Friday, February 4, 2011

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Feb 04, ‘11

In last week’s post, I had mentioned that the zone between the Apr ‘10 and Aug ‘10 tops would provide support, but the support was unlikely to hold. Market sentiments had turned negative, and the technical indicators were quite bearish.

After yesterday’s (Feb 3 ‘11) upward bounce on net buying by the FIIs, some market players expected a decent pullback. Today’s heavy volume of selling put paid to bullish hopes. A bearish ‘reversal day’ pattern (higher high, lower close) has been formed. What next?

BSE Sensex Index Chart


Today’s (Feb 4 ‘11) intra-day low was 17927 – just 127 points above the next support zone between 17500 (Oct ‘09 top) and 17800 (Jan ‘10 top). The Sensex has closed 7 straight trading sessions below the 200 day EMA, and it appears that the next support zone may also get breached. The weekly close above the 18000 level is a small consolation.

As long as the 50 day EMA remains above the 200 day EMA, bullish hopes will remain alive. But the ‘death cross’ is likely to lead to some panic selling. The technical indicators are not holding out much hope for a pullback rally.

The MACD is below its signal line, and both are sliding into deeper negative territory. The ROC is negative, and again failed to move above its 10 day MA. The RSI has got its nose above the oversold zone. The slow stochastic has spent almost 4 weeks inside the oversold zone. The ROC has made a higher bottom, which could lead to a brief bounce. The 18500 level will be a hurdle on the up side.

NSE Nifty 50 Index Chart


As expected, the first support zone between 5400 and 5550 has fallen by the wayside. The Nifty closed just below the 5400 mark at 5396 – so it can’t be termed a convincing break yet. The higher volumes on down days show that the selling pressure hasn’t abated. The next support zone between 5200 (Oct ‘09 top) and 5300 (Jan ‘10 top) is in the bear’s sights. Any pullback is unlikely to move above 5550.

The much-publicised arrests of the former telecom minister and his cohorts hasn’t cut much ice with the Opposition, the general public or the FIIs. The latter seem more concerned about the rising inflation rate and the comparatively lower valuations of their home markets. Another round of rate hikes by the RBI will not help the bullish cause.

There is no trigger for an upward move till the budget. If the Opposition continues to stall the Parliament during the budget session, the stock market will continue to slide. Q4 results in Apr-May ‘11, election results in a couple of states and the advent of monsoon will be the next set of events that may shake the bulls into some action.

Just remember that India’s growth story has slowed down a bit, but is still far ahead of the developed markets. Relative valuations are causing the FII’s to sell. As the US and UK markets keep rising and India keeps falling, the valuation gap will be narrowing down. 2011 is unlikely to be a repeat of 2008. It may be more like 2004 or 2006, when the markets corrected by 30% only to move up much higher.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are under strong bear attacks. Investors were waiting for a big correction in 2010 to enter at lower levels. Now that the indices are falling, not many are in the mood for buying. This is one pattern that gets repeated again and again. Now is a great time to prepare a ‘buy list’ of fundamentally strong stocks, and wait patiently for them to come down to more reasonable valuations.


Jasi said...

Now before I ask my question, I know we are urged to look at individual valuations than market as a whole. But not many would argue that market levels ARE indeed an indicator.

So going by that Sir, what do you think are good decent levels to actually start buying select blue chips or even in fact may be ETFs?

The second question I have is around banking and auto. They have had a stellar run and are expectedly undergoing correction. So is this their bubble going burst, which would mean stay away from these two sectors? Or is this an opportunity to enter them at tasty valuations. I mean if our economy is to grow, arent auto and banking obliged to keep up and NOT underperform?

Appreciate your thoughts around this and like always, your index posts are very informative and eagerly awaited, irrespective of how true/false they turn out to be. Afer all that is something even the best of noble winners havent been able to do.

:) thanks and regards!

thega said...

very informative its like a dose of vitamins after seeing the sensex dive.

pl suggest health care stocks
and fundamentally good stocks
as u mention in your write up.

i read your blog daily its like a ritual, u ar doing great service
sir i look forward for ur notes on a daily basis.

Subhankar said...

@Jasi: Thanks for your comments.

Ramesh Damani says one should buy when one sees value - regardless of the Sensex levels. Use the Margin of Safety and Circle of Competence concepts to figure out what to buy and when.

Banks and autos are two pillars of the India growth story. Valuations were stretched, but not in bubble zone. I have investments in both sectors, but don't see any compelling reason to add to my holdings yet.

@thega: Appreciate your comments.

Please await my post on healthcare stocks. More than 50 stocks have been analysed on my blog. Except for a handful of stocks I've asked investors to avoid, the rest are all fundamentally strong. Please go through them (links on the right panel of my blog).