BSE Sensex and NSE Nifty 50 Index Chart Patterns – Apr 08, ‘11

In last week’s analysis, I had expected the bears to put up a fight as both chart patterns of BSE Sensex and NSE Nifty 50 indices were near the downward sloping trend lines and the 61.8% Fibonacci retracement levels of the corrections from the Nov ‘10 tops to the Feb ‘11 bottoms. It wasn’t a great surprise that both indices turned down from the expected resistance levels.

Does it mean that the rally from the Feb ‘11 low has come to an end, or is it a temporary pause for breath after a sharp rise? Such questions make the stock market a challenging place to make money in. The market is at an important phase, with the scales almost equally balanced between the bulls and bears.

BSE Sensex Index Chart

The bearish case:

As per Dow Theory, a trend remains in place till it is reversed. The downward sloping trend line connecting the Nov ‘10 and Jan ‘11 tops has provided resistance to all up moves for 5 months. The Sensex continues to trade in a bearish pattern of lower tops and lower bottoms. The ‘death cross’ has been negated by the ‘golden cross’ within a month, but volumes have increased during the past four days as the index corrected – a bearish sign.

The technical indicators are turning bearish. The MACD is positive and above the signal line, but has stopped rising. The ROC is still positive, but has fallen sharply below its 10 day MA. The RSI is well inside its overbought zone – a place from which it tends to turn around fairly quickly. The slow stochastic is also inside its overbought zone, but has started correcting.

On the downside, support can be expected from the 19000 level, and below that from the 50 day and 200 day EMAs. High inflation and oil prices are keeping bullish sentiments in check.

Nifty 50 Index Chart

The bullish case:

The 5 months long down trend hasn’t been reversed yet. But the Nifty has been trading in a bullish pattern of higher bottoms and higher tops since touching the Feb ‘11 low. The index is now above both the 50 day and 200 day EMAs. These are bullish signs.

More importantly, the FIIs have been net buyers right through the week, while the DIIs were net sellers. The FIIs have deeper pockets, and they seem to have realised that emerging markets is where the real growth is going to be over the longer term. Anna Hazare’s successful campaign against corruption should be taken as a positive by the markets.

Expect the Nifty to consolidate between 5700 and 5950 for some time, till Q4 results give a clear direction. As one of the experts commented on a business TV channel: It is a time for cautious optimism.

Bottomline? The BSE Sensex and NSE Nifty 50 chart patterns faced expected resistances from their down trend lines. This is a good time to book out of non-performers in your portfolio – specially if they are mid-caps or small-caps that have seen sudden spurts. Fresh buying only on a clear break out above the down trend lines.