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Saturday, October 8, 2011

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Oct 07, ‘11

The BSE Sensex and NSE Nifty 50 index chart patterns have completed 11 months in down trends, and the past 9 weeks within rectangular trading ranges below large descending triangle patterns. The longer both indices consolidate within their rectangular ranges, the greater will be the significances of the eventual break outs.

Unfortunately, there is no way of knowing in advance the direction of the eventual break outs. If both indices climb above the upper resistance levels, the up moves should be accompanied by strong volumes. A break down below the lower support levels need not have much volume support.

Consolidation patterns tend to be continuation patterns. That means the previous down trends, before the indices entered rectangular consolidation zones, will continue. Probabilities of downward break outs are greater. 

Rectangular trading ranges have measuring implications. On a break down below the rectangles, the indices are expected to fall an equivalent of the height of the rectangles. Therefore, the downward targets for the Sensex and the Nifty will be 14100 and 4200 respectively; i.e. another 10-15% or so from the current levels. These downward targets are very similar to the downward targets mentioned in an earlier post.

BSE Sensex Index Chart

SENSEX_Sep0711

Note that the BSE Sensex chart has formed several small gaps during the past 9 weeks, including the upward gap on Fri. Oct 7 ‘11. Such gaps, formed within a rectangular consolidation zone, are called ‘common gaps’ that have little technical significance. The much larger downward gap that occurred when the Sensex broke down below the descending triangle (marked by light-blue oval), is a ‘breakaway gap’ that is more crucial technically. Till that gap is filled, bulls will remain at the receiving end.

The technical indicators are bearish, but showing some signs of recovery. The MACD is negative and below the signal line, but attempting a turnaround. The ROC has climbed above its 10 day MA, but is negative. The RSI has bounced up a bit near its oversold zone, but remains below the 50% level. The slow stochastic is trying to emerge from its oversold zone.

Q2 results should start hitting the market in the coming week. They are unlikely to be great, but the markets tend to discount such expectations in advance. Still, there will be stock-specific moves based on positive or negative surprises. Investors should remain nimble to take advantage of any opportunities.

NSE Nifty 50 Index Chart

Nifty_Sep0711

Despite the rally on Fri. Oct 7 ‘11, the weekly bar on a holiday-shortened week clearly shows a lower top, a lower bottom and a lower weekly close. So, the bears ‘won’ last week’s exchanges. Market sentiment remains weak, and the technical indicators are reflecting the market mood.

The distance between the 20 week and 50 week EMAs is widening, and the Nifty is trading below both EMAs. The bear market is gaining in strength. The MACD is moving sideways below its signal line in negative territory. The ROC is also negative and below its 10 week MA, but attempting to rise. Both the RSI and the slow stochastic have slipped into their oversold zones. Is the Nifty getting ready to fall below its 9 weeks long trading range?

Inflation remains a thorn in the side of the UPA government. Instead of fighting the problem together, senior government ministers are engaged in backstabbing each other. The opposition is caught on the horns of a dilemma – whether to expose the government’s corrupt deals, or to set their own house in order. The RBI will have no alternative but to increase interest rates once more.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are within trading ranges for the 9th straight week. The longer the consolidation, the stronger will be the move out of the range. The politicial and economic environment is not conducive to an up move. But strong FII buying (or selling) can change all equations quickly. This is a great time to learn the art of being patient till the right opportunity presents itself.

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