Sunday, May 18, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – May 16, 2014

Dalal Street was in celebratory mood as the election results were a positive surprise and way beyond expectations of the market. Though exit-polls had correctly predicted a NDA victory, all of them, bar one, underestimated the extent of the Modi wave that turned into a ‘tsuNaMo’.

BJP itself got a majority – the first time a political party has managed that since 1984. Coalition politics with its push-and-pull nature has been dumped by the electorate. Additional responsibility will have to be borne by the ruling party as they will not have anyone to blame if they can’t deliver on their promises.

Both Sensex and Nifty touched and closed at all-time highs on daily and weekly basis. Volumes were the strongest in 4 years. Though some profit booking set in on Friday, there is no reason to think that it is anything other than a well-deserved pause after a sharp climb.

BSE Sensex index chart


The daily bar chart pattern of Sensex formed an upward ‘gap’ of about 156 points on Tuesday, May 13. Since this ‘gap’ has formed after a new up move of 3 months duration (from the low of 19963 touched on Feb 4 ‘14), it can be treated as a ‘runaway’ or ‘measuring’ gap.

‘Measuring’ gaps have target implications. The low of Feb ‘14 – from where the fresh up move started – was at 19963. The middle of the ‘measuring gap’ is at 23651 (= previous day’s intra-day top of 23573 + half of the ‘gap’ of 156 points). So, the ‘length’ of the up move till the ‘gap’ is 23651 – 19963 = 3688 points.

The upward target should be the same, i.e. 3688 points - to be added to the middle of the ‘gap’ at 23651 to arrive at 27339. This should be the next target for Sensex. Note that it is the ‘next’ and not the ‘final’ target.

Caveat: Technical analysis targets are based on empirical observations. The index doesn’t understand logic or arithmetic. So, consider the target as indicative and not sacrosanct.

What about the ‘shooting star’ pattern (in ‘candlestick’ parlance) that appears to have formed on Friday, May 16? Doesn’t it have bearish implications? Yes, but. The pattern needs to get confirmed by a strong corrective move on Monday, May 19. Otherwise, it may lead to a short pause before the next climb.

Remember the theory of ‘gap’s. An upward ‘gap’ formed in the middle of an up move tends to act as a support zone for future down moves. Even if the ‘gap’ gets filled (partly or fully), the up move is likely to resume thereafter. So, no need to panic and sell. But partial profit booking is always a good idea.

All four technical indicators are in their overbought zones. While MACD and ROC have touched new highs, RSI and Slow stochastic are showing negative divergences by failing to do likewise. Some correction or consolidation is possible. It will improve the technical ‘health’ of the chart, and enable bulls to charge higher. 

NSE Nifty 50 index chart


The weekly bar chart pattern of Nifty is a good example of what a long-term bull market looks like. You don’t need to be an experienced technical analyst to note that the long-term up trend line (in blue) and the 2 weekly EMAs are all rising and the index is trading above them.

The up trend started back in Dec ‘11 and is already 29 months old. It doesn’t look like it is going to end anytime soon. Thanks to the massive electoral mandate for the NDA – which has won on the single plank of ‘development’ – the bull market has got a new impetus. However, one should not expect a one-way rise. There will be several corrections along the way.

The next upward target for Nifty – based on the ‘gap’ formed on the daily chart on May 13 – was calculated in this mid-week update, and is not being repeated here. It is the ‘next’ and not the ‘final’ target.

Weekly technical indicators are in their respective overbought zones – with two of them (ROC and Slow stochastic) showing negative divergences by failing to touch new highs with the index. Some correction or consolidation can be expected before Nifty starts to rise again.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices have touched new lifetime highs. Expect the indices to continue to move even higher. Stay invested; book partial profits to reduce risk. It is a bit late to jump in feet first. The low-hanging fruits have been plucked. That doesn’t mean there will be no opportunities to enter. But stock-picking skills will be tested. (Don’t know how to pick good stocks? Read the ‘related posts’ below.)

Related Posts

How to pick Stocks for Investment - Part I
How to pick Stocks for Investment - Part II
How to pick Stocks for Investment - Part III


Jasi said...

Great assessment, as always Sir. Now, if the Modi govt. delivers as is expected of it, what is your likely target after its 5 yr tenure? Is doubling a possibility?

Subhankar said...

Thanks for your comments, Jasi.

If Modi delivers even 50% of what he has promised, indices can double in 5 years.

Jasi said...

Wow! That says alot. By the way I completely agree and can vouch for something you said in your previous post. Small investors or people who dont have the time or skill are better off sticking to index funds. Ever since I started a SIP in index fund ive been sleeping alot better with not too bad returns :)
Thanks as always for carrying the torch for so many years.

Subhankar said...

Appreciate the feedback, Jasi.

There is no adrenaline rush in an index fund SIP. Just a drab and boring way to build wealth for the long term.

Those who can afford take a bit more risk can SIP into a good balanced fund.