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Sunday, May 20, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – May 18 ‘12

BSE Sensex index chart

There was good news and bad news last week. First, the good news. State Bank of India came out with results that exceeded market expectations. That led to short covering and some investment buying on Friday (May 18 ‘12), which caused a ‘reversal day’ pattern (lower bottom, higher close) on the Sensex bar chart.

Now the bad news. Inflation reared its ugly head again – the culprit being food inflation. That may prevent RBI from cutting rates any further in June. The Finance Minister eloquently described the current economic problems and promised some belt tightening in the form of curtailing foreign travel of ministers and a restriction on buying new cars. Sounds more like tokenism than serious intent of curtailing wasteful subsidy expenditure.

SENSEX_May1812

The daily bar chart pattern of BSE Sensex is looking oversold – so Friday’s ‘reversal day’ pattern may lead to a brief bounce. Why not an end to the down move?

‘Reversal day’ patterns can occur a few times in the midst of a down (or up) move. But to mark the end of an intermediate move, the ‘reversal day’ should be accompanied by a volume surge that indicates selling (or buying) exhaustion. Such volume support (not shown in chart) was missing on Friday. Overhead resistance from the falling 20 day EMA and the blue down trend line – which are converging around the 16500 level – is likely to restrict any up move.

Note that in Jul ‘11, all three EMAs had merged with each other and gave advance warning of a sharp move. Since the Sensex was in a down trend, the sharp move in Aug ‘11 was downwards. A similar pattern emerged when all three EMAs merged in Apr ‘12. The sharp downward move in May ‘12 may go down to test and even break the Dec ‘11 low. All three EMAs are falling and the Sensex is trading below them. That means the Sensex is back in a bear market.

The technical indicators are bearish and looking oversold. The MACD is negative and falling below its signal line. The ROC is also negative, but has crossed above its 10 day MA. The RSI and the slow stochastic are inside their oversold zones. Any upward bounce towards the blue down trend line is likely to be used by the bears to sell.

NSE Nifty 50 index chart

The hallmarks of a bear market are clearly visible on the weekly bar chart of the NSE Nifty 50 index. The 20 week EMA failed to cross above the 50 week EMA and has started to fall. The index is trading below both its weekly EMAs and has dropped below the blue down trend line.

Can’t the bulls fight back from here?

Nifty_May1812

The bearish technical indicators are suggesting that bulls are currently out of ammunition. SBI’s result announcement, followed by the CMD’s statement that the stock should trade at 2500, smacks of financial engineering and an effort to talk the market up. Even if SBI has performed a magic trick, it is unlikely that the other PSU banks will suddenly turn out to be magicians as well.

The MACD is below its signal line and has slipped into negative territory. The ROC is negative and below its falling 10 week MA. The RSI has entered its oversold zone, where it doesn’t stay for long. The slow stochastic is inside its oversold zone. Any upward bounce is likely to face resistance from the down trend line (currently at 5000).

Note that last week’s volumes were less than the previous week’s. Nothing unusual in that. Volumes are supposed to move in the direction of the trend.

Bottomline? Chart patterns of the BSE Sensex and NSE Nifty 50 indices are back in bear markets. Investors should stay away for now. Lower levels may provide better entry points. Risk takers can sell on every rise and buy back at lower levels. Always remember to use a stop-loss in case the market goes against you.

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