BSE Sensex and NSE Nifty 50 Index Chart Patterns – Aug 05, ‘11

BSE Sensex Index Chart

Two weeks back, I had made the following comment while analysing the one year closing chart pattern of the BSE Sensex index: “As long as the support level of 17460 holds, bullish hopes will be alive.”

Last Friday (Aug 5 ‘11), the Sensex touched a 52 week intra-day low of 16991, and ended the day at a 52 week closing low of 17306 (marked by light blue circle). The 3% ‘whipsaw’ lee-way rule means that the fall below the large descending triangle will be technically valid only on a close below 16950. That may be a question of ‘when’, not ‘if’.

The technical indicators are bearish, to the point of being oversold. But the index can remain oversold for a while. The MACD is negative, and falling below its signal line. The ROC is also negative, and falling below its 10 day MA. The RSI has entered its oversold zone. The slow stochastic is well-entrenched in its oversold zone.

Looks like it will be a season of discontent for the bulls – and not just because of insufficient rains. The height of the descending triangle – from the Nov ‘10 top to the Feb ‘11 bottom - is about 3500 points. A 3500 points fall below the triangle – to 14000 - is within the realms of possibility.

NSE Nifty 50 Index Chart

In last Wednesday’s post, ‘Will the market crash if Nifty falls below 5200?’, I had mentioned that if a downward break out is accompanied by high volumes, it may be a ‘shake out’ or a ‘bear trap’. So, should we be prepared for the Nifty to quickly turn around and trap the bears?

Under ‘normal’ circumstances, the answer would be ‘Yes’. But the downward gap (marked by the light blue oval) accompanied by increasing volumes has changed the equation in favour of the bears. A break out with a gap is considered to be a stronger break out than a ‘normal’ break out without a gap.

So, a deeper correction down to the 4000 level is a more probable outcome – provided high volume trading continues for a few more days. If volumes peter out, then the Nifty may seek support between 4600 – 4800.

Inflation is still untamed. Growth is slowing, and corporate profits are shrinking. The downgrade of US sovereign debt from AAA to AA+ is likely to send shock waves through global markets. India may not be immune to the side effects. Till interest rates start coming down, bulls will be on the back foot.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns have breached important support levels with downward gaps accompanied by strong volumes. That points to deeper corrections. Use any upward bounces to lighten up. (If you are feeling depressed, listen to Gregg Allman singing “Southbound”. It’s quite an up-tempo number.)