BSE Sensex and NSE Nifty 50 index chart patterns – Feb 15, 2013

BSE Sensex index chart

In last week’s analysis, it was mentioned that the correction wasn’t over and may last a bit longer. On the weekly bar chart pattern of the BSE Sensex index below, note that three weeks of correction has brought the index down to the middle of the long-term resistance zone between 19000 and 19800.

The good news for the bulls is that the index is still trading above its rising 20 week and 50 week EMAs, which means the long-term bull market is intact – and will remain so as long as FIIs continue to buy. The bad news is the relentless selling by DIIs – partly due to redemption pressure from retail investors in mutual funds.

There has been concern in some investment groups – particularly those which put their faith on Elliott Waves – that the index may crash and breach the Dec ‘11 low. As of now, there are no signs of a crash on the chart.

Weekly technical indicators have corrected from overbought conditions, but are not bearish yet. MACD has crossed below its signal line, and dropped from its overbought zone. ROC has crossed below its 10 week MA and is resting on the ‘0’ line. RSI is moving sideways above its 50% level. Slow stochastic has slipped down from its overbought zone.

The correction is likely to continue a bit longer. There should be good support at the 19000 level. A drop below 19000 may change the equation in favour of the bears.

NSE Nifty 50 index chart

Q3 results are over. They have been largely as per expectations, with a few positive and negative surprises here and there. The domestic business of Tata Motors and the overseas business of Tata Steel were in the red. Revival of the infrastructure sector is a few quarters away.

Efforts to reduce the government’s fiscal deficit through PSU disinvestments and oil price hikes are ongoing. The latter is likely to stoke the embers of inflation, and reduce RBI’s option of reducing interest rates. A Catch-22 situation.

The daily bar chart pattern of NSE Nifty 50 index has dropped below its 20 day and 50 day EMAs, and is in the middle of the resistance zone between 5750 and 5950. The index is trading above its rising 200 day EMA, so the bull market is under no immediate threat.

All four daily technical indicators are not only bearish, but also showing negative divergences by touching lower bottoms (marked by blue arrows), while the index touched a higher bottom.

A continuation of the correction is the logical outcome. But the market doesn’t necessarily move on logic. Any selling by FIIs – who have been net buyers since Jun ‘12 – can lead to a sharp drop. A halfway decent budget can change the current negative sentiment.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have continued with their corrections, and have dropped inside their long-term resistance zones. Will the resistance zones turn into support zones? The forthcoming budget proposals may provide the trigger. To protect profits, stop-losses can be placed at the lower edges of the respective resistance zones.