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Saturday, March 2, 2013

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

BSE Sensex index chart

For the past few years, the Budget had become a non-event for the markets – as it should be. It is like reading an Annual Report of a company. Past year’s results are already known. Next year’s projections are full of ‘forward-looking statements’ that will mostly remain unfulfilled.

So, why did the Sensex tank 300 points after the budget provisions were announced? Apparently there was some ambiguity regarding how the tax department may treat tax residency certificates of FIIs (who route investments through Mauritius).

The Finance Minister has promised to clear up the ambiguity during introduction of the Finance Bill in Parliament. That seemed to allay fears of FIIs for the time being, and the index bounced up a bit by the end of the week.

Sensex_Mar0113

Technically, the damage was done even before the budget. Sensex broke downwards from a small ‘head-and-shoulders’ pattern – with the ‘head’ at the upper edge of the upward-sloping channel; the left and right ‘shoulders’ and the  ‘neck line’ formed within the resistance zone (between 19000 and 19800).

Note that the weekly bar has dropped below the 20 week EMA and the 19000 level. A ‘head-and-shoulders’ pattern has measuring implications. The height of the ‘head’ above the ‘neck line’ is about 900 points. So, the downward target below the ‘neck line’ should be 900 points. That means a downward target of about 18400, which is slightly below the current level of the 50 week EMA.

Weekly technical indicators are beginning to turn bearish. MACD has crossed below its signal line and dropped from its overbought zone. ROC is below its 10 week MA and has fallen into negative zone. RSI is sliding towards its 50% level. Slow stochastic has slipped below its 50% level.

Can the Sensex fall lower – towards the lower edge of the channel? The possibility can’t be ruled out. However, there is a ‘gap’ area between 18000 and 18200 on the daily Sensex chart. That should provide support in case Sensex falls below 18400.

NSE Nifty 50 index chart

The Q3 GDP number was a real disappointment and confirmed that economic growth is slowing almost to a stop. The lack of governance is the main reason – though the FM and many industrialists are adept at pointing fingers towards the RBI.

Creating infrastructure and enabling policies suitable for investments should be the top priority for the government. But it has failed miserably on both fronts. Nothing has been done to curb corruption and the proliferation of a parallel economy. No wonder flow of FDI has come down.

Nifty_Mar0113

The daily bar chart pattern of Nifty clearly shows the break down below a multiple ‘head-and-shoulders’ pattern. The ‘left shoulder’ (marked LS) actually comprises two small shoulders. Similarly, the ‘right shoulder’ (marked RS) also comprises two small shoulders. In-between, the ‘head’ formed a small ‘double-top’ pattern.

The height of the ‘head’ above the ‘neck line’ (marked by thick blue down arrow) is about 280 points. The downward target below the ‘neck line’ (also marked by blue down arrow) is also 280 points – giving a target of about 5550 (below the current level of the 200 day EMA).

Despite the huge volume bar on budget day (Feb 28) – the highest daily volume since Feb 17 ‘12 – the index didn’t fall below the rising 200 day EMA. Bulls may try to take some solace from that.

Daily technical indicators are looking bearish and oversold. Note that all four indicators showed negative divergences by touching lower tops (marked by slender blue arrows) while the index rose higher from the ‘left shoulder’ towards the ‘head’.

Nifty has a ‘gap’ area between 5450 and 5500 (though it was ‘filled’ by an error trade on Oct 5 ‘12 that should be ignored). This ‘gap’ area is likely to provide support in case the index falls below 5550.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have broken down below ‘head-and-shoulders’ reversal patterns. Both patterns are relatively small in size, so the downside should be limited. This is still a bull market correction – as both indices are trading above their long-term moving averages. Use the dip to add fundamentally strong stocks.

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