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Saturday, April 7, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 06 ‘12

BSE Sensex index chart

The two years weekly closing chart pattern of the BSE Sensex index is showing text-book price patterns: A long down trend marked by the dark blue downward-sloping trend line; ‘death cross’ of the 20 week EMA below the 50 week EMA in Jul ‘11 that technically confirmed a drop into a bear market; a sharp bear market rally that climbed above the two EMAs and the down trend line; a pullback after the break out above the down trend line, followed by a bounce off the 50 week EMA.

SENSEX_Apr0412

Why is the rally from the Dec ‘11 low being termed a ‘bear market rally’ instead of the first upward leg of a new bull market? Because a couple of technical confirmations are still awaited. The ‘golden cross’ of the 20 week EMA above the 50 week EMA will be the first bullish confirmation. A rise above the Feb ‘12 top of 18290 will form a bullish pattern of higher tops and higher bottoms.

Wouldn’t awaiting the two bullish confirmations mean missing out on a 3000 points rally from the Dec ‘11 bottom? Yes, but that is the price one pays to reduce risk. Otherwise, one can enter at any time with a suitable stop-loss – which may lead to too many trades and possible losses.

Can the Sensex dive back below the dark blue down trend line, and go down to test the Dec ‘11 low? The possibility can’t be ruled out entirely. The rally has been fuelled by a gush of FII money. The likely passing of the GAAR provisions in the Finance Bill may force many of the FIIs to sell-off.

The technical indicators are still bullish, but giving contradictory signals. The MACD is positive and above its signal line, but has stopped rising. The ROC has crossed well below its 10 week MA, and is barely in positive territory. The slow stochastic has dropped from its overbought zone. The RSI has entered its overbought zone, and showing positive divergence by touching a higher top.

NSE Nifty 50 index chart

The 6 months bar chart pattern of the NSE Nifty 50 index is consolidating within a ‘falling wedge’ pattern. The ‘falling wedge’ is usually a continuation pattern that forms during a bull market rally, so the logical break out is upwards. Positive divergences in three of the four technical indicators are also pointing to an upward break out. The ‘golden cross’ of the 50 day EMA above the 200 day EMA has technically confirmed a bull market.

Nifty_Apr0412

The bears are on the back foot, but not out of the picture yet. Despite the ‘golden cross’, the 50 day EMA has not pulled away from the 200 day EMA; it is hovering slightly above the long-term average and moving sideways. The MACD is entangled with its signal line in negative territory. The ROC is just above its 10 day MA but both are in negative zone. The RSI has tried but failed to move above its 50% level for a month. The slow stochastic has climbed above its 50% level and the only one looking bullish.

The holiday-shortened week caused some profit booking and lower volumes. Q4 results and RBI’s forthcoming policy action are the next triggers for the market. A normal monsoon forecast is a positive. A tepid jobs report from the US is a negative.

Bottomline? Chart patterns of the Sensex and Nifty indices are still consolidating after sharp rallies. A continuation of the up moves from the Dec ‘11 bottoms is likely, but it may be prudent to wait for the actual upward break outs. Enter stocks of fundamentally strong companies that have broken out, or are about to do so. Cummins and Exide come to mind. Remember the old market adage: Bull markets climb a wall of worry.

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