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Sunday, November 11, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Nov 9, 2012

BSE Sensex index chart

The daily bar chart pattern of the Sensex made two abortive attempts to break out of the narrow 300 points range within which it has been trading for the past 5 weeks. The first, on Oct 30 ‘12, was a downward break out attempt, following the disappointment over RBI’s failure to effect a cut in repo and reverse repo rates.

The second, on Nov 7 ‘12, was an upward break out attempt, following general euphoria over Obama’s re-election as the US President (or, more realistically, due to the removal of uncertainty as to who would be the next US President). Both break out attempts turned out to be ‘false’, as the Sensex reverted back inside the 300 points rectangular range.

FIIs have been net buyers and DIIs were net sellers during the past week – sticking to their strategies since the uptrend (marked by the blue uptrend line) began from the Jun ‘12 low. The index is trading just below the resistance zone between 19000 and 19800 (refer last week’s weekly chart), which has so far proved a tough hurdle for the nascent bull market.

SENSEX_Nov0912

Are the bulls getting exhausted by their repeated failure to overcome the resistance zone? Is the Sensex getting ready for a big fall? These may be questions in the minds of many investors. On the evidence visible on the chart above, the answer is ‘No’ to both questions.

Why? Because the various technical definitions of a bull market have already been satisfied. These are:

  1. The index is trading more than 20% above its Dec ‘11 low of 15136
  2. The index is trading above its rising 200 day EMA
  3. The 50 day EMA has crossed above the 200 day EMA (‘golden cross’), and both EMAs are rising
  4. The index has retraced more than 61.8% of its fall from its Nov ‘10 peak to its Dec ‘11 bottom

So, what can be observed on the chart is a period of consolidation below a known resistance zone in a bull market. One can think of it as ‘catching one’s breath’ after running up a few flights of stairs. Once the consolidation is over – may be over the next few weeks – the Sensex is likely to gather the strength to climb above the resistance zone.

How can one be sure of such an outcome? There are no certainties in life – and definitely none in index or stock movements. But there is more evidence supporting a bullish outcome. Have a look at the blue uptrend line. It has been tested three times already, and may face a fourth test soon. Unlike a support or resistance level, a trend line tends to get stronger with each test. So, the Sensex is unlikely to fall below the trend line.

Even if it does, there should be strong support from the ‘gap’ area, and below it, from the 200 day EMA. Therefore, a big fall in the Sensex can be ruled out for now. Technical indicators are looking weak, but not bearish.

NSE Nifty 50 index chart

Arvind Kejriwal and his ‘India Against Corruption’ group took on some top industrialists and businessmen for maintaining Swiss bank accounts, and challenged the government to raid the high and mighty instead of penalising a few small-time thieves. Anna Hazare has formed a new team after his split with Kejriwal. More action from anti-corruption crusaders should keep things heated up during the winter months.

Those investors who still believe that the ‘Reliance’ name will cast a magic spell on their portfolios should start looking at other (better) alternatives. Telecom and real estate are unlikely to be better alternatives.

Nifty_Nov0912

The weekly closing chart of the Nifty continues its sideways consolidation below the resistance zone between 5750 and 6000. Weekly technical indicators are bullish but showing a hint of weakness. MACD is positive and above its signal line, but moving sideways. ROC is also positive, and has crossed above its 10 week MA. RSI and slow stochastic are inside their overbought zones, but slipping down a little.

Note the blue downtrend line that ruled the Nifty from Nov ‘10 till Jun ‘11. Though the rally from the Dec ‘11 low to the Feb ‘12 top penetrated the down trend line decisively, it was a bear market rally and not the beginning of a new bull market.

Why? Because of three reasons. First, the rally was too steep and on very high volumes. Such steep rallies are unsustainable. Second, the 20 week EMA failed to cross above the 50 week EMA – the ‘golden cross’ that heralds a bull market didn’t occur. Third, the index dropped below the downtrend line in May ‘12, and failed to cross above it in its first attempt.

The rally from the higher bottom of Jun ‘12 is however, the first leg of a new bull market. The ‘golden cross’ and the bullish pattern of higher tops and higher bottoms have technically confirmed it. Plus the four technical criteria mentioned in the Sensex analysis above have also been met by Nifty.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are still undergoing consolidations below known resistance zones after two ‘false’ break out attempts. Use the opportunity to accumulate good quality stocks. Waiting for indices to fall further may be futile.

2 comments:

feltra (Raman R) said...

Subhankar ji,

Elsewhere I read that the overall volumes have not picked up at all and look uncharacteristically low for a bull run. Request your comments on the same. Can a bull market be sustained on low volumes?

Thanks & Regards,
-feltra

Subhankar said...

You are quite right - bull rallies do need volume support to sustain.

If you look at Nifty volumes, they rose sharply during the rally and gap-up break out in Sep '12. Subsequently, volumes have reduced while the index entered a period of sideways consolidation. This is typical volume behaviour, as volumes tend to drop during corrections/consolidations.

Any upward break out should be accompanied by strong volumes. Downward breaks do not require volume support.