BSE Sensex and NSE Nifty 50 index chart patterns – Mar 9 ‘12

Both index charts – BSE Sensex and NSE Nifty – show classic break outs above down trend lines followed by pullbacks and upward bounces from the down trend lines. That should mean that trend reversals have occurred and it is time to buy. But all is not well as yet.

Results of the elections in five states have come and gone. The market was not expecting the thrashing that the Congress Party got at the hustings. There are rumblings from UPA partners about big-brotherly treatment. Another surprise was the 75 bps cut in the CRR announced by the RBI prior to its Mar 15 review meeting – probably to preempt the likely liquidity shortfall in the system due to advance tax payments. The better-than-expected manufacturing IIP number has further confused market players.

RBI’s Mar 15 meeting appears to have become a non-event. The good IIP number may dash any possibility of a cut in interest rates. Some experts are already suggesting that the CRR cut will be inflationary. Very little is expected from the Mar 16 budget announcement from a government that has backed itself into a corner financially and politically, with its populist measures and inability to take tough decisions.

BSE Sensex index chart

In the weekly bar chart of the Sensex, last week’s bar shows a dip below the down trend line followed by a strong upward bounce. The ‘golden cross’ of the 20 week EMA above the 50 week EMA has not taken place yet. The technical confirmation of a bull market is still awaited.

The weekly technical indicators remain bullish, but there are signs of weakness. The MACD is positive and above its signal line, but it has stopped rising and the histogram has started falling. The ROC is positive and above its rising 10 week MA. The RSI has started falling towards its 50% level. The slow stochastic has slipped down from its overbought zone.

The pre-budget rally may turn out to be a sideways consolidation. A budget without any negative surprises may provide the trigger for the rally to resume in earnest.

NSE Nifty 50 index chart

The daily bar chart pattern of the Nifty shows the break out above the down trend line, followed by a pullback and then a bounce up with a gap. Note that the volume bar is smaller on last Friday’s bounce up. That is not a positive sign for bulls.

The technical indicators are bearish, but showing signs of a turnaround. The MACD is falling below its signal line, but hasn’t yet entered negative territory. The ROC is negative, but is trying to cross above its 10 day MA. The RSI has bounced up from the edge of its oversold zone, but remains below the 50% level. The slow stochastic is trying to emerge from its oversold zone.

The 50 day EMA has crossed above the 200 day EMA, signalling a return to a bull market. But see what happened back in Apr ‘11 (left part of chart above). The 50 day EMA crossed above the 200 day EMA – only to drop back below it. Any fall below the down trend line can snuff out the bull rally.

Bottomline? Chart patterns of the BSE Sensex and NSE Nifty 50 indices have bounced up nicely after pullbacks to their down trend lines. Such bounces from resistance levels offer entry opportunities – provided there is adequate volume support and bullish technical indications. These seem to be lacking – probably because of the budget announcement hanging like the proverbial sword of Damocles. Those who are already invested should hold with stop-loss at the levels of the down trend lines. New entrants should await the budget announcement.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 2 ‘12

In last week’s analysis of the chart patterns of BSE Sensex and NSE Nifty 50 indices, it was mentioned that the ongoing corrections will be shallow unless the FIIs start to sell. Except on two days since both indices topped out on Feb 22 ‘12, the FIIs were net buyers. As a result, both the indices have stayed above important support levels so far.

BSE Sensex index chart

The daily bar chart of the BSE Sensex has managed to stay above the down trend line and the entangled 50 day and 200 day EMAs, keeping bullish hopes alive. But the failure of the 50 day EMA to cross above the 200 day EMA has prevented a technical confirmation of a bull market.

The technical indicators have turned bearish. The MACD is falling below its signal line in the positive zone, and the histogram has turned negative. The ROC is negative and below its falling 10 day MA. The RSI has slipped below its 50% level. The slow stochastic has dropped to the edge of its oversold zone.

Some more correction/consolidation can be expected till three likely trigger events – the UP state election results, RBI’s policy review and the union budget – get out of the way.

NSE Nifty 50 index chart

The weekly bar chart of the NSE Nifty shows a classic pullback towards the down trend line that is receiving support from the rising 50 week EMA. Any upward bounce from current level will be an entry opportunity.

Some signs of weakness are visible in the technical indicators, but they haven’t turned bearish by any means. The MACD is still rising above its signal line in positive territory, but the histogram is falling. The ROC has dipped in the positive zone. The RSI is still climbing towards its overbought zone – no weakness there. The slow stochastic is in its overbought zone, but sliding down.

The UP state election is unlikely to produce a decisive result. The RBI is expected to do no more than reduce the CRR or the SLR. Both these outcomes appear to have been discounted by the stock market. All eyes are therefore on the budget, where some pro-reform policy notifications are expected. Lack of any negative surprises should help the up move to resume.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are going through a correction after a sharp rally. Such corrections provide entry opportunities to those who missed out on the earlier rally. That doesn’t mean one has to buy anything and every thing. The beaten down sectors, which may not be fundamentally sound, have shown greater gains. That is a worrying sign. Time to be cautiously optimistic.

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 24 ‘12

The seven weeks long rallies on the charts of the BSE Sensex and NSE Nifty 50 indices finally came to a halt last week. There was no dearth of FII buying that had fuelled the rally. Selling by the DIIs overwhelmed the FII buying during the last couple of days. Unless the FIIs also start to sell, the correction should be a shallow one.

BSE Sensex index chart

On the weekly bar chart, the Sensex is trading above its rising 50 week EMA. The 20 week EMA is rising below the 50 week EMA, and an impending cross above the 50 week EMA may seal the fate of the bears. On the downside, the Sensex is likely to receive strong support from the 17000 – 17300 zone (where the 20 week EMA, 50 week EMA and the blue down trend line are congregating). A convincing drop below the down trend line may end the nascent bull market – but as of now, the probability of that happening is low.

The technical indicators are still quite bullish. The MACD is climbing above its signal line in positive territory. But the histogram has dipped a bit. The ROC is positive and rising well above its 10 week MA. The RSI is creeping up towards its overbought zone. The slow stochastic is inside its overbought zone, but showing signs of turning down.

The election results in UP and the central budget after that will be the next triggers for the Sensex to move up or down. Till then, expect some consolidation. Hold on with a stop-loss at 17300.

NSE Nifty 50 index chart

There are a couple of technical points to note on the Nifty 50 daily bar chart pattern. First, the small gap on the chart (between 5420 and 5460) was closed on Fri. Feb 24 ‘12. That has probably put paid to another sharp up move for the time being. Second, the ‘golden cross’ (highlighted by the light-blue oval – just below the blue down trend line) of the 50 day EMA above the 200 day EMA is about to confirm the return to a bull market.

The technical indicators are beginning to look bearish. The MACD is positive, but has crossed below its signal line. The ROC has dropped well below its 10 day MA and is about to enter the negative zone. Both the RSI and the slow stochastic have fallen sharply from their overbought zones and seem ready to slip below their 50% levels.

The correction may continue a bit longer and drop the index below its 20 day EMA. The confluence of the 50 day EMA, 200 day EMA and the blue down trend line should provide strong support near the 5200 level. In case the index falls below 5200, the bull rally may take some time to resume.

Rising oil prices will extract a heavy toll on India’s surging balance of payment problem. If the RBI maintains interest rates at current levels, there will be no fundamental reason for a runaway bull market. However, the FIIs are aware that their buying and selling move the Indian market. So remain calm and follow sound investing principles – like remaining true to your asset allocation plan and picking fundamentally strong stocks that do not use too much debt leverage.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices appear to be resting a little after a hectic rise into the first stage of new bull markets. Stay invested with stop-losses at 17300 (Sensex) and 5200 (Nifty). Any bounce up from the blue down trend lines will be buying opportunities. Drops below the down trend lines may stall the nascent bull markets. Be alert and nimble. No need to be gung-ho bullish or bearish.

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 17 ‘12

Before getting into detailed analysis of the BSE Sensex and NSE Nifty 50 index chart patterns, I have a confession to make. One of the reasons technical analysis is looked down upon by many well-known investors is because it can not ‘predict’ what will happen next – so why even bother to look through charts?

Well, the fault doesn’t lie in the charts but with the analyst who is interpreting the charts. The sudden rally that started on the Sensex and Nifty charts from the Dec ‘11 lows appeared to come as a bolt from the blue and was attributed to a rush of FII buying. That is only part of the story. On a closer inspection of both short-term and long-term charts over the weekend, it became quite clear that both indices clearly formed symmetrical triangle reversal patterns for about 4 weeks.

Why did I miss these reversal patterns earlier? A combination of hubris and a bid to second-guess the market. Symmetrical triangles are usually continuation patterns. Since the indices were in bear markets, it was expected that the break out from the triangles will be downwards. But triangles are notorious for being unreliable and can break out in either direction. Not often do triangles turn out to be reversal patterns. Also, the reversal pattern lasted only 4 weeks – much shorter duration than expected after a year-long down trend.

BSE Sensex index chart

Is this still a bear market rally or the first phase of a new bull market? Two patterns on the 6 months daily bar chart of the Sensex suggests that the trend has indeed changed. First, the small rectangular ‘flag’ pattern that formed after the index convincingly crossed above its 200 day EMA. Such patterns usually form at the mid-point of a strong up (or down) move. That gives an upward target above the 20,000 level. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market.

The break out above the ‘flag’ happened with a ‘gap’ – which makes the break out a strong and valid one. So, the rally is likely to continue despite the overbought condition. The MACD is positive and above its signal line, but the histogram has reduced in height - correcting the overbought situation a little. The ROC is showing negative divergence by failing to reach a new high and slipping below its 10 day MA. Both the RSI and the slow stochastic are well inside their overbought zones, and can stay there a while longer.

If you are holding from lower levels, don’t sell off in a hurry. Maintain trailing stop-losses and ride the bull. If you have missed the rally, don’t jump in now. At some point, there should be a decent 5-10% correction. Enter then.

NSE Nifty 50 index chart

The 4 weeks long consolidation within a symmetrical triangle on the 1 year weekly bar chart pattern of the Nifty was followed by an upward break out on increased volumes. The volumes kept rising even further as the index climbed past the 50 week EMA and the blue down trend line. Strong volume support validates upward break outs.

The technical indicators have turned bullish. The MACD is rising above its signal line and has entered the positive zone. The ROC is also positive and above its 10 week MA. The RSI has moved above its 50% level. The slow stochastic has entered its overbought zone. Any pullback to the blue down trend line – if it happens – will provide a buying opportunity. The ‘golden cross’ of the 20 week EMA above the 50 week EMA will be the final confirmation of a return to a bull market.

The fundamentals remain a matter of concern. Q3 results have shown continued downward pressure on margins of India Inc. The fiscal deficit will end up much higher than announced in the previous budget. Big ticket reforms are pending for a long time. Interest rates remain high.  A Greek sovereign default hasn’t been ruled out. War drums are being beaten - an Israeli attack on Iran can change bullish equations.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices have entered bull markets – thanks to strong buying support from the FIIs. It is unusual to see mid-cap and small-cap stocks making smart moves at the early stage of a bull market. Stock markets move on their own logic – there is no point in trying to second-guess the market. As Steve Winwood sang not too long ago: “Just roll with it, baby” – but remember to maintain trailing stop-losses.

A strategy to beat that ‘missed out’ feeling

A sudden gush of FII money has propelled the Nifty to a 1000 points gain from its Dec ‘11 low, and caught experts and small investors unawares. What had looked like a typical bear market rally is beginning to look more like the first stage of the next bull market.

Many who failed to buy at the low prices of 2011, and those who booked profits and moved to cash in the hope of buying at much lower prices, are feeling that they ‘missed out’ on the rally. How do investors ensure that they don’t miss out on opportunities to buy (or sell)?

In this month’s guest post, Nishit discusses the FoC (Free of Cost) strategy to beat that ‘missed out’ feeling.

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The stock market has rallied more than 20% from the Dec ’11 bottom. Many of us are feeling left out from this rally. What must one do to avoid such a situation? The stock market is one place where one can create a lot of wealth over the long-term. So, how does one go about doing this?

Step 1: Identify about 10 businesses which you feel will do well over the long term (as in next 5-10 years). Remember you are investing in businesses - not only stock prices.

Step 2: Once these businesses are identified, keep a watch on their stock prices. The strategy one will adopt is to keep investing into these stocks at regular intervals.

Step 3: With knowledge about the stock market and Nifty, buy these stocks at attractive valuations. There are 3 things which can happen to the stock prices. They can go up, go down or remain flat.

1. If the prices go down, be ready to average the stocks and buy them at a cheaper rate. For doing this, awareness of the broader trend of the market helps a lot.
2. If prices go up, be ready to book profits. One very effective way of doing this is by making the shares ‘Free of Cost’. Let me give you the example of SAIL. Say 100 shares were bought at Rs 90. Now the price has rallied to Rs 110. I feel I had enough of the ride and expect a correction in the markets. I book out 84 shares and remove my cost price. Now, the remaining 16 shares are free for me (i.e. my holding cost becomes zero). I know that SAIL will continue making steel for the next 10 years (and may be much longer than that). These 16 shares I will not touch unless there is a blow out rally where the Nifty trades in 22 + P/E which would be around 6300+.
3. If prices remain flat, I just wait and watch.

With this strategy, I will not be sad if prices go up and I have not bought anything fresh. If prices go down, I will be having cash to add to my holdings.

The risks to this strategy are the identification of the companies. If one goes for fly-by-night operators and the company goes bust, then one is in trouble. The ‘Free of Cost’ shares become worthless. Hence one has to keep a watch on the fundamentals of the companies and take a call to move on to other stocks.

This approach combines both fundamental and technical aspects. In the last year itself there were 4 bear market rallies. Even if one had booked with about 15-20 % profits one would have had a sizeable quantity of ‘Free of Cost’ shares right now.

This is one way to create long term wealth in the stock market.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 10 ‘12

In last week's post, the 3% 'whipsaw' leeway confirmation of the breaches of the blue down trend lines ruling the BSE Sensex and NSE Nifty 50 chart patterns were awaited. Confirmations have now been received. The bulls (read FIIs) should have celebrated by taking both indices higher. They did try their level best, but were held in check by bear (i.e. DII) selling. Poor IIP numbers didn't help the bullish cause either. The week's trading ended in a stalemate.

BSE Sensex index chart

The weekly candlestick chart pattern of the BSE Sensex formed a 'doji' (highlighted in light blue), which means that there was indecision among bulls and bears. Coming after a strong rally, the 'doji' may be hinting at a corrective move in the coming week. But a 'doji' by itself does not signify too much, and one needs to await bearish confirmation in the coming week. This is one of the challenges in technical analysis. Buy/sell decisions need to wait for various confirmations - by which time the window of opportunity may close, or considerably reduce in size.


The technical indicators are giving mixed signals. The MACD is still in negative territory, but has risen further away from its signal line - as can be seen from the histogram. The slow stochastic has climbed into its overbought zone. The RSI is meandering along its 50% level. But the ROC has turned down sharply, though it remains above its 10 week MA in positive territory.


A correction may revitalize the energy of the bulls. But a correction may not happen because every one expects it to happen. The 20 week EMA is still trading below the 50 week EMA. A cross above will confirm a bull market. Till then, the bears may keep up their selling efforts.


NSE Nifty 50 index chart

In a mid-week update on the NSE Nifty 50 chart, likely technical reasons for the battle for conquering the 5400 level were explained. That battle has not yet been won or lost. The entire week's trading (within the light blue oval) was restricted near the 5400 level, with only a day's close above it on Thu. Feb 9 '12. 


The technical indicators are showing some signs of weakness - which can be expected during a period of consolidation. The MACD is positive and above the signal line, but the histogram has started falling. The ROC is still positive, but has dropped below its 10 day MA and heading down. The RSI has stayed inside its overbought zone for quite some time and may be trying to come down. The slow stochastic is also inside its overbought zone. A pullback to the blue down trend line, or to the 200 day EMA, won't be surprising.


Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are showing some signs of hesitation after a strong rally. That doesn't mean that a correction is going to happen next week. But if it does, the rally may able to continue for a longer period. Don't fret if you have missed the rally. There are always opportunities to make money in bull and bear markets. But one has to work at it.

Nifty mid-week update: bears defend 5400

The bulls seem to be facing a ‘last mile problem’ on the Nifty 50 chart – as the 5400 level is being well-defended by the bears. What is so great about the 5400 level? Quite a bit – if you are a regular follower of the technical analysis posts on this blog.

For starters, 5400 was a previous top in Apr ‘10 (and again in Oct ‘11). Previous tops have a tendency to act as support/resistance levels. In last Friday’s post, four technical definitions of a bull market were discussed. Two of them are of interest in the context of the 5400 level.

One, a 20% rise from the Dec ‘11 low of 4531 gives a level of 5437 – close enough to 5400. Two, a 50% Fibonacci retracement of the entire fall from the Nov ‘10 peak of 6338 to 4531 gives a level of 5434. To satisfy the technical definition of a bull market, the Nifty has to close above these two levels.

There is another point of technical interest mentioned in last Sunday’s post. Note the blue down trend line that dominated the Nifty chart for the past 15 months, and got breached on the upside during the recent rally. An upward breach of any resistance level is technically valid provided it closes at least 3% above the point of breach.

The down trend line was breached on Feb 1 ‘12, and the point of breach came at about 5220. A 3% higher close means a level of about 5370. In technical analysis, exact levels are not important. Approximately, 5370 is close enough to 5400.

Despite an intra-day breach of 5400 on Feb 7 ‘12, the Nifty has so far failed to close above 5370. Obviously, the bears understand and follow technical analysis and are putting up a fight to defend the 5400 level.

Who will win the battle? Will the bulls propel the Nifty above 5400 soon, or will the bears push the Nifty back into its down trend? What do readers think?

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 3 ‘12

The down trend lines connecting the falling tops on the BSE Sensex and NSE Nifty 50 index charts have been breached on a weekly closing basis – the first time that has happened since the down trends began in Nov ‘10.

It is immaterial to debate the cause of the sudden bullishness. It may be ‘hot money’ flowing in, or anticipation of a change in the fundamentals – but that isn’t important. What is important is that trend lines in force for 15 months have been breached, and such breaches have to be respected. Does that mean both indices have returned to bull markets?

Technically, not yet – as was explained in a post on Feb 3 ‘12. There is another reason. Any breach of a trend line (or support/resistance level) should be subjected to a ‘3% whipsaw leeway’. That means, an index (or stock) should go past by more than 3% to avoid a ‘whipsaw’ pullback. Despite strong volumes that accompanied the upward breaches last week, neither index have moved above their down trend lines by more than 3%. Those levels are about 17830 (for the Sensex) and 5370 (for the Nifty).

BSE Sensex index chart

A burst of FII buying did what 15 months of negative sentiments could not – turn the Sensex chart pattern from bearish to bullish. A little more work is left for the bulls before the bears can be finally sent off to hibernation.

Technical indicators are reflecting the bullishness, but there are a couple of concerns. Three of the indicators – ROC, RSI and slow stochastic – are showing negative divergences by touching lower tops as the Sensex rose higher. The RSI and the slow stochastic are well inside their overbought zones, which usually precedes a correction. But the ROC is hugging its 10 day MA, and the MACD is rising above its signal line in the positive zone without moving too far away – so, the up move may not end immediately.

The likely outcome may be a bit of consolidation after a strong rally, or a pullback to the top of the breached down trend line. Note the bullish ‘rounding bottom’ pattern that is forming on the 50 day EMA.

NSE Nifty 50 index chart

The weekly bar chart of the NSE Nifty 50 index clearly shows the breach of the down trend line, accompanied by the strongest volumes in the past year. A trend line break on strong volumes is a sign of a valid break. Both the 20 week and 50 week EMAs have started rising, though the 20 week EMA is well below the 50 week EMA.

Three of the technical indicators – MACD, ROC and slow stochastic – are indicating overbought conditions. The MACD histogram (the bars that plot the difference between the MACD and its signal line) has risen to its highest level in the past year. On two previous occasions – in Apr ‘11 and Oct-Nov ‘11 – rising histogram led to corrections.

The ROC has climbed far above its 10 week MA – note the corrections that followed when this happened in Apr ‘11 and Oct ‘11. The slow stochastic has reached its overbought zone for the first time since Apr ‘11. The RSI is in neutral territory, straddling its 50% level – but has touched a slightly lower top (than the one in Nov ‘11). Looks like a correction may be around the corner after 5 straight weeks of higher closes.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns have rallied impressively from their Dec '11 lows on the back of strong FII buying, and have breached their downward-sloping channels. Technically, the breaches haven’t been confirmed yet – but that could be just a matter of time. Fundamentally, not much has changed since Dec ‘11 when both indices hit their lows. Don’t be surprised if the FIIs decide to book profits. It is always better to concentrate on individual stocks instead of getting hung-up about index movements.

Are the Sensex and Nifty back in bull markets?

Relentless buying by the FIIs have changed stock market sentiments from extremely negative to almost celebratorily positive. Have the Sensex and Nifty returned to bull markets? Is it time to change strategy from ‘selling the rallies’ to ‘buying the dips’?

Technically, there are four criteria that define a bull market. They are:

1. A 20% rise from the bottom.

For the Sensex, the recent bottom was 15136 (touched on Dec 20 ‘11). A 20% rise means a level of 18163. Still a little more than 500 points to get there. For the Nifty, the recent bottom was 4531 (also touched on Dec 20 ‘11). A 20% rise means a level of 5437. A bit more than 100 points away.

2. Index (or stock) trading above its 200 day EMA.

Both Sensex and Nifty are trading above their 200 day EMAs – so this definition has been met.

3. The ‘golden cross’ of the 50 day EMA above the 200 day EMA.

The 50 day EMA of the Sensex is rising, but is still 500 points below its 200 day EMA. The 50 day EMA of the Nifty is also rising but is more than 150 points below the 200 day EMA.

4. Index (or stock) retracing more than 50% of its fall.

The Sensex peaked at 21109 on Nov 5 ‘10, and dropped 5973 points to its low of 15136. A 50% retracement of the entire fall would mean a level of 18122 – almost 500 points away from today’s intra-day high. The Nifty hit a high of 6338 on Nov 5 ‘10, and dropped 1807 points to its low of 4531. A 50% retracement of the entire fall would take the index to 5434 – still about 100 points further than today’s intra-day high. (Now you know why technical experts are talking about the 5400 level.)

Only one (2 above) out of the four criteria that define a bull market has been met so far. Does that mean that both indices haven’t entered a bull market yet? Technically, the answer is in the affirmative. Ideally, meeting three out of the four criteria should leave no doubt that the bulls are on top. For that to happen, another 500 points on the Sensex and 100 points on the Nifty are left to cover. The way the FIIs are buying, that could happen in the very near future.

Related post

Are we in a Bear Market or a Bull Market?

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 27 ‘12

The following concluding comment was made in last week’s analysis of the BSE Sensex and NSE Nifty 50 index chart patterns: “…a flood of FII buying can throw all analysis out of the window.” The deluge of FII buying drowned DII selling, and overbought conditions in the market became even more overbought.

Reminds me of the title of a funny Jack Nicholson movie: Something’s gotta give. Technicals are pointing to a correction at any time, but the market just keeps marching up. Benjamin Graham had said that in the short-term, the market acts like a voting machine. FIIs are definitely voting for a return to a bull market. Q3 results declared so far continue to demonstrate pressure on the bottom lines, even as there have been some growth in top lines.

BSE Sensex index chart

The BSE Sensex weekly bar has just about managed to close above its 50 week EMA and is only 100 odd points below the upper edge of the downward-sloping channel (within which it has traded during the past 15 months). If the FIIs continue their buying spree, the index may breach the channel on the upside and return to a bull market.

The technical indicators are looking bullish and supporting the up move. The MACD has crossed above its signal line, but remains in negative territory. The ROC has risen sharply above its 10 week MA. The RSI has edged above its 50% level. So has the slow stochastic.

Note that the technical indicators were in a similar bullish state during the previous rally in Oct ‘11, but the bear market rally fizzled out near the top end of the channel. Will the Sensex behave differently this time? Only FIIs can provide the answer.

NSE Nifty 50 index chart

The NSE Nifty daily chart is looking bullish to the point of being heavily overbought. The index climbed above the 200 day EMA on a volume surge and has reached the top of the downward-sloping channel. The 20 day EMA has crossed above the 50 day EMA, and though both EMAs are rising they remain well below the 200 day EMA.

The rally has been too fast and too steep, which is typical of bear market rallies. The technical indicators are looking quite overbought. The MACD is above its signal line, and both are rising in positive territory. The ROC is also positive, and rising above its 10 day MA. The RSI and the slow stochastic are well inside their respective overbought zones.

The Nifty can remain overbought for long periods, but a correction, even a short one, will restore the technical health of the index. Otherwise, the bulls may get tired of buying and allow the bears to resume their control.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns had strong bear market rallies from their Dec '11 lows, and have reached the top end of their downward-sloping channels. Will they be able to break out of the bear grips finally? Technically, yes. Fundamentally, no. Nothing has changed much from the time that the Dec ‘11 lows were touched. Interest rates remain at their high points. Same with oil price. Balance of payments continue to deteriorate. Nothing is happening in the policy or reforms front. Inflation has moderated a bit, but that has more to do with the base effect. The Rupee has strengthened, mainly due to the FII inflows. This still looks like a sucker’s rally – but betting against the market can be hazardous to your wealth. Enjoy the ride while it lasts.

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 20 ‘12

BSE Sensex and NSE Nifty 50 index chart patterns closed smartly higher on a weekly basis. Both indices crossed above their 50 day and 20 week EMAs. The FIIs continued their buying, and DIIs continued their selling to keep the up moves in check. No prizes for guessing that the FIIs prevailed in last week's bull vs. bear contest.


Q3 results declared so far show that India Inc. is facing downward pressure on their bottom lines, even as there have been instances of top line increase. Reliance announced a buyback during the early part of last week, which boosted its stock price and both indices. By the end of the week, the company announced disappointing results, which may trigger a correction.

Both Sensex and Nifty indices are trading within downward sloping channels and below their respective 200 day and 50 week EMAs. That is a sign that the bears are still on top, and the rallies from the Dec '11 lows should be treated as bear market rallies; i.e. opportunities to sell. Breaking above the downward sloping channels and sustaining above them for a few days can finally change the trend. Will the indices be able to do that?

BSE Sensex index chart

The Sensex has moved up smartly above its 20 day and 50 day EMAs, and the 20 day EMA is about to cross above the 50 day EMA. Overhead resistance to a further up move can be expected from the falling 200 day EMA and the upper edge of the downward-sloping channel. The index had failed to cross above the downward channel on three previous occasions. Will it be fourth-time-lucky?

The technical indicators seem to suggest so. Both the MACD and the ROC have entered positive territory and are still rising. But the RSI and the slow stochastic are in their overbought zones from where they appear to be turning back.

Next week has an early settlement because of Republic Day holiday on Thursday. Coupled with the less-than-stellar RIL results, the stage may be set for some profit booking.

NSE Nifty 50 index chart

The weekly chart of the Nifty shows a clear breach of the 20 week EMA on strong volumes, which is a bullish sign. Three of the technical indicators are also showing signs of bullishness. The MACD has crossed above its signal line and the ROC has risen above its 10 week MA, but both are still negative. The slow stochastic has emerged from its oversold zone, but is yet to climb up to its 50% level. The RSI is showing a contra-indication by slipping down after touching its 50% level.

Both indices are indicating short-term bullishness but long-term bearishness. Let us take a look at two breadth indicators to gauge the sustainability of the current rally. 

First, the Nifty A-D line:

Note that the A-D line is moving sideways, and failed to climb higher with the Nifty. This is a negative divergence that may trigger a correction.

Now, the Nifty TRIN:

A week ago, the TRIN was at an overbought level of 0.6. Last week, it dropped further to 0.5. Note that in the past 12 months, the TRIN has bounced up from the zone between 0.6 and 0.8 a few times (0.75 is the demarcation level, below which the market is overbought). While the market can remain overbought or oversold for long periods, the upside risk has increased considerably.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns had splendid bear market rallies from their Dec '11 lows, and look ripe for profit booking. RIL's disappointing results may trigger the selling. The fundamental situation hasn't shown any great improvement to sustain a rally. But a flood of FII buying can throw all analysis out of the window. It may be prudent to wait for a break out of the downward sloping channels before deciding on entering.

5 reasons why this is a sucker’s rally and not a change of trend

P. T. Barnum, a 19th century American circus owner, had apparently said: “There is a sucker born every minute.” Translated into English, that means that the world is full of gullible people. Any idea, however ridiculous and unbelievable it may be, is sure to find a few takers.

Crazy ideas - from ‘the world is flat’ and ‘the sun moves around the earth’ to ‘Suzlon is the next GE’ and ‘RJ is the Warren Buffett of India – follow his portfolio if you want to become rich’ – always find believers (a.k.a. ‘suckers’).

So, what is a “sucker’s rally”? It is a sharp price rise in an index or a stock without the support of fundamentals – usually during a bear market. Here are 5 reasons why the current rally in the Sensex and Nifty indices is a sucker’s rally:

1. There is a ‘gut feeling’ among small investors that the worst is over. Gut feelings are seldom right, unless the guts belong to some one called Warren Buffett. Even Buffett is known to make mistakes. Keep your guts where they belong. Use your brains instead. The problems in Europe haven’t been solved yet. China’s economy is struggling with slower growth. The worst may not be over yet.

2. A general consensus among market players is that RBI may start reducing rates soon; even if the interest rate remains where it is, there is likely to be a cut in the CRR to increase liquidity. The RBI has not indicated any such thing. They have only paused in hiking interest rates further. That means, interest rate remains just as high as it was a month ago when the Sensex and Nifty hit their lows. Stock markets can’t sustain in a high interest rate environment.

3. Though food inflation has started coming down, it may be more due to a high ‘base effect’ and seasonal availability of vegetables. Core inflation has moderated a bit, but still remains high. RBI has made it quite clear that controlling inflation is their top priority. Unless core inflation drops below 5%, interest rate cuts may not be effected. Inflation won’t come down as long as the government spends recklessly on various schemes to buy votes.

4. The government’s policy inaction will continue till the annual budget is announced in mid-March – thanks to the impending elections in five states. The only bit of good news for foreign investors in recent times has been the Supreme Court’s judgement in the Vodafone case, stating that the Income Tax department has no jurisdiction over a transaction between two overseas entities. But that judgement is more in the nature of removing an unnecessary irritant than paving the way for any fresh investments. The government has to be far more proactive on the policy front to change the commonly held perception that it is bureaucratic and inept.

5. Technically, both the Sensex and Nifty are in 14 months long bear markets. Bear markets (and bull markets) don’t turn around suddenly. They usually form some sort of a reversal pattern, which takes a few weeks to a few months to form. No such reversal pattern is visible as yet.

The recent spate of FII buying has begun to attract inexperienced small investors who don’t want to miss the bus. Technical indicators are looking overbought. The stage seems set for the big boys to get out. The suckers may get stuck with shares bought at higher prices.

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 13 ‘12

BSE Sensex and NSE Nifty 50 index chart patterns closed higher on a weekly basis but both indices are yet to convincingly cross above their 50 day EMAs and down trend lines (marked DTL). The FIIs have stepped up their buying, but DII selling kept the up moves in check.

Q3 results have started to trickle in. Infosys did well, but their Q4 guidance disappointed the market and the stock took a beating. IndusInd Bank declared encouraging results. HDFC results were also good. The market is factoring in some positive policy announcement by the RBI later this month.

Both the indices are trading within their down trend channels and are in bear markets. Till they break out above their downward channels, the bears will remain on top.

BSE Sensex index chart

The Sensex is facing resistance from the blue down trend line (DTL) within the downward-sloping channel. In case the FIIs continue their buying, the up move will need to cross above three important hurdles – the falling 20 week and 50 week EMAs and the upper end of the channel.

The weekly technical indicators are still bearish, but showing signs of turning around. The MACD is negative, but has moved up to touch its signal line. The ROC is negative and below its 10 week MA, but starting to rise. The RSI is just below its 50% level. The slow stochastic has emerged from its oversold zone.

Note that the last four weeks’ trading has formed a bearish ‘flag’ pattern, from which the likely break is downwards. However, volumes have risen during the formation of the flag, which is a contrary indication. Has the rally run its course?

NSE Nifty 50 index chart

The Nifty index has moved above its 50 day EMA and the DTL, but not very convincingly yet. Volumes have picked up in the last week, thanks to FII buying. The technical indicators are bullish, but showing signs of weakness. The RSI is above its 50% level, but touching lower tops while the index moved higher. The slow stochastic is turning back after entering its overbought zone. The MACD is rising above its signal line, and about to enter the positive zone. The ROC is positive and above its 10 day MA, but its upward momentum has slowed down.

There has been bullish opinions expressed among some technical analysts that the DTL and the lower end of the downward channel has formed a bullish falling wedge pattern. But two reasons put a question mark over such a prognosis. Falling wedges usually occur as continuation patterns within an up trend. Any pattern formation within a prolonged downward channel is unlikely to have any long-term implication.

A look at the Nifty TRIN should send most bulls scrambling for cover:-

The current rally in the Nifty started after touching a low of 4531 on Dec 20 ‘11 when the TRIN (in red) touched an extremely oversold level of 1.5 (any level of 1.2 and above is considered oversold). The TRIN has now dropped to an overbought level of 0.6 (levels of 0.75 and lower are considered overbought). Is this a warning prior to a break below the downward channel?

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns are in bear markets and falling within downward sloping channels. Several counter-trend rallies have provided bears with opportunities to sell. A sharp fall below the down trend channels can occur at any time. Smart investors may use such a fall to accumulate fundamentally strong stocks for the long-term.

Related Post

Two market breadth indicators

Why did the stock market fall despite a good IIP number?

India’s Nov 2011 IIP (Index of Industrial Production) came in at 5.9% – higher than the consensus estimate – raising hopes of a quick return to the growth path. Considering the Oct 2011 IIP of –5.1%, there was a huge 11% swing month-on-month.

The stock market should have celebrated by spiking higher – specially since both the Sensex and Nifty are in the midst of rallies from their recent bottoms. Instead of doing the obvious by rising, both indices lost ground. Not much, but enough to cause consternation among small investors.

What is going on? Is this just the way Mr Market behaves to separate investors from their hard-earned money?

There can be a few logical explanations, which are mentioned below:

1. Both the Sensex and Nifty are in the midst of prolonged bear markets. Good news tend to get ‘discounted’ quickly and bad news causes renewed selling during bear markets.

2. Infosys – which is generally considered to be one of the bellwethers of the Indian stock market – announced better than expected Q3 results, but disappointing Q4 guidance and got hammered. Its high weightage in both indices caused the fall.

3. Oct 2011 IIP number was unusually low – but one must remember that it was a festival month (Navratri and Diwali), which meant lower production days due to the holidays. Nov 2011 IIP was comparatively much better, but some of the new orders may be due to inventory replenishment. Lower growth usually leads to inventory draw-downs (companies tend to let their existing inventory get depleted almost completely before placing new orders).

4. Technically, both indices retreated after facing twin resistances from their 50 day EMAs and DTLs (refer last Sunday’s post on Sensex and Nifty chart patterns).

5. All of the above.

Stock markets don’t necessarily move according to logic. In the short-term, sentiments can, and often do, overrule the fundamentals. So can a rush of buying or selling by the FIIs. What should small investors do?

Remember an old saying: “Buy the rumour; sell on news.” There is no better example of that maxim than today’s price action in the TTK Prestige counter. The company announced impressive Q3 results, but the stock lost more than 7% after the ‘good news’!

The stock market is in a state of flux. After 14 months of down trend, small investors are becoming impatient to buy in the hope of a trend reversal soon. Please be aware that interest rate is still high. So is inflation – though food inflation has turned negative. Stock markets don’t reverse trend till the first few interest rate cuts happen.

There is a clamour for a CRR rate cut from all corners. If the Nov 2011 IIP figure is the reality, i.e. economic growth is back on track instead of what has been mentioned in point 3 above, then there is no reason for the RBI to cut the CRR – let alone cut the interest rate. A rate cut may stoke the inflation fire.

In other words, there is no need to turn bullish yet. Await Q3 results of the big guns and RBI’s policy announcement on Jan 24. You may miss the absolute bottom by being conservative, but in a bear market it is better to be safe than sorry.

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 07 ‘12

The BSE Sensex and NSE Nifty 50 index chart patterns spent the first week of the new year consolidating within narrow ranges in an extended week necessitated by the extra trading on Saturday to test a new software installation at NSE.

Food inflation came in at a negative figure – probably due to the high ‘base effect’ and seasonal inflow of vegetables. Much was made of the higher than expected PMI figure – but whether the improvement was due to inventory replenishment (which happens after inventory draw downs during a slower growth period) or rising production due to new orders will only be known after a couple of months.

Government’s annual budget has been postponed by two weeks to accommodate elections in a few states. Till then, important policy decisions will be kept in abeyance. Not that this government has been very forthcoming with important policy decisions! Q3 results, to be announced from this week onwards, and RBI’s interest rate policy announcement towards the end of this month will be the next triggers for the indices to change directions or continue their downward slides.

BSE Sensex index chart

The Sensex played hide-and-seek with its 20 day EMA and managed to stay above the support level of 15700. But it is trading well below its 200 day EMA, and also below its 50 day EMA and the small down trend line (marked DTL). The bears are very much in control. The convergence of the 50 day EMA and DTL may provide strong resistance on the up side.

Can the Sensex move up much further from here? The technical indicators are giving out mixed signals. The MACD is rising above its signal line, but is in negative territory. Mildly bullish. The ROC has dropped below its 10 day MA into the negative zone. Bearish. The RSI is rising above its 50% level towards the overbought zone. Bullish. The slow stochastic turned down immediately after entering its overbought zone. Mildly bearish. Honours were even between the bulls and bears last week.

Some more sideways consolidation can be expected in the near term.

NSE Nifty 50 index chart

Despite the extra trading session on Sat. Jan 7 ‘12, the weekly volume bar of the Nifty isn’t conducive for a stronger rally. Note that the last three green volume bars (representing weeks when the Nifty closed higher than the previous week) are reducing in size. That shows lack of buying conviction.

The technical indicators are all bearish, but showing faint signs of a turn around. The MACD is below its signal line, but has stopped falling. The ROC is looking very weak, falling below its 10 week MA, deeper into the negative zone. The RSI is trying to climb towards its 50% level. The slow stochastic is trying to emerge from its oversold zone.

The Nifty is trading well below its 20 week and 50 week EMAs, and remains in a bear market.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns continue their falls within downward-sloping channels. The balance of power is with the bears, and sharp falls below the channels may happen at any time. Some mid-cap and small-cap stocks have started jumping around. Don’t be tempted to buy – these are called ‘sucker’s rallies’. Remain patient. If you want to buy for the long term, accumulate fundamentally strong stocks slowly.

5 strategies to follow in a bear market

Most small investors enter the stock market when a bull market is nearing its peak. They don’t have clear goals and strategies, and get caught on the wrong foot by the bear market that inevitably follows. The trauma of losing money in a hurry can be soul-destroying.

Without the necessary skills and experience of surviving in a bear market, investors resort to all kinds of ill-advised strategies in an effort to quickly recover the losses. That only makes a bad situation worse.

The current bear phases in the Sensex and Nifty indices are 14 months old, and so far there has been very little indication of a reversal in the down trends. Experts are saying that the bear phase can last till the first half of Financial Year 2012-13. If they are right, the bear market may sustain till Sep 2012 – another 9 months!

Whether you are one of the unfortunates who are ‘stuck’ at higher levels, or a more seasoned investor who is sitting on cash to deploy at lower levels, here are 5 strategies that you may want to follow in the current bear market:-

1. Remember that bear market rallies are sharp and swift. Don’t jump in by thinking that you will miss a buying opportunity at a low entry price. Such rallies are some times ‘created’ by bears so that they can sell at a higher price.

2. Just because a stock has fallen to a 52 week low doesn’t mean it can’t fall any lower. As long as the trend is down, it can fall lower. If it is worth buying, being patient can help you to enter at a much lower price.

3. A sharp vertical drop in price – often accompanied by strong volumes - usually attracts a lot of buyers who believe that they are being smart by entering at a low price. It is the sign of a ‘panic bottom’, which seldom holds. Prices bounce up on the buying, but then fall lower than the ‘panic bottom’.

4. At the risk of sounding like a broken record (or, a damaged CD) – do not, repeat do not, average down in price. No one knows how much further a stock’s price will fall, or worse still, if it will ever recover (e.g. Cranes Software). It is far better to average up once the price forms a bottom and starts its up move.

5. Major down trends are not reversed in a day or a week. Bottom reversal patterns take a few weeks to a few months to form. Ability to ‘read’ chart patterns can help investors to accumulate a stock while a reversal pattern is ongoing (refer Chapter 7: Reversal Patterns of my free eBook: Technical Analysis – an Introduction).

If you can’t ‘read’ a reversal pattern, don’t worry. Eventually, prices will turn up and a new bull market will begin. You may enter at a higher price, but the chances of a loss can be minimised by using a trailing stop-loss.

Related Posts

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Five more things to avoid in a Bear Market

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 30 ‘11

The BSE Sensex and NSE Nifty 50 index chart patterns spent an entire year trading within downward-sloping channels, alternatively raising and dashing the hopes of small investors. A series of scams and government inaction on the policy reforms front spooked the FIIs, and they voted with their feet.

RBI’s attempts to stem the rising inflation rate through 13 interest rate hikes failed to tame inflation, but slowed down the growth engine of India Inc. to crawl speed. The government continued with its spending profligacy – subsidy payments and the NREGA scheme drained the coffers without increasing productivity – and aggravated inflation. Depreciation of the Rupee added to the woes.

All in all, a forgettable year. The good news is that neither of the two indices collapsed like they did three years ago. That doesn’t mean that sharp falls have been ruled out. 2012 is likely to be quite challenging – at least the first half of the year is unlikely to show any significant improvement in the economy or the stock indices.

BSE Sensex index chart

Last week, it was mentioned that any bounce from the lower edge of the downward channel would be a weak one. How was the conclusion drawn? The technical indicators on the daily and weekly charts had looked bearish, though positive divergences were visible on the daily chart. Note that the weekly bar of the Sensex moved above the support level of 15700 but stopped well short of the falling 20 week EMA. The index closed the week, month and year below the 15700 level – losing more than 25% for the year.

There is no respite for the bulls visible on the weekly Sensex chart. The index is trading below its falling 20 week and 50 week EMAs. All four technical indicators are bearish. The MACD has crossed below it signal line deep inside negative territory. The ROC is also negative and below its 10 week MA. The RSI is below the 50% level, but trying to rise. The slow stochastic has fallen inside the oversold zone. Expect a test and possible breach of the lower edge of the trading channel.

NSE Nifty 50 index chart

The weak bounce up from the lower edge of the downward channel took the Nifty above the support level of 4700 – only to face resistance from the falling 20 day EMA and sip down below 4700 at today’s close.

Note that during Apr ‘11 and Jul ‘11, the index made several unsuccessful attempts to break out above the downward channel. During that period, the lower edge of the channel wasn’t tested even once. The tables have turned in the past 5 months. Only one serious attempt was made to test the upper edge of the channel in Oct ‘11. But multiple attempts were made by the index to breach the lower edge of the channel.

It seems as if the weight is shifting downwards, and the next couple of attempts to breach the lower edge of the channel may lead to a sharp fall - which the bulls have been able to prevent so far. The technical indicators have corrected oversold conditions, but are looking bearish.

The MACD is about to cross below its signal line in negative territory. The ROC is above its 10 day MA and trying to enter the positive zone. Both the RSI and slow stochastic are below their 50% levels. For the past two months, the Nifty is also facing resistance from a small blue down trend line drawn within the downward channel.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns are falling gradually within downward-sloping channels. The balance of power is shifting to the bears, and sharp falls below the channels may happen sooner than later. Remain patient, but stay prepared. Some investable funds may be locked away in long-term bonds offering tax-free interest.

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 23 ‘11

Technical analysis of the BSE Sensex and NSE Nifty 50 index chart patterns last week posed a challenge as both indices dropped towards the lower edge of their downward channels. Would the indices bounce up or not? The technical indicators on weekly charts looked bearish except for a positive divergence in the ROC.

All four technical indicators in the daily charts showed positive divergences. Plus the Nifty TRIN had spiked up above the 1.2 level, which is usually followed by a bounce. The conclusion was that the likely bounce will be a weak one.

BSE Sensex index chart

The Sensex fell during the first two days of trade last week, and even closed below the downward channel for a day. Two days of upward bounce took the index above the support level of 15700. On Fri. Dec 23 ‘11, the index moved up to face resistance from the falling 20 week EMA and just about managed to close above 15700. A higher weekly close hasn’t changed the technical situation a great deal.

The technical indicators are bearish, but showing faint signs of turning around. The MACD is negative and below its signal line, but trying to move up. The ROC is also negative, but has just crossed above its 10 day MA. The RSI is at the edge of its oversold zone. The slow stochastic has climbed out of its oversold zone.

The odds are still stacked in favour of the bears. The periodic counter-trend rallies have provided them with selling opportunities. A small down trend line within the downward channel has been drawn by connecting the Nov ‘11 and Dec ‘11 tops. The 50 day EMA and the small down trend line are likely resistances for any up move in the last week of a forgettable 2011.

NSE Nifty 50 index chart

The weekly bar chart of the Nifty 50 index shows that the 4700 level, which provided support during Aug and Sep ‘11 is now turning into a resistance level. The weekly volume bar shows the same volume as the previous week’s – which doesn’t augur well for sustaining a rally.

The technical indicators are bearish. The MACD is negative and below its signal line. The ROC is negative and below its 10 week MA. The RSI is below its 50% level. The slow stochastic has dipped into its oversold zone. Things aren’t looking very good for the bulls at this stage.

Inflation is showing moderation, but repeated interest rate hikes have put the brakes on economic growth. It will take a while before the growth engine starts chugging along at full steam. Substantial interest rate cuts are required before that. Less than commendable Q3 results next month may trigger off more selling.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns are still sliding within downward-sloping channels. Breaks below the channels can’t be ruled out. It is disheartening to spread gloom on Christmas Eve – so here is an attempt to spread some good cheer: Next year around this time, the stock market should be in much better shape. (Regular readers of this blog may please stay tuned for a surprise gift on New Year Eve.)

Wishing all readers, followers and subscribers a merry Christmas and a happy 2012.

Nifty 50 chart pattern: a midweek update

The following comments were made in last Sunday’s post:

“The NSE Nifty 50 daily chart pattern is clearly showing positive divergences from all four technical indicators, which made higher bottoms while the index fell lower. That should lead to an upward bounce. Perhaps a weak bounce because the indicators are looking bearish.”

“TRIN has spiked up sharply to 1.4, which indicates oversold conditions and a very likely upward bounce. A TRIN level of 1.2 and higher indicates oversold conditions, which is usually followed by an up move.”

Instead of bouncing up, the Nifty continued its fall during the first two days of the week, closing at 4544 on Tue. Dec 20 ‘11 - below the downward channel. The TRIN rose to 1.5 – its highest level in the past year. Positive divergences disappeared from the MACD and slow stochastic indicators, but both the ROC and RSI continued to show positive divergences (marked with blue arrows in the Nifty 50 chart below).

The strong 150 points bounce in today’s trading has not changed the technical picture greatly. The index has moved back within its trading channel and prevented a steep fall for now, but its upward bounce stalled near the 4700 level that had earlier provided support during Aug to Oct ‘11.

Today’s up-day volumes were about the same as yesterday’s down-day volumes, and lower than Monday’s down-day volumes. That probably means more short covering than buying. All four technical indicators are bearish – though showing some signs of turning around. The MACD and ROC are negative. The RSI is below its 50% level. The slow stochastic is in its oversold zone.

As mentioned in last Sunday’s post, don’t try to chase this bounce because it may not go very far. Even if the Nifty crosses the 4700 barrier, resistance can be expected from falling 20 day and 50 day EMAs.

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 16 ‘11

In last week’s analysis of the BSE Sensex and NSE Nifty index chart patterns, I had mentioned the likelihood of both indices falling below their support levels (marked by blue dotted lines). So, the break and close below the support levels on Fri. Dec 16 ‘11 should not have come as a surprise to this blog’s followers. The good news is that neither index fell below its downward channel. We will expect both indices to continue trading within their downward channels – unless something drastic happens in the global or local economies.

BSE Sensex index chart

The sharp fall last Friday dropped the weekly bar of the Sensex to a closing level below 15500 – its lowest weekly close in more than 2 years. While that may sound ominous, it isn’t the end of the world – yet. Note that the Sensex fall stopped just short of the lower edge of the downward-sloping channel.

Will the Sensex bounce up – like it did on the past few occasions when it dropped to the lower edge of the channel? Three of the technical indicators are suggesting: ‘No’. The MACD has slipped below its signal line in negative territory. The RSI is falling below its 50% level. The slow stochastic is moving sideways below its 50% level, but has started sliding.

Only the ROC is showing positive divergence by touching a higher bottom while the index dropped lower. However, the ROC is negative and below its 10 week MA. So, any bounce up may be a weak one and induce more selling. There is a possibility of some FII buying in the next week – due to year-end considerations.

NSE Nifty 50 index chart

The NSE Nifty 50 daily chart pattern is clearly showing positive divergences from all four technical indicators, which made higher bottoms while the index fell lower. That should lead to an upward bounce. Perhaps a weak bounce because the indicators are looking bearish. The MACD is negative and below its signal line. The ROC is also negative – but has dropped too far below its 10 day MA. The RSI failed to cross above its 50% level. The slow stochastic has just entered its oversold zone.

A look at the NSE TRIN indicator gives a slightly different picture:

Note that the TRIN has spiked up sharply to 1.4, which indicates oversold conditions and a very likely upward bounce. A TRIN level of 1.2 and higher indicates oversold conditions, which is usually followed by an up move. (Please don’t go crazy about chasing the bounce!)

The pause in interest rate hike by the RBI should have encouraged the market – but didn’t. Ignoring ‘good news’ is the sign of a bear market. Inflation still remains high, even though food inflation has come down. The de-growth in IIP is a huge concern.

Many corporate honchos are fed-up with policy inaction and flip-flops by the UPA government and want to shift their businesses overseas. Some have started spending a lot of time overseas to manage their global businesses. The BJP-led opposition along with the Leftists are trying to corner the government on the issue of corruption, but stalling the passage of the Lokpal Bill which is meant to curtail corruption!

In short, the economic and political climate is just not conducive enough for the stock market to stop its steady slide.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns continue their slide within downward-sloping channels. Bravehearts can trade the range. Sensible investors may be better off parking their money in bank fixed deposits or gilt funds. Those who are accumulating good stocks trading at reasonable values should keep a two-three years time frame in mind.