BSE Sensex Index Chart Pattern - Jun 05, '09

This week's BSE Sensex index chart pattern reminded me of an old Bob Dylan song that was popularised by The Byrds in the 1960s. A line from the song says: "Pack up your money, pick up your tent, you ain't going nowhere."

The Sensex had made a high of 14931 on May 19, '09 on strong volumes (the day after history was created by the Sensex chart when it hit two upper circuits and the stock market closed for the day after a few minutes of trading). On Jun 5, '09 the Sensex chart made a new high of 15257 - barely 2% higher after 3 weeks of trading on volumes that were quite a bit lower.

May be it is time to pick up your money and pack up your tent (Dylan had a tendency to deliberately mix his metaphors) because the Sensex "ain't going nowhere."

We will take a look at the 2 years weekly bar chart pattern of the BSE Sensex index to highlight a couple of possible bearish pattern formations:-

The big gap created on Monday, May 18, '09 still remains unfilled. For three weeks in a row, the Sensex hasn't even come close to even partially filling the gap. The island-like formation on the weekly chart pattern has been circled.

Any trading below the gap will indicate an 'island reversal'. Such a formation is not very common, but if it happens, it is very bearish and signals a trend change.

Now take a look at the 3 months period from Oct '07 to Jan '08 - when the previous bull market had peaked. The slow stochastic had remained overbought all through those 3 months before suddenly breaking downwards.

Compare it with the past 2 months. The slow stochastic has been overbought right through, even though the Sensex index is 6000 points below the Jan '08 high. The slow stochastic can remain overbought for a while longer, but it is better to take some profits early than make a loss later.

There are other concerns as well. The RSI is highly overbought and is much higher than what it was during the 3 months bull market period from Oct '07 to Jan '08. The ROC is also much higher and looking overbought.

The MACD is lower than what it was during the bull market. But have a look at the divergence between the MACD and its signal line. It is much higher now than what it was earlier.

So, all the technical indicators on the long-term BSE Sensex chart pattern are indicating 'caution'. Bull markets are known to climb a 'wall of worry'. The question is - how high is the wall? The strong bullish sentiment in the stock market would indicate that the wall isn't very high.

The upward movements in mid-caps and small-caps are making me a trifle suspicious that a nice bull-trap has been set. Just a hunch.

Bottomline? The technical indicators on the long-term chart pattern of the BSE Sensex index is suggesting caution. This is not the time to jump in with both feet. The risk-averse can start booking partial-profits. Others can maintain strict trailing stop-losses and continue the bull ride.