BSE Sensex and NSE Nifty 50 Index Chart Patterns – May 13, ‘11

Honours were even as the bulls and bears fought it out during the week’s trading. The chart patterns of the BSE Sensex and Nifty 50 indices closed flat on a weekly basis – the Sensex closing marginally higher and the Nifty closing marginally lower.

The better-than-expected IIP numbers were ignored by the market on Thursday (May 12 ‘11). Favourable state election results on Friday triggered buying, but failed to overcome resistance from the 200 day EMAs. Both indices have formed bearish inverted ‘flag’ patterns, which have measuring implications.

BSE Sensex Index Chart

The 20 day EMA has crossed below the 50 day EMA, and is likely to drop below the 200 day EMA next week. The ‘death cross’ of the 50 day EMA below the 200 day EMA will confirm a re-entry into the bear market – unless the FIIs dramatically step-up their buying.

Now, about the ‘inverted flag’. Such consolidations usually appear in the middle of a move, and tend to be continuation patterns. In other words, the likely break out will be downwards. How far down? The fall can equal the height of the inverted flag pole.

In this case, about 1500 points (from the intra-day top of 19700 on Apr 21 ‘11, to the intra-day bottom of 18200 on May 5 ‘11). Assuming the break from the flag occurs at 18300, the Sensex can drop to about 16800. Will it?

The technical indicators are suggesting as much. The MACD is below its signal line, and both are falling in negative territory. The ROC has managed to cross above its 10 day MA, but remains negative. The RSI briefly emerged from the oversold zone, but dropped back. The slow stochastic tried to come out of its oversold zone, without much success.

Nifty 50 Index Chart

Volumes have been comparatively low during the week - not unusual during flag formations. Down day volumes were higher than up day volumes, which is bearish. Note that the up trend line from the Feb ‘11 low is going right through the flag – a sign that bulls are desperately trying to defend the up trend?

The height of the inverted flag pole in the Nifty 50 chart – from the Apr 21 ‘11 intra-day top to the May 5 ‘11 intra-day bottom is about 470 points. That gives a down side target of about 5000. The consolidation within the flag can continue for a few more days.

What makes technical analysis challenging is that a spurt in FII buying (or selling) can upset all expectations. In the previous week, FIIs were net sellers. This week, they were small net buyers during the first 3 days, but turned net sellers on Thursday and Friday.

If commodity prices – particularly gold, silver, oil - continue to fall, FIIs may re-deploy in emerging markets. Their buying can turn any bearish pattern into a bullish one. Food inflation is moderating, which is a positive sign.

It is too much to expect that the plodding UPA government will suddenly announce a slew of economic reforms – now that election results are over and done with. But this is a good time to do it, and can provide a big boost to the sagging market sentiments.

Bottomline? The BSE Sensex and Nifty 50 index chart patterns are trading below their 200 day EMAs, and have formed bearish inverted ‘flag’ patterns. Remain cautious and watch the 17600 Sensex level and 5300 Nifty level closely. Any breach of those levels may provide selective buying opportunities.