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Saturday, September 10, 2011

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Sep 09, ‘11

In last week’s analysis, I had speculated about the cause of the rallies in the BSE Sensex and NSE Nifty 50 index chart patterns. Why stock markets go up or down can’t always be explained logically, or fundamentally. Technical analysis may help some times – but not always – by studying chart patterns that have occurred many times before under various economic conditions.

Once a clearly visible and identifiable pattern emerges – like the large descending triangles on the Sensex and Nifty charts – one should respect the pattern and expect a similar outcome that has been repeated many times before. In our case, the outcome has been as expected: a break below the descending triangle, followed by a pull back to the lower edge of the triangle. Such pull backs are selling opportunities.

BSE Sensex Index Chart

Sensex_Sep0911

Is the rally in the Sensex over then? It seems like that. The FIIs were net buyers during the first four days of the week. The index climbed above the 20 day EMA and seemed ready to move above the 17300 level. Out of the blue came the FII selling on Friday (Sep 9 ‘11) that caused a ‘reversal day’ pattern on the chart (higher high, lower close) and marked an intermediate top.

Did the FIIs sell because the index was close to 17300, or were they merely booking profits before the weekend? Only they can answer the question, but my guess is that it was a bit of both. FIIs use sophisticated models for managing their portfolios, and were aware that a resistance level was near.

Can’t more FII buying cause the rally to continue next week? Sure it can. Support and resistance levels only indicate the probability of a turn around, not a certainty. But there are a number of likely resistances to a further up move – the 17300 level; the falling 50 day and 200 day EMAs; the 300 points gap on the chart; and the blue down trend line.

The technical indicators are bullish, but showing signs of weakness. The MACD is rising above its signal line, but is negative. The ROC is positive and above its 10 day MA, but turning down. The RSI is moving sideways after crossing the 50% level. The slow stochastic entered its overbought zone, but is turning down. The Sensex is likely to consolidate between 17300 and the next support level of 15580 over the next couple of weeks.

NSE Nifty 50 Index Chart

Nifty_Sep0911

The weekly bar chart of the Nifty found resistance from the lower edge of the descending triangle but managed a marginally higher weekly close. The up-tick in volumes may encourage the bulls, but the technical indicators are not that encouraging.

The MACD has stopped falling, but is negative and below its signal line. The ROC is also negative and below its 10 week EMA, and has started falling. The RSI emerged from its oversold region, but has been unable to move up. The slow stochastic is trying to emerge form its oversold zone. Some more consolidation within the 4700 – 5200 band is likely.

Food inflation came off slightly but the overall inflation remains high and a 25 bps (0.25%) interest rate hike by the RBI is almost inevitable. Has the market discounted the rate hike? We will find out next Friday (Sep 16 ‘11), but there is a section of analysts who are expecting a pause by the RBI. The pause may lead to buying. The rate hike will attract sellers. The monsoon has been pretty good. Q2 results next month may not be so good.

Bottomline? The BSE Sensex and Nifty 50 index chart patterns are consolidating in bear markets. The good news is that the indices haven’t crashed. The bad news is that the possibility of a crash can’t be ruled out by any means. This may be a good time to avail of the higher interest rates in short-term bank fixed deposits.

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