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Sunday, September 30, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Sep 28, 2012

BSE Sensex index chart

One of the enduring myths of the stock market is that good news and bad news get ‘discounted’ in advance. It doesn’t really, though it may appear to be so sometimes. Despite various rules and regulations by the authorities, insider trading remains alive and kicking. It is often insider buying or selling that triggers movements in a stock’s price.

It is more difficult to manipulate an index or large-cap stocks. When the Sensex fell to its low in Jun ‘12, it was mainly FII buying that pushed the index upwards. DIIs were sellers. Did the FIIs know something in advance that the DIIs didn’t? Highly unlikely. The FIIs may have bet on the likelihood of the UPA government announcing some reforms.

FIIs had bought heavily during the Dec ‘11 to Feb ‘12 rally – but the FDI in retail proposal was rolled back at that time and diesel price hike never happened. The deteriorating economic outlook, plethora of scams and a tardy monsoon caused a sell-off. More often than not, the stock market reacts to news rather than ‘discounting in advance’.

Sensex_Sep2812_ST

The 220 points gap in the daily bar chart pattern of the Sensex was formed after the announcements by ECB and the US Fed about another round of QE3. Announcements about FDI in retail and aviation plus a hike in the price of diesel by the UPA government ensured that the Sensex remained above the gap instead of filling it.

Why is the index hesitating just below the 19000 level? Is it worried about some impending bad news? This is where technical analysis comes into play. The zone between 19000 and 19750 is a long-term support/resistance zone. Also, the index is looking overbought as it is trading 1500 points above its 200 day EMA.

Technical indicators are bullish, but correcting overbought conditions. Expect a correction down to the top of the gap, or a sideways consolidation, before the bulls manage to push the Sensex past the resistance zone. If the gap remains unfilled, or gets partly filled, it will be a ‘measuring gap’ with an upward target of 20600 for the Sensex.

NSE Nifty 50 index chart

For a change, our PM has stood firm against the ruckus raised by the UPA’s allies and the opposition parties about rolling back the announced reform proposals. Lack of foresight shown by the BJP in stalling the monsoon session of parliament, and by Mamata Banerjee’s TMC by withdrawing support to the UPA may come back to haunt them during the next election in 2014.

By then, the Walmarts and Tescos and Carrefours may open retail stores, and the benefits to farmers and local suppliers will become visible to all. FDI in other sectors have brought great benefits to India in terms of job creation and quality of life. Suddenly, FDI in retail has made everyone and his brother-in-law a champion of the poor farmers. What did the politicians do when farmers were committing suicide due to failed crops or low prices? 

Nifty_Sep2812

The weekly bar chart of the Nifty shows a break out from a symmetrical triangle, followed by a pullback to the top of the triangle and a sharp upward bounce that has taken the index back into bull territory. The ‘golden cross’ of the 20 week EMA above the 50 week EMA has technically confirmed a bull market.

The index is expectedly facing strong resistance from the resistance zone between 5700 and 5950. The rising volumes indicate that the bulls may have adequate firepower to overcome the resistance zone, but perhaps after a period of consolidation or correction.

Weekly technical indicators are looking bullish, but overbought. MACD is rising above its signal line in positive territory. ROC has crossed above its 10 week MA in positive zone. Both RSI and slow stochastic are inside their overbought zones.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have entered new bull markets, but have come up against strong resistance zones. Use dips to enter, but be very selective about the stocks and funds you choose. This is not a runaway bull market yet. Inflation and interest rates need to come down for the markets to gain upward momentum.

2 comments:

VJ said...

Subhankar,
It is nice to see some stick his neck out and make a statement that we may have well entered a new bull market. I liked your analysis and obviously the conclusion !!

Cheers,
VJ

Subhankar said...

Appreciate the comments.

I write what I see on the charts. Bullish technical evidence has been building up over the past 3 months - so it isn't like I'm sticking my neck out:

First, a higher bottom in Jun '12; next a break out from a large triangle, followed by a pullback to the top of the triangle and a bounce up; 'golden cross' of the 20 week EMA above the 50 week EMA on weekly charts; 'golden cross' of the 50 day EMA above the 200 day EMA on the daily charts; an upward gap on the daily charts.

Fundamentally, interest rates have topped out; the government has finally announced some much-needed reforms; GAAR and retrospective tax proposals are likely to be postponed; Rupee has started appreciating.

So many bullish events one after the other can only mean that a new bull market has started.