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Sunday, August 30, 2015

BSE Sensex and NSE Nifty 50 index chart patterns – Aug 28, 2015

Devaluation of the Chinese Yuan created panic selling across global markets that got exacerbated by unwinding of long positions. Despite signs of improvement in India’s macroeconomic data, our stock market could not avoid the global contagion of fear.

FIIs rushed towards the exit door, their net selling in equities for the week touching a whopping Rs 13000 Crores, as per provisional figures. DIIs were net buyers of equity worth Rs 11400 Crores. Sensex and Nifty closed 3.5% lower on a weekly closing basis.

Both indices formed downward ‘gaps’  on Mon. Aug 24. The gaps remained unfilled during the week. Even if the ‘gaps’ do get filled – either fully or partly – the possibilities of lower levels on both indices can’t be ruled out.

BSE Sensex index chart

Sensex_Aug2815

From the 3rd week of Jun ’15, the daily bar chart pattern of Sensex started to form a ‘rounding top’ reversal pattern that concluded with a ‘gap’ down fall below the 200 day EMA on Fri. Aug 21. Though the index pulled back to close just inside the ‘support-resistance zone’, a fall with a ‘gap’ below an important support level has greater bearish significance.

On Mon Aug 24, the index opened with a bigger 400 points downward ‘gap’ and dropped to a low of 25625. On Tue Aug 25, it formed a ‘reversal day’ pattern (lower low of 25298, but higher close), and has since pulled back to the ‘gap’. The ‘gap’ is likely to act as a resistance zone to near-term up moves.

The first, smaller ‘gap’ on Aug 21 is a ‘breakaway gap’. The second, larger ‘gap’ on Aug 24 is a ‘measuring gap’ (which typically occurs in the middle of an up or down move).

From the peak of the ‘rounding top’ pattern – from where the current leg of the down move started – to the middle of the ‘measuring gap’ is a fall of about 1645 points. The downward target for Sensex is, therefore, 1645 points below the middle of the ‘gap’ – i.e. at 25285.

Since Sensex touched a low of 25298 (only 13 points above 25285), the downward target may have already been met. That doesn’t mean the index can’t fall lower and slip into a bear market.

Daily technical indicators are in bearish zones even after partly correcting oversold conditions. MACD and ROC are still inside their respective oversold zones. RSI and Slow stochastic have managed to climb out of their respective oversold zones.

The index may try to fill the larger ‘gap’ next week, but a reversal of the down trend that started from the Mar ‘15 top may take a while longer.

On longer-term weekly chart (not shown), Sensex is trading well above its rising 200 week EMA in a long-term bull market. So, dips are providing opportunities to add/enter.

NSE Nifty 50 index chart

Nifty_Aug2815_LT

The weekly bar chart pattern of Nifty formed a 9 weeks long ‘rounding top’ reversal pattern that faced strong resistance from the upper edge (8630) of the ‘support-resistance zone’.

The index dropped below its two weekly EMAs and the ‘support-resistance zone’ with a rare weekly ‘downward gap’. A fall with a ‘gap’ below an important support level is technically more significant than a fall without a ‘gap’.

Even if the ‘gap’ gets filled – partly or fully – the down move is likely to resume. Expect the ‘gap’ to act as a resistance zone to near-term up moves.

Should bulls wind up their positions and go on a vacation? It may not be a bad idea - to allow the fear to dissipate and let the index form a bottom.

To every bearish dark cloud there is often a bullish silver lining. In candlestick parlance, Nifty has formed a weekly ‘hammer’ pattern with huge volumes. That may be indicating a ‘selling climax’ and a possible trend reversal.

Weekly technical indicators have turned bearish. MACD has crossed below its signal line and entered negative zone. ROC has crossed below its 10 week MA and is falling towards its oversold zone. RSI has crossed below its 50% level. Slow stochastic is about to cross below its 50% level.

Nifty needs to fill the ‘gap’ and cross convincingly above the 8630 level to resume its bull rally. That may not happen in a hurry.

Bottomline? The bar chart patterns of Sensex and Nifty have fallen below important supports with ‘gaps’. The implications are quite bearish in the near-term. Long-term bull markets remain intact. Slowly accumulate ‘good’ stocks but maintain appropriate stop-losses. New entrants to the market should choose a good balanced fund.

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