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Sunday, May 19, 2013

BSE Sensex and NSE Nifty 50 index chart patterns – May 17, 2013

BSE Sensex index chart

FII buying caused the 5th straight week of higher closes – despite continuous selling by DIIs and an overhang of equity dilutions by companies with more than 75% promoter holdings. There are several interesting technical chart patterns visible in the weekly bar chart of Sensex below, and they will be discussed one by one – starting from the extreme left of the chart.

First, the ‘diamond’ reversal pattern (which can be looked upon as a head-and-shoulders pattern with a bent neckline) that formed during Oct – Dec ‘10. It ended the previous bull phase that started from Mar ‘09. Note that a horizontal dotted line drawn from the right apex of the ‘diamond’ has acted as a resistance level for more than 2 years – in one of those ‘coincidences’ that frequently appear in technical charts!

The bear phase that started after the break down below the ‘diamond’ and ended with an intra-week low of 15136 in Dec ‘11 actually turned out to be the first half of a bullish consolidation pattern known as a ‘cup and handle’. This is an example of why one needs to look at short-term, medium-term and long-term charts before arriving at a conclusion.

SENSEX_May1713

The ‘handle’ formation appears to have completed, and the rally during the last 5 weeks is about to convincingly breach the resistance level of the dotted line (at about 20200). Upward target of the ‘cup and handle’ pattern is 25000, as explained in this post. The index is trading above its rising 20 week and 50 week EMAs. The next leg of the bull market that started in Mar ‘09 is ready to unfold.

Weekly technical indicators have turned bullish, but all four are exhibiting negative divergences by failing to touch new highs with the index. Does that indicate a possible reversal of trend, or a more probable correction/consolidation near a previous top? What do readers think – and why?

NSE Nifty 50 index chart

The drop in WPI inflation below RBI’s threshold level of 5% seems to have given a boost to the bulls – though the ‘base effect’ probably had more to do with it than a real fall in prices. In any case, the ‘drop’ is not really a drop, but an increase at a slower rate. Investors need to understand this concept about the rate of inflation.

Q4 results declared so far have been better than expectations and not as bad as Q3 results. That has also added to improved sentiments. Mid-cap and small-cap stocks have started to move up again – probably an indication that retail investors are returning to the market (not surprising near a new high!).

Nifty_May1713

All three EMAs are rising and Nifty is trading above them. A new up trend line has been drawn connecting the Jun ‘12 and Apr ‘13 bottoms. All four daily technical indicators are bullish and looking overbought. That doesn’t mean Nifty can’t move up higher. Rising volumes last week – after the break out above 5970 and a pullback - is a bullish sign.

However, the need for caution at a new high can’t be over-emphasised – particularly when three of the four technical indicators are showing negative divergences by touching lower tops (marked by blue arrows). Don’t sell off in a panic at the first hint of a correction. Don’t try to short a bull market. Stay invested with a trailing stop-loss, or add stocks where you see compelling value.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are about to embark on new bull phases after touching 2 year highs. Don’t expect a one-way up move. Use corrections/consolidations as adding opportunities. Select only the best quality stocks, and maintain a stop-loss.

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