Sunday, February 5, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 3 ‘12

The down trend lines connecting the falling tops on the BSE Sensex and NSE Nifty 50 index charts have been breached on a weekly closing basis – the first time that has happened since the down trends began in Nov ‘10.

It is immaterial to debate the cause of the sudden bullishness. It may be ‘hot money’ flowing in, or anticipation of a change in the fundamentals – but that isn’t important. What is important is that trend lines in force for 15 months have been breached, and such breaches have to be respected. Does that mean both indices have returned to bull markets?

Technically, not yet – as was explained in a post on Feb 3 ‘12. There is another reason. Any breach of a trend line (or support/resistance level) should be subjected to a ‘3% whipsaw leeway’. That means, an index (or stock) should go past by more than 3% to avoid a ‘whipsaw’ pullback. Despite strong volumes that accompanied the upward breaches last week, neither index have moved above their down trend lines by more than 3%. Those levels are about 17830 (for the Sensex) and 5370 (for the Nifty).

BSE Sensex index chart


A burst of FII buying did what 15 months of negative sentiments could not – turn the Sensex chart pattern from bearish to bullish. A little more work is left for the bulls before the bears can be finally sent off to hibernation.

Technical indicators are reflecting the bullishness, but there are a couple of concerns. Three of the indicators – ROC, RSI and slow stochastic – are showing negative divergences by touching lower tops as the Sensex rose higher. The RSI and the slow stochastic are well inside their overbought zones, which usually precedes a correction. But the ROC is hugging its 10 day MA, and the MACD is rising above its signal line in the positive zone without moving too far away – so, the up move may not end immediately.

The likely outcome may be a bit of consolidation after a strong rally, or a pullback to the top of the breached down trend line. Note the bullish ‘rounding bottom’ pattern that is forming on the 50 day EMA.

NSE Nifty 50 index chart


The weekly bar chart of the NSE Nifty 50 index clearly shows the breach of the down trend line, accompanied by the strongest volumes in the past year. A trend line break on strong volumes is a sign of a valid break. Both the 20 week and 50 week EMAs have started rising, though the 20 week EMA is well below the 50 week EMA.

Three of the technical indicators – MACD, ROC and slow stochastic – are indicating overbought conditions. The MACD histogram (the bars that plot the difference between the MACD and its signal line) has risen to its highest level in the past year. On two previous occasions – in Apr ‘11 and Oct-Nov ‘11 – rising histogram led to corrections.

The ROC has climbed far above its 10 week MA – note the corrections that followed when this happened in Apr ‘11 and Oct ‘11. The slow stochastic has reached its overbought zone for the first time since Apr ‘11. The RSI is in neutral territory, straddling its 50% level – but has touched a slightly lower top (than the one in Nov ‘11). Looks like a correction may be around the corner after 5 straight weeks of higher closes.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns have rallied impressively from their Dec '11 lows on the back of strong FII buying, and have breached their downward-sloping channels. Technically, the breaches haven’t been confirmed yet – but that could be just a matter of time. Fundamentally, not much has changed since Dec ‘11 when both indices hit their lows. Don’t be surprised if the FIIs decide to book profits. It is always better to concentrate on individual stocks instead of getting hung-up about index movements.

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