BSE Sensex and NSE Nifty 50 Index Chart Patterns – Mar 18, ‘11

Despite concerns over inflation, oil prices and the catastrophe in Japan, Indian stock indices had remained quite resilient till mid-week. The inflation number came in higher than expected, and the RBI had no choice but to increase the repo and reverse repo rates by another 25 bps (0.25%).

Many market players were hoping that the RBI won’t increase rates because there were signs that the economy was beginning to slow down. Readers of this blog had been warned: ‘If the RBI hikes interest rates next week, the bears may use that as a trigger to sell.’

BSE Sensex Index Chart

Oil prices rose above the $100 mark again, which compounded the problem of the interest rate hike. India’s weightage in the MSCI index was reduced, and FIIs – not surprisingly – turned net sellers. The 18050 level, which had supported the Sensex for the previous 12 trading sessions, was decisively broken on Fri. Mar 18 ‘11.

Both the 50 day and 200 day EMAs have fallen within the consolidation zone between 17300 and 18700, and they are ensuring that the upside remains capped. A test of support from 17300 is almost inevitable. Whether the support will hold or not is the bigger worry for bulls. A break below could take the Sensex down to 16000.

The technical indicators are bearish. The MACD is negative, and has drifted down to touch its signal line. The ROC has dropped below its 10 day MA into the negative zone. The RSI is slipping down towards its 50% level. The slow stochastic is just below its 50% level.

The Sensex correction is in its fifth month with no sign of a trend change yet. Still I am getting requests about which stocks to buy. The Sensex is technically in a bear market, and you make money in a bear market by selling short. That is not a strategy recommended for small investors. Better wait for the trend to turn bullish.

Nifty 50 Index Chart

Many analysts and TV experts were convinced that 5400 was a ‘strong support’. One such expert mentioned the huge open interest at 5400; another went on record that the support was strong because it had been tested a few times. Supports (and resistances) don’t become stronger if they are tested in quick succession. They become weaker.

The other thing to note is that 5400 is the mid-point in the consolidation range between 5200 and 5600, and can be used as a ‘line of control’ by short-term traders. Sell when the Nifty moves above 5400 and buy when it falls below.

5200 is a stronger support because it has been tested only once about a month back. That is no guarantee that the support will hold the next time it is tested. A break below 5200 could see the Nifty testing 4800.

Global indices have been correcting due to the twin effects of high oil prices and likely supply-chain disruptions due to factory closures and port destructions in Japan. The barely visible economic growth rates in Europe and USA are facing headwinds again. Gold price has started to rise as appetite for risky assets gets reduced.

Bottomline? The chart patterns of the BSE Sensex and Nifty 50 indices continue to consolidate within trading ranges. Short-term traders can make some money by trading the range. Long-term investors should use such periods to learn patience, and read books about fundamental and technical analysis (links on the right panel of this blog).