Both Sensex and Nifty gave up further ground - losing 2.5% and 2.7% respectively - on a weekly closing basis. Both indices may test, and even breach, their lows of the previous week.
Rupee depreciation against the US Dollar, a likely US interest rate hike which can cause more outflow of foreign capital, RBI's failure to supply adequate currency to replace the demonetised bank notes of Rs 500 and Rs 1000 have badly dented bullish sentiments.
BSE Sensex index chart pattern
The following were the concluding comments in last week's post on the daily bar chart pattern of Sensex: "Small investors should not be in a hurry to start bottom fishing. A test of Wednesday's low of 25900 can't be ruled out."
The index continued its downward trajectory, closing lower on all four trading days of the week. It has closed below its 200 day EMA in bear territory for 5 straight days, and is within handshaking distance of the previous week's low of 25902.
The bottom has fallen out of the previous week's 'flag' pattern, so it has been replaced with a down trend line. As per trend line theory, the down trend will remain in force till it gets breached convincingly.
The 20 day EMA is about to cross below the 200 day EMA. The 50 day EMA has formed a 'rounding top' reversal pattern. These are signs that the index may be slipping into a bear phase.
Sensex has retraced 48% of its gains from the Feb 29 '16 low (of 22495) to the Sep 8 '16 top (of 29077). That is close to the 50% Fibonacci retracement level from which bull market corrections are likely to reverse.
Stock indices don't really follow mathematics or logic. There is no reason to go long during F&O expiry week. However, there is some possibility of at least a technical bounce.
All four daily technical indicators are inside their oversold zones. Note that ROC is showing positive divergence by not falling lower with the index.
Any pullback towards the 200 day EMA will provide another selling opportunity to bears (i.e. FIIs).
NSE Nifty index chart pattern
The weekly bar chart pattern of Nifty dropped to close well below its 50 day EMA, and looks poised to revisit its previous week's low of 8002.
The 20 week EMA is forming a bearish 'rounding top' pattern. So is the signal line of the MACD indicator. Weekly ROC, RSI and Slow stochastic are looking oversold and showing downward momentum.
The index had formed a high-volume 'panic bottom' in the previous week. A 'panic bottom' seldom holds. A drop below 8000 seems likely. Support levels below 8000 were mentioned in last Wednesday's post.
Oversold conditions indicate the possibility of a technical bounce towards 8300 next week. If you are a short-term player, use the likely bounce to close out long positions.
For long-term investors, the current state of the index is a good test of their patience and discipline. Both characteristics will be under stress. The men will get separated from the boys.
Bottomline? Sensex and Nifty charts are turning bearish due to global and local events. Valuations are improving, but weak earnings growth of India Inc. is going to take some more time to overcome the demonetisation shock. Caution is advised. Any technical bounce may be followed by lower levels on both indices.