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Saturday, June 1, 2013

BSE Sensex and NSE Nifty 50 index chart patterns – May 31, 2013

The volatility in the Sensex movements last week seems to have stumped even seasoned investors and analysts. Too bad they don’t spend a little time looking at chart patterns and technical indicators, that had pointed to the possibility of the correction continuing for a while.

Heavy selling by FIIs on the last day of the week saw a steep fall in the index, but a slightly higher weekly close. The gyrations over the past two weeks have been within a small symmetrical triangle, from which the likely break out is upwards. Why? Because a triangle is usually a continuation pattern.

Since the triangle has formed after an up move, the break out should, logically, be upwards. But triangles are notorious for being unreliable. That means there can be a downward break out or even a negation of the pattern if the index rolls out through the apex of the triangle. In other words, any buying should be done with a strict stop-loss.

BSE Sensex index chart

SENSEX_May3113

Daily technical indicators are looking mildly bullish - except the ROC, which has dropped below its falling 10 day MA into negative territory. MACD is positive, but falling below its signal line. RSI is resting at its 50% level. Slow stochastic is ready to slip below its 50% level. Note that MACD and ROC are showing negative divergences by touching lower bottoms; but RSI and Slow stochastic touched higher bottoms along with the index. Such confusing and contradictory signals do occur during periods of consolidation.

The new up trend line (connecting the Jun ‘12 and Apr ‘13 bottoms) is intact. Both the 50 day EMA and 200 day EMA are rising, with the index trading above them. The consolidation within the triangle is providing an opportunity to add to existing holdings.

NSE Nifty 50 index chart

The drop below 5% in the Q4 GDP number wasn’t really a surprise for the market. Results announced by biggies like Tata Motors and M&M weren’t great, but beat expectations. Then why the selling by FIIs? Well, they can’t just go on buying every day. Some times profits need to be booked – otherwise how do you make money?

There were rumours of a buy-back announcement by Glaxo Pharma. The stock price spiked up in anticipation. A similar announcement some time back had done wonders to Glaxo Consumer stock’s fortunes. A low floor price announced for Novartis’ OFS (offer for sale) led to buying. Horrible results from Opto Circuits saw a steep drop in the stock’s price.

Nifty_May3113

Negative divergences in all four weekly technical indicators (marked by blue arrows) were observed last week. Some correction/consolidation was expected. Nifty closed flat on a weekly basis, and traded above both its 20 week and 50 week EMAs.

All four indicators are in bullish zones. There is no immediate threat to the bull market. However, to comply with SEBI’s orders, many companies are expected to offer shares for sale during June to bring down the promoter’s holding to 75% (for private sector)/90% (for public sector). Some liquidity will get diverted from the secondary market.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are consolidating after touching 2 year highs. Both indices should rise to new highs after the consolidation is over. Hold (or add to) existing portfolios.

(PS: If you are thinking of adding good mid-cap/small-cap stocks to your portfolio but are not sure which stocks to pick, book your subscriptions in advance to my Monthly Investment Newsletter. New subscriptions will be offered from July 1 ‘13.)

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