Sunday, July 10, 2011

BSE Sensex and S&P CNX 500 Index Chart Patterns – Jul 08, ‘11

In last week’s analysis of the chart patterns of the BSE Sensex and NSE Nifty 50 indices, I had made the following comments:

‘If (the FIIs) 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.’

As is apparent from the closing chart pattern of the BSE Sensex (and also of the Nifty 50 – though not shown here), both indices behaved exactly as expected, as the FIIs continued their net buying through the week.

BSE Sensex Index Chart


The blue down-trend line was breached on Thursday, July 7 ‘11. But the breach wasn’t technically valid, though the Sensex managed to close above the down-trend line. Why?

Firstly, because all breaches of supports and resistances should follow the 3% ‘whipsaw’ lee-way rule. In other words, if an index or stock remains within 3% of a breached support or resistance level, then more often than not, there is a ‘whipsaw’ (i.e. a sudden change of direction) – as marked by the blue circle on the Sensex chart).

Also, though not shown in the chart, volumes were not significantly higher during the break out above the down-trend line. That is another technical ‘rule’ for valid upward break outs. (Note that the ‘rule’ doesn’t apply for downward breaks; i.e. volumes need not be higher – though they some times are.)

Though the index is back inside the large descending triangle, it is above all the three EMAs. The EMAs may support any down moves. The technical indicators are suggesting that any such support may be temporary.

The MACD is in positive territory, and rising above its signal line. The ROC is also positive, but has crossed below its 10 day MA. The RSI has entered overbought territory, where it doesn’t stay very long. The slow stochastic is in its overbought zone, but made a lower high as the index rose higher to breach the down-trend line – a negative divergence.

In spite of the FII buying spree, the bears managed to stall the rally.

S&P CNX 500 Index Chart

S&P CNX 500_Jul0811

For a different perspective, I have included the one year closing chart pattern of the broader S&P CNX 500 index instead of the Nifty 50. The Nifty 50 chart is very similar to that of the Sensex. But the broader index has a couple of very interesting differences – both of which have bullish implications.

First, the 200 day EMA and the down-trend line were breached ahead of the Nifty a week ago. The long-term support-resistance level of 4550 was also breached, and is now providing support. However, the CNX 500 didn’t quite get past the 3% ‘whipsaw’ lee-way.

The June ‘11 low was higher - by almost 100 points - than the Feb ‘11 low. That makes the large triangle on the CNX 500 a ‘pennant’ rather than bearish descending triangles on the Nifty and Sensex charts. The upward break out may turn out to be valid – but possibly after a pullback to the down-trend line.

Bottomline? The chart patterns of the BSE Sensex and the S&P CNX 500 indices show that the bears are in no mood to give up their 8 months long strangle-hold on the Indian stock market. Thanks to a surge in FII (round-tripping ‘hot’ money?) inflows, the bulls have regained some lost ground. Be very stock specific in your buying, and set tight stop-losses. Things can get worse in a hurry if Q1 results belie expectations. Better to watch the fight from the sidelines. 

2 comments: said...

though it broke the trend line on thursday and failed on friday nifty excatly touched 200 sma 5740 on thursday and friday and reversed from there . so which is better sma or ema

Subhankar said...

Good question, Dr. A.

Which moving average you follow depends on individual preference and comfort. EMA gives more weightage towards recent data.

The same question also arises about using semi-logarithmic charts. I have always used the combination of EMAs and semi-logarithmic charts - and they seem to work for my style of investing.

The short answer: If a system works for you - it is better that you use it. Regardless of what others may say or use.