BSE Sensex and NSE Nifty 50 index chart patterns – May 23, 2014

Extreme volatility on the day of election results announcement (on Fri. May 16) was followed by a week of more sedate index movements. FIIs were net sellers on Tue., Wed. and Thurs. but their net buying on Mon. and Fri. exceeded three days of net selling by Rs 1100 Crores.

It is no surprise that both Sensex and Nifty indices continued to move up and closed at new lifetime highs for the week. Technical analysts and experts have started falling over each other in predicting ever higher index levels. Morgan Stanley has come up with a 75000 Sensex target in 10 years. The RaRe bull has predicted a 15 years ‘mother of all bull markets’.

Small investors would do well to ignore the noise about index levels, and concentrate on building or managing their portfolios. Since mid-cap and small-cap stocks have also joined the bull party, it will become increasingly difficult to find reasonably valued stocks. The smart move at this stage will be to SIP into a good index fund or balanced fund instead of trying your luck with individual stocks.

BSE Sensex index chart

The significance of the upward ‘gap’ formed on the daily bar chart pattern of Sensex on Tue. May 13 was explained in last week’s post. It may be worthwhile re-reading it. Note that the ‘gap’ has remained unfilled so far. Even if it gets partly or fully filled, the up move should resume thereafter.

Daily technical indicators are bullish but looking overbought. MACD and RSI have touched new highs inside their respective overbought zones. ROC has moved down to touch its rising 10 day MA, but remains inside its overbought zone. Slow stochastic has corrected down from its overbought zone, but has started to move up again.

Remember that the index can remain overbought for long periods. There is one other overbought signal – the vertical distance between the 50 day and 200 day EMAs. This is currently at 1500 points. As per empirical observations, major corrections occur when the distance becomes 2000 points or more.

Any corrections that occur now will be adding opportunities.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty is soaring in blue-sky territory with no known resistances. The index closed the week at a new lifetime high of 7367 on massive volumes. It is probably just waiting for an excuse to move higher. NaMo’s cabinet formation on Mon. May 26 may provide the excuse.

All four weekly technical indicators are inside their respective overbought zones, with MACD and RSI touching new highs. The index can remain overbought for long periods. So, whatever you do, don’t try to short the index (unless of course you are an extremely skilled trader or suicidal by nature).

However, be prepared for a correction at any time. The trick to making money in the stock market is simple, but not easy: Stay long in a bull market; go short in a bear market.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices have closed at new lifetime highs on daily and weekly basis. Expect the indices to continue to move even higher. Stay invested; book partial profits to reduce risk. If you want to enter now, start a SIP in a good index or balanced fund.