BSE Sensex and NSE Nifty 50 Index Chart Patterns – Oct 15, ‘10

BSE Sensex Index Chart

The BSE Sensex chart pattern broke out above the 18500 level in Sep ‘10 following a year-long consolidation and quickly touched the 20000 level. Eight sessions of sideways consolidation in a narrow band was followed by another upward break out (highlighted in blue) that touched a new high of 20707 – meeting the minimum upward target of 20600 from the break out level of 18500.

A small consolidation in a ‘flag’ pattern – the possibility of such a pattern was discussed in last Tuesday’s post – was followed by an upward break out (also highlighted in blue) that touched a new high of 20854 on Oct 14 ‘10.

A ‘reversal day’ pattern (higher high, lower close) led to two days of profit booking that brought the Sensex down to the twin support of the rising 20 day EMA and the top of the ‘flag’. Will the support hold, or will the Sensex drop some more?

That’s a good question, and only Mr. Market knows the answer. But we can always assess the bullish and bearish possibilities. First the bullish view.

The BSE Sensex index chart is poised just above the rising 20 day EMA. All three EMAs are moving up, indicating a bull market. The FIIs have been net buyers through out all the ups and downs in the index for the past few months. Recent restrictions in overseas fund inflows into many emerging markets (that have trade surpluses or marginal deficits with the USA) should lead to more FII money flows into India.

The reasonably successful conclusion of the Commonwealth Games, with India second in the medals tally, will bring India, Inc. greater attention from global investors. The CEO of Radisson Hotels said in a TV interview on CNN that in spite of the infrastructure gliches and bad publicity preceding the Commonwealth Games, he had no qualms about going ahead with his plans of opening 100 hotels in India by 2015!

Next, the bearish view – given below the analysis of the Nifty 50 chart.

NSE Nifty 50 Index Chart

The NSE Nifty 50 chart pattern looks almost identical to the BSE Sensex chart. Only the levels are different. The upward break out above the year-long consolidation channel occurred at 5550 in Sep ‘10. The index touched the 6000 level and entered a narrow sideways consolidation.

The break out from the ‘flag’ consolidation pattern touched a new high of 6284 on Oct 14 ‘10. Note that the ‘reversal day’ pattern was accompanied by good volumes – but not significantly higher volumes, which would have indicated buying exhaustion. 

In spite of a strong bullish case mentioned above, the technical indicators are not very supportive. The MACD is positive, but falling below the signal line. The RSI has dropped from the overbought zone down to its 50% level. The slow stochastic has also dropped from its overbought zone. It is above the 50% level but has given a bearish cross.

More importantly, all the three indicators are showing negative divergences. They made lower tops as the NSE Nifty 50 index made higher ones. The IIP numbers were a let down. Infosys Q2 results announced today were as per expectations, but the market was expecting a bonus issue while the company offered a special dividend.

Bottomline? The BSE Sensex and NSE Nifty 50 index charts are showing technical weakness caused by profit booking – mostly by domestic investors. The FIIs remain net buyers, and they have deep pockets. On the downside, expect support from the bottom of the narrow sideways trading band and the rising 50 day EMA. A drop below the 50 day EMA may provide opportunities to enter individual stocks. Stay invested. There are no signs of a trend change yet.