BSE Sensex and NSE Nifty 50 index chart patterns – Jan 25, 2013

BSE Sensex index chart

The weekly bar chart of Sensex has closed above the 20000 level for two consecutive weeks. That should be cause for celebration, right? But talking heads on business channels as well as retail investors seem to be suffering from a strange ennui. Forget about celebrating – there is almost an underlying feeling of ‘Oh God! Not again’ about what is likely to happen next.

Anecdotal evidence from brokers and investment group chat zones indicate that retail investors may have been influenced by the title of a hilarious Woody Allen movie called “Take the Money and Run”. Jot it down as another example of recency bias. Every one seems to remember what happened in Jan 2008 and Nov 2010 – the previous two occasions when Sensex crossed the 20000 mark.

But this time it is different. In Jan 2008, the index had gained 6 times after a 5 years long bull period and in Nov 2010, the index had gained almost 2 times after a 2 years long bull period. This time the gain is just 33% after 1 year of bullishness. The earnings of Sensex stocks have increased, so Sensex valuation has not yet reached stratospheric levels – though valuation is no longer mouthwatering.

Note that the Sensex has crossed the resistance zone between 19000 and 19800 and has closed just above the parallel channel within which it has traded for the past 13 months. Some hesitation is to be expected near a previous high, but it doesn’t call for a sell-out from existing holdings.

Both weekly EMAs are rising and the index is above them – the sign of a bull market. Weekly technical indicators are bullish but looking overbought. Some consolidation or correction is likely. Book some partial profits if you are feeling jittery. Otherwise, hang on to existing holdings, and add more on dips.

NSE Nifty 50 index chart

It is amusing how the Congress Party is trying to project Rahul Gandhi as its saviour for the 2014 elections. The guy has displayed good intentions, but seems to lack political acumen. The main opposition party is in disarray with too many leaders jockeying for position. Looks like coalition politics will be the only realistic outcome.

That means a back seat for tough decisions – like labour reform and reduction of subsidies and populist measures. The parallel economy will continue with the politician-business-underworld nexus ruling the roost. The ordinary citizens of the country will suffer the effects of inflation and poor governance. Kudos to Indian entrepreneurs for succeeding despite such overwhelming odds.

The daily bar chart pattern of Nifty spent Dec ‘12 inside the resistance zone between 5750 and 5950. All of Jan ‘13 has been spent above the resistance zone with the 20 day EMA providing downside support. All three EMAs are rising, with Nifty trading above them. Bulls are clearly in charge.

Daily technical indicators are bullish, but showing negative divergences by failing to touch new highs with the index. Some consolidation or correction is likely. FIIs are still net buyers. DIIs have been selling – with one noteworthy exception. LIC’s Chairman mentioned in a TV interview that the company has been a net buyer of equity shares.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are at 2 year highs. Weekly technical indicators are looking overbought and daily indicators are showing negative divergences. Watch out for some consolidation or correction. It will help improve the technical health of the charts and enable both indices to move to new highs. Concentrate on fundamentally strong stocks with low debt and growth prospects.