Sunday, August 10, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Aug 08, 2014

In the 6 trading sessions in Aug ‘14, FIIs pulled out a total of Rs 940 Crores from equities, including Rs 580 Crores in the last 2 days of the week. By contrast, DIIs invested a total of Rs 1600 Crores in equities, including Rs 680 Crores in the last 2 days of the week. Still, both indices closed lower for the week.

Global markets – particularly in USA and Europe - have been in corrective modes, thanks to unrest in the Middle East and Ukraine. The selling had a spill-over effect on the Indian market. The good news is that Sensex and Nifty valuations are becoming more attractive for buyers.

The bad news is that FII selling has caused a depreciation in the value of the Rupee, which will inflate import costs – just when the first signs of industrial growth was emerging. Auto sales have started rising. Even heavy commercial vehicles are beginning to show an increase in sales. That is an early signal of revival in growth.

BSE Sensex index chart


Sensex tried to cling on to its 20 day EMA during the first 4 days of the week, but opened with a downward ‘gap’ of 120 points on Friday and dropped to seek support from its 50 day EMA. The support level of 24900 (marked by dotted horizontal line) may get tested during next week.

All four technical indicators are looking bearish, but not oversold. MACD is falling below its signal line in positive territory. ROC has dropped into negative zone below its 10 day MA. RSI has slipped below its 50% level. Slow stochastic looks ready to enter its oversold zone. Some more downside is possible.

In case the 24900 level gets breached, expect the index to receive strong supports from the ‘gap’ (formed on May 13), the up trend line 2 and the 200 day EMA. Buying support is likely to emerge before that can happen. Remember that we are in a long-term bull market, where dips are used to buy.

That doesn’t mean caution should be thrown to the winds. The best policy in the stock market is to have a plan of investment, and then sticking to it without getting swayed by day-to-day index movements. Staying in cash in the hope of a big correction may lead to eventual re-entry at higher levels.

NSE Nifty 50 index chart


For the third time during the past 13 weeks, the weekly bar chart pattern of Nifty is testing the lower edge of the upward-sloping channel. Will the index bounce up – like it did earlier, or will it drop below the channel? Knowing the answer to the question can make some one rich!

So, let us weigh the pros and cons (from the bullish point of view) visible on the Nifty chart and try to draw a conclusion. First, the pros: 1) the index has remained within the upward-sloping channel for 13 straight weeks; 2) Nifty continues to trade above its two weekly EMAs and the blue up trend line 2 in a long-term bull market.

Now, the cons: 1) Volumes have been sliding (marked by blue arrow) while the index has been moving up – a negative divergence; 2) three of the four technical indicators – MACD, RSI, Slow stochastic – are looking overbought, though there are some signs of correcting overbought conditions. (Note that ROC is showing positive divergence by moving up while Nifty closed lower last week.)

On balance, the bulls are at an advantage in the near term. But things could change in a hurry if external factors continue to cast a shadow over global markets. Stay invested. If you must buy, stick to quality. Avoid ‘momentum’ stocks and the ones where promoters have pledged a significant amount of their share holdings.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices corrected for the 2nd week in a row, and are at important support levels. Both indices are in long-term bull markets. Corrections provide adding opportunities. This is a good time to enter large-cap stocks that are facing some temporary problems.

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