BSE Sensex and NSE Nifty 50 index chart patterns – Jul 12, 2013

Infosys declared better then expected Q1 numbers with Narayanamurthy back at the helm. Bulls celebrated with a buying spree that propelled Sensex and Nifty to their third straight higher weekly closes. However, every silver lining is accompanied by a dark cloud.

IIP number surprisingly turned out to be negative 1.6%. CPI inflation rose almost to double digits - not so surprisingly - thanks to rising food prices due to higher cost of diesel. Oil’s price has gone past the $100 mark, putting pressure on the current account deficit. Gold imports have dropped a bit – mitigating the deficit somewhat.

Ministers of Finance and Commerce have gone west with begging bowls – a bit late in the day. Only time will tell whether they will be able to convince overseas investors to increase the flow of FDI into the country. Wish both these ministers made greater efforts to stop the flow of black money that continues to bleed the Indian economy.

BSE Sensex index chart

Despite the decelerating growth in the Indian economy, Sensex is showing a lot of bullish signals. This is a clear example of the stock market cycle ‘leading’ the economic cycle – as it generally tends to do. Bears may argue that the bullishness is due to the flood of liquidity in global markets – thanks to various ‘Quantitative Easing’ programmes. But haven’t the FIIs been selling of late?

As the old market saying goes: ‘The trend is your friend’. And the trend is definitely up, for more than 18 months. Let us look at the bullish signs in the Sensex chart above:

1. After touching a higher top in May ‘13, the index correction touched a higher bottom in Jun ‘13
2. On Jun 28 ‘13, Sensex jumped above its 200 day EMA with a ‘gap’ (marked ‘GAP 1’)– after spending 6 consecutive trading sessions below its long-term moving average
3. Sensex spent 9 consecutive trading sessions consolidating within a rectangular band just above its 200 day EMA; such consolidations usually turn out to be continuation patterns – so, no surprises when the index broke out and closed above the rectangular band on Jul 11 ‘13
4. On the last day of the week (Jul 12 ‘13), the index rose further with a ‘gap’ (marked ‘GAP 2’), and almost touched the psychological 20,000 level; break outs with gaps are considered to be ‘stronger’ than break outs without gaps
5. The 20 day EMA has bounced off the top of ‘GAP 1’ and is about to cross above the 50 day EMA; the Sensex is trading above all three EMAs
6. MACD signal line and ROC 10 day MA are forming bullish ‘rounding bottom’ patterns – just like they did in Apr ‘13.

Daily technical indicators are bullish. MACD has climbed into positive territory above its signal line. ROC is also positive, but has dropped to its rising 10 day MA. RSI and Slow stochastic are in their overbought zones. There is a possibility of a pullback that can take the index down inside the rectangular consolidation zone.

Why? Because volumes during past 3 weeks’ rally have been receding (not shown in chart above, but clearly shown in Nifty chart below). Also, the market didn’t get a chance to react to the poor IIP and CPI numbers. The likely dip can be used to add fundamentally strong stocks.

NSE Nifty 50 index chart

Small investors are often confused by daily volatility in stock indices and stay away – only to enter when the market rises to new highs. That is precisely the time not to enter. Unfortunately, their confusion is compounded by experts on TV who turn bullish or bearish depending on how the Nifty performs in a particular day.

The broader market comprising mid-cap and small-cap stocks – typically preferred by small investors because they tend to be ‘cheap’ – have not performed well. However, there are always exceptions. A few mid-cap and small-cap stocks have continued to perform against all odds. This is why stock selection and a long-term view should take precedence over daily index movements.

A look at the weekly bar chart of Nifty above should allay all doubts as to the direction of the stock market. The longer-term up trend (‘1’) from the Dec ‘11 low is intact. The shorter-term up trend (‘2’) from the Jun ‘12 low was breached intra-week, but remains intact also. (The ‘error trade’ of Oct 5 ‘12  is ignored for technical analysis, since it doesn’t appear on Sensex or Nifty Futures charts.)

The weekly technical indicators are turning bullish. MACD is about to cross above its signal line in positive territory. ROC is below its 10 week MA, but has bounced up from the ‘0’ line. RSI is moving up towards its overbought zone. Slow stochastic has crossed above its 50% level. However, falling volumes during the past 3 weeks may bring the rally to a halt soon.

Do not get swayed by doomsayers who have been predicting Nifty levels of 4500 and even 3000. While a ‘black swan’ event can change things overnight, there is no point in keeping your money ‘safe’ out of unwanted fear. It is better to stay invested and follow regular investment plans by maintaining suitable stop-losses.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are getting ready to rise to new highs on the back of bullish technical signals. However, fundamentals seem to be worsening, so some caution should be exercised. In other words, accumulate fundamentally strong stocks for the long-term but stay away from high-beta and ‘theme’ stocks.

(PS: If you are planning to add growth-oriented and fundamentally strong mid-cap/small-cap stocks to your portfolio, but are not sure which stocks to choose, book your paid subscription to my Monthly Investment Newsletter now. New subscriptions will be offered till July 21, ‘13.)