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Sunday, July 20, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 18, 2014

Q1 results have started hitting the market – and so far, results show that size matters. After better than expected results from Infosys, it was the turn of TCS and Reliance to positively surprise the market.

This is a very good example of why small investors should build a core portfolio of large-cap stocks that can sustain growth through good times and bad. Mid-cap and small-cap stocks should form a satellite portfolio comprising not more than 20-25% of total portfolio value.

Monsoon is spreading across more regions of the country. The overall rainfall deficit has reduced considerably – though some areas are facing drought-like conditions. By quickly taking steps against hoarders and increasing export duties, the government has kept food prices within control.

BSE Sensex index chart


The 6 months daily bar chart pattern of Sensex received good support from the 24900 level, which has acted as a support/resistance level for the past 2 months. The upward bounce took the index above its 20 day EMA. Both are good news for bulls.

However, the index is yet to cross above its Jul 8 ‘14 top of 26190. Unless it does so in a hurry, the possibility of a head-and-shoulders reversal pattern may come to the fore. Note that the ‘left shoulder’ and the ‘head’ has formed already. If the index drops again towards 24900, the ‘right shoulder’ may get formed with 24900 as the ‘neckline’.

Should that happen – and it is only a possibility, not a certainty – the index may drop all the way down to the ‘gap’ formed on May 13 ‘14. Note that the 50 day EMA is just below the 24900 level, and should provide added support on the downside.

Why are we discussing down side when the index is trading above all three EMAs in a long-term bull market? Note the mixed signals being given out by the daily technical indicators. MACD is moving sideways in positive zone, but is below its falling signal line. ROC is also moving sideways below its falling 10 day MA, but in negative zone.  RSI is falling towards its 50% level. Slow stochastic has just crossed above its 50% level.

MACD and ROC are in down trends for more than a month. All four indicators showed negative divergences by failing to touch new highs with the index on Jul 8. Unless 26190 is surmounted convincingly, bears may play spoilsport in the near term.

On longer term weekly chart (not shown), the index is consolidating sideways but is well above its three rising weekly EMAs. Weekly technical indicators have started correcting overbought conditions. Some more correction or consolidation will help improve the technical ‘health’ of the chart, and enable it to scale new highs.

NSE Nifty 50 index chart


The weekly bar chart pattern of Nifty formed a ‘reversal week’ pattern (slightly lower low and a much higher close). So, is the intermediate down trend that started in the previous week over? The answer is: Not till the index can cross above the previous week’s all-time high of 7808.

Volumes have been sliding for the past 8 weeks, with down-week volumes being higher. That is a clear sign that bears remain active. However, the bearishness is only in the near term – which is not unusual near an all-time high. The index is trading well above its two weekly EMAs and the blue up trend line. The long-term bull market is intact.

Weekly technical indicators remain in their respective overbought zones, with some signs of slipping down. MACD is moving sideways above its rising signal line inside overbought zone. ROC has merged with its 10 week MA inside its overbought zone. RSI is getting good support from the edge of its overbought zone. Slow stochastic is moving sideways inside overbought zone.

The index is likely to consolidate or correct a bit more before it moves higher.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are undergoing consolidations in long-term bull markets. This is a good opportunity to add fundamentally strong stocks to your portfolio before both indices embark on the next legs of their up moves. Avoid the temptation of buying unknown ‘cheap’ stocks recommended on various message boards.

(Note: If you want to give your portfolio a boost, add fundamentally strong small-cap stocks recommended in my Monthly Investment Newsletter. But hurry. Offer for paid subscriptions will close on July 21, 2014.)

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