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Friday, October 29, 2010

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Oct 29, ‘10

BSE Sensex Index Chart

SENSEX_Oct2910

The BSE Sensex index chart pattern shows the continuing struggle between the bulls and bears, with the bulls conceding 134 points on a weekly basis but ensuring that the low of 19772 remained unbreached and the psychological 20000 level was regained. That was the good news.

Now the bad news. The Sensex has formed a bearish head-and-shoulders pattern, with the left shoulder at 20268 (formed in Sep ‘10), the head at 20854 and the right shoulder at 20452 (both formed in Oct ‘10). The neck-line of the pattern is at 19845 – just above the support level of 19772. If the pattern plays out, the downward target will be 18836. Say, 18800 – since we don’t deal with exact levels in technical analysis. That means a possible 1200 points (6%) drop from today’s weekly (and monthly) closing level of 20032, and a 2000 points drop from the peak of 20854.

Could the index fall further? Sure it can – if the FIIs start booking profits. They sold Rs 950 Crores worth on Thu. Oct 28 ‘10, but today were net buyers to the tune of Rs 750 Crores. Even the DIIs were net buyers today. On the down side, there should be strong support at 18500 and from the rising 200 day EMA (at 18050).

The technical indicators have weakened further. The MACD is below the signal line, and both are falling in positive territory. The RSI has slipped below the 50% level, but has stopped falling. The slow stochastic is about to re-enter the oversold zone. The correction is likely to continue next week.

NSE Nifty 50 Index Chart

Nifty_Oct2910

The NSE Nifty 50 index chart pattern found support at the previous low of 5932 and regained the psychological 6000 level. The volume data is showing ‘distribution’ – higher volumes on down days. Ideally, the volumes should have been lower during the formation of the right shoulder of the head-and-shoulders pattern (also visible on the Nifty chart).

With the left shoulder at 6018, the head at 6284, the right shoulder at 6151 and the neck-line at 5963, the down side target for the Nifty is 5642. Say, 5600. That’s a 400 points (6.5%) drop from today’s weekly and monthly closing level of 6018.

The technical indicators are hinting at a continuation of the correction. The MACD is below the signal line, and both are falling. The MFI and RSI are below their 50% levels. The slow stochastic has re-entered the oversold zone.

Food inflation rate has receded a little – more due to the base effect than any actual reduction in food prices. Q2 results declared so far have been mixed. Even some of the outperformers are showing a slow down in profit margins. The prolonged monsoon has affected the fortunes of cement manufacturers as well as metals, construction and real estate companies. Adverse publicity caused by the woeful mismanagement of the Commonwealth Games preparations have hit the profits of hotel companies.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are taking a break from a long bull rally. A 10-15% correction will be healthy for the next stage of the rally. As long as the indices stay above their rising 200 day EMAs, the bull market will remain in tact. Stay invested. Let the correction play out before buying.

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