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Saturday, January 8, 2011

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jan 07, ‘11

Readers and followers of this blog who have been reading my regular updates of the BSE Sensex and NSE Nifty 50 index chart patterns should not be too surprised by the sharp drop in the markets during the first week of the new year. I had given ample warnings about a couple of bearish possibilities. One of which – an ‘end run’ – seems to be playing out.

BSE Sensex Index Chart

SENSEX_Jan0710

The break out from the symmetrical triangle pattern in the last week of Dec ‘10 was not accompanied by a volume spurt. The technical indicators on the weekly charts were looking bearish. The combined effect of the two led to a ‘false’ break out. The Sensex has dropped back inside the symmetrical triangle and found support at the rising 100 day EMA.

Will the support hold? The technical indicators are not conducive. The MACD is still positive but has dipped below the signal line. The ROC has dropped below its 10 day MA into negative territory. Both the RSI and slow stochastic have fallen sharply below their 50% levels from their overbought zones.

The near-term supports can come from the upward sloping trend line of the symmetrical triangle (at 19400); the rising 200 day EMA (at 18850) and the Aug ‘10 top (at 18500). Can the Sensex go lower? Yes, it can – but then we may be looking at a trend reversal. Till the index trades above its rising 200 day EMA, technically the bull market remains in tact.

On the upside, expect resistance from the downward sloping trend line forming the symmetrical triangle, the 50 day EMA and the 20 day EMA – in that order.

NSE Nifty 50 Index Chart

Nifty_Jan0710

In last week’s post, I had kept the possibility of an ‘end run’ open. The ‘false’ upward break out from a symmetrical triangle followed by a sharp drop on increasing volumes seems to be in progress.

The fall on rising volume does not augur well for the bull market in the Nifty 50 index. The weakness in the technical indicators are pointing to a deeper correction, and a possible test of the 200 day EMA. Immediate down side targets for the Nifty are 5800 (upward sloping trend line of the symmetrical triangle); 5650 (200 day EMA) and 5550 (Aug ‘10 top).

Any bounce up on high volumes from the current level, or from any of the three down side targets mentioned, would be a buying opportunity. That is likely only if the Q3 results surprise on the up side. Interestingly, the heavy selling by FIIs on Friday (Jan 7 ‘11) was more than covered by the DII buying, still the indices fell. The logical explanation is that the FIIs mostly sold index-constituent stocks.

Food inflation continues to rise – with the Government coming out with new explanations every time. The Minister for Food and Agriculture should be put on the docks for ineptitude, if not downright corruption. RBI may be forced to hike interest rates, which will be detrimental to the bull market.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are once again following a downward trajectory – as it has done in 7 out of the last 10 Januarys. Long-term investors should hold with a stop-loss at the respective Aug ‘10 tops. New entrants should wait for an upward bounce from the support levels mentioned.

4 comments:

Jasi said...

"Any bounce up on high volumes from the current level, or from any of the three down side targets mentioned, would be a buying opportunity"

Questions!
1) What volumes are we talking about? Overall trading volumes?
2) Where can we track them?
3) How do you quantify/judge "high" or "low" volumes?

Much appreciate your guidance Sir! :)

Eswar Santhosh said...

A good correction would be welcome at this stage. If it does test the 200MA, it's time for me to be a little more active. If not, I'll continue being on the sidelines. The sell period (Part profit booking, selling off some over-priced stocks) is already over for me. Sensible buy range though is elusive. Things are however getting a bit more interesting with this week's correction. I'll continue to keep track on a weekly basis till things get really interesting on either side.

Jasi said...

Yea, and I noticed that in a time when sensex/nifty might have just corrected around 3-4% from its highs, the midcap/junior nifty is already down around 15% from its highs.
With sensex/nifty set to go further down, midcap/junior nifty will be at mouth watering valuations.
A case of investing in nifty junior benchmark may be? I'd surely do that for a decent 10-12% gains in short to mid term for sure.

Subhankar said...

@Jasi: Volume data are available from BSE, NSE, Google Finance, Yahoo Finance, Moneycontrol. High and low volumes are judged by comparing with volumes at previous tops, as well as volumes transacted more recently.

For an index, it is the total volume of transactions. The easiest way for me is to look at Nifty charts from chartnexus.com.

When to re-enter the market is always a challenge for small investors. As Ramesh Damani keeps saying: buy whenever you see value. But you have to get into the long-term investment mode. Short-term activity enriches brokers.

@Eswar: Technically, 15-20% is a 'good' correction in a bull market. Anything more, and we need to be careful about a trend reversal.

Looks like the 18500 level is going to be tested. Prices are not yet at mouth-watering levels for frontline stocks, but some mid and small caps are beginning to look interesting. At most times, 'doing nothing' is the best strategy - and you seem to have mastered that well.