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Sunday, July 27, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 25, 2014

Q1 results declared so far have been a mixed bag. Apart from the large IT services companies, positive surprises have been fewer, and stock specific. Even private banks are beginning to show a degradation in performance.

It may take a couple of more quarters before India Inc. gets well and truly on a revival path. The new government is trying to do its best. Reports indicate a change in attitude and activity among the ‘babus’ – who are endeavouring to push files up instead of around, thanks to clear directions from the PM’s office.

FIIs were net buyers throughout the week. However, net selling by DIIs on the last two days of the week was higher than FII buying. Both Sensex and Nifty charts are trading above their daily and weekly EMAs – as well as their up trend lines – in long term bull markets. Both indices touched new highs, but are showing some signs of strain.

BSE Sensex index chart

SENSEX_Jul2514

Sensex touched a new high of 26300 in early trading on Fri. Jul 25, but formed a ‘reversal day’ pattern by closing lower by more than 250 points. Profit booking after 8 days of rallying? Possibly. Next week has F&O settlement and a holiday. That may embolden bears to sell.

All four technical indicators continue to show negative divergences (marked by blue arrows) by failing to touch new highs with the index. The longer these divergences remain, the greater becomes the probability of a correction or consolidation.

Unless there is an external ‘black swan’ event, the chances of a deep correction are less. There are plenty of supports marked on the chart – the three EMAs, the 24900 level, the ‘gap’ and the ‘up trend line 2’ – that should protect the down side.

No need to worry about an impending correction, or sell in a panic. Trying to sell with an intention to buy back at lower levels works better in bear markets. Stay invested with appropriate stop-losses. Buy only if you see compelling value. Don’t get trapped by the ‘greater fool theory’.

NSE Nifty 50 index chart

Nifty_Jul2514

The weekly bar chart pattern of Nifty touched new intra-week and closing highs during the week. The index has been trading in an upward-sloping channel for the past 10 weeks. The lower edge of the channel is at 7500, which should provide near-term support in case of a correction.

Why talk of a correction when the index is trading above its weekly EMAs and the up trend line in a long-term bull market? Note the volume bars, which have been sliding as Nifty has moved higher. A bull rally requires volume support to sustain.

Weekly technical indicators are in their respective overbought zones. However, ROC is showing the first signs of cracking by crossing below its 10 week MA. Also, all four indicators failed to touch new highs with the index. The negative divergences will eventually lead to a correction or consolidation.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in long-term bull markets, and touched new highs last week. Negative divergences in technical indicators are pointing to a likely correction or consolidation at any time. Such corrections/consolidations are an integral part of a bull market. Be prepared for it and use it to your advantage. Sharp falls in quality scrips – like Tata Motors and IPCA Labs – provide opportunities to add.

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