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Wednesday, February 5, 2014

Sensex – a mid-week update (Feb 05, ‘14)

In a previous post on Sensex, the following were the concluding remarks: “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).”

Sensex not only dropped to the lower edge of the rectangle – within which it has been trading for the past 4 months – it dropped below its 200 day EMA and the psychological 20000 level on intra-day basis. The index has since recovered a bit as value buying emerged.

Is the correction over, or is it just the first leg of a much bigger fall? Let us look at the patterns formed on the daily bar chart of Sensex (below) for likely answers.

SENSEX_Feb0514

Technically, the intra-day drop below the rectangle and the 200 day EMA is not a convincing one. Why? Two reasons. First, the index failed to close below the rectangle and the 200 day EMA. Second, the intra-day drop was within the ‘3% whipsaw leeway’.

Does that mean the correction is over? Not really. In fact, the 20 day EMA has crossed below the 50 day EMA, and both EMAs are falling. That is a bearish signal. However, the daily technical indicators are looking oversold. So, a rally from the current level is a possibility.

Why did the Sensex stop falling after it breached its 200 day EMA intra-day? Yes, value buying did emerge. But there is also a technical reason.

The rise from the Aug ‘13 low to the Dec ‘13 high was about 4000 points. The drop from the Dec ‘13 high to Tuesday’s low was about 1500 points; i.e. a 37.5% retracement of the rise – which is close to the Fibonacci retracement level of 38.2%. That makes it a likely turning point.

During the first three trading days of Feb ‘14, FIIs have been net sellers while DIIs have been net buyers. If FIIs continue selling, the index will fall more. Expect bulls to defend the lower edge of the rectangle – like they did back in Nov ‘13.

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