Sensex gained 1.46% and Nifty gained 1.3% on a weekly closing basis. Both indices broke down below 'descending triangle' patterns - as mentioned in last week's post.
However, subsequent recoveries from support levels have negated the triangle patterns. Both indices appear to have formed bullish 'flag' patterns - from which the likely breakouts should be upwards.
BSE Sensex index chart pattern
The daily bar chart pattern of Sensex dropped and closed below the long-term support level of 27600 on Mon. Oct 17 but bounced up sharply the next day, only to face resistance from its entangled 20 day and 50 day EMAs.
The index oscillated about its two shorter-term EMAs for the rest of the week. The upper down trend line (of the redrawn 'flag') - which was earlier part of the 'descending triangle' pattern - provided resistance on the upside.
Can the index correct some more, or will it breakout upwards right away? That will depend on how Q2 (Sep 16) results pan out.
Last week's FII selling was well absorbed by the DIIs. Still the index failed to make much headway.
Daily technical indicators are not looking strongly bullish, though all four are showing some upward momentum. MACD and ROC are still inside their respective negative zones. RSI and Slow stochastic have crossed above their 50% levels.
The lower edge of the 'flag' is inside 'Gap1' formed on Jul 11, and should provide good support if the index corrects some more. An upward breakout may face resistance from the 28600 level.
Sensex is trading well above its rising 200 day EMA in a bull market. A 'flag' pattern is a fairly reliable 'continuation' pattern. So, expect the index to breakout upwards.
NSE Nifty index chart pattern
The weekly bar chart pattern of Nifty dropped below the 8550 level and the 20 week EMA, but bounced up strongly after receiving good support from the 8500 level.
In a mid-week technical update, the earlier bearish 'descending triangle' pattern was redrawn as a bullish 'flag' pattern. Why the switch? Because technical analysis is not a science, and is based on price action that reflects the combined greed and fear of market participants.
Chart patterns evolve and change and don't always play out as expected - just as market mood changes from bullish to bearish and back to bullish during the same day.
Weekly technical indicators are looking bearish. MACD, RSI, Slow stochastic are showing downward momentum in bullish zones. ROC is in neutral zone - trying to recover after slipping into negative territory.
Nifty's TTM P/E at 23.23 remains higher than its long-term average. The breadth indicator NSE TRIN (not shown) is hovering above its overbought zone. Some more correction within the 'flag' pattern is possible before the eventual upward breakout.
Bottomline? Sensex and Nifty charts appear to have formed bullish 'flag' patterns, from which the likely breakouts should be upwards. The correction is providing adding opportunities. Be stock specific and buy in small lots.