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Saturday, January 23, 2016

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 22, 2016

There seems to be no let up in FII selling. Last week, their net selling in equities crossed Rs 5900 Crores as per provisional figures. DIIs more than matched them as their net buying in equities crossed Rs 6075 Crores.

However, both Sensex and Nifty closed marginally lower for the week after completing bearish 'rounding top' patterns. Can Friday's (Jan 22) technical bounce lead to a trend reversal? Or, can more downside be expected?

The charts below are showing some interesting developments that may go in favour of bulls.

BSE Sensex chart pattern


The daily bar chart pattern of Sensex dropped to test support from the 'gap' (of 156 points between 23573 and 23729) formed on the chart in May '14 following the euphoria of Modi-led victory in the general elections.

Most 'gaps' formed on charts get filled quickly, but some don't get filled for a long time and often become 'support/resistance' zones. The May '14 'gap' has remained unfilled for 20 months.

So, will the 'gap' continue to act as a 'support' zone for the index, as it did last week? It may, or it may not - but it shouldn't really matter for bulls. Why?

After an upward 'gap' gets filled, the previous up move - during which the 'gap' had formed - tends to resume. (The same holds true for a downward 'gap', i.e. the down move usually resumes after the 'gap' is filled.)

Are there any other technical indications of a reversal of the intermediate down trend? The answer is: Yes. Three of the four technical indicators have formed reversal patterns inside their respective oversold zones. 

ROC has formed a small 'inverse head and shoulders' pattern. RSI and Slow stochastic have formed 'double bottom' patterns. (Please right click on the chart and open it in a new window or tab to see the patterns more clearly.)  

Note that the index is trading below its three falling EMAs and the blue down trend line in bear territory. The 24830 level, which had acted as a 'support' level in Sep '15 and Dec '15 may provide 'resistance' to a continuation of Friday's technical bounce.

On longer-term weekly chart (not shown), Sensex continues to trade more than 900 points above its still rising 200 week EMA in a long-term bull market. The correction has provided an opportunity to buy fundamentally strong stocks at fair prices.

NSE Nifty 50 chart pattern


The weekly bar chart pattern of Nifty has formed a 'dragonfly doji' pattern (in candlestick parlance), which has bullish implications. 

A 'doji' usually indicates indecision among bulls and bears. But a 'dragonfly doji' formed at the bottom of a 3 months long intermediate downtrend may be hinting at a trend reversal.

There is no guarantee that the index won't fall lower - specially with FIIs still in selling mode. However, the 7120 level is likely to provide strong support. (Significance of the 7120 level was explained in a post 2 days ago.)

All four weekly technical indicators are looking bearish and oversold. ROC is showing some upward momentum in an effort to emerge from its oversold zone. The other three are still showing downward momentum.

The index looks ready for a counter-trend move, but that may not happen during F&O settlement week.

Bottomline? Chart patterns of Sensex and Nifty are near important long-term support levels. Technical indicators are suggesting a counter-trend move. Long-term bull markets are still intact, as both indices are trading above their rising 200 week EMAs (not shown). Use the dip to gradually buy fundamentally sound stocks. Deploy 15-20% of your savings on 2/3 different stocks instead of going 'all in' on one.

2 comments:

Subhankar said...
This comment has been removed by the author.
Subhankar said...

A quick clarification:

The 'gap' mentioned in the Sensex analysis (and its technical significance) is a 'measuring gap' that typically occurs in the middle of an up (or down) move. To learn more about 'gap' analysis, read the following post:-

http://investmentsfordummieslikeme.blogspot.in/2009/09/analysis-of-gaps-in-stock-chart.html