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Saturday, August 17, 2013

BSE Sensex and NSE Nifty 50 index chart patterns – Aug 16, 2013

Whenever there is unusual movement in stock indices, experts fall over each other to explain why. As if they know – and it really matters. There were no dearth of explanations for last Friday’s ‘crash’:

  • rumours of control of forex outflows being extended to FIIs;
  • more rumours about increasing margin requirements for short selling;
  • improvement in US employment numbers that may lead to early tapering of QE3;
  • fall in the value of the Rupee as FIIs hit the exit doors.

Take your pick. One reason for the ‘crash’ that no one mentioned was ‘wish-fulfillment’. For the past several weeks, fundamental and technical analysts have been predicting a big crash in India. So, when FIIs started to sell last Friday, every one jumped onto the bandwagon. Except for DIIs – they absorbed all that FIIs sold, and then bought some more.

Did anything change fundamentally or technically before or after the sell-off? The IIP number was again negative. CPI inflation dropped a bit, but WPI inflation rose. So, chance of reduction in repo rate is low. Let us look at the Sensex and Nifty charts below for technical guidance.

BSE Sensex index chart

SENSEX_Aug1613

The recovery in the daily bar chart pattern of Sensex during the first three days of a holiday-shortened week stalled at the 50 day EMA. Friday’s selling spree brought down the Sensex to a slightly lower close for the week. The index has closed below all three EMAs in bear territory.

Despite the 700 points fall, the bulls are still very much in the game. The ‘gap’ formed back in Sep ‘12 (marked by blue dotted parallel lines) has been providing support to the Sensex. The longer-term up trend – connecting the Dec ‘11 and Jun ‘12 lows – is still intact. Even if the ‘gap’ gets filled, the up trend line is likely to provide support.

Daily technical indicators had corrected from oversold conditions, but are once again looking oversold. MACD is falling below its signal line in negative territory. ROC failed to move back into positive zone, and is about to cross below its 10 day MA in negative zone.. RSI has slipped back into its oversold zone after a failed attempt to emerge. Slow stochastic couldn’t quite move up to its 50% level, and is falling towards its oversold zone.

Stay invested, with a stop-loss at the up trend line (at about 17500).

NSE Nifty 50 index chart

Nifty_Aug1613

The weekly bar chart pattern of Nifty closed below both its weekly EMAs for the third week in a row, and is testing the lower edge of the rectangle pattern (marked by blue dotted lines) within which the index has traded since Sep ‘12.

Weekly technical indicators are looking oversold. MACD has dropped below its signal line into negative territory. ROC is at the edge of its oversold zone, and well below its falling 10 week MA. RSI is about to enter its oversold zone. Slow stochastic has dropped inside its oversold zone.

The lower edge of the rectangle is at 5477. The current level of the blue up trend line is at about 5430. Expect the bulls to put up a fight in the zone between 5430 and 5477. A convincing breach below the trend line may mark a change of trend from bull to bear.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are undergoing corrections within a longer-term consolidation pattern. Q1 results and other macroeconomic data are disappointing. But the government has belatedly taken some steps to steady the market. The negative sentiment can be used to add fundamentally strong stocks, but keep a long-term view and maintain appropriate stop-losses. Stick to regular investment plans that are already in place.

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