India’s Stock Market Rally May Not Last: Chart

Despite the gloom about India’s economy, the country’s stock market is up 12.5 percent this year making it the best performer among the BRIC nations. India’s Sensex has also outperformed other major indices in Asia, such as the Hang Seng, Shanghai Composite and Nikkei 225.

This week Indian markets were looking for a positive direction from the government after the country’s Prime Minister Manmohan Singh took charge of the finance ministry. Singh’s recent comments have given investors hope of favorable changes to government policy and initiatives.

But the key question for investors is whether the stock market rally will be short lived or the start of something bigger.

The Sensex is dominated by a long term chart pattern. This is a down sloping triangle. It is best seen on the weekly Sensex chart. The base of the triangle is near 17900. The downside target projection for the triangle is near 15500. This downside target was achieved and the 15500 level played a strong role as a support area.

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The down sloping trend line is projected below the base of the triangle and plays an important role in the current behavior of the market. The initial market breakout above the downtrend line in February 2012 was not successful. The retreat following this breakout used the trend line as a support level and the index slid down this line in May and June.

The base of the triangle pattern near 17900 has acted as a support level in the triangle pattern and it is now acting as a resistance level that effectively caps any rebound.

Since August 2011 the Sensex has been trapped in a sideways consolidation band between 15500 and 17900. The current rally in response to Government initiatives must be seen in this context.

There is a higher probability that the market will retreat from the 17900 level and return to this sideways trading consolidation. This may include a brief breakout above 17900 as happened in February 2012.

A sustained move above 17900 is required before this rally can be classed as the beginning of a new longer term uptrend. From a technical perspective there is a low probability of this development because there is no end of trend pattern development shown on the Sensex index.

The tight and well defined trading band between 15500 and 17900 suggests the most probable outcome is a return to sideways consolidation trading.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

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