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Saturday, August 7, 2010

BSE Sensex Index Chart Pattern – Aug 06, '10

The chart pattern of the BSE Sensex index reminded me (again) about an old Herman’s Hermits pop-song where all the verses have the same words and tunes. The late Patrick Swayze’s ghost (not the real one, but the one in the movie ‘Ghost’) sang it to irritate Whoopi Goldberg into helping him contact his wife Demi Moore.

Who will help the bulls to take the Sensex out of the boring 11 months long trading range? The FIIs are net buyers, but they seem to have given up on most of the Sensex stocks, and are concentrating on mid-caps and small-caps. Many such stocks are shooting up like rockets on sharp volume spikes for no apparent rhyme or reason.

Some investors are sure that a big correction may be around the corner. They are selling at every opportunity and hoarding their cash to buy at lower levels. Others think that the Sensex will soon break out upwards and make new highs that are 5-10% higher than the current levels. They are holding on to squeeze out the last few paisas.

A few investors – mainly inexperienced – are feeling left out of this grinding up move, since they sold out much earlier and didn’t get a chance to get back in. If the Sensex does make new highs above its range, these left-out souls may get sucked in only to find that all escape hatches are closed.

Then there are those that have come to the end of their reasoning capabilities and have started looking heavenwards, with the hope that some kind of strange and magical astrological configuration of stars and planets can unlock the secret to untold riches!

The bar chart pattern of the BSE Sensex index since the bull rally started in Mar ‘09, is still stuck in the slightly upward sloping channel that I drew two weeks back:

Sensex_Aug0610 For two months, the index has been moving up and getting good support from the 20 DMA. It reached the upper end of the trading range and has again dipped a bit. All three moving averages are rising with the Sensex above them – indicating that the bulls are controlling the market.

The Sensex made new intra-day and closing highs last week, but the technical indicators failed to follow suit – a negative divergence. The MACD is entangled with its signal line in positive territory, and made a lower top. The slow stochastic also made a slightly lower top but is above the 50% level. The RSI also made a clear lower top, but stayed above the 50% level.

Most of the Q1 results have been declared – except for the Tata biggies and a few others. Top lines have shown better growth than bottom lines. Raw material and other expenses have eaten into profits. The monsoon, which was deficient in Jun ‘10, fully revived in Jul ‘10 and caused floods in some parts of the country.

The interest rate hikes by the RBI may take some more time to cool down inflation. Any one doing grocery shopping knows that food prices remain expensive. Most of the good news has already been discounted in the stock market.

Even the slightest bad news could start a correction that every investor seems to be waiting for. The relentless FII buying has propped up the market and allowed the Sensex to defy gravity. There is no reason to believe they will suddenly turn sellers – unless some thing drastic happens in Europe or USA.

Bottomline? The chart pattern of the BSE Sensex index continues to trade in a range with the bulls calling the shots. Investors should remain cautious and need not go the whole hog either in their buying or profit booking. There are still value picks in this market – but they are not that easy to find. Stick to your ‘Circle of Competence’ and hold on to what you own.

Related Post

What is your Circle of Competence?

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