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When I look at the Sensex (Bombay Stock Exchange), I see very few investors. It’s as if India has turned its back on the market and gone to watch the cricket, which they should enjoy as it’s doubtful the West Indies can match it with the Indians.
But let’s focus on the issue at hand – the Sensex chart:
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When I look at a chart, particularly if it is for a market I do not trade, I follow a ‘stock’ standard routine. The above is my default chart - the 90-day ProfitSource Elliott – and when I see a low looming like the one illustrated above, I dig deeper and analyse Elliott over other time frames – 30-day, 60-day and right up to 300-day.
I then turn to On Balance Volume (OBV), which tells me how much interest there is in a market and, lo and behold, it seems everyone has gone to the cricket:
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OBV indicates quite a sharp fall in interest over the past three months but volume has actually been declining over the last year.
The ‘further fall’ scenario above is by no means certain but it does suggest there is risk to the downside and that I should watch my positions. Light volumes are also a warning that it may not take much to send the market lower.
The chart below reveals a negative divergence. A relief rally has pushed the market higher over the last two months but volumes indicate little support for this.
click to enlarge
I then turn back to the weekly chart and my pet 90-day ProfitSource Elliott:
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The prospect of medium-term weakness in the coming months remains. The oscillator is below the zero line (confirming a weak market) and is consistent with a potential wave five low.
Maybe this isn’t telling you anything you didn’t already know but the message is that one shouldn’t base trades on ‘feelings’, rather what the clinical ‘technicals’ are telling us - they are objective with no subjectivity.
I note also the Sensex has double-topped:
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But the projected wave five is about 50% retracement of the move up from March, 2009 to the double-top in late 2010, which is sort of comforting but does suggest the possibility of some pain ahead.
I then look at a monthly, this time extended out to a 120-day Elliott:
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While a wave five is a possibility into mid-2012, we should remember that the Sensex rose up out of nothing over the last ten-years and the today’s levels are historically very high. (I also wish I’d bought shares in Sachin Tendulkar twenty years ago!)
For the moment, I would make sure my positions are covered and head to the cricket.
Enjoy the ride
Tom Scollon
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