Saturday, December 25, 2010

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Dec 24, ‘10

BSE Sensex Index Chart


The BSE Sensex index chart pattern broke out of the downward sloping channel within which it was trading for the past two months. Such break outs should be accompanied by a volume surge – but that was not the case this time. The pattern has been redrawn as a consolidation within a symmetrical triangle (lower tops and higher bottoms). The break out criterion from a triangle – four reversal points with two on the top and two on the bottom – have been met.

This opens up several possibilities – with a couple of bullish and a couple of bearish outcomes. Let’s evaluate them:

1. The merged 20 day and 50 day EMAs are beginning to show an upward bias. Both the 100 day and 200 day EMAs are moving up. The Sensex has closed above all four EMAs. The bull market is intact. The expected break out from the triangle should be upwards.

2. The technical indicators are showing positive divergences. All four made higher tops as the Sensex made a lower top. Only the MACD is showing weakness as it remains in the negative zone. The ROC is positive. The RSI is just above its 50% level. The slow stochastic has entered its overbought zone. Another reason for a likely upward break out.

3. Triangles are not very reliable in gauging future direction. However, they tend to be continuation patterns. In other words, the break out is likely to be in the direction in which the index was headed before entering the triangle. In this case – downwards.

4. The break out from the downward sloping channel was on low volumes. FIIs have turned net sellers due to year-end profit booking considerations and relative outperformance of the Dow and FTSE. If volumes remain thin due to lack of FII buying, then an upward break out from the triangle may be ‘false’ and the up move may get reversed by an ‘end run’ (a high volume drop).

Stay invested with a stop-loss at 18500.

NSE Nifty 50 Index Chart


In last Tuesday’s update of the Nifty 50 chart pattern, I had expressed certain concerns regarding the continuation of the bull market. Though the technical indicators have improved and are sending bullish signals, the previous high of 6069 is yet to be crossed and volumes are petering off.

Volumes are supposed to reduce during periods of uncertainty represented by triangle patterns. The real concern is the higher volumes during down days and lower volumes during subsequent up days. In case there is a high volume break down below the triangle, it may be the sign of a ‘shake out’ and the index may start a rapid rise shortly thereafter.

Stay invested with a stop-loss at 5550.

Bottomline? The chart patterns of the BSE Sensex and Nifty 50 indices are consolidating within symmetrical triangles after 10% corrections from their tops. Since break outs from triangles can happen on either side, it is best to remain circumspect and stay invested. As Warren Buffet has mentioned, money gets transferred from active to patient investors. Let the correction and consolidation play out before jumping in, but continue with your regular planned investments.

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