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Saturday, December 14, 2013

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 13, 2013

Before the green shoots of economic recovery could grow into healthy growing plants, some one seems to have trampled all over them. The IIP number was a disappointing negative 1.8% – though the pundits put a positive spin on it by pointing to a high base effect.

The CPI inflation number was equally disappointing – climbing more than a percentage point to 11.24%, thanks to rising food prices. The RBI governor may have no alternative but to raise the repo and reverse repo rates by at least 25 bps, may be even 50 bps.

DIIs continued to be net sellers and overwhelmed FII buying. After touching new lifetime highs on the first day of the week, both Sensex and Nifty corrected sharply – much like they had done after touching their respective Nov ‘13 tops.

What is going on? Why is there so much fear among investors? Are they suffering from ‘recency bias’ – remembering what happened after indices touched their tops in Jan ‘08 and Nov ‘10? Is history going to repeat itself, or will this time be different? Let us look at the charts below to find answers.

BSE Sensex index chart

$BSE-001-001

The 6 months daily bar chart pattern of Sensex touched a new lifetime high on Mon. Dec 9 ‘13, but all three daily technical indicators failed to do so. Slow stochastic formed a double-top reversal pattern inside its overbought zone. These bearish signs warned of a likely correction, which came swiftly.

It is obvious that domestic investors are selling at every rise – not convinced about the 2 years long bull market that started from the Dec ‘11 bottom. But ‘sell on rise’ is a strategy to be followed during bear markets. When a bull market is clearly climbing a ‘wall of worries’ – buy the dips.

Sensex is near a support/resistance zone between 20000 and 20500 (marked by blue horizontal lines). The 50 day EMA is just above this zone. The index can be expected to bounce up from the zone, but probably after correcting a bit more. Why?

Daily indicators are looking bearish, but remain in bullish zones. That means the correction isn’t over yet. MACD has dropped down to touch its signal line in positive territory. RSI has just slipped below its 50% level. Slow stochastic is falling towards its 50% level.

The correction is providing another adding opportunity.

NSE Nifty 50 index chart

$CNXN-001-001

The 2 years weekly bar chart pattern of Nifty touched a new lifetime high, but formed a ‘reversal week’ pattern (higher high, lower close) to drop inside the support/resistance zone between 6100 and 6200 (mentioned in this update).

A reversal pattern usually marks the end of an intermediate trend, but there are a couple of technical reasons why the index may bounce up from here: (1) the index is within a support/resistance zone; (2) the index has pulled back towards the ‘falling wedge’ pattern from which it broke out in the previous week. Such pullbacks provide buying opportunities.

Weekly technical indicators are bullish, but showing signs of weakness. MACD is above its signal line in positive territory, but its upward momentum has slowed down. RSI is above its 50% level, but forming a head-and-shoulders reversal pattern. Slow stochastic is about to drop below its overbought zone.

Note that RSI and Slow stochastic are showing negative divergences by failing to touch new highs with the index. Expect the correction to continue for a few more days.

Still not convinced about the 2 years long bull market? Just take a look at the 200 week EMA (in green) on the Nifty chart. It has been rising continuously since Jan ‘12 – despite Nifty dropping below it briefly in May ‘12 and Aug ‘13.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are undergoing bull market corrections after touching new lifetime highs. The corrections are providing opportunities to add fundamentally strong mid-cap and small-cap stocks that are still available at reasonable valuations. Both indices should resume their up moves soon.

(Note: Still undecided about buying stocks? It is a bull market! Learn how to choose fundamentally strong mid-cap and small-cap stocks. Register for a paid subscription to my Monthly Investment Newsletter. A limited number of new subscriptions will be offered during Jan. 2014. Contact me for details:mobugobu@yahoo.com)

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