end of the channel.

Three times in-between, the Sensex turned down after reaching the upper end of the channel. As of Friday’s close, the Sensex is about 200 points below the upper end of the channel. Is it time for the index to head down once again?

The technical indicators are all showing negative divergences. The MACD is positive and just above the signal line. The RSI and slow stochastic have entered their overbought zones. However, all three have made lower tops as the Sensex made a higher top.

In the near term, buying by the FIIs will determine the index direction. Technically, a move above the upper end of the channel at about 18350, accompanied by strong volumes will be treated as a break out. An upward break on muted volumes may turn out to be a ‘false’ break out.

For a confirmed technical break upwards, the Sensex needs to close above 18900 (including the 3% ‘whipsaw’ lee-way above 18350). The probability of that happening is increasing with the daily FII inflows.

Concerns about the economies of the Eurozone and the USA remain. Inflation has not been tamed in India yet and another round of interest rate hikes may be in the offing. The monsoon is deficient till date. Q1 results announced so far have been mostly good, with a few exceptions.

Bottomline? The chart pattern of the BSE Sensex index has been trading in a sideways channel for 11 months, and may continue to do so for some more time. The scale is tipping towards the bulls for now, but the time isn’t ripe for all-out buying. Stay invested with strict trailing stop-losses.