BSE Sensex and NSE Nifty 50 index chart patterns – Apr 20 ‘12

BSE Sensex index chart

For the second Friday in a row, the Sensex suffered an intra-day crash that unnerved traders and investors alike. On the previous Friday,the 13th, some of the blame could have been assigned to the superstitious. This time, it was supposed to be a trading ‘error’ or may be even a ‘short and distort’ scam.

Whatever it was, the bulls refused to get chased away. Despite a close just below both the 20 week and 50 week EMAs a week ago, the Sensex has climbed back above both its moving averages. The 20 week EMA is still below the 50 week EMA. Once it crosses above, the bulls will be back in control after a long period of bear dominance.

The 50 bps cut in the repo and reverse repo rates by the RBI caused some cheer in the stock market, but the good mood was tempered because the underlying fundamentals are not showing much improvement. Oil prices have drifted down a bit, but remain high. Industrial growth is definitely slowing down. There is every possibility of inflation rising once the base effect begins to wear off. Already food prices are showing an up trend. That puts a question mark on further rate cuts that are required to stimulate economic growth.

The weekly technical indicators are looking weak, but not bearish. The MACD is slightly positive, but moving sideways and about to touch its rising signal line. Both the RSI and the slow stochastic have dropped from their overbought zones but remain above their 50% levels. Only the ROC is looking a bit bearish by falling well below its 10 week MA into the negative zone, but it is showing signs of turning around.

NSE Nifty 50 index chart

RBI’s interest rate cut provided the trigger that caused a break out above the ‘falling wedge’ pattern last week. Upward break outs above known resistance levels are usually sharp and accompanied by strong volumes. Not so for a break out above a ‘falling wedge’. Such break outs tend to be more gradual and in the form of a ‘saucer’ (note the saucer-like pattern visible in the signal line of the MACD indicator below).

The challenge with such a tepid break out is that one can’t be sure whether the index will drop back within the wedge pattern or not. The good news is that investors may get several opportunities to enter, which is not always possible on a sharp upward break out.

The technical indicators are slowly turning bullish. The MACD has inched above its signal line and is just below the ‘0’ line which demarcates positive (bullish) and negative (bearish) territory. The ROC has slipped a bit below its 10 day MA into the negative zone. The RSI and the slow stochastic have both moved above their 50% levels, but their upward momentum has waned.

For the sake of the economy and the stock market, the government needs to set aside its socialistic inclinations and take some much-needed decisions on reforms. Trying to act tough with FIIs will only chase them away. FIIs should be made to feel welcome by making transparent and enabling legislations – with due safeguards. Likewise with FDI. Investors get irritated and frustrated by the unnecessary bureaucracy and corruption at various levels.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are gradually shaking off bear strangleholds. A lot of work is still left for the bulls. To be on the safe side, concentrate on well-established and cash-rich companies for now. More speculative bets can be made once the bull market revives fully.