BSE Sensex and NSE Nifty 50 Index Chart Patterns – Feb 18, ‘11

In last week’s analysis, I had expected a pull back rally based on the ‘reversal day’ pattern on both the Sensex and Nifty charts on Fri. Feb 11 ‘11. The following comments may be worth repeating:

‘An upward bounce is likely, but may find resistance from the first support zone and the falling 20 day EMA. In case the Sensex manages to move up further, the 200 day EMA will be a tougher resistance to overcome.’

BSE Sensex Index Chart

As if on cue, the Sensex started a pull back rally that found resistance from the falling 20 day EMA on Tue. Feb 15 ‘11 and Wed. Feb 16 ‘11; moved up further to the top edge of the support zone at 18500 on Thu. Feb 17 ‘11; and, in today’s (Feb 18 ‘11) trading, crossed above the support zone intra-day, found strong resistance from the 200 day EMA and fell back within the support zone.

Technically, the support zone was not breached. The Sensex failed to close above it. More worrisome for the bulls is the formation of another ‘reversal day’ pattern (higher high, lower close) on the chart, backed by good volumes. The short pull back rally seems over. What next?

There could be a bit of consolidation within the support zone before the down move starts in earnest. The MACD has crossed above its signal line, but remains negative. The ROC is above its 10 day MA, and is trying to stay in positive territory. The RSI has turned down after reaching the 50% level. The slow stochastic is touching the edge of its overbought zone.

The ROC, RSI and slow stochastic have reached higher tops while the Sensex made a lower top. The positive divergences may enthuse the bulls. The ‘death cross’ has also been averted for the time being. But this is probably a better time to sell or stay away. A test of the 17500 level, and even of the previous low around 16000, are well within the realms of possibilities.

NSE Nifty 50 Index Chart

An interesting picture emerges by including the OBV indicator instead of the MACD in the Nifty 50 chart. The correction in the Nifty 50 began after the index hit its peak of 6338 in Nov ‘10. But the OBV hit its peak in Oct ‘10, and has since been making a pattern of lower tops and bottoms – a sign of distribution. Even during the Dec ‘10 rally, the Nifty 50 made a higher top but the OBV made a lower one. A clear sign of smart money moving out.

The FIIs will continue to book profits and redeploy in their home markets, as well as other emerging markets where valuations look more reasonable. There are signs of inflation in the US and in Europe. That means the economic recovery is beginning to gain momentum. As long as the valuation gap remains, the FIIs won’t resume buying in a big way.

Inflation has started to moderate in India – partly due to the base effect. The monetary tightening by the RBI is also cooling things down. Investors should not have high hopes from the budget. Q4 results of India Inc. may show a reduction in profit margins. Till interest rates flatten out and start going down, buying stocks may not be a smart move.

Bottomline? The corrections in the chart patterns of the BSE Sensex and NSE Nifty 50 indices continue. Periodic rallies will only encourage the bears to sell more. Playing a waiting game could provide better value buys over the next few months.