BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jun 24, ‘11

In last week’s analysis of the BSE Sensex and Nifty 50 index chart patterns, my concluding observations were:

‘The BSE Sensex and NSE Nifty 50 chart patterns are poised near important support levels. Things aren't looking good for the bulls. Both indices can lose another 2-3% from current levels easily.’

Both indices dropped by 3% to test their Feb ‘11 lows. Some times technical analysis works like magic. The charts almost ‘talk’ to you. Wish they did that more often – or may be they do so all the time, but my listening faculty is not always fine-tuned.

BSE Sensex Index Chart

The Sensex bounced up after dropping to an intra-day low of 17314 on Mon. June 20 ‘11. After consolidating sideways for the next three days, the index jumped up on Fri. Jun 24 ‘11 on a combination of strong FII buying and short covering. The falling 20 day EMA was breached, but the 50 day EMA provided resistance.

Is the worst over for the bulls? Not yet. Even if the 50 day EMA is breached next week, the 200 day EMA may prove to be a tougher hurdle. The strongest resistance is likely to be provided by the blue downtrend line that has been ruling the Sensex since the Nov ‘10 top.

The technical indicators have turned positive from being very bearish. But they haven’t quite turned bullish. The MACD has turned up, but remains below its signal line in negative territory. The ROC has crossed above its 10 day MA, and just about touching the ‘0’ line. The RSI has turned around quickly from its oversold zone, but is below the 50% level. Likewise for the slow stochastic. A deeper correction below the 17300 level has been averted – for the time being.

Nifty 50 Index Chart

A new lower support level for the Nifty has been drawn at the Feb ‘11 low of 5178, since the earlier support level of 5345 was breached again (though the Nifty whipsawed back within the 3% leeway). Chart patterns are not static. As new patterns develop, the supports and resistance levels need to be adjusted – even though an earlier support level wasn’t technically broken.

This may appear confusing to inexperienced observers, but is a common practice with more experienced analysts. By the way, the new support level was not redrawn on the basis of one previous support point in Feb ‘11. The level of 5178 had earlier acted as strong resistance during Oct ‘09 and during most of Dec ‘09.

Before bulls get too excited about rising volumes on the last two days of the week, it should be pointed out that the highest volumes occurred on Monday’s down day. The other point in favour of the bears is the large descending triangle pattern being formed by the blue down trend line and the 5178 level. The likely break is below the 5178 level.

With food inflation refusing to go down, another 25 bps interest rate hike is likely in July. The monsoon is expected to be slightly below normal. Though exports have grown, the slow turnaround of the economies in Europe and USA are causing concern. Q1 results next month may be below par.

Bottomline? The BSE Sensex and NSE Nifty 50 chart patterns have averted deeper corrections by bouncing up from long-term support levels. But it is a time to be cautious. Both indices are technically in bear markets – which means the sensible thing to do will be to sell on rises. If you want to be a contrarian, pick your stocks very carefully.