Saturday, August 21, 2010

BSE Sensex Index Chart Pattern – Aug 20, '10

The BSE Sensex index chart pattern finally seems to have broken out of its ‘boring’ trading channel. If I didn’t know better, I would claim that comparing the Sensex to the Chennai climate in last week’s analysis finally goaded the bulls into some serious action.

It was actually the cascading flow of FII money which tipped the scales towards the bulls. Here are some interesting data published in the BusinessWorld issue of Aug. 16 ‘10. FII inflows in US $Billions in the Jan to July ‘10 period (and percentage increase over the same period a year ago) have been as follows:

India – 10.25 (+40%); Japan – 8.7 (+128%); South Korea – 7.6 (-40%); Indonesia – 1.4 (+67%).

There may be questions about the source of these FII funds. Whether they are of a particularly dark colour, hitherto stashed away in a picturesque, land-locked country in Europe by some of our esteemed representatives in Parliament, is some thing only a detailed investigation by SEBI may reveal.

If such rumours are indeed true, then any fears of a sudden reversal of the flow is unlikely. Remember an old stock market adage: ‘buy the rumour and sell the news’. So let the inflows continue to boost the wealth of small investors who believe in partial profit booking.

Enough ranting. Now a look at the short-term daily bar chart pattern of the BSE Sensex index:


Of particular interest is the last two days of trading (marked with a blue oval on the top right). On Thurs. Aug 19, ‘10, the index broke out of its ‘Mini-me’ trading range with decent volumes. On Fri. Aug 20, ‘10, the index pulled back towards the trading channel, found support and closed just above the upper trend line.

The technical indicators are giving mixed signals. The slow stochastic is looking bullish and has entered the overbought zone. The RSI dropped down after touching the overbought zone, and the lower top indicates negative divergence. The MACD has been playing hide-and-seek with the signal line for a while, drifting down slowly in positive territory without giving any clear trend indications.

Let us also look at the longer-term picture – the weekly bar chart pattern of the BSE Sensex since the May ‘09 election results announcement:


Note the gap at the left of the chart which was partly filled during the July ‘09 correction. I had written a post about ‘gap analysis’ in Sept ‘09 to set a possible upward Sensex target of 17800.

The index has been in the upward-sloping consolidation channel for the past 12 months from which it tried to emerge last week. The blue oval at the top right marks the spot where the index just managed to close above the trading channel.

Technically, the upward break out from the trading range has not yet been confirmed. The 3% ‘whipsaw’ lee-way means only a close above 18850 will be a technically valid break out.

The slow stochastic is well inside the overbought zone. The RSI has moved up to touch the overbought zone. The MACD is meandering sideways in positive territory. Note that both the MACD and RSI made higher tops in Jun ‘09, when the Sensex was at 15600. Can the negative divergences cause the Sensex to crash down? Let us answer that by saying that the bulls have definitely left the door ajar.

Bottomline? The bulls (read, the FIIs) are trying to use a flood of liquidity to wrest complete control of the BSE Sensex chart pattern. The bears are on the ropes, but still on their feet. Stay invested, and maintain trailing stop-losses to preserve your profits. In case you have missed the bull rally, this is not the time to lose patience and start buying.

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