BSE Sensex and NSE Nifty 50 index chart patterns – Jan 08, 2016

Two downward circuits at the Shanghai stock exchange last week sent FIIs into panic selling mode in global stock markets. Global indices faced their worst weekly losses in four years. Indian market wasn't spared.

FIIs were net sellers of equity worth Rs 3550 Crores during the week - almost 50% more than their entire selling in Dec '15. DIIs were net buyers of equity worth Rs 1560 Crores, as per provisional figures.

Sensex lost 4.7% and Nifty lost 4.5% on weekly closing basis. Will there be more correction next week? Is the worst over? Let us see what the charts are telling us.

BSE Sensex index chart

The daily bar chart pattern of Sensex collapsed under the weight of FII selling - losing more than 1200 points on a weekly closing basis. All is not doom and gloom for bulls yet. Here are some bullish signs on the chart:

• The index found support at the 24840 level where it had received support twice before - in Sep '15 and Dec '15 (marked by green arrows)
• All four daily technical indicators are showing positive divergences (marked by blue arrows) by touching slightly higher lows while Sensex touched a low of 24826 last week; its previous low was 24868 (in Dec '15)
• Three of the four technical indicators (ROC, RSI, Slow stochastic) are looking oversold, which can lead to a technical bounce
• Sensex had formed two back-to-back downward 'gaps' in Aug '15; it formed another downward 'gap' on Thu. Jan 7 '16 - which may be an 'exhaustion gap' that forms at the tail end of a bear phase 

Bears may not pay much heed to these so-called bullish signs. Why? Here are some bearish counter-arguments:

• A 'support' (or 'resistance') level gets weakened if tested frequently - unlike a trend line that gets strengthened by each test
• Technical indicators can remain oversold for long periods during bear phases
• Sensex is trading below the blue downtrend line and its three EMAs in bear territory
• If FIIs continue with their selling spree, all technicals will get blown out of the window

Bears clearly have the advantage in the near term. Note that last week's carnage was caused by the collapse in the Chinese stock market. The fall in the Yuan will make Chinese imports even cheaper and exports to China more expensive.

However, there has been no sudden change in India's economy. Tata Motors faced huge selling due to slowdown in its China operations, but it has more than made up the shortfall with its exports to USA and Europe. Once the dust settles and sanity prevails, FII selling should subside. 

On longer-term weekly Sensex chart (not shown), the index is trading more than 1400 points above its rising 200 week EMA. The long-term bull market is intact.

What should small investors do now? Depends on their investment horizon. Short-term, one should stay with the trend - which is down. Long-term, one can use the dip to accumulate fundamentally strong stocks with appropriate stop-losses.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty faced resistance from its falling 20 week EMA, and dropped sharply to an intra-week low of 7556 - testing support from the 7540 level. 

The long-term 'support/resistance' level had earlier provided support in Aug '14, Sep '15 and Dec '15 (marked by green arrows). Will the support hold? The large volume bar of last week may be a sign of 'selling exhaustion'.

The following comment was made in a mid-week Nifty update: "There is a very good chance that bulls will strongly defend the 7550 level." Despite heavy FII selling last week, bulls were able to defend an important support level. The real test of their resolve will come next week.

Weekly technical indicators are looking bearish and showing downward momentum. MACD is falling below its signal line in negative zone. ROC has dropped inside its oversold zone. RSI and Slow stochastic are moving down below their respective 50% levels.

Some more correction can't be ruled out. If 7540 gets breached convincingly, likely lower support zones have been mentioned in the mid-week update.

Bottomline? Chart patterns of Sensex and Nifty are again testing long-term support levels. The support levels may get breached if FII selling continues. Long-term bull markets are intact, as both indices are trading above their rising 200 week EMAs (not shown). Use the dip to accumulate slowly, but maintain suitable stop-loss levels.

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