Is it any wonder that the Sensex is the acronym for the SENSITIVE INDEX.?
A sense of fear creeps in each time I voice a view on the benchmark index – for the simple reason that apart from serving as a barometer of business and investor confidence, it has been quite an impressive tutor in giving a lesson or two on humility. So sensitive, that each time I take a side with one of the two popular camps, the index has to first visit the opposing camp before it takes sides with me.
Markets have rallied further since my last report in August, where I suggested a possible top to have formed near 16100. My call then was for a move towards the lower end of 12000.
While I sit to reassess this view, with markets ruling strong at 16,400 currently, I’m clearly tempted to feel that calling for tops in the Sensex is perhaps an exercise in futility. However, the pattern that has unfolded in the charts visibly compels me not to succumb just yet.
This pattern better known as the diagonal triangle, is a special type of price action which typically occurs in the terminal part of a rally or fall which has moved too far or too fast. Price action gets to narrow down and is confined within two converging trend-lines.
Whenever such a pattern evolves, price usually breaks out in the opposing direction of the move immediately preceding it and usually price retraces back to at least the start of the triangle. In this case we could the index tanking downward.
A closer look at the chart above indicates that the current pattern is more or less emerging to be a mirror reflection of the pattern seen during Jan-March lows. There again, we saw index dropping to new lows in the form of a triangle, generating substantial feelings of pessimism – after which followed a sudden and sharp move to the upside.
Guess my wait for the index to finish its visit with my peers in the bull camp is fast coming to a close!
