Saturday, February 1, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 31, 2014

A global sell-off in equity markets dropped both Sensex and Nifty indices towards the lower edge of the rectangular consolidation patterns within which both indices have been trading for the past 4 months.

Concerns about slowing growth and a possible credit crisis in China led to the initial sell-off. Growth concerns and currency instabilities in emerging economies and a rate hike by RBI further strengthened the bears. FIIs and DIIs were net sellers last week - and for the entire month of Jan. ‘14.

Is it the beginning of the crash that every one was expecting? Is it time to move into cash and await the bear onslaught? The headlines and TV experts may make you believe so. What are the charts foretelling? Let us have a look.

BSE Sensex index chart


Sensex opened with a downward gap on Mon. Jan 27 that pushed the index below its 20 day and 50 day EMAs. Another downward gap on Thurs. Jan 30 saw the index fall towards its 200 day EMA and the lower edge of the rectangle.

Observant readers may notice that Sensex recovered considerably from its Thursday low and closed almost near the day’s high. (In candlestick terminology, a ‘hammer’ has formed – which means the correction may be coming to an end.)

Daily technical indicators are looking bearish and a bit oversold. MACD has fallen sharply below its signal line into negative zone. ROC is below its 10 day MA - trying to turn up from near the edge of its oversold zone. RSI has dropped to the edge of its oversold zone (and is showing positive divergence by not falling lower). Slow stochastic is inside its oversold zone.

Some more correction can’t be ruled out, but buying interest is likely to emerge if Sensex drops to the lower edge of the rectangle (at about 20100).

NSE Nifty 50 index chart


The weekly bar chart pattern of Nifty shows a downward ‘gap’ and a close below the 20 week EMA. The correction should not have come as a surprise because of the following comments in last week’s analysis: “…weekly bar has formed a ‘shooting star’ pattern (in candlestick terminology), which can have bearish implications. Also, weekly volumes indicate that bears may be gaining the upper hand.” 

Despite the global sell-off by FIIs, Nifty continues to trade above its long-term up trend line (in blue) and its 50 week EMA. The long-term bull market is under no threat as yet.

Weekly technical indicators are turning bearish. MACD has crossed below its signal line in positive territory. ROC has crossed below its 10 week MA and about to re-enter negative territory. RSI has slipped below its 50% level. Slow stochastic is about to do the same.

Some more correction is possible. The dip can be used to add.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are undergoing corrective moves within ‘rectangle’ patterns. Both indices are in long-term bull markets, so the eventual break outs from the rectangles are expected to be upwards. However, rectangles can be unreliable. This is a good opportunity to gradually add fundamentally strong stocks to your portfolios. But maintain stop-losses.

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