BSE Sensex and NSE Nifty 50 index chart patterns – May 24, 2013

BSE Sensex index chart

Sensex reversed direction last week – the sharp fall coming as a surprise to many analysts and investors, who are once again fearing a big crash. Readers of this blog received ample warning about a correction/consolidation in last week’s post, where negative divergences in all four weekly technical indicators were pointed out.

Several reasons were put forth for the ‘sudden’ fall: Bernanke’s statement that unlimited bond buying in the US (a.k.a QE3) may be tapered down if the US economy shows continued improvement; slowdown in China’s GDP growth rate; recession in Europe. Technically, stock markets in US, UK and India were overbought, and some profit booking was inevitable.

So, is it just a correction or a change of trend? FIIs are still buying – though they were net sellers on Friday (May 24 – the only day the Sensex closed higher last week!). The blue uptrend line remains intact. the 200 day EMA is still rising. The index received support from its 50 day EMA, and formed a ‘reversal day’ pattern (lower low, higher close). All these point to a correction of the rally from the April bottom.

The daily technical indicators are showing a more bearish picture. MACD has crossed below its signal line after forming a double-top reversal pattern inside its overbought zone. ROC formed a head-and-shoulders reversal pattern in its overbought zone and has dropped below its 10 day MA into negative territory. RSI has fallen below its 50% level. Slow stochastic has dropped to the edge of its oversold zone.

The correction may continue next week. While the possibility of a trend reversal can’t be entirely ruled out – it can come into consideration only if the blue uptrend line (currently at about 18500) is breached. (Remember that this is a new uptrend line – the earlier one connecting the Dec ‘11 and Jun ‘12 lows and marking the long-term bull market is at 17200).

NSE Nifty 50 index chart

There were some negative surprises from large-cap companies at the tail-end of Q4 results season. SBI, L&T, Tata Steel disappointed. L&T announced a 1:2 bonus in an effort to stall the slide in its stock price. Tata Steel’s result was affected by a one-time charge, so the stock price reacted positively.

The IPL spot-fixing scandal is turning out to be like a script of a B-rated film – with players, umpires, team managements, movie stars, politicians, bookies, underworld dons, police – all playing important roles. The rot of corruption and ‘hawala’ money has entered every pore and cell of India’s moneyed classes. The stock market is not immune to this rot.

The weekly bar chart of Nifty touched a new 2 years high but closed lower – forming a ‘reversal week’ pattern. All four weekly technical indicators are showing negative divergences by touching lower tops (marked by blue arrows). Though the indicators are still in bullish zones, they are beginning to turn bearish.

A drift down towards the 50 week EMA or the blue uptrend line are possibilities. The bull market is intact and under no immediate threat. The dip is an opportunity for adding to existing holdings.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are undergoing corrections after touching 2 year highs. Such corrections improve technical health of indices and provide opportunities for adding. Remember to use stop-loss limits in case the market turns against you.