BSE Sensex and NSE Nifty 50 Index Chart Patterns – Feb 25, ‘11

In last week’s analysis, I had observed that the ‘reversal day’ pattern formed on Fri. Feb 18 ‘11 marked the end of the brief rally. Positive divergences in the technical indicators led to the conclusion that there could be a bit of consolidation within the support zone before the down move resumed. Readers of this blog were forewarned.

BSE Sensex Index Chart

The consolidation within the support zone (between 18000 – 18500) lasted exactly three days. The fall on Thu. Feb 24 ‘11 on massive volumes was followed by a test of the 17500 level on the last day of the week. The ‘death cross’, signalling a bear market (marked by the blue oval), is now a foregone conclusion.

How low will the Sensex go? If I knew the answer, I would get seriously rich! The index has fallen about 18%, and could easily fall another 10% from the current level. That would take it close to the May ‘10 low of 15960. Continued strong selling by the FIIs can take it even lower, but we will keep 15960 as the low target for now.

The technical indicators have turned bearish. The MACD is well inside the negative territory, but marginally above its signal line. The ROC has dropped below its 10 day MA, and into the negative zone. Both the RSI and slow stochastic are below their 50% levels.

One can expect a bit of a rally if the budget on Feb 28 ‘11 is a populist one. But it is unlikely that FIIs will return in a hurry. Without their follow-up buying, any rise in the index will provide the bears with another opportunity to sell. Any fall below 17000 can be used to accumulate large-cap stocks slowly.

NSE Nifty 50 Index Chart

The 5400 level was breached on a very high volumes on Thu. Feb 24 ‘11. FIIs sold heavily. DII buying could not stem the rot. A test of the 5200 level on the Nifty 50 chart is imminent. The 50 day EMA is about to drop below the 200 day EMA. The bears are in control. The index can fall to 4800.

A populist railway budget could only provide a mild boost to the Nifty. Let us wait and see whether the Finance Minister can pull a rabbit out of his hat. Going by his past record, the budget is unlikely to be revolutionary. The domino-like effect of protests in the middle-east and north African countries have pushed oil prices above the three digit mark. That is real bad news for India, which imports 70% of its oil requirements.

Rising oil prices would have an inflationary effect on a country already reeling under inflation. Another round of interest rate hike by the RBI is likely. The fine balance between controlling inflation, and keeping the growth engine functioning smoothly, may get tilted towards the former. That will not be received well by stock investors. 2011 is going to be a challenging year of consolidation for the Indian markets.

Bottomline? The chart patterns of the BSE Sensex and Nifty 50 indices are about to fall into confirmed bear markets. Investors should not panic. It is not the end of the world. Bear markets follow bull markets, and bull markets follow bear markets. Bear markets test your mettle as an investor. (Some what like playing good fast bowling on a bouncy pitch. You’ll get hit a few times, but unlikely to be seriously injured.) Be patient, and wait for an appropriate opportunity to buy.