Sunday, June 22, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Jun 20, 2014

Stock market players – investors, brokers, analysts, funds – have finally agreed that a bull market is in progress. Some are calling it a ‘new’ bull market; others are still hedging their bets and calling it ‘the cusp’ of a bull market. So, Sensex and Nifty should be moving up, right?

Instead, both indices closed lower for the second straight week. What is going on? Anticipation of an NDA-led government, and its confirmation after the elections had changed market sentiment from mildly bullish to strongly bullish. That led to sharp up moves on both indices.

The market became ‘overbought’ technically, and required some correction or consolidation for restoring its technical ‘health’. Such corrections or consolidations in bull markets are necessary for the indices to gather ‘energy’ for the next up move, and provide entry or adding opportunities.

BSE Sensex index chart


Three bearish signals were mentioned in last week’s analysis of the daily bar chart pattern of Sensex. The first – a likely ‘false’ upward break out from the consolidation within a symmetrical triangle – has turned out to be a bullish signal. The index is consolidating within a ‘falling wedge’ pattern from which the break out should be upwards.

The other two bearish signals – widening gap between the 50 day and 200 day EMA, and increasing downward momentum of the technical indicators – are still visible. The consolidation within the ‘wedge’ may continue next week, which is also F&O expiry week.

All four technical indicators have corrected from their respective overbought zones. ROC has dropped into bear territory below its ‘0’ line. The other three are still in bullish zones, but falling. Use the index slide to accumulate good stocks.

What about the trouble in Iraq that has led to higher oil prices? It did dampen bullish sentiments, and perhaps caused the consolidation within the ‘wedge’. Some times, an overbought market just needs an excuse to correct or consolidate. The long-term bull market is intact.

NSE Nifty 50 index chart


As expected, the weekly bar chart pattern of Nifty started to correct after touching a new lifetime high of 7700 and forming a ‘reversal week’ pattern (higher high, lower close) in the previous week.

Weekly technical indicators are still in their respective overbought zones. ROC has just crossed below its 10 week MA. RSI is drifting down. But MACD and Slow stochastic are moving up. The conflicting signals are suggesting that the correction may not last long.

The long-term up trend line (marked 1-1) seems to have lost its near-term relevance, as Nifty is trading more than 1500 points above it. A new up trend line from the Aug ‘13 low (marked 2-2) has been drawn. Henceforth, the new up trend line will be treated as the next leg of the bull market.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are consolidating after touching new lifetime highs. Bull market corrections/consolidations provide adding opportunities. Choose stocks that are steady compounders rather than ‘rockets’ that move up sharply and then fall just as rapidly. The name of the game is ‘preservation of capital’.

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