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Sunday, May 6, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – May 04 ‘12

BSE Sensex index chart

Why did the Sensex fall 300 points last Friday (May 4 ‘12)? Was it the continuous slide of the Rupee against the Dollar? Or, was it the announcement by the Minister of State for Finance that the Double Taxation Avoidance treaty with Mauritius may be amended (a requirement if GAAR is to be implemented)?

My guess is that it was a knee-jerk reaction to both. The fall in the Rupee will be partly offset by the fall in oil’s price; plus it will make our exports more attractive. The FIIs have been net buyers in the four trading days in May ‘12 – so they are not the cause of the Rupee’s fall. The culprit must be buying of Dollars by importers.

Regarding amendment of the tax avoidance treaty with Mauritius, there hasn’t been much progress in the matter despite several meetings because Mauritius has little to gain. The next round of meetings hasn’t even been scheduled. So, the possibility of introduction of GAAR in its present form during the current financial year appears remote.

SENSEX_May0412

Technically, there is good news and bad news on the Sensex chart. First, the good news. Friday’s fall halted at the lower edge of the ‘falling wedge’ pattern, and just above the blue down trend line. The consolidation within the wedge pattern has so far corrected 50% of the rise from the Dec ‘11 low of 15136 to the Feb ‘12 high of 18124. So, there is a good possibility of an upward bounce from the current level. Remember that the ‘falling wedge’ is a bullish consolidation pattern.

Now, the bad news. All three EMAs have become entangled and the index has fallen below them. The last time this happened was in Jul ‘11. It has been observed that when the three EMAs come close to each other, a sharp move follows. The odds are favouring a down move, because the technical indicators are looking bearish.

The MACD has slipped below its signal line, and both are in negative territory. The ROC has dropped below its 10 day MA into the negative zone. Both the RSI and the slow stochastic are falling below their 50% levels. However, there is a silver lining to the dark clouds. All four indicators have touched higher bottoms as the index has fallen lower. The positive divergences may be signalling a rally.

NSE Nifty 50 index chart

The weekly closing chart pattern of the Nifty index is threatening to drift down into a bear market. The 20 week EMA has merged with the 50 week EMA – which is a precursor to a sharp move in the index. Since the index is falling, the sharp move is likely to be downwards. The bulls may try to put up a fight near the blue down trend line.

Nifty_May0412

The weekly technical indicators are looking bearish. The MACD is still positive, but has slipped below its signal line. The ROC is negative, and well below its 10 week MA. A steep fall below the MA is often followed by a rally. The RSI and the slow stochastic have both dropped below their 50% levels.

A continuation of the correction is likely. An upward bounce from the blue down trend line is a possibility, but may not be a buying opportunity unless accompanied by a spurt in volumes. Even then, it may be better to wait for a convincing cross above the 20 week and 50 week EMAs (at about 5200). A drop below the down trend line – currently at 5000 – may extinguish bullish hopes.

Q4 results declared so far have been a mixed bag. Even within the same sector, performances have been uneven. Companies that have declared better-than-expected results have seen a spurt in their stock prices. That means there is no dearth of buying interest – a bullish sign.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices have not been able to shake off the bears. Any clarification on the application of GAAR provisions may act as a positive trigger. It is uncertainty that causes bearishness. Stick to well-established and cash-rich companies. This isn’t a good time to punt on stocks like Claris Lifescience or Rathi Steel and Power.

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