BSE Sensex and NSE Nifty 50 index chart patterns – Oct 18, 2013

An 11th hour temporary resolution of the US fiscal impasse caused global markets to rise towards new highs. Tapering of bond buying by the US Fed may be kept in abeyance till the end of the year. Bulls would like to use the window of opportunity before the whole debt-ceiling drama gets re-enacted at the beginning of 2014.

Both WPI and CPI inflation is on the rise again. A protracted monsoon followed by cyclone devastation in a few states have sent food prices soaring upwards. RBI may be left with no option but to keep interest rates high. Signs of revival in exports and manufacturing may get nipped in the bud. All the negative news got swept aside by good Q2 results from L&T and large-cap IT stocks.

Sensex and Nifty indices touched new highs, supported by FII buying. However, the Sensex chart below is showing a short-term technical barrier. The longer-term Nifty chart below is poised to rise significantly higher. Bulls appear ready to take complete control.

BSE Sensex index chart

The 1 yr daily bar chart pattern of BSE Sensex touched a new 52 week (and 2 yrs) high on Fri. Oct 18 ‘13. All three EMAs are rising and the index is trading above them. The bulls are clearly regaining control, but haven’t quite done it yet. Why?

All four daily technical indicators touched lower tops while the index touched a higher top. The combined negative divergences (marked by blue arrows) is likely to halt the bull rally temporarily. Also, all four indicators are looking overbought – ROC and RSI are at the edge of their overbought zones while MACD and Slow stochastic are inside their overbought zones.

The combination of overbought indicators displaying negative divergences should lead to some correction or consolidation. For those who are still waiting to enter at much lower levels, the likely dip may be the last chance to pick up fundamentally strong stocks at reasonable valuations.

NSE Nifty 50 index chart

The 3 yrs weekly closing chart pattern of NSE Nifty has formed a large ‘cup-and-handle’ pattern, which is a bullish continuation pattern with measuring implications. Since Nifty was in a bull market when it touched its Nov ‘10 high, the eventual break out from the ‘cup-and-handle’ pattern should occur above the ‘rim’ of the ‘cup’ (marked by dotted horizontal line at about 6175).

The depth of the ‘cup’ – from the ‘rim’ to its closing low of 4625 touched on Dec 30 ‘11 – is 1550 points. That provides an upward target of 7725 (= 6175+1550). Note that technical analysis is not a science, and targets are approximate based on empirical observations. Also, the break out above the ‘rim’ should be accompanied by a significant increase in volumes – otherwise the break out may turn out to be a ‘false’ one.

The rally since the completion of the ‘handle’ in Aug ‘13 has been on falling volumes – partly due to several intervening trading holidays in the past 6 weeks. However, the ‘rule’ of stronger volumes on an upward break out holds regardless.

All four weekly technical indicators are looking bullish, with ROC and Slow stochastic entering their overbought zones. Expect some correction or consolidation before the eventual upward break out occurs.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices touched new 52 week (and 2 yr) highs as expected. Technical headwinds may stall the bull rallies temporarily – providing adding opportunities. Both indices should move up to touch life-time highs in the near future.