BSE Sensex and NSE Nifty 50 index chart patterns – Oct 01, 2015

For the second month in a row, and in 4 of the past 5 months, FIIs were net sellers of equity due to a variety of reasons – poor monsoon, poor earnings of India Inc., possible interest rate hike in USA, poor growth in China. DIIs have been net buyers of equity in every month since Feb ‘15.

Can India become the next China for global investors? PM Modi is certainly hoping so, and timed his visit to Ireland and USA accordingly. India’s slow but steady growth based on domestic consumption, low inflation, a huge young workforce may finally get the global attention it deserves.

There was mixed news on the economic front. Passenger vehicle sales in Sep ‘15 grew 4.6% on a YoY basis, with Maruti, Hyundai, Honda and Ford being leaders and M&M, Toyota, Tata Motors being laggards. 2-wheeler sales were marginally lower. Manufacturing PMI in Sep ‘15 slipped to a 7 months low of 51.2 from 52.3 in Aug ‘15 (a figure above 50 indicates growth).

BSE Sensex index chart

The daily closing chart pattern of Sensex has been trading in a bear market since the sharp fall with a downward ‘gap’ on Aug 24 ‘15. The ‘death cross’ (marked by light blue circle) of the 50 day EMA below the 200 day EMA technically confirmed a bear market.

There is hope of a turnaround for bulls. The index has formed a complicated ‘inverse head and shoulders’ reversal pattern. Why complicated? Because the left and right shoulders (marked LS and RS respectively) are themselves small ‘double bottom’ reversal patterns and the Head is itself a small ‘inverse head and shoulders’ reversal pattern.

The downward-sloping neckline (marked NL) of the pattern has been breached upwards, but not convincingly yet. Overhead resistances from the falling 50 day and 200 day EMAs and the ‘measuring gap’ should prevent a bull rally from running away.

However, a ‘reversal pattern’ is clearly visible and should be respected. So, it will be advisable not to short the index.

Daily technical indicators are turning bullish, but three of them – ROC, RSI, Slow stochastic – are showing negative divergences by touching lower tops. MACD is above its signal line, and both are rising in negative territory. ROC has crossed above its rising 10 day MA in positive territory. RSI is showing a bit of weakness by turning down towards its 50% level. Slow stochastic is moving up towards its overbought zone.

Expect some consolidation or correction before the index can start rallying.

RBI Governor gave an early Diwali bonus with an unexpected 50 bps cut in interest rates. Banks have been coaxed to transmit the bulk of the cut to its base lending rates. Rate sensitive sectors, including capital goods, consumer discretionary and infrastructure should benefit.

This may be a good time to start accumulating fundamentally strong stocks.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty has spent 6 straight weeks below the rare weekly ‘gap’ formed on the chart in the week ending on Aug 28 ‘15. The 20 week and 50 week EMAs are touching each other and sliding down. The index is trading below them in bear territory.

However, the index closed nearly 1000 points above its rising 200 week EMA (not shown). That means the long-term bull market is intact, though bears continue to dominate the chart in the near term. (Awareness and appreciation of the effect of different time frames on price charts will enable better decision making.)

Weekly technical indicators are in bearish zones but their downward momentum is slowing down. MACD is falling below its signal line in negative territory. ROC is again trying to emerge from its oversold zone, but remains below its sliding 10 week MA. RSI has started to move down after facing resistance from its 50% level. Slow stochastic is moving up after receiving support from the edge of its oversold zone.

Transaction volumes appear low during the past three weeks due to holidays. Volumes should pick up soon.

Bulls have a lot of work to do before the index can resume its up move. The ‘gap’ needs to be filled and the blue down trend line needs to be crossed convincingly. That can happen only if the FIIs stop selling.

Bottomline? Chart patterns of Sensex and Nifty are in down trends and are trading below bearish ‘gaps’. Daily charts have formed trend reversal patterns. Long-term bull markets are still intact. The long correction has provided an opportunity to enter good stocks at fair prices. Use it.