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Friday, November 19, 2010

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Nov 19, ‘10

BSE Sensex Index Chart

SENSEX_Nov1910

In last week’s analysis of the BSE Sensex index chart pattern, I had indicated that the probability of the index falling below the 19772 support level was high. The Sensex dropped below the support level intra-day on Thu. Nov 18 ‘10, but managed a smart recovery by the end of trading. No such luck today. The index dropped below and stayed below – closing the holiday-shortened week at 19585. This was the second straight lower weekly close after the Sensex had closed at an all-time high level of 21005 two weeks back.

Will the correction continue next week? Yes, as per the technical indicators. The Sensex closed just below the flattened 50 day EMA on Thursday, and Friday’s high (also the opening level) touched the 50 day EMA. Once penetrated from above, the 50 day EMA has started to resist any up moves.

The MACD has dipped into negative territory, and is well below its signal line. The ROC has turned negative and its 10 day MA is about to follow. The RSI tried to cling on to the 50% level for a while before dropping below. The slow stochastic has fallen sharply to its oversold zone. All four indicators have turned bearish.

Is it time to short the index? It may not be a good idea – for three reasons:

1. The Sensex is in a bull market. The strategy in a bull market should be to buy the dips. Short only if you really know what you are doing and have the discipline to exit if your stop-loss is triggered.

2.  Note the slow stochastic. For the past 6 months, it has spent very little time in the oversold zone. Not unusual in a bull market. An upward bounce can happen soon.

3.  Today’s FII and DII trading data. Both were net buyers to the tune of Rs 668 Crores – and still the index dropped almost 350 points. Things can turn around quickly if they continue buying.

On any upward bounce, expect the 19772 level, the falling 20 day EMA and the flat 50 day EMA to provide resistance. On the downside, support can be expected from the 100 day EMA at 19300, the previous top at 18500 and the 200 day EMA at 18350. A close below the 200 day EMA will change the bullish equation, and open the door for a deeper correction.

NSE Nifty 50 Index Chart

Nifty_Nov1910

The NSE Nifty 50 index chart has closed below the support level of 5932 on good volumes and all four technical indicators have turned bearish. The chance of further correction next week is on the cards. Expect supports at 5800 (100 day EMA), 5550 (previous top) and 5500 (200 day EMA).

Q2 results have been good, but there are signs that higher raw material prices and rising interest rate may have adverse impacts on profitability in the next two quarters. The $600 Billion that Ben Bernanke has decided to pump in will stoke the fire of inflation globally. India may get singed, if not burned.

Bottomline? The BSE Sensex and Nifty 50 indices are undergoing a much-needed correction. Another 5-8% correction from current levels will be healthy for the bull market. For small investors, this is not a time to be active in the market. Identify fundamentally strong stocks that can be added on this dip, but wait for the indices to change direction before jumping in.

(Note: the telecom sector has been out of favour with investors, but I identified 2-3 stocks that are swimming against the bear tide.)

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