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Saturday, May 2, 2015

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 30, 2015

Finally, a couple of positive triggers for the market – the first good, the second better. Apr ‘15 passenger car sales grew 19% over Apr ‘14 sales, which is hinting at an economic recovery. EPFO will be investing 5-15% of its incremental corpus in equity instruments (probably ETFs). That means anywhere from Rs 4000 to 12000 Crores will be entering the market.

Provisional figures for Apr ‘15 indicate that FIIs were net buyers of equity worth Rs 7800 Crores, and DIIs were net buyers of equity worth Rs 11500 Crores. How come Sensex and Nifty dropped to their lowest levels since the first week of Jan ‘15?

The FII figure was skewed by a huge bulk deal in Ranbaxy shares on Apr 21. During the last 6 trading days of Apr ‘15, FIIs were net sellers of Rs 6000 Crores. Apparently, the MAT uncertainty, poor Q4 results expectations and a depreciating Rupee contributed to the selling spree.

Both Sensex and Nifty look oversold. A technical bounce is likely. Whether it will lead to a resumption of the up move will depend on Q4 results from some of the larger companies. An expected weak monsoon is a sentiment dampener. But unseasonal rains, which have filled up water reservoirs, can help mitigate effects of a weak monsoon.

BSE Sensex index chart


The daily bar chart pattern of Sensex dropped - and closed - below the ‘support-resistance zone’ between 27350 and 28800 and the 200 day EMA (currently at 27150). Any breach of a support zone – and particularly of the 200 day EMA – should be considered seriously.

Technical analysis is based on empirical observations. One of the important observations of any breach of a support (or resistance) level is the ‘3% whipsaw limit’. What does it mean? Quite often, an index (or stock) is seen to reverse directions within this 3% limit.

So, an index (or stock) needs to close more than 3% below a support level (or 3% above a resistance level) for the breach to be technically valid. In this case, 3% below the 200 day EMA is 26335 – which is close to the support level of 26350 (corresponds to the Jul ‘14 top and the Dec ‘14 bottom). Hence, a close below 26350 will trigger a stop-loss set at the 200 day EMA.

There is no hard and fast ‘rule’ that a stop-loss has to be set only at the 200 day EMA. If some one had set the stop-loss at 27350 (lower edge of the ‘support-resistance zone’), the trigger will be a close below 26530. In other words, if you have long positions on the index, the time to sell has not arrived yet.

Technical indicators are looking oversold. Note that RSI and Slow stochastic are showing positive divergences by failing to touch new lows with the index. Some more correction can’t be ruled out, but buying interest can emerge soon.

NSE Nifty 50 index chart


The following remarks appeared in last week’s analysis of the weekly bar chart pattern of Nifty: “A test of support from the lower edge of the ‘support-resistance zone’ and the rising 50 week EMA appears likely.”

Note that Nifty briefly breached the lower edge of the ‘support-resistance zone’ between 8180 and 8630, and tested support from its 50 week EMA before closing exactly at the lower edge of the ‘support-resistance zone’.

Weekly technical indicators are looking bearish, and oversold. MACD is rapidly falling below its signal line in positive zone. ROC has dropped to the edge of its oversold zone. So has RSI. Slow stochastic has entered its oversold zone.

The NSE TRIN (a breadth indicator – not shown) is well inside its oversold zone – where it rarely stays for any length of time.

Is the correction over? May be not yet. However, a technical bounce can happen at any time.

Bottomline? BSE Sensex and NSE Nifty charts are feeling the effects of FII selling, and have breached important support levels. Any further correction may lead to trend reversals. Stay invested till then. Maintain appropriate stop-losses for individual stocks in your portfolios.

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