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Saturday, August 11, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Aug 10, 2012

BSE Sensex index chart

The negative IIP number was taken in its stride by the stock market, an indication that sentiments were bullish. FIIs continued to be net buyers, which is a bit worrying. Most FIIs have gone on record saying India is more expensive than other emerging markets, and governance and policy issues are making it less attractive for investments.

Then why are they buying? Or, is it round-tripping of Indian money in the garb of FIIs? There was a concern that Iran is pouring money into India, which may be used for terror funding. SEBI hasn’t been very pro-active in its methods and actions, so the truth may never come out.

As small investors, we need to worry more about capital preservation than trying to make windfall gains. Choosing fundamentally strong, low debt companies with investor-friendly management who have proven their worth over several years and holding stocks of such companies over the long term is the way to building wealth. Slowly, but surely. Stay away from companies that declare net profit growth of 350% while their top line shrinks by 30%.

SENSEX_Aug1012

The weekly bar chart pattern of Sensex has broken above the large symmetrical triangle pattern within which it was consolidating for the past eight months. The 20 week EMA is getting ready to cross above the 50 week EMA – the ‘golden cross’ will technically confirm a return to a bull market. The bulls will try to avoid a repetition of the situation during Mar and Apr ‘12, when the 20 week EMA came close to the 50 week EMA, but failed to cross above it.

Technical indicators are looking bullish. MACD is rising above its signal line in positive territory. ROC is also positive and is moving up above its 10 week MA. Both RSI and slow stochastic are above their 50% levels. The Feb ‘12 top of 18524 should be the next target for the bulls. Crossing it would form a bullish pattern of higher tops and higher bottoms. If the FIIs continue their buying spree, that target could be easily achieved.

NSE Nifty 50 index chart

Q1 results announced so far have shown top line growth but bottom line shrinkage, particularly for PSU companies. Economic growth is slowing down, but not enough to change RBI’s declared policy of curtailing inflation at the cost of growth. There is unlikely to be any interest rate reduction in the near-term. Poor monsoon rains may further stoke the inflation fire.

Stock markets may not perform well in a high interest rate regime. Near-zero interest rates have fuelled the rise in US and Europe stock markets, but haven’t helped to increase the growth momentum. Quantitative easing may have saved the large banks from collapsing, but the cash infusion has been diverted to the stock markets instead of being used for productive corporate loans. Similarly, RBI’s efforts at easing liquidity constraints by cutting CRR and SLR rates haven’t really translated into capital expenditure by India Inc. A period of slow growth and high inflation is likely to continue for some more time.

Nifty_Aug1012

After breaking out of eight months of consolidation within a symmetrical triangle pattern, the daily bar chart pattern of Nifty quickly pulled back to the top of the triangle. Such pullbacks are quite common and provide entry opportunities for those who may have missed the break out.

Technical indicators are bullish, but three of them (MACD, RSI, slow stochastic) touched lower tops while the Nifty touched a higher top. The negative divergences may drop the Nifty back inside the triangle. The break out above the triangle wasn’t accompanied by significantly higher volumes – raising questions about the validity of the break out.

All three EMAs are rising and the Nifty is trading above them. Technically, Nifty has re-entered bull territory. A cross above the Feb ‘12 top of 5630 will put the bulls back in control. Bears will not give up without a fight. There may be some consolidation before the Nifty moves up to test its Feb ‘12 top.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have broken upwards from prolonged consolidation within symmetrical triangles. Though the break outs haven’t been strong, such break outs after long consolidations are often followed by strong up moves that can take the indices close to their Nov ‘10 peaks. The bear market may be finally getting over.

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