Indian stocks may drop more than 8 percent within the next month after breaking below a support level that confirmed a bearish head-and-shoulders pattern, according to a technical analyst at Natixis.
The S&P BSE Sensex may fall to as low as 16,400 after sliding below the 18,150 level last week and thus breaching an April low, Ouri Mimran said. That implies a 8.9 percent decline from yesterday’s close. The gauge also breached the so-called neckline of the head-and-shoulders pattern on Aug. 9.
“We have seen quite a decline already in Indian stocks,” Mimran said in a telephone interview from Paris. “With the head-and-shoulders pattern confirmed, we are confronted with a bearish signal, which means we could be seeing new lows soon.”
A head-and-shoulders reversal occurs when price movements form three consecutive peaks on a chart, with the middle being the highest. The start of a downturn is signaled when prices fall below a line serving as the pattern’s base.
The Sensex rose to an intraday high of 20,203.66 on Jan. 29 and then fell to 18,144.22 on April 15, completing the first shoulder. The gauge climbed to 20,443.62 on May 20, before declining to 18,467.16 on June 24. That formed the head. Then, the index then rallied 20,351.06 on July 23, after which it dropped again.
The measure has fallen 11 percent from this year’s high on July 23 on concern steps to stem a record slide in the rupee will weigh on economic growth. The currency has lost 19 percent against the U.S. dollar so far this year.
The Sensex advanced 1.7 percent to 18,296.96 at 12:25 p.m. in Mumbai today.
In technical analysis, investors study charts of trading patterns and prices to predict changes in a stock, commodity, currency or index.