BSE Sensex and NSE Nifty 50 index chart patterns – Nov 25 ‘11

BSE Sensex index chart

In last week’s analysis, I had made the following comment:

“There is a good chance that the index may drop to the lower edge of the downward channel.”

How did I know that the 15700 level, which had provided strong support for the past three months, would be breached? I didn’t. It was a calculated guess based on logic. The Sensex has been trading within the downward sloping (blue) channel for 11 months. Unlike the previous two occasions in Apr ‘11 and Jul ‘11, the index failed to reach the top end of the channel during the Oct ‘11 rally. That was a sign of weakness. The bearish technical indicators had confirmed the weakness.

As expected, the Sensex did bounce up after touching the lower edge of the channel and managed to close the week just below the crucial 15700 support level. Technically, the 15700 level has not been convincingly breached because the index hasn’t closed more than 3% below it yet. Does that mean that a counter-trend rally is likely?

The technical indicators are looking quite bearish. The MACD is falling deeper into negative territory, and the gap with its falling signal line is widening. The ROC is attempting a recovery, but remains negative and below its 10 day MA. Both the RSI and the slow stochastic are trying to turn around after dropping well inside their negative zones. Any rally will probably be short-lived, and may not get past the falling 50 day EMA.

NSE Nifty 50 index chart

The weekly Nifty 50 bar chart pattern has closed lower for four straight weeks, but got good support from the lower end of the downward-sloping channel and closed just above the crucial 4700 level. (The importance of the 4700 level was explained in last Wednesday’s post.)

Have a look at the rising volumes during the last four weeks’ fall (the apparent drop in volumes three weeks ago was because there were only three trading days that week). Rising volumes in a falling market is an ominous sign for bulls.

The technical indicators are turning bearish. The MACD is touching its signal line in negative territory. The ROC has dropped below its 10 week MA into the negative zone. The RSI is moving sideways just below its 50% level. The slow stochastic has fallen below its 50% level. Any upward bounce is likely to be used by the bears to sell.

Inflation moderated a bit last week – more due to ‘base effect’ than any real drop in prices. The UPA government finally approved conditional 51% FDI in multi-brand retail after dilly-dallying for two years. The market didn’t get too enthusiastic about either news. Eurozone debt problems remain unresolved. A few long-only funds have started to sell-off. These are bearish signs.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns continue to trade within downward-sloping channels, and may do so for some more time. Any breach below the channel can lead to a sharp drop of 8-10%. Be prepared with a list of fundamentally strong stocks that can be accumulated slowly on dips – but this is no time to be aggressively bullish. The bear phase can last longer than you think.