BSE Sensex and NSE Nifty 50 index chart patterns – Apr 05, 2013

BSE Sensex index chart

Two days of net selling by FIIs last week and already the market is in a panic. Interestingly, DIIs turned net buyers – but their buying could not stop the Sensex from dropping below its 200 day EMA. Retail investors had mostly stayed away from the market during the rally from Jun ‘12 to Jan ‘13. They may continue to run scared – and miss opportunities for buying that such corrections provide.

Q4 and annual results are just around the corner. But there is unlikely to be many positive surprises – considering the slowdown in GDP growth and delay/postponement of large projects. These are times when the men get separated from the boys. So, look out for good performers – not on the basis of one quarter’s results, but for the year as a whole.

Small investors have a penchant for obscure mid-cap and small-cap stocks, in the hope of latching onto multibaggers. But during a downtrend in the Sensex, small and mid-cap stocks fall a lot more. So this is a good time to pick large-cap stocks. Once the market starts showing signs of recovery, then think of buying mid-caps and small-caps.

The index has dropped close to the ‘gap’ area between 18060 and 18290 that was formed back in Sep ‘12. The ‘gap’ acted as support in Oct ‘12 and Nov ‘12. A bounce from the ‘gap’ area is a possibility. What if the ‘gap’ gets filled? Chances are that the index is likely to resume its up move thereafter.

The Sensex appears to be correcting its entire up move from the Dec ‘11 low of 15136 to the Jan ‘13 top of 20204. The 38.2% Fibonacci retracement level of the up move is at 18270 – inside the ‘gap’ area marked by dotted lines in the chart above. The 50% retracement level of the up move is at 17670 – which is close to the Apr ‘12 top of 17664 and Jul ‘12 top of 17632.

Since the index doesn’t understand arithmetic, it is better to look at previous tops for support. So, observe index action near the ‘gap’. If the ‘gap’ gets filled, then look for support around 17650. If that gets breached, then it is likely to be a change of trend from bull to bear.

Daily technical indicators are looking bearish and oversold. MACD is falling below its signal line towards its oversold zone. ROC has bounced up from its oversold zone and crossed above its 10 day MA, but remains negative. RSI and slow stochastic have dropped back inside their oversold zones. Note that MACD, ROC and slow stochastic are showing positive divergences by not falling lower with the Sensex. A bounce towards the 200 day EMA can be expected.

NSE Nifty 50 index chart

With the stock market in a jittery mode, any remotely negative news is causing more selling. BJP’s L K Advani hinted at an early Lok Sabha election, and FIIs started selling. But the selling was not limited to India. Profit booking took place across Asia, Europe and USA.

Government’s efforts at curtailing inflation, managing deficits and promoting investments have been a failure. Periodic inflated tax demands on foreign entities have not helped. There are rumours about arm-twisting of telecom players to force them to participate in spectrum auctions. Instead of enabling new investments, government seems to be dissuading foreign investors. No wonder inflow of FDI has been paltry.

The weekly bar chart of Nifty has closed below its 50 week EMA for the first time since Jul ‘12. Weekly technical indicators are suggesting that worse may follow. MACD is falling below its signal line towards its negative zone. ROC is dropping deeper into negative territory below its 10 week MA. RSI is about to fall into its oversold zone. Slow stochastic has already entered its oversold zone.

How low can the Nifty fall? The 38.2% Fibonacci retracement level of the entire up move from the Dec ‘11 low of 4531 to the Jan ‘13 top of 6112 is about 5510. That is inside the ‘gap’ area between 5450 and 5525 formed in the daily chart (shown here) back in Sep ‘12. The 50% Fibonacci retracement level of the up move is at 5320 (which is close to a long-term support/resistance level of 5340).

Since technical analysis deals with approximate and not exact levels, 5300 can be taken as the ‘trend decider’ level. A fall below may push Nifty into a bear market.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have dropped close to their respective ‘gap’ areas formed back in Sep ‘12. Both indices may bounce up from the ‘gaps’. Filling of the ‘gaps’ is possible – specially if FIIs continue to sell. However, both indices are expected to resume their up moves. Keep accumulating fundamentally strong stocks – but keep strict stop-losses.