BSE Sensex and NSE Nifty 50 index chart patterns – Nov 16, 2012

BSE Sensex index chart

Late selling on Fri. Nov 16 ‘12 pushed the daily bar chart pattern of the Sensex below its 50 day EMA and the blue uptrend line, down to the ‘gap’ area marked in the chart below. The index closed the week below the uptrend line, but 20 odd points above the ‘gap’.

In last week’s post, a big fall in the Sensex was ruled out due to several bullish signals. But the Sensex did close below the uptrend line. It may be prudent to remain cautious. However, one need not sell-off in a panic. Why?

For two reasons. First, the breach of, and close below, the uptrend line is still within the 3% ‘whipsaw’ zone. Only a close below 17900 will technically confirm a breach of the uptrend line. Second, the index has received support from the top of the ‘gap’. There is a possibility that the index may bounce up from here and move above the uptrend line.

What if the Sensex closes the ‘gap’ and falls below 17900? Wouldn’t that be bearish? Yes, and no. Yes, if the index also falls below the 200 day EMA and the Sep ‘12 low of 17250. In that case, all bullish bets should be off.

But closing of the ‘gap’ by itself will not be bearish. Typically, an index or stock closes a ‘gap’ only to resume its previous move – which in this case would be upward. Even a close below 17900 – which will confirm a breach of the uptrend line – may not be bearish if the index bounces up from the 200 day EMA and resumes its up move.

There is a bearish possibility of an ‘island reversal’, if the index opens below the ‘gap’ on Mon. Nov 19 ‘12 and continues to trade below the ‘gap’ for the next few days. The entire trading above the ‘gap’ will then form an ‘island’ of trading, which has bearish implications. However, ‘island reversals’ are rare, and some times get negated by a subsequent up move.

Daily technical indicators are looking bearish. MACD is falling below its signal line, and about to enter the negative zone. ROC has dropped below its 10 day MA into negative territory. RSI is below its 50% level and falling further. Slow stochastic has dropped to the edge of its oversold zone.

The ‘gap’ may get partly or completely filled soon.

NSE Nifty 50 index chart

Q3 results season is over. There were very few positive surprises. Finance Minister urged the RBI governor to open up new banking licences, but the governor is unlikely to get pushed into any hasty decisions. Battle lines are being drawn by opposition parties to take on the government during the winter session of parliament against FDI in retail and insurance sectors.

There are very few positive triggers for the index to move up, since all the good news has already been digested. FIIs are still net buyers, which is bullish. Nifty has closed below the uptrend line but remains above its 20 week and 50 week EMAs. So, the nascent bull market is not under threat yet.

Weekly technical indicators are showing signs of weakness, but haven’t turned bearish yet. MACD is touching its signal line in positive zone, after correcting a bit from its overbought region. ROC has crossed below its 10 week MA, but is still positive. RSI has slipped from its overbought zone. Slow stochastic is sliding down, but remains inside its overbought zone.

A drop below the 20 week EMA is a possibility in the coming weeks.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are still undergoing consolidations below known resistance zones. Consolidations may be turning into corrections, but so far the bull markets are not under any threat. Use dips to accumulate good quality stocks (like the ones recommended in my paid monthly newsletter).