BSE Sensex and NSE Nifty 50 index chart patterns – Jul 13, 2012

BSE Sensex index chart

It was another week of trading during which the FIIs and DIIs acted at cross purposes. FIIs continued to be net buyers, but stronger net selling by the DIIs swung the scales in favour of bears. Not-so-great Q1 results of Infosys may have triggered stronger selling, but TCS declared reasonable results which partly stemmed the rot.

There was good and bad news on the economic front. IIP numbers were higher than expected at 2.4%, but that number should be taken with a pinch of salt. The previous month’s paltry 0.1% IIP has been reversed downwards to a negative growth rate. Trade deficit came down because of lower imports, which was partly due to lower oil price. But exports went down as well.

The weekly bar chart pattern of Sensex shows a ‘reversal week’ pattern (higher intra-week high and a lower intra-week close) that formed last week. Though the index received support from its 50 week EMA, the support may not hold in the coming week. Such a ‘reversal week’ pattern usually terminates an intermediate rally – like it did when the previous rally got terminated in Feb ‘12.

Note that the index touched a higher bottom in Jun ‘12 than the one it touched in Dec ‘11, but has so far failed to cross above its Feb ‘12 top. A similar pattern was formed a year ago when Sensex touched a slightly higher bottom in Jun ‘11 than the one it touched in Feb ‘11. The subsequent rally failed to rise above the Apr ‘11 top, and the index dropped much lower.

Is the pattern likely to repeat? The possibility can’t be ruled out. Keep your eyes peeled on the second blue uptrend line (currently at about 16000 level). A breach of the trend line can drop the Sensex below its Dec ‘11 low of 15136. Only a move above the Feb ‘12 top of 18524 can push the bears on the back foot.

Technical indicators are giving mixed signals. MACD is above its signal line, and has just entered its positive zone but the histogram isn’t rising. ROC is positive and above its 10 week MA, but its upward momentum is slowing down. RSI is looking bearish. It has slipped below its 50% level. Slow stochastic has entered its overbought zone - where it doesn’t stay for very long during bear phases.

The 20 week EMA is trading below the 50 week EMA, which means the Sensex is technically in a bear market.

NSE Nifty 50 index chart

In last week’s post, a bearish ‘rising wedge’  pattern was drawn on the daily closing chart of the Sensex with the following observation: “There are no certainties in life, and definitely none in technical analysis – but when a bearish pattern is clearly visible, it is best not to bet against it.”

Not surprisingly, a ‘rising wedge’ pattern had formed on the daily bar chart pattern of Nifty as well, from which a ‘gap down’ break out occurred last week. While an upward break out should be accompanied by a volume surge for the break out to be valid, no such stipulation is required for a downward break out. However, the ‘gap down’ break out is quite bearish.

The good news for bulls is that the index found support from its 20 day EMA. The not-so-good news is that the 50 day EMA hasn’t been able to cross above the 200 day EMA. A ‘golden cross’ that confirms a return to a bull market is awaited.

Technical indicators are still bullish, but showing signs of slowing upward momentum. MACD is positive, but has crossed below its signal line, and the histogram has turned negative. ROC has dropped sharply below its 10 day MA into negative territory. Such sharp falls are often followed by pullbacks. RSI has dropped from its overbought zone after forming a bearish head-and-shoulders reversal pattern. Slow stochastic has fallen sharply from its overbought zone after forming a bearish rounding-top pattern.

Bears may use any pullback towards the ‘rising wedge’ as an opportunity to sell.

Bottomline? Despite net buying by FIIs, selling by DIIs is upsetting bullish plans. Chart patterns of BSE Sensex and NSE Nifty 50 indices are in danger of falling deeper into bear markets. It is time to be cautious and preserve capital. High inflation and high interest rates are not conducive to a bull market. Regular investments in blue chip companies should not be stopped. But speculative bets should be avoided.