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Saturday, September 4, 2010

BSE Sensex Index Chart Pattern – Sep 03, '10

The BSE Sensex index chart pattern reminds me of one of the many quotes attributed to the colourful former NY Yankee’s coach, Yogi Berra: “You got to be very careful if you don’t know where you are going, because you might not get there!”

In last Saturday’s BSE Sensex analysis, the technical indicators were looking weak, hinting at a deeper correction. The FIIs had also started selling, after being net buyers throughout Aug ‘10. I had advised readers not to panic, and to watch the FII trading data closely.

On Fri. Aug 27 ‘10 and Mon. Aug 30 ‘10, the 50 day EMA provided good support to the Sensex. But on Tue. Aug 31 ‘10, the index fell below the 50 day EMA intra-day and touched a low of 17820 – a fall of over 650 points (3.5%) from the Aug 19 ‘10 peak of 18475.

Just when it seemed that the pendulum was beginning to swing towards the bears, a smart bout of buying and end-of-the-month short-covering saw the Sensex close the day above the medium-term moving average. From Wed. Sep 1, ‘10, the FIIs became net buyers again and the index moved above the 20 day EMA.

I’m not very sure where the Sensex is going – or whether it will get there. But let us try to look for some clues in the 9 months bar chart pattern of the BSE Sensex index:

Sensex_Sep0310

In Mar ‘10, the Sensex was making new highs while the RSI peaked out and started moving lower. The slow stochastic remained flat. The negative divergences were followed by the index touching the upper end (18048 on Apr 7 ‘10) of the upward-sloping trend channel and reversing directions.

The Sensex (marked by blue oval) dropped to the 50 day EMA, got support and then bounced up above the 20 day EMA. Observe the RSI (within blue oval) closely. It dipped below the 50% level, rose up to touch the mid-point and even as the Sensex rose a bit higher, the RSI started to drift down. The slow stochastic touched the 20% level, bounced up and then moved marginally above the 50% level.

Now, fast forward to the Jun-Aug ‘10 period. Note that the gradual higher tops in the Sensex were once again not matched by the RSI and slow stochastic. The negative divergences were a precursor to the brief correction from the Aug 19 ‘10 top of 18475.

Let us see what happened last week (marked by blue ovals again). The Sensex dropped below the 50 day EMA intra-day but closed just above it. The subsequent bounce took the index above the 20 day EMA – almost repeating what happened back in Apr ‘10. As Yogi Berra might say: “It’s deja-vu all over again!” 

Observant readers may perceive a subtle difference. The RSI dipped below the 50% level, but rose above it. The slow stochastic touched the 20% level and then moved slightly higher above the 50% level.

What can we conclude from these observations? The odds are favouring the bulls a bit more. A drop to the lower end of the trading range may not happen just yet. A test of the upper end of the trading channel seems more likely.

But I’m not ready to place any bets. Why? I’ve learned the hard way (by losing money) that it is pointless to bet on Sensex movements. The double-digit inflation number consequent to high food prices is also a cause of concern. Not to forget that the Sensex is just 250 points (<1.5%) below the recent 52 week high.

Bottomline? The BSE Sensex index chart appears to be repeating a pattern it followed back in Apr ‘10. It really shouldn’t matter to investors which way the Sensex will move next. Stay invested with appropriate stop-losses. The index has spent a year inside the upward-sloping channel. It may be a good time to adjust your asset allocation plan.

(Note: If you don’t know how to reallocate your assets, read my FREE eBook.)

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