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Friday, December 30, 2011

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 30 ‘11

The BSE Sensex and NSE Nifty 50 index chart patterns spent an entire year trading within downward-sloping channels, alternatively raising and dashing the hopes of small investors. A series of scams and government inaction on the policy reforms front spooked the FIIs, and they voted with their feet.

RBI’s attempts to stem the rising inflation rate through 13 interest rate hikes failed to tame inflation, but slowed down the growth engine of India Inc. to crawl speed. The government continued with its spending profligacy – subsidy payments and the NREGA scheme drained the coffers without increasing productivity – and aggravated inflation. Depreciation of the Rupee added to the woes.

All in all, a forgettable year. The good news is that neither of the two indices collapsed like they did three years ago. That doesn’t mean that sharp falls have been ruled out. 2012 is likely to be quite challenging – at least the first half of the year is unlikely to show any significant improvement in the economy or the stock indices.

BSE Sensex index chart


Last week, it was mentioned that any bounce from the lower edge of the downward channel would be a weak one. How was the conclusion drawn? The technical indicators on the daily and weekly charts had looked bearish, though positive divergences were visible on the daily chart. Note that the weekly bar of the Sensex moved above the support level of 15700 but stopped well short of the falling 20 week EMA. The index closed the week, month and year below the 15700 level – losing more than 25% for the year.

There is no respite for the bulls visible on the weekly Sensex chart. The index is trading below its falling 20 week and 50 week EMAs. All four technical indicators are bearish. The MACD has crossed below it signal line deep inside negative territory. The ROC is also negative and below its 10 week MA. The RSI is below the 50% level, but trying to rise. The slow stochastic has fallen inside the oversold zone. Expect a test and possible breach of the lower edge of the trading channel.

NSE Nifty 50 index chart


The weak bounce up from the lower edge of the downward channel took the Nifty above the support level of 4700 – only to face resistance from the falling 20 day EMA and sip down below 4700 at today’s close.

Note that during Apr ‘11 and Jul ‘11, the index made several unsuccessful attempts to break out above the downward channel. During that period, the lower edge of the channel wasn’t tested even once. The tables have turned in the past 5 months. Only one serious attempt was made to test the upper edge of the channel in Oct ‘11. But multiple attempts were made by the index to breach the lower edge of the channel.

It seems as if the weight is shifting downwards, and the next couple of attempts to breach the lower edge of the channel may lead to a sharp fall - which the bulls have been able to prevent so far. The technical indicators have corrected oversold conditions, but are looking bearish.

The MACD is about to cross below its signal line in negative territory. The ROC is above its 10 day MA and trying to enter the positive zone. Both the RSI and slow stochastic are below their 50% levels. For the past two months, the Nifty is also facing resistance from a small blue down trend line drawn within the downward channel.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns are falling gradually within downward-sloping channels. The balance of power is shifting to the bears, and sharp falls below the channels may happen sooner than later. Remain patient, but stay prepared. Some investable funds may be locked away in long-term bonds offering tax-free interest.

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