BSE Sensex and NSE Nifty 50 Index Chart Patterns – May 27, ‘11

Last week, the BSE Sensex and NSE Nifty 50 index chart patterns had thrown up bearish and bullish possibilities. The scales remain tipped in favour of the bears, in spite of the FII buying on the last two days of the week that ensured that both indices closed about 1.5% higher on a weekly basis.

Why? For three easy-to-observe technical reasons:

1. The down trend lines (in blue) from the Nov ‘10 tops are intact

2. Both the Sensex and Nifty are trading below their 200 day EMAs

3. Both indices have spent 4 straight weeks below their falling 20 day EMAs; the 20 day EMAs are below the 50 day EMAs; the 50 day EMAs have slipped below the 200 day EMAs – the dreaded ‘death cross’.

Are the indices getting ready for a bigger fall?

BSE Sensex Index Chart

All the signs are pointing towards a deeper correction. What should investors do? The answer will depend on what kind of a fish they are! The Anagatavidhatas should sell and preserve capital; the Pratyutpanyamatitwas may set a stop-loss 3% below the Feb ‘11 low of 17300; the Jadvabishyas will await their destiny.

The technical indicators are showing signs of life, but are still bearish. The MACD is deep in negative territory, but has moved up to touch the signal line. The ROC is above its rising 10 day MA, but both are still negative. Both the RSI and slow stochastic have emerged from their oversold zones, but are below their 50% levels.

Observant readers may notice the positive divergences. The Sensex reached a lower bottom of 17786 on Wed. May 25 ‘11. The ROC, RSI and slow stochastic made higher bottoms. Was the net buying by the FIIs on the last two days of the week a mere coincidence?

Nifty 50 Index Chart

There is every chance that the Feb ‘11 low of 5200 (or 5178, if you want to be precise) will be tested, if not broken. I’m not a gambling man, but if I was, I would put some money on 5200 level holding. Why?

Three reasons. First, despite all the negative news and lack of buying support from investors, the Nifty has not crashed. Second, the time-wise correction of the 20 months long bull rally (from Mar ‘09 to Nov ‘10) is almost over. Third, the MACD, the RSI and the 10 day MA of the ROC are forming bullish saucer-like rounding-bottom patterns. My guess is that the FII buying was triggered by these technical reasons.

Food inflation went up again. The proposal to allow FDI in multi-product retail – should it become a law – will not only help tame inflation, but provide huge job opportunities for semi-educated youth. The impending hikes in the prices of diesel and cooking gas, and the likely moderation in the GDP growth rate have already been discounted by the market.

Bottomline? The BSE Sensex and Nifty 50 index chart patterns have entered bear markets, and may face steeper corrections. There are signs of reversal of the down trends in the near term. Unless the down trend lines in both indices are convincingly breached, one should not go on a buying spree. This may be a good time to nibble into fundamentally strong stocks that have corrected a lot.