BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jul 01, ‘11

All good things must come to an end, and the sharp bull rallies in the chart patterns of the BSE Sensex and NSE Nifty 50 indices appear to have hit strong road-blocks.

Last week, I had mentioned that even if the 50 day and 200 day EMAs were breached, the 8 months long down-trend lines would prove to be tougher hurdles. Both indices climbed past their 50 day and 200 day EMAs with ease, but stopped short of the down-trend lines.

BSE Sensex Index Chart

For a different perspective, let us take a look at the weekly bar chart pattern of the Sensex. A couple of interesting patterns are visible – and I will provide bullish and bearish views.

The Sensex formed a ‘diamond’ reversal pattern between Sep ‘10 and Dec ‘10, which ended the bull rally from Mar ‘09, and started the corrective phase from the Nov ‘10 peak. A ‘diamond’ pattern has measuring implications: the height of the diamond should be less than or equal to the subsequent fall below the diamond.

In the Sensex chart, the height of the ‘diamond’ is about 2400 points. After breaking down below the ‘diamond’, the Sensex dropped almost 2900 points to the low of Feb ‘11. So, the downward target of the ‘diamond’ has been met. The subsequent up move was halted by the down-trend line (blue dotted) that became an extension of the diamond.

The next leg of the correction found support at the level of the Feb ‘11 low of 17300, followed by last week’ rally. Note that the Sensex has formed a large descending triangle pattern which has bearish implications – a breakdown below the 17300 level is a distinct possibility.

All isn’t lost for the bulls - yet. In spite of the prolonged correction, the 20 week EMA has remained above the 50 week EMA (equivalent to the 200 day EMA on daily charts). Technically, we are still not in a full-fledged bear market.

The other bullish news is that the FIIs have turned net buyers again. If they continue their buying spree, the down-trend line may get breached next week. But if it isn’t a high-volume break out, the index may pull back into the descending triangle.

The technical indicators look weak, but are showing some signs of recovery. The MACD is negative and below its signal line, but trying to turn up. Likewise, the ROC is negative and below its 10 week MA but trying to rise. The RSI is straddling its 50% level. The slow stochastic has bounced up from the edge of its oversold zone, but is below the 50% level.

Nifty 50 Index Chart

 

The up move in the Nifty daily bar chart ended with Friday’s ‘reversal day’ (higher high, lower close) pattern – marked by the light blue oval. Since it is within handshaking distance of the blue down-trend line, chances are that the Nifty will reverse directions next week.

The negative divergence in the RSI, which reached a lower top while the Nifty touched a higher one (marked by blue arrows), is also signalling an end to the brief rally. The MACD, ROC and slow stochastic are looking bullish. Note that the ROC has climbed well above its 10 day MA – a correction or consolidation may follow.

The macro situation is getting a little worrisome. The price hike of diesel, LPG and kerosene will add to the inflation problem, though duty cuts will soften the blow. Passenger car sales have slowed down. Q1 results are likely to be below par. However, any positive surprises can lead to fresh buying.

The Indian economy is still growing – perhaps better than most countries except China. There is scepticism all around – particularly among retail investors. The monsoon rains are gradually covering the entire country. Not a time to be despondent. Being cautiously optimistic may be better for your investment health.

Bottomline? The BSE Sensex and NSE Nifty 50 chart patterns have completed brief relief rallies that failed to breach their down-trend lines. The scales are tipping towards a break below the descending triangles. Expect some consolidation before that can happen. Be careful, not fearful.