Last week, I had analysed the two gaps (labelled GAP1 and GAP2) on the chart patterns of the BSE Sensex and the NSE Nifty 50 indices. The following conclusions were drawn:
- GAP1, a ‘breakaway’ gap from a bearish descending triangle pattern, was unlikely to get filled in a hurry
- GAP2 was a ‘common’ gap that both indices were likely to fill on an upward bounce over the next two trading days
- Bears would use the upward bounce to sell
- Both indices would consolidate for a while before resuming the downward journey.
Some times, technical analysis can be almost prophetic. ‘Almost’ because the first three events happened exactly as per expectation; but not the fourth. GAP2 got filled during the first two days of the trading week. The down trend resumed immediately, and ended the week by breaking below the May ‘10 lows (15960 for the Sensex and 4786 for the Nifty).
BSE Sensex Index Chart
How important is the break below the May ‘10 low of 15960? Not very – other than indicating that the Sensex is ready to fall lower. During down trends, supports occur at previous tops. While a previous bottom is like a milepost on the way down, it usually acts as a resistance during future up moves. It may be worthwhile noting that.
Which are the previous tops from which the Sensex can seek some support? The Jun ‘09 top of 15580 is the nearest one. Below that is the likely support from the May ‘09 top of 14930. That is barely 5% below this week’s closing level! Can the index go down further to fill the big gap formed in May ‘09? The top level of that partly-filled gap is at 13220. Nothing can be ruled out. A fresh look can be taken if and when 14930 (the May ‘09 top) is breached.
The technical indicators are looking very bearish, and oversold. Note that the ROC, the RSI and the slow stochastic reached higher bottoms as the Sensex dropped to a new low. The positive divergences should lead to an upward bounce. The way FIIs are selling at every rise, any rally may be short-lived.
NSE Nifty 50 Index Chart
The weekly bar chart pattern of the Nifty 50 index clearly shows five straight lower weekly closes. It is a good time for a counter-trend rally. Will it happen?
The weekly technical indicators are looking oversold, so a rally is a possibility. Note that the weekly RSI hardly spends any time in the oversold zone. In the past year, it had spent only one week in Feb ‘11. Now it has remained in the oversold zone for two straight weeks.
Please remember that the ‘death cross’ of the 20 week EMA below the 50 week EMA has confirmed a bear market. That means, any counter-trend rally will be a selling opportunity. For likely lower Nifty levels, check out my post of Aug 24 ‘11.
Food inflation seems out-of-control. Daily use vegetables (except potatoes) cost Rs 40 – 60 a Kg in Calcutta. Last year, they were in the Rs 30 – 40 a Kg range. The Anna Hazare anti-corruption demonstration has tied up the Parliament in knots - to the point where important and necessary policy decisions are not forthcoming. Unless the Lokpal Bill is tabled soon, stock markets will slide, as FIIs will continue selling.
Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns are falling deeper into bear markets. Any upward bounce next week may only prolong the pain. Stay on the sidelines and start brushing up on analysis and stock-picking skills.