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Sunday, September 28, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Sep 26, 2014

The role reversal in the Indian market continued for the second week in a row. DIIs have turned bulls. Their net buying in equity during the week was almost Rs 2500 Crores. But net FII selling of Rs 4150 Crores tilted the scales in favour of bears. Supreme Court’s cancellation of coal blocks allocated over the past 2 decades affected sentiments.

Both Sensex and Nifty have corrected about 4% from their respective peaks touched on Sep 8 ‘14 – which are considered mild corrections in bull markets. The bad news for bulls is that both indices have formed bearish patterns of lower tops and lower bottoms since Sep 8.

The good news for bulls is that both indices are in long-term bull markets with plenty of supports on the downside from trend lines, moving averages and gaps (formed on daily charts back in May ‘14). The corrections will improve the technical ‘health’ of both indices – enabling them to move higher.

BSE Sensex index chart

Sensex_Sep2614_ST

On Fri. Sep 26 ‘14, the daily bar chart pattern of Sensex dropped below its 50 day EMA intra-day, but managed to recover and close well above it.

Support from the blue up trend line (marked UL3) was not tested – but that can happen next week. Will the support hold, or will it get breached? As per trend line theory, the more a trend line gets tested the stronger it gets. UL3 has already been tested twice. So, odds of a breach are low.

What if the trend line does get breached? Technical analysis is not a science, but based on empirical observation of many thousands of charts. ‘Rules’ don’t always hold. The next likely support is in the zone between 25375 (top touched in May ‘14) and 25725 (top touched in Jun ‘14).

Daily technical indicators are looking bearish. MACD is falling below its signal line in positive zone. ROC is below its falling 10 day MA in negative zone. RSI and Slow stochastic have dropped towards the edge of their respective oversold zones. A bit more correction is possible, but buying support should emerge soon.

Many good mid-cap and small-cap stocks have corrected sharply during the past 3 weeks. This may be a good time to add them, or even enter afresh if you had booked profits earlier.

NSE Nifty 50 index chart

Nifty_Sep2614_LT

The weekly bar chart pattern of Nifty came within 50 points of testing support from the blue up trend line (marked UL3), before bouncing up. It was the first lower weekly close after 6 weeks. Is the correction over?

Weekly technical indicators are suggesting otherwise. MACD has merged with its signal line inside its overbought zone. ROC has crossed below its falling 10 week EMA in positive zone. RSI is sliding down after failing to re-enter its overbought zone. Slow stochastic is moving down towards the edge of its overbought zone.

In case the index falls below UL3, it should receive support from the zone between 7560 (top touched in May ‘14) and 7700 (top touched in Jun ‘14). Note that the 20 week EMA is in the middle of the support zone – strengthening it further.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are undergoing mild bull market corrections - turning charts of both indices technically ‘healthy’. Add to existing holdings, or just stay invested. Don’t panic if the indices fall some more. Learn to rely on your asset allocation plan.

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