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Sunday, July 31, 2011

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jul 29, ‘11

BSE Sensex Index Chart


The large descending triangle pattern continues to dominate the BSE Sensex chart, despite substantial FII buying. The reason for the failure to breach the blue down trend line was apparently the unexpected 50 bps interest rate hike by the RBI (as an experienced fund manager claimed). But the Sensex had failed to breach the down trend line in Dec ‘10, Apr ‘11 and earlier in Jul ‘11. Different reasons were put forth at those times as well.

For those who still don’t believe in technical analysis, the blue down trend line on the one year weekly bar chart of the BSE Sensex index is as clear an example as possible of trend line theory: A trend, once established, remains in place till it is convincingly broken. Whatever the fundamental reasons, the index has remained below the down trend line. There is no point in betting against a down trend unless there are clear signals of a trend reversal. No such trend reversal signals are visible at present.

The weekly technical indicators are bearish, which means a likely test of the 17300 support level. If that level is broken – as it should from a descending triangle – the Sensex can go much lower. For the bulls, the silver lining is that the 20 week EMA is still above the 50 week EMA (equivalent to the 200 day EMA on daily charts).

No need to sell in a panic. The Sensex is less than 15% below its Nov ‘10 top. A high-volume breach of 17300 can lead to a ‘shake out’ that may see a resumption of the bull market.

NSE Nifty 50 Index Chart


Volumes were heavy as the Nifty 50 index dropped below all three moving averages after another failed attempt at breaching the blue down trend line. The support level at 5190 or so is likely to be tested, and possibly breached. A low volume breach will be considered ‘normal’. A high volume breach may be a ‘bear trap’. So, remain prepared.

The technical indicators are bearish. The MACD is below its signal line, and about to fall into negative territory. The ROC is negative and below its 10 day MA. The RSI is below the 50% level, trying to make up its mind about which way to go. The slow stochastic has entered the oversold zone. Doesn’t look good for the bulls in the near term.

Whether the latest interest rate hike is going to have any effect on rising inflation will not be known for a couple of months. Q1 results declared so far are revealing a pattern of lower profits in spite of growth in sales. A couple more interest rate hikes can’t be ruled out altogether. We are nearing the peak of the high interest rate cycle, and still the Nifty hasn’t really crashed. The turnaround – when it comes, probably around Diwali – should result in a strong rally. Stay invested.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns are consolidating within large descending triangles, after several failed attempts to break out upwards. Tests and possible breaches of the support levels are on the cards. A good time to stay away and spend the time usefully by studying Annual Reports in detail.

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