Saturday, August 14, 2010

BSE Sensex Index Chart Pattern – Aug 13, '10

Another week has come and gone without any noticeable difference in the BSE Sensex index chart pattern. I remember being surprised by the hot and humid weather when I visited Chennai in the month of January once. A long-term resident of the city had enlightened me: ‘We have three kinds of weather in Chennai – hot, hotter and hottest’!

The Sensex has exhibited three different types of behaviour in the past year – boring, more boring and utterly boring. Just when you think it can’t possibly move up any further and is due for a correction, the index makes a new high. When it starts to drop and you get ready to shake off the dust from your ‘buy’ list, it abruptly stops falling.

No wonder Buffett had once said: ‘Making money in the stock market is simple but not easy’. Many investors would do well to remember that, and not indulge in unnecessarily risky strategies in the hope that more risk may lead to more gain. That theory may work in drug smuggling, but leads to losses in the stock market.

Particularly disturbing are some emails I received from recent market entrants who want to know how they can start trading, and whether I provide daily tips using email or SMS. There can be only one response to such queries: read about how the stock market works and learn how to become a long-term investor; leave trading to the experienced professionals.

There is a saying in Bengali: some learn by observing, others learn by losing money. A small minority will heed my advice. The rest will lose money and then learn.

The one year bar chart pattern of the BSE Sensex index continued its gyrations in the upward-sloping channel:

Sensex_Aug1310

Note that the higher tops of the index during the past two months have not been matched by the technical indicators. The MACD and RSI have made lower tops while the slow stochastic has made a series of tops at the same level.

These negative divergences could lead to a bigger correction than the three day blip we saw last week. But the technical indicators are showing bullish signs. The RSI and slow stochastic bounced off their 50% levels. The MACD has slipped below the signal line, but remains in positive territory.

Thursday’s (Aug 12 ‘10) trading was interesting, as the Sensex formed a ‘reversal day’ pattern on decent volumes. It dropped below the 20 DMA to make a lower low, but moved up to close marginally higher than the previous day and exactly on the 20 DMA. It wasn’t surprising that the index moved up on Friday and closed 23 points higher on a weekly basis.

The FIIs have been net buyers during the week. Selling by the DIIs caused the three days of weakness, but they turned net buyers on Friday. The index is receiving good support from the 20 DMA, and all three DMAs are moving up.

If you look at last week’s longer-term chart of the BSE Sensex and observe the pattern from the low of Mar ‘09 till date, and compare it with the pattern following the recent low of May ‘10 – you will find an uncanny similarity.

A narrower upward-sloping consolidation channel within a wider upward-sloping channel (almost like the villain ‘Mini-Me’ of the Austin Powers movies!):

Sensex_Aug1310_2

Bottomline? The chart pattern of the BSE Sensex index is trying to break out upwards, but is being held in a tight leash by the bears – resembling a tug-of-war with one side slowly gaining ground but the other side refusing to give up without a good fight. Stay invested, and watch the ‘Mini-Me’ channel (of about 400 points width) closely.

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