In last week's analysis of the BSE Sensex index chart pattern, I had mentioned that the bulls may get encouraged by the budget provisions but the rally may face resistance in the 16700 - 17500 zone.
In a 'Holi'day shortened week, the Sensex quickly entered the resistance zone and went as far as the 17100 mark - which was exactly in the middle of the resistance zone and just above the 61.8% Fibonacci retracement level of the fall from 17790 in Jan '10 to 15652 in Feb '10.
Though the index closed about 3.5% higher for the week it failed to close above the 17000 level. So, have the bears been rocked back on to the ropes and awaiting the knockout punch? The 3 months bar chart pattern of the BSE Sensex index would seem to suggest that:-
The Sensex is forming a bullish saucer-like pattern which can take it at least to the Jan '10 high. May be even higher. Can't see the pattern? Take a look at the 20 day EMA, which is smoothly moving up towards the 50 day EMA and should cross above it next week.
The 200 day EMA continues its up move. Volumes have been decent for a change. The slow stochastic has entered the overbought zone. The RSI is about to do likewise. The MACD has turned positive and is well above the signal line. The MFI is above the 50% level and climbing.
Strong FII buying has been the single most important factor in the post-budget rally. The DIIs have sold heavily - may be to raise money for investing in the slew of forthcoming PSU divestments. They had to bail out a couple of recent FPOs.
The bears have a few straws to cling on to. The feel-good factor seems to be returning among retail investors as they try to lap up mid and small cap stocks. Valuations - particularly for the large caps - are beginning to look stretched again.
Technically, the RSI tends to react downwards soon after hitting the overbought zone. Will the Jan '10 pattern get repeated? It is a possibility that investors should keep in mind.
Bottomline? The chart pattern of the BSE Sensex index is poised at an interesting stage. Keep an eye on the Dow, which has started to soar again. The odds are favouring the bulls. Avoid sectors that have already moved up considerably. Look for fundamentally strong scrips in beaten-up sectors.
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