BSE Sensex and NSE Nifty 50 index chart patterns – Nov 08, 2013

After touching lifetime highs, both Sensex and Nifty indices retreated during a Diwali holiday-shortened trading week. Bears (read: DIIs) booked profits. FIIs remained net buyers, but were overwhelmed by the strong volume of DII selling.

Better than expected GDP growth in the USA and Dollar buying by PSU oil firms led to a weaker Rupee. Gold’s price dropped on fears of QE3 tapering sooner than later due to signs of strength in the US economy.

Tech Mahindra and Tata Motors announced strong Q2 results. However, stand-alone numbers of Tata Motors were disastrous. Domestic passenger vehicle and commercial vehicle sales nose-dived. A pick up in CV sales will be an indication of a recovering economy.

BSE Sensex index chart

In last week’s analysis, negative divergences were observed in all four technical indicators and overbought conditions in three of the four indicators led to the following remarks: “A few days of correction/consolidation will remedy the overbought condition and improve the technical ‘health’ of the chart pattern. The likely dip will be another opportunity to add.”

All four technical indicators also formed reversal patterns in their overbought zones, with MACD, ROC and Slow stochastic forming double-tops and RSI forming a head-and-shoulders pattern. So, will all these technical headwinds end the bull market?

The short answer is: No. Bull markets usually end in euphoria, with stock tips flooding the Internet and every one and his brother-in-law buying junk stocks. There is not even an iota of any euphoria. On the contrary, experts have already started predicting much lower levels for the index.

The correction may last a little longer and go a little deeper, but it should remain a bull market correction that is providing an opportunity to add.

NSE Nifty 50 index chart

The weekly bar chart pattern of NSE Nifty is in the midst of another bull market correction, but is trading above both its 20 week and 50 week EMAs and the long-term up-trend line (in blue). Such corrections help the index to gather strength for the next up move, and also offer opportunities for adding to existing holdings.

Weekly technical indicators are bullish, but beginning to correct from overbought conditions. Some more correction may be on the cards. Is this a good time to enter the market for new investors?

A good time to enter the market is when you have the money. Index level wise, Jun ‘12 and Aug ‘13 were better times to enter. But one needs courage, conviction and experience to buy during sharp dips.

Note that the up-trend is almost 2 years old. Low-hanging fruits have already been plucked. Most new investors would be better off regularly investing a part of their monthly savings in a recurring deposit scheme and a part in a balanced fund. Gain experience and knowledge before jumping into the stock market.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in corrective modes after touching life-time highs. Many fundamentally strong mid-cap and small-cap stocks are still available at reasonable valuations – provided one takes a longer-term view of the market. Such stocks can be accumulated gradually.

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