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Sunday, August 3, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Aug 01, 2014

FIIs were net buyers to the tune of Rs 6900 Crores while DIIs were net sellers of Rs 3200 Crores during July ‘14. (The gap of Rs 3700 Crores must have been made up by retail selling.) FIIs were net sellers during the last 3 days of a holiday-shortened week. But their net selling was equally matched by net buying of DIIs.

Q1 results declared so far continue to be a mixed bag. Bottom line pressure is evident – even from the results of the better performers. Anecdotal evidence points to an increase in hiring. Tatas and ITC have announced huge capex programmes. Core sector growth is picking up as well. An interest rate cut can really give a boost to the market, but that is unlikely to happen soon.

Negative divergences visible on Sensex daily technical indicators and sliding volumes on Nifty’s weekly chart – mentioned in last week’s analysis – had warned of a possible correction or consolidation. So, the correction should not have come as a surprise. Such corrections in long-term bull markets provide opportunities to add.

BSE Sensex index chart

SENSEX_Aug0114

F&O settlement week coincided with a holiday-shortened week. Bears decided to use the opportunity to sell. Sensex has dropped and closed below its 20 day EMA, which is bearish in the near term. Any drop below the 50 day EMA can test support from the 24900 level (marked by blue dotted line).

Technical indicators are turning bearish. MACD has crossed below its signal line in positive zone. ROC has crossed below its 10 day MA, and looks ready to enter negative zone. RSI and Slow stochastic are above their respective 50% levels, but falling. Some more correction is likely.

Can Sensex fall below 24900? Sure it can, but buying support is likely to emerge in that case, or even earlier. At worst, the ‘gap’ (formed back in May ‘14) may get tested – but that doesn’t look very likely at this stage.

Periodic corrections in a bull market keeps the chart ‘healthy’, allowing it to move higher. Hold on to your long positions. Use the dip to add to them. No need to go chasing after ‘new ideas’.

NSE Nifty 50 index chart

Nifty_Aug0114

Nifty was in a corrective mode last week, but traded within the upward sloping channel formed during the past 11 weeks. The lower edge of the channel is at 7500. In case of a fall below 7500, expect the rising 20 week EMA to provide support. Note that Nifty hasn’t traded below its 20 week EMA since Feb ‘14.

What if the 20 week EMA gets breached on the downside? On the daily chart of Nifty, the upper edge of the ‘gap’ formed on May 13 ‘14 is at 7067, a bit above the blue up trend line 2. The ‘gap’ should provide stronger support.

Weekly technical indicators are showing the first signs of correcting overbought conditions. MACD is inside its overbought zone, but has dropped to touch its signal line. ROC has fallen sharply below its overbought zone. RSI has just slipped down from its overbought zone. Slow stochastic is still inside its overbought zone.

The technical set-up is not indicating a deep correction. But global markets have been correcting, and India may suffer from a filter-down effect. Stay invested.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in corrective modes. Both indices are in long-term bull markets. Such corrections provide adding opportunities. Stick to quality stocks. Avoid potential ‘multibaggers’ or the ‘next Infosys’. This is a good time to enter large-cap stocks that are facing sharp corrections.

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