Sunday, June 15, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Jun 13, 2014

An external event has dampened bullish market sentiments. The turmoil in Iraq has caused oil prices to rise, which will affect India’s current account deficit and inflation – putting paid to any hopes of an interest cut by RBI in the near term.

So far, the oil price rise is merely speculative as Iraq’s major oil fields are in the southern part of the country where the Sunni rebels are yet to gain control. It is unlikely that the western countries will sit back and let these oil fields fall into the hands of rebels.

However, it has provided bears with an opportunity to get back in the game. In last week’s analysis, overbought conditions and negative divergences visible on daily and weekly technical indicators had provided advance warning of corrections in both Sensex and Nifty indices.

BSE Sensex index chart


Some bearish signals are visible on the daily bar chart pattern of Sensex:

  1. The upward break out from the symmetrical triangle was expected to be followed by a pullback towards the top of the triangle. Instead, it is looking like an ‘end run’ (‘false’ break out) that may drop the index below the triangle
  2. The vertical distance between the 50 day EMA and 200 day EMA has reached 2000 points. It has been observed that a major correction often follows such a condition.
  3. All four technical indicators have started correcting overbought conditions. Though still in bullish zones, their downward momentum is increasing.

There is a possibility of the index dropping down to fill the ‘gap’ formed on the chart on May 13 ‘14. Contrary to popular belief, a part or complete filling of the ‘gap’ has bullish implications. The index is expected to resume its up move subsequently.

Note that the long-term bull market is intact. That means any correction may be used as an adding opportunity. Should you short the index? You may, if you are a short-term trader. But long-term investors should stay long. However, profits can be booked in small-cap and mid-cap stocks that have risen sharply.

NSE Nifty 50 index chart


The weekly bar chart pattern of Nifty has formed a ‘reversal week’ pattern (higher high, lower close) after touching a new lifetime high. That has bearish implications. Note that a similar pattern was formed two weeks back, but with a difference. The index didn’t touch a new high then.

Weekly technical indicators are in their respective overbought zones, but beginning to correct. MACD is still moving up, but its upward momentum is slowing down. ROC has started to slide down to its rising 10 week MA. RSI and Slow stochastic have started moving down.

Nifty is still trading 10% above its 20 week EMA, and needs to correct some more to restore the technical ‘health’ of the chart.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices have started correcting after touching new lifetime highs. Bull market corrections provide adding opportunities. But don’t jump in feet first. Be cautious, and very selective.

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