Amazon deals

Saturday, January 19, 2013

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 18, 2013

BSE Sensex index chart

The inevitable happened. The daily bar chart pattern of the BSE Sensex index finally breached the resistance level of 19800, and is now testing the resistance of the upper edge of the blue upward-sloping channel.

Resistance (and support) levels act as thin rubber membranes or bands. By getting tested a few times in quick succession, they tend to break. That is what happened during the first two weeks in Jan ‘13. After testing the 19800 level a few times, the index broke out above it.

The index closed the week above the psychological 20000 level for the first time in 2 years. All three EMAs are rising, and the index is trading above them. The bulls are clearly in control. So, is this a good time to buy?

Sensex_Jan1813

A general answer is: Any time is a good time to buy if you have the money. A more specific answer is: No. Why? Look at recent history, and the state of the technical indicators (all four showed negative divergences by touching lower tops while the index rose higher).

In Feb ‘12, Sensex had touched the upper edge of the blue channel, but formed a ‘reversal day’ pattern and started a 3 months long correction that reached the lower edge of the channel. This time, no such ‘reversal day’ pattern is visible, but last Friday’s (Jan 18 ‘13) opening and closing levels were the same – which indicates indecision (‘doji’ for candlestick fans), and a possible turning point.

Q3 results declared so far have been quite good – particularly those from market favourites TCS, ITC and RIL. FIIs remain net buyers. The chances of a correction down to the lower edge of the channel may be low. However, a correction that takes the index down within the resistance zone is a possibility.

NSE Nifty 50 index chart

Will the RBI governor finally cut interest rates this month? WPI inflation reduced a bit, but stayed above 7%. CPI inflation rose back to double-digits. With most Q3 results coming in at or above expectations, the economic slowdown seems to have bottomed out.

The government has started taking baby steps towards reducing its huge deficit – through share divestment by PSUs and de-regulation of diesel prices. At best, a 25 bps cut in the repo and reverse repo rates can be expected. A 50 bps cut will cheer the market. Maintaining status quo on interest rates will be a dampener.

Nifty_Jan1813

Weekly technical indicators are bullish, but looking overbought. MACD is positive and rising above its signal line inside overbought territory. ROC is also positive and rising above its 10 week MA. RSI is about to enter its overbought zone. Slow stochastic has remained inside its overbought zone for almost 6 months.

Three of the four technical indicators – ROC, RSI, slow stochastic – are showing negative divergences by failing to reach new highs. Last week’s up-week volume bar is lower than the previous week’s down-week volume bar. Caution should be exercised at a 2 years high, though both the 20 week and 50 week EMAs are rising with Nifty trading above them.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have reached 2 year highs. Daily and weekly technical indicators are showing negative divergences. Analysts have started issuing significantly higher targets. This is a good time to book some partial profits.

(Note: Regardless of index movements, there are some fundamentally strong stocks with growth prospects that are available at reasonable valuations. My paid Monthly Investment Newsletter recommends such stocks. Subsequent monthly technical updates identify entry/exit points. A limited number of new subscriptions are being offered till Jan 21, 2013. Contact me at mobugobu@yahoo.com for details.)

No comments: