BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jan 28, ‘11

In a post on Jan 18 ‘11, I had mentioned that the zone between the Apr ‘10 and Aug ‘10 tops should provide strong support. It wasn’t crystal-ball gazing. Previous tops tend to provide support. Both indices stopped exactly in the middle of their support zones. Will the support hold? The sheer volume of FII selling gives that a low probability.

BSE Sensex Index Chart

In last week’s analysis, the weakness in the technical indicators led me to comment that the correction wasn’t over and only a mild pullback rally could be expected. The pullback halted at the falling 20 day EMA. The subsequent correction has dropped the Sensex below the 200 day EMA and rung the first warning bell of trend-change possibilities.

The technical indicators are hinting that the correction may continue. The MACD is falling below its signal line into deeper negative territory. The ROC remains negative, moving up to the ‘0’ line but reversing directions towards its 10 day MA. Both the RSI and and slow stochastic are in their oversold zones.

How low can the Sensex go? Market sentiments don’t care much for arithmetic, but here are some technical support levels:

• The next zone of support is between 17500 (Oct ‘09 top) and 17800 (Jan ‘10 top)
• A 20% drop from the Nov ‘10 top will take the Sensex to 16900
• A 38.2% Fibonacci retracement level of the bull rally from Mar ‘09 to Nov ‘10 is at 16150
• A 50% Fibonacci retracement level of the bull rally is at 14600

Can the Sensex go even lower? Nothing can be ruled out when the bears go on a rampage, but it seems highly unlikely at this stage. Any drop below 17000 should provide good buying opportunities.

NSE Nifty 50 Index Chart

The drops below the 200 day EMA on Thu. Jan 27 ‘11 and into the support zone on Fri. Jan 28 ‘11 were accompanied by an increase in volumes, which doesn’t augur well for the bulls. Looks like the market wants to go lower – or, rather the FIIs would like to see lower levels. The technical indicators are not indicating any halt to the correction yet.

In case the support zone between 5400 and 5550 gets breached, the next support levels of the Nifty 50 can be:

• the zone between 5200 (Oct ‘09 top) and 5300 (Jan ‘10 top)
• at 5050, which is a 20% drop from the Nov ‘10 top
• at 4900, which is the 38.2% Fibonacci retracement level of the bull rally from Mar ‘09 to Nov ‘10
• at 4450, which is the 50% Fibonacci retracement level of the bull rally from Mar ‘09 to Nov ‘10

In technical analysis, we don’t deal with exact numbers, so the levels indicated have been rounded-off to the nearest 50. Remember that breach of any level is subject to a 3% ‘whipsaw’ lee-way.

It is not expected that the Nifty will fall too far below 5000. There is neither euphoria nor panic among investors. Q3 results declared so far have shown good growth in top and bottom lines of India, Inc. The companies that have fared poorly are getting hammered. The RBI is monitoring the economy well and there doesn’t seem to be any asset bubbles. Reforms are moving in fits and starts, but the track record of the Congress-led UPA has never been exemplary about taking bold decisions.

Now that food inflation has become a major problem, there is sudden talk of allowing MNCs to enter organised retail. That one single move can not only bring down food prices through better procurement, storage and distribution but also provide thousands of jobs to semi-literate youths. One can only hope that the Finance Minister takes this important step in the forthcoming budget.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices have formed bearish patterns of lower tops and lower bottoms. Jan 2010 was also a down month, but it helped buyers to enter at lower valuations. So look at this correction as an opportunity to accumulate blue-chip stocks. The correction hasn’t played out yet; avoid aggressive buying.