Friday, November 12, 2010

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Nov 12, ‘10

BSE Sensex Index Chart


Last week, the BSE Sensex index chart pattern had closed at an all-time high just above the 21000 level, negating the bearish head-and-shoulders pattern discussed two weeks back. I had advised investors against celebrating the new high because of the negative divergences clearly visible in all four technical indicators – which made lower tops as the Sensex closed at an all-time high.

Was it purely technical reasons that caused the Sensex to slide by 850 points this week, or were there some fundamental reasons as well? Let me put it this way: technical analysis helped to provide an advance warning. A deterioration in the global economic scenario hastened the fall.

There is an old saying: misfortune never comes alone. The Sensex was no exception. First, there was the ripple effect of a sell off in South Korea’s KOSPI index because the USA and South Korea failed to sign off on an expected deal during President Obama’s visit. The ripple turned into a wave when the Shanghai Composite index sold off because of expected economic tightening due to rising inflation. Ireland’s cost of borrowing has reached new highs, and another bail-out by the European Union may be in the offing. Last, but not the least, was the poor IIP numbers in India.

The technical indicators continue to show weakness. The MACD is still in positive territory, but has slipped below the signal line and started to fall. The RSI has dipped below the 50% level. The slow stochastic is dropping fast and is just above its 50% level. The ROC is barely positive but has moved below its 10 day moving average.

On the down side, there is likely support at the 50 day EMA at 19950 and at 19772 – which corresponds to the neckline of the failed head-and-shoulders pattern. If that is broken, and the probability seems high, the next support is at the previous top of 18500 and below it, at the 200 day EMA at 18300. A fall to the 200 day EMA will be a good buying opportunity.

On a bounce to the upside, expect resistance from the 21000-21200 zone.  

NSE Nifty 50 Index Chart


The NSE Nifty 50 index fell on strong volumes this week – which is cause for concern as it indicates that the correction may continue for a while. All four technical indicators are displaying weakness, though they stopped short of turning bearish.

The support levels on the down side are the 50 day EMA at 6000, the neckline of the failed head-and-shoulders pattern at 5932, the previous top of 5550 and the 200 day EMA at 5500. A break below the 200 day EMA is not expected, but should it occur then a change of strategy would be warranted.

On a bounce upwards, expect resistance from the 6340-6360 zone.

Bottomline? The chart patterns of the BSE Sensex and the Nifty 50 indices are correcting after reaching all-time closing highs. Bull market corrections are healthy and necessary for the upward move to continue. Stay invested in fundamentally good stocks, and refrain from chasing hyped ‘multibagger’ stocks that suddenly appear out of the woodwork near bull market tops. Start preparing a ‘buy list’ – or better still, get ready to add to the stocks already in your portfolio.

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