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Saturday, June 4, 2011

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jun 03, ‘11

The bears continue to dominate the chart patterns of the BSE Sensex and NSE Nifty 50 indices. In last week’s analysis, I had pointed out positive divergences and bullish rounding-bottom formations in the technical indicators. Net FII buying helped the cause of the bulls in the earlier part of the week.

By the end of the week, the bullish fervour got exhausted as both Sensex and Nifty found strong resistances form their 200 day EMAs. Friday’s trading turned out to be a ‘reversal day’ (higher high, lower close) - a signal that the mini-rally from the support levels of 17780 for the Sensex and 5345 for the Nifty has probably ended.

BSE Sensex Index Chart

Sensex_Jun0311

The Sensex will remain in a down trend as long as it trades below the blue down trend line. It is technically in a bear market, since the 50 day EMA is below the 200 day EMA and the index is trading below both EMAs. That is bad news, as far as the bulls are concerned.

The good news is that in spite of the scams, raging inflation, rising interest rates, slowing GDP growth, the Feb ‘11 low has held so far. The periodic rallies have also ensured that the 200 day EMA has remained sideways for the past 5 months, and hasn’t yet decisively turned downwards. The Sensex closed 110 points higher on a weekly basis.

The technical indicators are showing signs of weakness, but the rounding-bottoms and positive divergences are still visible. The MACD has crossed above the signal line, but both are in negative territory. The ROC is above its rising 10 day MA, but has turned down sharply to the ‘0’ line. The RSI is at its 50% level after a brief foray above it. The slow stochastic is at the edge of its overbought zone, but turning down.

Nifty 50 Index Chart

Nifty_Jun0311

The volume bars present an interesting picture. Tuesday’s (May 31 ‘11) up day volume was the highest during the previous month, as the Nifty jumped above the 20 day EMA. Volumes are only a secondary (or supporting) indicator, but do show buying interest (or lack of it) – particularly from the FIIs. By the way, FIIs were net buyers on Friday’s ‘reversal day’. A contrarian sign?

Looks like the bull rallies in the US and European markets are stalling. On a forward P/E basis, the Sensex and Nifty are not looking that expensive. Some outflows from the developed markets may re-enter emerging markets. A number of mid-cap and small-cap stocks with strong fundamentals are trading at attractive valuations.

GDP growth has been gradually coming down over the past few quarters, though it is at a still-respectable 7.8%. India Inc. seems to have put capital expenditures on hold on growth worries and high-interest rates. In a recent interview on a TV channel, Morgan Stanley’s Ridham Desai mentioned that the top 100 Indian companies are sitting on more than Rs 30000 Crores of cash! That should set the stage for some judicious mergers and acquisitions.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns are mired in down trends for almost seven months. Several revival efforts have been thwarted by the bears. Despite all the negative sentiments, apathy among retail investors rules out a crash. Good time to concentrate on picking good stocks for your ‘buy list’.

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