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Saturday, August 27, 2011

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Aug 26, ‘11

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:

  1. GAP1, a ‘breakaway’ gap from a bearish descending triangle pattern, was unlikely to get filled in a hurry
  2. GAP2 was a ‘common’ gap that both indices were likely to fill on an upward bounce over the next two trading days
  3. Bears would use the upward bounce to sell
  4. 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.


Subhankar said...

The 10 day moving average of the NSE TRIN has reached 1.25 on Fri. Aug 26 '11. Levels of 1.2 and above are considered 'oversold', which could lead to a rally.

VIPAN said...

How far do you think this rally would go ?

Anonymous said...

Dear Subhankar, I'm really impressed with your analysis. I did find your site only yesterday, and I feel so depressed by the fact that I should have discovered you and your site much earlier. Anyway better late than never!

I've a question for you... do you think this bear market can be transformed to a secular bear market? If your answer is in the affirmative how much down can it go and how long can it take to end?

If Nifty was in a secular bull market from its birth up to 2010, i.e., for almost two decades, is it not the time for a secular bear market which we never witnessed so far?

Subhankar said...

@VIPAN: If I knew the answer to your question, I would get seriously rich! Jokes apart, a likely rally of 700-800 points on the Sensex (200-300 points on the Nifty) is possible.

One should worry less about index movements, and concentrate on individual stocks.

@n-t: Thanks for your kind words. The fact that you found my blog from among millions on the Internet is a minor miracle!

I don't really have an answer to your question. A guesstimate is that this bear phase is going to be a minor blip in a very long bull market. How low can the market go? Check out my post of Aug 24, '11 on Nifty Fibonacci retracement levels.

India's economy has to de-grow significantly before we can enter a secular bear market. No signs of that yet.

Anonymous said...

Thanks for your reply! I don't really have an idea how bear market starts... some analysts say if future growth prospects tend to start shaky investors would not be willing to attach large multiples to the expected-EPS... like something India is enjoying for the last 8-10 years, that is 10-12 to 18-20. This may come down to 8-10 to 12-14.

Maybe India has already entered into a secular bear market after the double top formation in the past couple of years.

Subhankar said...

@n-t: Bull (and bear) markets usually end with recognisable reversal patterns. One doesn't know in advance if the reversal pattern will be followed by a correction or a trend reversal. Technical signals confirm that after a while.

Double-tops have certain 'rules' associated with them. The most important one is a breach of the 'valley' between the two 'peaks', which has not happened yet. Most double-tops (and double-bottoms) tend to occur within a few weeks or months - not after two-three years.

Having experienced several bull and bear markets, it matters little whether we are in a cyclical or a secular bear (or bull) market. As long as one concentrates on individual stocks and sticks to an asset allocation plan, opportunities are always available to make money.