Saturday, March 8, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 07, 2014

The trading week began with a whimper and ended with a bang. Russia’s ‘invasion’ of the Crimea region in Ukraine sent global stock indices crashing down on Mon. Mar 3. Markets started recovering from the next day when it became clear that Russia was just flexing its muscles and not really starting a war.

But what caused the sudden spurt in volumes on Fri. Mar 7 as both Sensex and Nifty broke out upwards from the ‘rectangle’ consolidation zones of the past 5 months? Was it FII buying due to the contraction in India’s Current Account Deficit? But the deficit contracted because of import restrictions on gold and reduced import of capital goods due to slowdown in the economy. Those are not positive signs for the stock market.

Did the latest poll projections predicting an NDA win prod bulls to go on a buying spree? Or, was it just a technical break out because buyers overwhelmed sellers – as often happens after a long period of sideways consolidation? May be, all of the above? The reasons are not important.

What is important is that both indices are at lifetime highs in Rupee terms. In US Dollar terms, both indices are more than 20% lower than their levels back in Apr ‘11. That means FIIs are not going to stop buying any time soon.

BSE Sensex index chart


Riding on a strong volume spurt (not shown in chart above), the daily bar chart pattern of Sensex convincingly broke out of the ‘rectangle’ consolidation zone to touch lifetime intra-day, intra-week and daily/weekly closing highs. The increase in volumes provides validity to the break out.

All four technical indicators are looking overbought – so a correction or consolidation may be around the corner. Such sharp break outs are often followed by a pullback to the break out point – which is the top of the rectangle (at about 21400). The pullback – if it occurs – will be a buying opportunity.

Rectangles have measuring implications. The height of the rectangle is about 1300 points. The index should rise 1300 points from the top of the rectangle – to 22700. That is the minimum target. Bull rallies often exceed their targets. Note that the indices don’t understand arithmetic. Targets are based on empirical observations of similar chart patterns.

This is not the time to sell. In a bull market, you make money by staying invested or adding on dips. You sell when there is euphoria all around and index movements make front-page headlines.

NSE Nifty 50 index chart


The weekly bar chart pattern of Nifty broke out with a volume spurt above the ‘rectangle’ consolidation zone within which it was trading for the past 5 months. The volume support validates the break out. Nifty should now move up to its first target of 6750, but don’t expect a straight line rally. There is likely to be some correction along the way.

All four technical indicators are in bullish zones but not looking overbought yet. MACD has formed a bullish ‘rounding bottom’ pattern to cross above its signal line in positive zone. ROC has crossed above its 10 week MA into positive territory. RSI and Slow stochastic are above their respective 50% levels, and moving up towards their overbought zones.

Though Nifty has touched a lifetime high, all four technical indicators are below their Nov ‘13 highs. The negative divergences may lead to a corrective pullback towards the top of the rectangle, which should be used as an adding opportunity.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices have broken out above their respective ‘rectangle’ consolidation patterns to touch lifetime highs. Increase in trading volumes validated the break outs. Both indices are in long-term bull markets and should continue to move higher. Stay invested, and use any dips to add fundamentally strong stocks.

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