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Sunday, February 3, 2013

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 01, 2013

BSE Sensex index chart

In last week’s analysis of the weekly bar chart pattern of BSE Sensex, it was pointed out that weekly technical indicators were looking overbought, and some consolidation or correction was expected. The daily chart pattern of Sensex indicates that the expected correction has commenced.

After a brief foray above the upper edge of the upward-sloping parallel channel, the index has dropped below its 20 day EMA back inside the long-term resistance zone between 19000 and 19800. Is this the start of a big fall? Nothing can be ruled out in the stock market, but a big fall seems unlikely for two reasons.

The rising 50 day EMA should provide some support to the falling index. Stronger support can be expected from the 19000 level (lower edge of the resistance zone). Why? Because the index had breached the resistance of the 19000 level in end-Nov ‘12 with strong volume support (not shown in chart below). That usually indicates that the breached resistance will turn into a strong support.

SENSEX_Feb0113

FIIs continue to be net buyers, and their volume of buying and selling appears to be increasing. However, considerable DII selling swung the pendulum towards the bears last week. Some profit booking due to F&O expiry added to the bearishness. These are routine strategies.

Thanks to RBI’s recent policy action, which cut the repo, reverse repo and CRR rates by 25 bps (0.25%), the banking system will get increased liquidity. Hopefully, that will translate into increased borrowing by companies, and in turn rise in capital expenditure for productive purposes – leading to stronger top and bottom lines in the next few quarters.

Daily technical indicators are looking bearish, which means the correction isn’t over. MACD is positive, but has fallen below its signal line. ROC has dropped below its 10 day MA into negative territory. Both RSI and slow stochastic have slipped below their respective 50% levels. (Note that the RSI formed a small head-and-shoulders reversal pattern.)

NSE Nifty 50 index chart

Q3 results declared so far have been a mixed bag. Stocks with any hint of ‘infrastructure’ tagged to their business have been taking it on the chin. Lower top and bottom lines haven’t helped. The few positive surprises have been few and far between, and not enough to turn around negative sentiments of retail investors.

All eyes seem to be shifting towards the budget at the end of the month. For the past couple of years, the budget had turned out to be a non-event with incremental changes. It is unlikely that a pre-election year budget will make any drastic changes. The government is finally waking up about curtailing deficit through disinvestment of PSU shares and tweaking diesel price.

Nifty_Feb0113 

Nifty continues to trade within the upward-sloping parallel channel and well above its rising 20 week and 50 week EMAs. There is no immediate threat to the bull market. Any correction/consolidation will improve the technical health of the index and enable it to scale greater heights.

Weekly technical indicators are bullish, but showing signs of correcting from overbought conditions. MACD has started to drift down towards its signal line in overbought territory. ROC is positive, but dropping towards its 10 week MA. RSI has slipped below its overbought zone. Slow stochastic is well within its overbought zone, but gradually sliding down.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are correcting after touching 2 year highs. Such bull market corrections provide opportunities to enter and improve technical health of charts. Be selective about which stocks to buy. Sticking to proven performers never hurt.

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