The BSE Sensex index chart pattern touched an intra-day high of 20707 on Mon. Oct 4 ‘10 – meeting the upward target from the break out above the year-long upward sloping trading channel - before starting a pullback down to the narrow trading band between 19772 and 20268.
Nothing unusual about such a pullback. Break out moves from trading ranges are often followed by pullbacks to the trading range. In fact, a pullback down to the 18500 level will also not be ‘unusual’. Bull markets often encounter 10-20% drops after reaching a new high.
Such corrections let buyers enter at lower levels and helps the market to attempt new highs. A look at last week’s long-term Sensex chart clearly shows the periodic corrections during the previous bull market from 2003 through 2007.
The 6 months bar chart pattern of the BSE Sensex index is catching its breath after a fairly sharp up move in Sep ‘10:
Friday’s (Oct 8 ‘10) trade has been marked with a blue oval to highlight the fact that the Sensex entered the narrow trading band on an intra-day basis and closed at 20250 - inside the band just below the top edge of 20268.
The technical indicators are showing signs of weakness. The MACD is positive but below the signal line. Both the RSI and slow stochastic have dropped down from their overbought zones. There is no sign of bearishness yet, but the correction may continue next week.
All three EMAs are rising and the index is above them and the ‘higher tops and higher bottoms’ bullish pattern is still intact – which means the Sensex is in a bull market.
There should be no cause for worry even if the index drops below 18500 into the year-long trading channel. A drop there may provide good entry points into some individual stocks. A fall below the 200 day EMA – currently at about 17700 – will be more of a concern.
FII inflows continue unabated. The Government has been making a lot of encouraging noises – about the current inflows not being a concern, allowing FDI in multi-product retail and foreign individual investors to buy stocks directly from the Indian markets. These will be positive for our markets.
Q2 results will start hitting the markets during the Navratri festival period, and are expected to be good. Any negative surprises may cause selling in individual stocks but not in the market as a whole. The Dow and S&P 500 have crossed above important resistance levels and are poised to make new highs.
What can spoil the bull party? Not much that is visible. Valuations are on the higher side but not in bubble territory yet. However, investors should not throw caution to the wind and start buying big time. Remaining circumspect but nimble near all-time highs would be the smart option.
Bottomline? The chart pattern of the BSE Sensex index is facing some profit booking, which hasn’t turned into a full-fledged correction but may do so. A 10-15% correction will restore the long-term market health and make the valuations look fairer. This is a good time to get out of non-performers in your portfolio. Buy very selectively – if you must.