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Saturday, October 1, 2011

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Sep 30, ‘11

The BSE Sensex and the NSE Nifty 50 index chart patterns have spent almost 11 months in a down trend from their Nov '10 peaks, forming large bearish descending triangles. Both indices dropped below the triangles, as expected, but have been consolidating within rectangular ranges for the past eight weeks. Is the bear phase coming to an end, or is the consolidation only a lull before a selling storm?

BSE Sensex Index Chart

The BSE Sensex tested the lower edge of the rectangular trading range, but bounced up on a bout of short-covering and some bottom fishing on F&O expiry week. Though the index gained almost 2% on a weekly basis (which is a bullish sign), it formed a 'lower-top and lower-bottom' bar for the week (which is bearish). The bulls ensured that the index didn't fall below the rectangular trading range. The bears prevented the index from moving up too much.

The weekly technical indicators show that the scale is slightly tipped towards the bearish side, which isn't a surprise during a bear phase. The MACD is negative, and gently sliding below its falling signal line. The ROC is negative and below its 10 week MA. The RSI is moving sideways, just above its oversold zone. The slow stochastic is about to slip into its oversold zone.

The question is: Should one start buying now, or is it better to wait? The answer depends on whether you have money to invest, and on your risk appetite. Buy, if you have the money and can identify value. But be prepared to see even lower levels. What if there is a sudden turnaround in sentiment and the Sensex starts shooting up? Remember that it is practically impossible to catch the exact tops and bottoms. If you invest in reputed companies for the long-term, buying a stock Rs 10 lower or Rs 15 higher won't make too much of a difference. A suitable stop-loss will act as an insurance in the event of a market crash.

NSE Nifty 50 Index Chart

Triple resistances from the 5180 level, the 20 day EMA and the 50 day EMA are keeping the bear market rallies in check. The 4700 level has twice provided support to the falling Nifty. Logically, the index should break down below 4700 and fall another 10-15%. But stock market moves are not based  on logic.

As Graham has taught us, the market behaves like a voting machine in the short-term. In other words, sentiments rule. In the long-term, the markets act like a weighing machine. That means the earnings of companies are 'weighed' to find their true worth. Q2 results are due in two weeks, and they are not likely to be very good. High interest rates are not conducive to earnings growth. 'Weigh' the upcoming results before committing big money into the market. Ignore the TV experts, most of whom have vested interests.

If you are a regular visitor to the grocery market, you know that food prices are showing very little signs of moderation. With the festival season upon us, food prices have been hiked further. Corporate hiring is slowing down, and in some cases there have been talk of layoffs. The failure to launch several FPOs by PSUs have left the government coffers depleted. More borrowing will be resorted to - which will stoke the inflation fire. Expect another 25 bps rate hike by the RBI in Oct '11.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are still within trading ranges - unable to make up their minds which direction they want to go. The downside risk is greater, so be cautious about bottom fishing. Buy if you must, but with strict stop-losses. Waiting for, and evaluating the upcoming Q2 results may be a better option.


Jasi said...

Dear Sir,

With an assumption that im still a newbie, I have a request.
On numerous occasions you have advised to await quarterly results.
My question is, what do you mean by that? What is that these results would change?
Basically how do you please quarterly results?

Would really appreciate your advice, although you might have covered it somewhere or the other.

Thanks n regards

Subhankar said...

Let me try to answer your question with a counter-question.

Suppose you have prepared a 'buy list' of 5 stocks. Three of them come out with disappointing Q2 results, one declares flat growth in earnings, and one comes out with better than expected Q2 results. Which stock would you put your money on?