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Sunday, November 7, 2010

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Nov 5, ‘10

BSE Sensex Index Chart

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The New Samvat began with a bang! The BSE Sensex index chart pattern closed above the 21000 mark for the first time ever. The index had moved above the 21000 level intra-day three days in a row in Jan ‘08 – but the highest close it had achieved was 20873 on Jan 8 ‘08.

While we do look at intra-day movements in the short-term, the closing level of the index is used for long-term analysis. The one year closing chart pattern of the BSE Sensex index is in a long-term bull market and there shouldn’t be any doubt that this bull market will last for a while.

The bearish head-and-shoulders pattern that I had observed in the Sensex chart last week did not lead to the expected correction. This shows that technical analysis is not a science, and therefore needs to be used judiciously. The flood of FII inflows is turning technical analysis on its head. The strong listing of Coal India added to the buoyant mood.

That doesn’t mean that one should open the bubbly and go on a buying spree. Note that from Jun ‘10 onwards, volumes have been receding. All four technical indicators, which are in bullish zones, are showing negative divergences – as they failed to make new highs while the Sensex soared to an all-time high. A correction may be round the corner. Wait for the likely dip to enter good sectors and stocks that haven’t performed.

An empirical observation is the distance between the 50 day and 200 day EMAs. A correction or trend change occurs when the distance between the medium-term and long-term EMAs reaches 2000 points. This hasn’t occurred yet. That means there may be some upside left in this phase of the rally. It will be interesting to see if the Sensex pauses near its all-time intra-day high of 21207 touched on Jan 10 ‘08.

NSE Nifty 50 Index Chart

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The NSE Nifty 50 index chart also closed at a life-time high level of 6312. Its previous closing high was 6288 on Jan 8 ‘08 – the same day on which it touched its all-time intra-day high of 6357.

The slow stochastic bounced off sharply from the edge of the oversold zone and rose above the 50% level. The MACD has moved above the signal line after falling below it. The RSI has inched above the 50% level. The ROC has risen quickly into positive territory after spending some time in the negative zone. These are all bullish signs, but with one important exception.

None of the indicators reached new highs while the Nifty closed at an all-time high. The negative divergences could be the harbinger of a correction in the near future. There are no signs of a change of trend and there won’t be – as long as the index stays above the rising 50 day and 200 day EMAs.

Most of the good news have been ‘discounted’ by the market – good Q2 results, good monsoon, rising auto sales. Looks like the FIIs will determine the index movements till the end of the calendar year 2010. They will need to book some profits to dress up their books for the New Year. If you enter now, maintain adequate stop-losses.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices have closed at life-time highs. Many small investors get lured into the market when indices are at their peaks. Follow the discipline of buying the dips, holding for the long-term and booking partial profits to rebalance your portfolio. If you don’t know how to pick good stocks – stick to mutual fund investments. And as Rakesh Jhunjhunwala advised on Muhurat Day – please don’t trade.  

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