BSE Sensex and NSE Nifty 50 index chart patterns – Dec 07, 2012

BSE Sensex index chart

FIIs continued their buying spree as DIIs played counterpoint by selling. Net result was a slightly higher weekly close inside the long-term resistance zone between 19000 and 19800 on the weekly bar chart pattern of Sensex.

Note that the index has been trading within an upward-sloping channel since touching a low of 15136 in the week ending on Dec 23 ‘11. The top end of the channel is currently at 19800, which coincides with the top end of the resistance zone. That means 19800 may be a tough hurdle for the bulls in the near term.

The UPA government managed excellent floor coordination – particularly in the Rajya Sabha where they were in a minority – to sail through the vote on FDI in multi-brand retail in both houses of parliament. The news had already been ‘discounted’ by the market – as indicated by the lack of any buying euphoria.

Both the 20 week and 50 week EMAs are rising and the index is trading above them – which is the sign of a bull market in progress. That doesn’t mean the index will gain immediate upward momentum. Why? Because of two reasons – one fundamental and the other technical.

Fundamentally, nothing has changed on the ground. Winning the vote on FDI in multi-brand retail was an enabling step. Only 11 states/union territories have agreed to allow overseas chains like Walmart and Tesco to open stores. That doesn’t mean that stores will open anytime soon. It may take a year or two before government red-tape is successfully negotiated (read ‘bribes paid’) and actual investments are made.

Technically, weekly indicators are bullish but looking overbought. All four are also showing negative divergences by failing to touch new highs with the index. It is that time of year when FIIs may start taking some profits home before proceeding for their Christmas holidays. Expect the index to correct or consolidate before attempting to cross 19800.

NSE Nifty 50 index chart

The RBI governor has made it quite clear that till inflation gets controlled, there will be no further cuts in interest rates. However, a further reduction in CRR is likely. There seems to be ample liquidity in the financial system, and there are some signs of an increase in credit off-take.

Capital goods sector and infrastructure projects may take a while longer to get out of the doldrums. But the economic cycle seems to be bottoming out. Despite the slowdown, the Indian economy is still growing at rates that are much higher than those in Europe and USA. That is the real reason for buying by FIIs.

The daily bar chart pattern of Nifty has reached levels last seen in Apr ‘11. That is the good news. The bad news is that 5950 is a long-term resistance level. Also, not only are daily technical indicators looking overbought, but three of the four (marked by blue arrows) are showing negative divergences by failing to touch new highs.

There is a good possibility of some correction or consolidation before the 5950 level can be crossed. The upper end of the parallel channel within which Nifty has been trading for the past year is currently at about 6150. That will be the next level of resistance beyond 5950. On the downside, good combined support from the rising 20 day EMA and the 5750 level (at the lower end of the resistance zone) is likely.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are trading within long-term resistance zones. Some correction/consolidation can be expected before the resistance zones are overcome. This may be a good chance to enter some good stocks still available at reasonable valuations (just the kind of stocks recommended in my paid monthly investment newsletter).