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Saturday, July 31, 2010

BSE Sensex Index Chart Pattern - Jul 30, '10

The BSE Sensex index chart pattern showed distinct uneasiness as it moved above the Apr ‘10 high of 18048. I had given ample warning last week to investors that celebrating the new high in the Sensex may be premature.

The negative divergences in the technical indicators, and the proximity of the index to the upper end of an upward sloping channel (from where it had retreated three times) were signs that bears may emerge from the shadows.

Let us take a look at the 1 year bar chart pattern of the BSE Sensex index:

SENSEX_Jul3010

The index was earlier consolidating within a slightly broader rectangular band between 15300 and 18000. Since the Sensex made several tops in July above the Apr ‘10 high of 18048, an upward sloping channel with a width of about 2300 points has been drawn on the chart.

What caused the retreat from the upper end of the channel? Was it the proximity to the upper trend line from where the Sensex has corrected before? Or, was it the negative divergences in the technical indicators? Or, could it be that most of the Q1 results are out and they have been a mixed bag? Or, was it the hike in the repo and reverse repo rates?

May be due to some or all of those reasons – depending on who is doing the explaining. As far as I am concerned, the Sensex is back inside the sideways consolidation zone of the past 11 months – whether you choose the rectangular band or the up-sloping channel.

The break above the Apr ‘10 top of 18048 was not valid technically, as the Sensex failed to close above 18600 (the 3% ‘whipsaw’ lee-way above 18048). The 50 day and 200 day MA are both rising with the index above them. So, the long-term bull market is in tact.

The technical indicators are favouring the bears. The MACD is positive but has slipped below the signal line. The RSI has dropped below the 50% level. The slow stochastic has entered the oversold zone.

On the down side, look for supports at 17500 (50 DMA), 17200 (200 DMA), 16300 (lower trend line of the up-sloping channel) and 15300 (the bottom of the rectangular band). Can the Sensex go below 15300? Sure it can, specially if the FIIs turn sellers.

The FIIs have been net buyers all through last week while the DIIs were net sellers. Still the Sensex dropped below 18000. If things suddenly go wrong in Europe or USA, and FIIs start to pull out – the Sensex could be in for a deeper cut.

As long as the index stays above the rising 200 day MA, there is no cause for alarm. A bounce up from 16300 could be an opportunity to buy. If 16000 breaks, then we may need to change strategy, as the bull market will be in danger.

Bottomline? The BSE Sensex index chart pattern is confusing and confounding investors by steadfastly remaining in a sideways consolidation pattern. Be very selective in buying, and maintain strict stop-losses. The down side risk appears greater. Hold on to your good portfolio stocks till a clearer trend emerges. Get rid of junk.

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