BSE Sensex and NSE Nifty 50 index chart patterns – May 11 ‘12

BSE Sensex index chart

During bull markets, bad news gets overlooked as buying frenzy sweeps away any negative impact from the news. Good news seem to come out of the woodwork. The opposite happens in bear markets. There is no dearth of bad news. Not the least of which was the negative IIP numbers for Mar ‘12. The capital goods sector contributed the most to the drop in the index.

There has been a clamour from all quarters for further easing of interest rates. The surprising 50 bps rate cut by the RBI barely left a ripple on the financial markets. The next RBI meet is a month away. Unless there is a noticeable fall in inflation rate, another rate cut may be impractical.

The FIIs were net buyers on the last two trading days of the week gone by. That couldn’t prevent the weekly closing chart of the Sensex from plunging below the blue down trend line, and back into a bear market. Note that the 20 week EMA failed to cross above the 50 week EMA. The technical confirmation of a bull market failed to materialise.

The sharp rally during Dec ‘11 and Jan ‘12 took the Sensex above its two weekly EMAs and the down trend line. But what had looked like the first leg of a new bull market turned out to be nothing but a bear market rally.

The technical indicators are looking bearish – so a deeper fall in the Sensex is likely. The MACD has crossed below its signal line and entered the negative zone. The ROC is also negative and below its falling 10 week EMA. The RSI has dropped to the edge of its oversold zone. The slow stochastic has entered negative territory. Any pullback towards the down trend line is likely to be used as an opportunity to sell by the bears.

NSE Nifty 50 index chart

In a mid-week Nifty update, three possible moves by the Nifty index was discussed. The Nifty chose the most bearish of the three options by dropping below the blue down trend line, after raising bullish hopes by staying above the trend line for more than three months.

The 20 day EMA has crossed below the 200 day EMA. The 50 day EMA is on the verge of doing likewise – the ‘death cross’ will confirm a return to a bear market. The technical indicators are looking bearish to the point of being oversold. The MACD is falling below its signal line in negative territory. The ROC is negative, and below its falling 10 day MA. The RSI is inside its oversold zone, but trying to turn around. The slow stochastic is inside its oversold zone.

An attempt at a pullback towards the blue down trend line is a possibility. But it would be a selling – not a buying – opportunity. Looks like the Nifty is determined to go down further, and test its Dec ‘11 low.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are now under the influence of persistent bears. The global and domestic economic outlooks continue to be gloomy. RBI’s efforts at controlling inflation has ended up in curbing growth. The government has backed itself into a wall of corruption, indecisiveness and strident allies who behave more like opposition parties. Looks like it will be a long, hot summer till the advent of monsoons bring some relief. Preserving cash should be the priority.