BSE Sensex and NSE Nifty 50 Index Chart Patterns – Dec 03, ‘10

BSE Sensex Index Chart

In last week’s analysis of the BSE Sensex index chart pattern, the technical indicators were signalling that the market was oversold and I had made the following comment:

‘…there is a good chance that buying may emerge as the Sensex nears the 18500 mark.’

But 18955 was as low as the Sensex dropped before the FIIs started buying gain. In four straight trading sessions, the Sensex moved back above the psychological 20000 level and touched 20084 intra-day – retracing more than 50% of its fall from 21109 to 18955.

The 20 day EMA fell to the 50 day EMA but didn’t move below it. Both have joined together and are moving sideways. The index closed the week above them. The technical indicators are turning bullish. The MACD is still negative, but has crossed above its signal line. The ROC moved above its 10 day MA and entered the positive zone. The RSI has risen nicely from the oversold zone and is just below the 50% level. The slow stochastic jumped up sharply from its oversold zone and is above its 50% level.

Are the good times back again? Not quite. Yet another scam has hit the market. This time it is a pump-and-dump scheme involving four listed companies, of which Welspun is the best-known name. Strict action is required by putting a few perpetrators behind bars. A penalty and a ban is not enough to deter others from trying to get rich quick.

NSE Nifty 50 Index Chart

The Nifty 50 index chart pattern has paused after retracing 52% of its recent fall. Note the declining volumes as the index rose quickly. Will the index resume its up move next week or is it getting ready to test the support from its 200 day EMA?

The technical indicators are appearing bullish. But a closer look reveals bearish undertones. Note the lows made by the ROC, RSI and slow stochastic back in May ‘10 when the Nifty 50 made a low of 4786. Last week, the index made a much higher bottom of 5690, but all the three technical indicators made lower bottoms. The negative divergences may pour cold water on bullish fervour.

The latest scam has come at an inopportune time. An investigation is also going on about FDI in certain sectors getting diverted into the stock market instead of in production and marketing facilities. There is a good possibility that the correction isn’t over and the next leg may begin soon. A drop to the twin support of the 5550 level and the 200 day EMA is likely.

Bottomline? Both the BSE Sensex and Nifty 50 index chart patterns are poised at interesting cross-roads. The increasing frequency of scams is beginning to take a toll on investor sentiments. Caution should be the watch word. Buying can be initiated only on a move on good volumes above 20300 in the Sensex and 6100 in the Nifty. Downward breaks below the 200 day EMA may change the equations in favour of the bears.