Is the Sensex correction already over?

In last Thursday’s post, what had looked like a ‘beautiful’ break out from a short-term trading channel was actually just a test of the upper end of a ‘boring’ longer-term trading range.

One of the fun aspects of watching the business TV channels is that smartly-clad young presenters ask almost identical questions to different ‘experts’ who, in turn, provide identical answers depending on what the Sensex was doing in the prior 2-3 days.

If the Sensex was moving up, the ‘experts’ talk about ‘another 5-10% upside’ or ‘new highs’. Two days of down moves, and the tone changes. The talk shifts to ‘a correction is overdue’ or ‘at least 10-15% downside from here’.

No wonder small investors get all confused. The fact is, no one really knows for sure what the Sensex is going to do next and, as I have mentioned a number of times before, it shouldn’t really matter.

Investors should always take buy/sell decisions based on their own portfolios and their outlook. So why am I writing about Sensex levels? It is an effort to show how technical analysis can assist in taking investment decisions.

Now, a look at the short-term Sensex chart pattern:

Last Thursday’s (Aug 19, ‘10) break out was on good volumes, followed by Friday’s pullback to the upper end of the trading channel. But there was no follow-through buying on Monday (Aug 23, ‘10) that would have confirmed the break-out.

Instead, the index closed on the upper end of the trading channel, before dropping back into the channel on Tuesday. The correction continued on Wednesday (Aug 25, ‘10) but got support from the 20 day EMA. Today, the Sensex closed slightly higher than the 20 day EMA.

If the correction resumes tomorrow, there is strong support in the 17950 – 18050 zone from the lower end of the trading channel, the 50 day EMA and the Apr. ‘10 top. What if the support zone is breached?

Let us look at the long-term chart pattern of the Sensex for the clues:

The 200 day EMA is currently at 17100, and the lower end of the trading range is approximately at 16300. Those will be the lower targets for now.

Another point to note is how the 20 day EMA has provided good support to the Sensex for the past 2 months. A breach of the short-term moving average will be an indication of a slightly deeper correction.

Fundamentally, not much has changed in India. We can conclude that this was routine profit booking due to the monthly F&O settlement today (Aug 26, ‘10).

Did the recent disappointing economic news from Europe and USA have any effect on investor sentiments in India? It doesn’t seem so from the chart below:

For the past three months, the Dow and Sensex seem to be going their separate ways – the former is in a bear market while the latter is in a clear bull market. No wonder the FIIs are pumping money into Indian stocks.

That was the long answer. The short answer is: technically, it would seem so.