Technically Speaking

The recovery from the July low major support level is itself now staging healthy corrections at predictable levels but more of that later. The major thing to note since the recovery set in is that the SENSEX has decoupled from the Asian markets and is moving under its own steam.
While the performance on overseas markets will continue to influence the markets here the major decoupling which has taken place is dramatically demonstrated by the chart here on the left. For daily technical comments on the SENSEX see my webpage www.reutersindia.net
On the upper part of the chart the SENSEX is charted against the benchmark MSCI Asia Pacific Stocks Index excluding Japan. The decoupling since the turn of the month is striking and amply backed up by the correlation sub-chart.
Above the zero line shows a positive correlation, the higher above the zero line the higher the correlation, and below shows a negative correlation. Anything above +0.7 or -0.7 for the correlation index is considered significant and as you can see on this chart the 10-day correlation is currently around -0.45.
It has been many months since the correlation with the rest of the Asian markets has been negative. The second quarter of 2007 was the last time, in fact.
Why? Well looking at it purely from the chart the only incident that seems to coincide with the decoupling was the government victory of the vote of confidence and the associated politics. Scandals notwithstanding, it would seem investors here view the outcome positively and are bullish for economic reforms.
It would seem overseas investors are not so sure as the rupee has not been firming and has been stuck in a 41.70-42.80 per US dollar range since the vote. The FII (Foreign Institutional Investors) data backs this up with a net inflow since the July 22 vote of just $225 million by my calculation of the daily figures. If foreign money is going back into the market it has been money left on deposit here after earlier stock sales, not fresh money.
It follows therefore that before we can even start thinking about getting back close to the old highs, overseas money that left the country during the sell-off, or fresh money, must come back in.
The near-term SENSEX chart is getting a little stretched with our bullish indicators which have been in place since the 12,500 low starting to fade. We are currently looking at a bounce of the 61.8 percent Fibonacci retracement of the May-July down-move and that could skew some of our short-term technical indicators like the Parabolic-SAR.
As the next chart shows the Parabolic-SAR now looks like it might turn bearish although other indicators like the MACD and Alpha Beta trend are still bullish. (For an explanation of these studies see my earlier blog From looking at the Long Term Trend to looking at the Long Term Support)
The Alpha-Beta study is indicating an uptrend with the signal line, the green one, crossing down through the lower line, the blue one. But we need to watch these indicators very carefully during any hesitation in the uptrend.
The longer term chart is still worth learning some lessons from. There was major technical support at the long-term trendline in Q1-Q2 and when that broke around the 38.2 pct Fibonacci retracement level in Q2. You can see both these supports. Since the 38.2 pct support broke the next big level was 12,500 which was the high reached before the 2006 sell-off and the 2007 low.
There is very good long-term technical support for this market between 11,900 and 12,500 as marked but with the oil price continuing to do the right thing, revisiting those levels would at the moment seem a fairly remote possibility.