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Saturday, August 13, 2011

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Aug 12, ‘11

BSE Sensex Index Chart


The weekly bar chart pattern of the BSE Sensex index has several points of interest, and I will take them up one by one. The first is the ‘diamond’ reversal pattern that formed during Sep ‘10 to Dec ‘10 – marking the end of the strong bull rally from the low of Mar ‘09 to the peak of Nov ‘10. The diamond is quite a rare formation, and can be thought of as a head-and-shoulders pattern with a bent neck line. The downside target after the break out is the height of the diamond – which was met when the Sensex touched the low of Feb ‘11.

Reversal patterns should have ‘something to reverse’. That condition was amply met by the rally from 8000 to 21000. The diamond morphed into a large descending triangle pattern, from which the expected downward break out occurred on Fri. Aug 5 ‘11. Note that the break out coincided with the ‘death cross’ of the 20 week EMA below the 50 week EMA (marked by blue arrow) that confirmed a descent into a bear market. The week’s low of 16432 was 22% lower than the Nov ‘10 peak of 21076. A 20% fall from the peak – though it has taken a considerable amount of time – is another confirmation of a bear market.

The technical indicators are looking bearish. The MACD is falling below its signal line in negative territory. The ROC is also negative, and below its 10 week MA. The RSI and the slow stochastic are at the edge of their oversold zones. The next support level for the Sensex is the zone between 15000 and 16000. A breach of that zone can push the Sensex down to 14000 - the downside target of the break out below the descending triangle.

A wave of FII selling in Aug ‘11 has caused the breakdown; their buying can change the situation quickly. LIC is sitting on a pile of cash – around Rs 40,000 Crores – which they are deploying to prevent a bigger fall. But the bears are in no mood to give up their stranglehold on the Indian stock market.

NSE Nifty 50 Index Chart


In Wednesday’s update of the Nifty 50 chart pattern analysis, I had made the following comment: “The strong volumes on the downward break last Friday (Aug 5 ‘11), followed by two more down days on good volumes should make the 5200 level a strong resistance to any up moves in the near term.”

The bulls tested the resistance of the 5200 level through the week, but was unable to pierce it. High volume selling pressure on Fri. Aug 12 ‘11 finally overwhelmed them. The technical indicators are pointing to a deeper correction. The MACD and ROC are in negative territory. The RSI is inside its oversold zone. The slow stochastic tried to emerge from its over sold zone, but is slipping back in.

The IIP numbers pleasantly surprised on the up side. But inflation rose again – which may mean another 25 bps interest rate hike in Sep ‘11. Q1 results of India Inc. are indicating a slow down in profit margins. The overhang of the debt problems in USA and the Eurozone are making the FIIs jittery, and Asian stock indices are facing the brunt of their selling.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns have entered bear markets. The good news is that the indices haven’t collapsed yet. But there is every possibility of deeper corrections. Mid-cap stocks, and even a few large-cap ones are beginning to look attractive. If you are brave enough, start accumulating. Sitting out the correction may be a more sensible approach.


Jasi said...


A question.
"Sitting out the correction may be a more sensible approach"
In fact two questions:
1) How do you quantify "sitting out the correction"? Basically how would one know that the correction is complete?
2) Isnt this tantamount to timing the market, which is practically impossible?

Thanks n regards!

Subhankar said...

"Sitting out the correction" means re-entering only after clear signals of reversal are given by the market.

Fundamental reversal signals are: Sensex falling below its normal P/E range; interest rates starting to fall.

Technical reversal signals are: Sensex starting to trade above a rising 200 day EMA; 50 day EMA climbing above the 200 day EMA.

I agree that timing the market is practically impossible; so is climbing Everest or swimming across the English Channel. Not every one can do it, but many have done it. So, it boils down to whether one has the skills to do it or not.

Jasi said...

Alrite! Thats fair enough.
But help me understand this more. For all you now, markets may well be a lot off their lows by the time clear reversal signals emerge ... right?
I mean, do reversal signals and the real bottom of the market do coincide in timings?

Subhankar said...

Catching the exact top and bottom of the market is not just impossible; it is futile. The stocks you own/track may not touch their tops and bottoms simultaneously with the market.

The point is: it is better to be sure of a trend change and then enter 10-15% above the bottom, instead of buying now and hoping that the market won't fall another 15-20-30%.

Jasi said...

Thank you so much for your thoughts, time and patience while replying to my queries.
All this is priceless for still amateur investors like me.