Sunday, December 4, 2011

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 2 ‘11

Both the BSE Sensex and the NSE Nifty 50 index chart patterns are bouncing around inside downward sloping channels and touching lower tops and lower bottoms. Q2 results have not helped to change the market sentiments. Decent top line growth didn’t translate to much profit growth. Higher interest rates took a toll on margins. Q3 results may be a little worse, as the GDP slowdown starts to affect sales. Despite news-driven counter-trend rallies from time to time, the trend is clearly down and may remain so for a while.

BSE Sensex index chart


The Sensex jumped back above the 15700 level, which provided good support during Aug ‘11 and Sep ‘11. Technically, 15700 has not yet been breached. That will happen when the Sensex closes convincingly below it. On the upside, expect resistances from the 20 week and 50 week EMAs and the upper end of the channel.

The apparent trigger for last week’s rally was the news that the USA has made dollar loans easier for Eurozone countries. The USA is justifiably worried that a Eurozone collapse will have severe repercussions for the global economy in general and the USA in particular. Since the bail-out fund (EFSF) didn’t reach anywhere near the required amount, the USA decided to step-in and steady the rocking boat.

FIIs turned net buyers, and our stock markets benefitted from a global rally. Short covering helped the bulls. Will the rally last much longer? Both external and internal factors deem otherwise. The 51% FDI in multi-brand retail announcement, which can be a game changer for growth and employment in India, has become embroiled in petty politics. The BJP, which had originally mooted the idea, has now become its opponent! Without adequate numbers in parliament to vote the ruling combine out of power, they have resorted to disrupting and shutting down proceedings.

The technical indicators are giving mixed signals. The MACD is entangled with its signal line in negative territory, but trying to move up. The ROC has crossed above its 10 week MA into the positive zone. The RSI has got its nose above the 50% level. The slow stochastic is below the 50% level. All counter-trend rallies provide selling opportunities to the bears.

NSE Nifty 50 index chart


The NSE Nifty 50 chart had a gap-up move on Thu. Dec 1 ‘11 and closed above the 50 day EMA by the end of the week. But volumes slipped as the index moved up. That means follow-up buying was lacking. The government has decided to go slow on implementing its retail FDI policy – possibly to pacify its allies. Such policy flip-flops are not going to help in attracting foreign investments or pushing growth.

Despite the 13 months long down trend, the Nifty valuations are quite a bit higher than other emerging markets. FIIs are unlikely to pour in the kind of money they did last year. The effectively devalued Rupee is making our deficit situation even worse. Inflation has shown some moderation – more due to the ‘base effect’. If prices don’t come down significantly, the ‘base effect’ may work in reverse next year and inflation may start to rise again.

The technical indicators are correcting from oversold conditions, but are not quite bullish yet. The MACD has crossed above its signal line, but remains negative. The ROC has climbed too quickly above its 10 day MA into the positive zone. The RSI has risen towards its 50% level, but is yet to cross it. The slow stochastic has just about moved past its 50% level. Expect a bit of consolidation before the Nifty makes another attempt to reach the upper end of the channel.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns continue to trade within their downward sloping channels. The macro-economic situation is not conducive for a change of trend in the near future. Preserve cash and dispose of underperformers during rallies. Accumulate good large-cap stocks slowly on dips. This is not a time to look for multibaggers among mid and small-cap stocks. They may have fallen a lot already. That doesn’t mean they won’t fall even more.

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