BSE Sensex and NSE Nifty 50 index chart patterns – Mar 30 ‘12

BSE Sensex index chart

The daily bar chart pattern of the BSE Sensex shows the index consolidating within a ‘falling wedge’ pattern that was identified last week. It is a consolidation pattern, which means the trend preceding the consolidation should resume after the break out. Though triangles can be quite fickle in predicting trends, a ‘falling wedge’  - which is a triangle with two of its sides pointing downwards – has bullish implications.

The upward break out from a ‘falling wedge’ can be a slow, gradual break that may start off like a sideways movement before it picks up speed. There is supporting evidence for an upward break out from the technical indicators. Three of them are showing positive divergences by touching higher bottoms (marked by blue arrows), though all four are still looking bearish.

The MACD is falling below its signal line in negative territory. The ROC has crossed above its 10 day MA and about to enter the positive zone. The RSI bounced up from the edge of its oversold zone, but hasn’t crossed above its 50% level. The slow stochastic is trying to emerge from its oversold zone. All three EMAs are converging – like they did back in Jul ‘11. A sharp move usually follows. Will the move be upwards this time?

NSE Nifty 50 index chart

The answer to the question is visible in the weekly closing chart pattern of the NSE Nifty 50 index. The rally that started from the Dec ‘11 low went past four likely resistances – the 20 week EMA, the 50 week EMA, the blue down trend line and the long-term support-resistance level of 5270. Note that the weekly volumes kept increasing, showing underlying strength.

After such a strong rally of 1100 points, a pullback to the 50 week EMA or the blue down trend line was expected. Such pullbacks provide buying opportunities to those who missed out on the rally. But the pullback has bounced up from the 5270 level. The 20 week EMA has almost merged with the 50 week EMA, and a cross above will technically confirm a bull market. But it is unlikely to be a runaway bull market.

The technical indicators have corrected overbought conditions and are still looking bullish. The MACD is positive and above its signal line. The ROC has crossed below its 10 week EMA, but remains positive. The RSI has entered its overbought zone for the first time since Nov ‘10. The slow stochastic has slipped down from its overbought zone. All four indicators are showing positive divergences by reaching higher tops (marked by blue arrows) while the Nifty touched a lower top. All signs are pointing to a resumption of the up move.

What can spoil the bull party? Our inept government of course! As if the various scams and poor floor management of its own allies wasn’t enough, they have now shaken the confidence of the FIIs by introducing a draconian GAAR policy in a bid to plug a tax loophole. If the FIIs start packing their bags, all bullish bets will be off.

Bottomline? Chart patterns of the Sensex and Nifty indices are consolidating after sharp rallies. Despite high interest rates, high oil prices and a falling Rupee, India’s comparatively higher GDP growth has attracted FIIs. Our geriatric political leaders are experts at shooting themselves in the foot. Instead of cracking down on FIIs, they should put their own house in order. Only then can India truly shine. This is as good a time as any to start accumulating good large and mid cap stocks. You can choose several from the stocks covered on the right panel of this blog.