BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jun 10, ‘11

The bears tightened their grip during a week of listless trading. Both the BSE Sensex and NSE Nifty 50 chart patterns closed lower on a weekly basis – almost by the same amount that they rose a week ago. Both indices are trading below their three EMAs and their (blue) down trend lines, and are technically in bear markets.

As long as the Feb ‘11 lows hold, the bulls will be in the game. A break of the Feb ‘11 lows can lead to deeper corrections. Will it happen? A lot will depend on the stance that RBI takes next week. If interest rates remain unchanged, it will be a bullish signal for the markets. But with food inflation rising again, a 25 bps (0.25%) rate increase is likely. That may trigger more selling.

BSE Sensex Index Chart

The support-resistance level of 17780 may be crucial for the near term. If the two breaches in Feb ‘11 are ignored (as they should be, because the Sensex ‘whipsaw’ed back within the 3% leeway), then the entire formation from the Nov ‘10 top is a consolidation within a large descending triangle. A close below 17250 (a 3% breach below 17780) could see a fall to 14500.

I’m not saying it will happen – just discussing possibilities. The fact is, the Sensex is in a down trend. Till the down trend line is broken on the up side, the downside risk remains greater. Investors may be better off selling the rises instead of trying to buy the dips.

The technical indicators are showing signs of weakness, but haven’t turned bearish yet. The MACD is above its signal line, but both are in negative territory. The ROC has dropped below its 10 day MA, and is resting on the ‘0’ line. The RSI is above the 50% level. The slow stochastic is falling after reaching its overbought zone, but is above the 50% level.

Nifty 50 Index Chart

Volumes are tapering off and retail investors are deserting the market. A convincing break below 5345 can drop the Nifty to 4350. That is the measuring implication for the descending triangle – even though such a possibility may seem unlikely. If you want to remain invested, keep a strict stop-loss at 5200.

The IIP numbers were a big disappointment. Economic growth is clearly slowing down, thanks to the pro-active interest rate hikes by the RBI. Further rate increases may stymie the growth even further. At the Canara Bank yesterday, I noticed that fixed deposit rates for longer periods have been reduced by 0.25-0.5%. The first sign that we are nearing the peak of the interest rate cycle?

In last week’s update, I had mentioned that India Inc. may go on a merger and acquisition spree because the top 100 companies were sitting on several tons of cash. RIL’s acquisition of Bharti’s loss-making insurance businesses may be the first of many such deals to follow. Bharti is an obvious beneficiary. RIL seems to be showing signs of di’worse’ification!

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns are finding it tough to extricate themselves from strong bear grips. Things may get worse before they get better. Stay on the sidelines. Better still, take a vacation.