Technically Speaking

The 200-day Moving Average lent some support on Tuesday with the close near the line.

The drift lower saw the RSI come back at bit to just below the key 70 level. This could be the start of a reaction low I was talking about on Monday – see below.

Otherwise technical signals like the MACD and Parabolic-SAR are still near-term bullish. (See the middle chart for their initial signal where I have marked where the MACD cross coincides with the Parabolic-SAR switching to indicate a long position)

We need to watch both these studies carefully as the bullish signal could change.

The recovery has so far been very similar to what we saw after the sell-off in 2006 with a slight overshoot to the downside below the longer trend. We are now back above our long term trendline and current end-year forecasts of around 19,000 look reasonable as you can see from the lower chart. One thing to watch for is a minor downward correction to the recent upturn to form a ‘reaction low.’

Have a close look at the 2006 downturn and you will see what I mean. From a technical point of view don’t be surprised to see the BSE correct back towards the long term trendline for a short time.

All that has really happened is that the BSE has corrected from the extremely overbought levels seen late last year. Since last November the chart had been pointing to a correction such as the one we have seen, as regular readers of this item will know.

Please note the 200-day on this weekly chart is calculated week-to-day so the absolute level of the line does not exactly coincide with the value on the daily chart – for our purposes it is close enough)

(Parabolic SAR (Stop and Reverse) study gives signals for going long or short. While the study, the dots, is below the price action it indicates a long position but as the trend slackens the study touches the price action and indicates a switch to a short. It is supposed to be a constant position trading system.)

Below is a picture of the BSE valuation vis-à-vis the main Asian markets since the start of the year and since the longer-term upmove started in May 2005. As you can see the BSE is underperforming its Asian countrparts so far this year but measured since May 2005 it is still outperforming.