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Saturday, August 18, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Aug 17, 2012

BSE Sensex index chart

There was no let up in FII buying during a holiday shortened week. Sensex bounced up from the top of the symmetrical triangle and touched a slightly higher top, but the long weekend (with Eid holiday on Monday) led to some profit booking. As long as liquidity flows sustain – mainly from overseas ETFs – the current weak fundamentals of the Indian economy will not be able to dampen bullish sentiments.

Stock markets tend to turn around ahead of the economy, and that is what the FIIs are betting on. The first signs of a stock market revival become visible when stocks from the financial sector like banks and NBFCs (Non-banking financial companies), retail and transportation sectors start to rise and consumer durables like home appliances, cars and trucks start showing improved sales.

Stocks like HDFC Bank, M&M Financial Services, Sundaram Finance are at or near their 52 week highs. BSE Consumer durables index is well above its 52 week low, and consolidating sideways. The next up move may take it to a new 52 week high. So, the stage is set for the start of a new bull market.

SENSEX_Aug1712

An upward break out from a large symmetrical triangle, followed by a pullback to the top of the triangle and a bounce up is an indication that bulls are beginning to take control of the 1 year daily bar chart pattern of the Sensex. All three EMAs have started rising and the index is trading above them. Technically, Sensex is back in a bull market.

Technical indicators are bullish, but beginning to correct from an overbought situation. MACD is positive, and above its signal line, but the histogram has started to fall. ROC is also positive, but has crossed below its 10 day MA. RSI is well inside its overbought zone, but showing signs of turning around. Slow stochastic is also inside its overbought zone, but moving sideways.

A bit of correction or consolidation appears likely. On the downside, the rising 20 day EMA and the top of the symmetrical triangle should provide support. On the up side, a cross above the Feb ‘12 top will put bulls firmly in control.

NSE Nifty 50 index chart

How can you tell that the market sentiment has turned bullish? When the stock market ignores regular flow of bad news and indices continue to rise. Disappointing IIP numbers were ignored in the previous week. Friday’s (Aug 17 ‘12) CAG draft report blaming the government for a massive scam in allocation of coal blocks was initially met with selling, but indices recovered somewhat by the end of the day.

Nifty_Aug1712

On the 1 year weekly bar chart pattern of the Nifty 50 index, an upward break out from eight months long consolidation within a large symmetrical triangle is clearly visible. The smaller volume bar last week is not of great concern, because of the mid-week Independence Day holiday.

The 20 week EMA has moved up to touch the 50 week EMA – just as it had done back in end-Mar ‘12. But the Nifty was moving down in Mar ‘12, and the ‘golden cross’ did not take place. Looks like the bulls are determined to push the Nifty into a bull market this time.

Technical indicators are bullish. MACD is rising above its signal line in positive territory. ROC is positive and above its 10 week EMA, but showing signs of slowing upward momentum. RSI has risen to the edge of its overbought zone. Slow stochastic has entered its overbought zone.

Nifty’s breadth indicators (not shown) like the A-D line and TRIN are hinting at a likely correction or consolidation before the up move resumes. On the down side, the top of the symmetrical triangle and the entangled 20 week and 50 week EMAs should provide support. A cross above the Feb ‘12 top of 5630 should restore the bulls’ dominance.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are gradually returning to bull markets. Weakening economic fundamentals and policy inaction by the government do not warrant a runaway bull rally. But strong inflows of FII money seem to have changed market sentiments for the better. Stick to stocks of fundamentally strong, low debt companies with sound management.

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