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Saturday, March 9, 2013

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 08, 2013

BSE Sensex index chart

In last week’s post, it was observed that the Sensex had broken down below the ‘neck line’ of a small head-and-shoulders reversal pattern, but had received good support from its long-term moving average. Head-and-shoulders patterns have measuring implications. The Sensex was expected to drop to 18400 (a little below the level of the 200 day EMA).

During last week’s trading, the Sensex started a pullback towards the ‘neck line’ of the head-and-shoulders pattern. Such pullbacks offer selling opportunities – but the pullback continued past the ‘neck line’ and has possibly negated the reversal pattern.

How does one protect oneself from such a pattern failure? By keeping a stop-loss at the level of the ‘right shoulder’ (RS). Note that Sensex has reached the level of the ‘right shoulder’ but has not crossed it yet.

Sensex_Mar0813

There are two possible moves that the Sensex can make now: 1) continue upwards to touch a new high; 2) turn back and drop below the long-term moving average to meet the downside target of the head-and-shoulders pattern (and fall a little lower to fill the ‘gap’ between 18000 and 18200 formed in Sep ‘12).

Though counter intuitive, a further up move may be bearish. Why? Because there is no denying that Sensex formed a head-and-shoulders reversal pattern (that appears to have failed). Formation of any reversal pattern should be treated with respect. Even if it fails, it is quite likely that a further up move may lead to a much deeper correction.

A turnaround and drop below the 200 day EMA may be bullish. It will meet the downside target of the head-and-shoulders pattern and may even fill the ‘gap’ in the chart. That means the Sensex is unlikely to fall much below 18000. The subsequent up move will be stronger.

Daily technical indicators are looking bullish. MACD is negative, but has crossed above its signal line. ROC has climbed above its 10 day MA into positive territory. Both RSI and slow stochastic have risen above their respective 50% levels.

A further up move seems likely – provided the FIIs continue buying. A few PSU share divestments are planned over the next three weeks. That can divert attention and funds to the primary market.

NSE Nifty 50 index chart

Will he – won’t he? Many market players are wondering whether the RBI Governor will cut interest rates some more this month. The Governor has already shown that he is conservative and can resist pressure from the Finance Minister to cut rates.

CPI inflation remains high, though WPI is beginning to come down (probably more due to base effect). At most a 25 bps cut can be expected, if at all. Such a cut is unlikely to spur an industrial revival in the near term. With Q4 results unlikely to be a great improvement over Q3 results, the stock market will grasp at any straws.

Nifty_Mar0813

A small reversal pattern generally causes a small correction. But the break down below the small head-and-shoulders pattern visible on the weekly bar chart pattern of Nifty was even smaller than expectation (i.e. failed to meet downside target of 5550).

Good support from the 50 week EMA prevented a deeper fall. A pullback has already breached the ‘neck line’ (marked by blue line) on the up side. Last week’s lower volumes puts a question mark on the sustainability of the up move.

Weekly technical indicators are turning bullish. MACD is below its signal line in positive territory, but has stopped falling. ROC is below its 10 week MA, but has entered positive zone. RSI is moving sideways just above its 50% level. Slow stochastic is also moving sideways just below its 50% level.

Nifty needs to move above its recent top of 6111 to maintain a bullish pattern of higher tops and higher bottoms.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have pulled back after breaking down below small head-and-shoulders reversal patterns. If up moves touch new highs, deeper corrections may follow. If down moves resume, long-term moving averages may get breached. Both indices are in bull markets – but near 2 year highs. No need to panic or feel euphoric. Stay cautiously optimistic.

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