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Saturday, July 27, 2013

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 26, 2013

Q1 results season is on in full swing. This is the time when the wheat gets separated from the chaff. Better results usually get declared early. Market leaders HUL and ITC declared decent sets of numbers. But slow volume growth for HUL and negative FMCG result for ITC led to some serious selling.

RBI’s efforts at shoring up the value of the Rupee through short-term liquidity squeeze seems to be working. However, growth may take a further hit if the liquidity squeeze is sustained through an increase in CRR. Bank stocks tanked in fear. Prices of oil and gold have stopped rallying, which should help reduce the CAD (Current Account Deficit).

Short-term focus of fund managers and market analysts are evident from the recent spate of ‘sell on rise’ calls. The good news is that the long-term bull market is intact, as can be seen from the weekly bar chart pattern of Sensex below. The bad news is that the index has traded in a sideways rectangular range year-to-date.

BSE Sensex index chart


The weekly bar on the Sensex chart shows a ‘reversal week’ (higher high, lower close) pattern that could lead to some correction or consolidation. Note that the index is trading above the blue up trend line and its two weekly EMAs, but it failed to get past its May ‘13 top by less than 100 points. Attaining a new high may take a little longer.

Weekly technical indicators are showing signs of weakness. MACD is just above its signal line in positive territory, but moving sideways. ROC is below its 10 week MA and has dropped into negative territory. RSI has bounced down from the edge of its overbought zone. Slow stochastic has reached the edge of its overbought zone, but its upward momentum has slowed down.

Downside support is expected from the 50 week EMA and the blue up trend line (both at around 19000). The Jun ‘13 low of 18467 can be maintained as a shorter-term stop-loss. A drop below 18467 will form a bearish pattern of lower tops and lower bottoms. 

NSE Nifty 50 index chart


The following warning was given in last week’s analysis of the daily bar chart pattern of Nifty 50: “The blue uptrend line from the Jun ‘13 low is a bit too steep. Such steep up trends don’t sustain for long.” Note that after moving higher during the first two days of the week, the index comprehensively breached the steep trend line.

This is another example of how technical analysis can provide advance warning of likely changes in direction. A test of, and possible drop below, the 200 day EMA appears likely. Just below the 200 day EMA is the ‘gap’ between 5700 and 5750 that formed on Jun 28 ‘13. There is a good chance the ‘gap’ will support the fall. Even if the ‘gap’ gets filled, the up move should resume thereafter.

Daily technical indicators are beginning to look bearish. MACD is positive, but has just crossed below its signal line. ROC has dropped very sharply below its 10 day MA into negative territory. Such sharp falls in ROC are seldom sustained. RSI bounced up a bit from its 50% level. Slow stochastic has slipped below its 50% level.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices faced temporary technical headwinds, and are undergoing corrections. There are no signs of a huge fall - being predicted by some experts. The dips can be used to add fundamentally strong stocks, but with appropriate stop-losses.

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