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Tuesday, December 14, 2010

Have the bulls regained control of the Sensex?

Looking at short-term Sensex movements can cause unnecessary confusion, specially for small investors whose portfolios are overweight on mid-cap and small-cap stocks. Those who have joined the bull party late are unsure whether to book their meagre profits before they disappear into thin air, or use the correction to buy.

However, Sensex movements do provide an indication of overall market sentiments. The FIIs are still sellers, and the DIIs have now turned buyers. Are they trying to front-run the index with the hope that FIIs will resume their buying soon? Or, are they trying to ensure that the government can push through its disinvestment proposals?

Whatever may be the reasons, the fact is that unless the FIIs resume buying, we may not see new highs in a hurry. A quick look at the 3 months bar chart pattern of the Sensex shows that the index has hit a technical fork on the road:

SENSEX_Dec1410

The index touched a higher bottom of 19074 on Fri. Dec 10 ‘10 – which is a positive sign. But it is still trading within the downward channel, and has three immediate hurdles. The first is the combined resistance from the 20 day and 50 day EMAs at 19800. Then comes the resistance from the upper end of the channel at 19900.

Even if the Sensex breaks out above the downward channel, it needs to cross the previous high of 20218 touched on Dec 6 ‘10. That will form a bullish pattern of higher tops and higher bottoms. Till then, the bulls will not regain full control.

Both the RSI and slow stochastic are above their 50% levels, which are bullish signs. But the MACD is still negative and merged with its signal line, and the ROC is barely positive and has failed to move up. Bears may try to stall the up move and the Sensex can test support from the 200 day EMA. An interesting tussle is expected to play out over the next couple of days.

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