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

In last week’s post, the possibility of a post-budget rally was mentioned. It was more of a relief rally, since the budget didn’t turn out to be either negative or positive. The FIIs were net buyers for a few days. Short-covering added fuel to the rally. Is it time for the bears to retreat? Far from it.

BSE Sensex Index Chart

Bulls will be happy that the Sensex managed to close above the 20 day EMA, and breached the entangled 50 day and 200 day EMAs on intra-day basis on Fri. Mar 4 ‘11. It also reached a slightly higher top. The rally managed to keep the ‘death cross’ (50 day EMA dropping below the 200 day EMA) at bay.

Bears will point out that the upper edge of the Bollinger Band had been touched, Friday’s bearish ‘reversal day’ pattern (higher high, lower close), resistance from the 50 day and 200 day EMAs and failure to close above the support zone.

The Sensex has been trading within a range of 17300 and 18700 for 5 weeks, and is poised at an interesting cross road. Technically, the resistance from the 18500 level and the 200 day EMA has not yet been broken. Further consolidation within the trading range is likely. Watch for support from the lower edge of the Bollinger Band and the bottom of the trading range at 17300.

The technical indicators are giving mixed signals – not unusual during consolidations. The MACD is above its signal line and rising, but is still in negative territory. The ROC failed to move above its 10 day MA, reached a lower top and has slipped back into negative zone. The RSI turned down before it could reach the overbought zone. The slow stochastic is at the edge of its overbought zone.

NSE Nifty 50 Index Chart

The trading range of the Nifty 50 for the past 5 weeks has been between 5200 and 5600. The index faced strong resistance from the upper end of the trading range and the combined 50 day and 200 day EMAs, before closing just below the 5550 level. The technical indicators are giving mixed signals, which means that the consolidation within the trading range may last a while longer.

The budget uncertainty is out of the way. That was the probable cause of the relief rally. Whether the fiscal deficit can be kept below the 5% level is a moot point. The UPA government doesn’t seem to be trying too hard to curtail expenditure. The one-time cash inflows from the 3G auction won’t be repeated. The unrest in North Africa and the Middle East has sent oil prices soaring, and that certainly isn’t good news for the deficit.

Inflation is still high and the RBI may have little choice but to raise interest rates again. Already higher interest rates have increased the cost of doing business and begun to affect the profitability of India Inc. Till the fixed deposit rates in banks start going down, the stock markets may remain in a range. The short-term hedge fund types have started pulling out of India. The long-term FIIs and pension fund types have kept faith in India’s growth story.

Bottomline? The chart patterns of the BSE Sensex and Nifty 50 indices are consolidating within trading ranges. If the unrest in the Middle East doesn’t get resolved soon, high oil prices will stall India’s growth, and there is likely to be another leg downwards for both indices. The long-term and medium-term trend is down, but technically this is still a bull market correction. Stay invested.