Sunday, April 23, 2017

Sensex, Nifty charts (Apr 21, 2017): profit booking near lifetime highs stops bulls on their tracks

Net selling in equities by FIIs touched Rs 30 Billion, as global uncertainties and lacklustre corporate earnings cast a shadow over the market. DIIs were net buyers of equity worth Rs 24.9 Billion, as per provisional figures.

Q4 (Mar '17) results of HDFC Bank, IndusInd Bank and Yes Bank showed good bottomline growth but with rising NPAs and provisions. Credit growth has been at its lowest level in 60 years for the banking sector as a whole.

To counter visa restrictions being imposed by USA, UK, Australia, Singapore on Indian tech workers, the government is considering reimposing a ceiling on royalty payments to overseas principals by MNCs operating in India. 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex had formed an upward 'gap' on Mar 14 '17, but has failed to make much headway since then. 

The 'gap' has provided good support to the index so far; but the lower edge of the 'gap' may be turning into the 'neckline' of a 'head and shoulders' reversal pattern.

The 50 day EMA is just below the 'gap' zone, and can provide additional support if the index slips further.

Note that the right 'shoulder' of the 'head and shoulders' pattern hasn't formed yet - and may not form at all, if bulls manage to propel the index above the previous top of 30007 (touched on Apr 5).

However, the possibility of formation of a reversal pattern near an index top should be treated with respect and caution.

Daily technical indicators are looking bearish. MACD is falling below its signal line in bullish zone. ROC has dropped inside bearish zone but its downward momentum has stalled. RSI has slipped inside its bearish zone. Slow stochastic has entered its oversold zone.

There can be a technical bounce, but a resumption of the up move is unlikely in F&O expiry week. The index may rise to form the right 'shoulder' of the 'head and shoulders' pattern - providing short-term players an exit opportunity.

The index is trading well above its rising 200 day EMA in a bull market. If a 'head and shoulders' pattern does get formed and the index breaks down below it, the correction should end with a test of support from the 200 day EMA at worst.

Why? The 50% Fibonacci retracement level of the entire rally from the Dec 26 '16 low to the Apr 5 '17 top is at about 27880 - 20 points above the current level of the 200 day EMA. Bull market corrections often end near the 50% Fibonacci retracement level.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty failed to close above the psychological level of 9200 for the 6th week in a row. The index is trading above its two rising weekly EMAs in a bull market, with the upward 'gap' formed on Mar 14 '17 providing good support.

Three of the four weekly technical indicators - MACD, RSI, Slow stochastic - are inside their respective overbought zones, but have started to slide down. ROC has already slipped down from its overbought zone.

Nifty's TTM P/E remains above 23 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is hesitating near the lower edge of its neutral zone.

Some more correction, and a complete filling of the upward 'gap' are possibilities. The formation of a 'head and shoulders' reversal pattern is also a possibility.

In other words, waiting on the sidelines instead of rushing in to buy or sell may be a good idea.

Bottomline? Sensex and Nifty charts appear to be forming reversal patterns that may lead to deeper corrections. Both indices are overvalued. Unless earnings catch up with expectations, don't expect runaway rallies. Stay invested and continue your SIPs.  

Friday, April 21, 2017

Why a stop-loss is the difference between gambling and investing

Many small investors - particularly old timers - prefer to invest in 'safe' options. Like bank fixed deposits, tax free bonds, national savings certificates. They get a fixed rate of return - regardless of the state of the economy or volatility in the stock market. Plus, they rest assured that their principal amount will be returned intact on maturity.

For 'safe' investors, investing in stocks is nothing short of gambling. A company one invests in can go out of business. Even if they remain in business, they may make losses and not pay any dividends. In other words, there are no guarantees of any returns, plus there is a risk that the invested principal may get  depleted. (The same logic applies for equity mutual funds.)

In some ways, investing is gambling if you have no idea of what you are doing. If you buy a company's stock without doing adequate research about its background, competition, business outlook, management capabilities then the possibility of making any money through capital gains or dividends will be like betting on a cricket or football match. You will either win, or lose.

Since you have no control over the outcome of a sporting contest, you will lose your entire wagered capital if your team loses. You won't have much control over the performance of a company either - specially if you hold only 200 or 500 shares.

However, you may use a stop-loss - set 3% (or 8%) below your invested amount in a company's share. If a share's price falls more than 3% (or 8%), you can sell the share at a small loss and recover more than 90% of your invested capital.

This loss mitigation technique is the major difference between gambling and investing. One would think that most investors would be disciplined about setting stop-losses for each of their purchases, and sell when the stop-losses get hit.

Experience says otherwise. Setting a stop-loss (or a trailing stop-loss) is an art that few investors learn and even fewer investors practice. 

There is another important difference between gambling and investing: regular dividends. Only long-term investors benefit from it. If you do proper research before buying a stock and then hold on to it for 5 years or more, reinvesting the dividends that a company pays can add up to substantial returns.

In gambling, there are no dividend payments for betting over long periods. Since each bet usually has a short time limit, you either win or lose quickly. Then you place your next bet, with similar results.

You can read more here.

Wednesday, April 19, 2017

Nifty chart: a midweek technical update (Apr 19 ‘17)

FIIs were net sellers of equity worth Rs 18.5 Billion during the first three trading days this week. DIIs were net buyers of equity worth Rs 13.5 Billion, as per provisional figures.

Nifty is sliding down towards the 85 points upward 'gap' formed on Mar 14 '17. The 'gap' had provided good support twice - on Mar 22 and Mar 27.

India's WPI-based inflation fell to 5.7% in Mar '17 from a two-and-a-half years high of 6.5% in Feb '17, mainly due to a fall in mineral and fuel prices, while food prices continued to rise.



The daily bar chart pattern of Nifty is bearing the brunt of FII selling. The index has corrected below its 20 day EMA, but managed to close just above the 9100 level.

Nifty is 40 points above the 'gap' that had twice provided support earlier - and may do so again. The index is trading well above its rising 200 day EMA in a bull market

If the index finds support from the 'gap' and bounces up, it may proceed to form the 'right shoulder' of a 'head and shoulders' reversal pattern. Such a pattern - when formed at an index top - should be treated with extreme caution.

Note that the 'left shoulder' has already formed, and the 'head' formation is nearly complete, with a 'neckline' at about 9020. Completion of the pattern may cause a downward breakout towards 8800.

Can the index fall even further? Sure it can - specially if FIIs continue to sell. Will it? That will depend on how Q4 (Mar '17) results pan out. They haven't been that great thus far.

Daily technical indicators are looking bearish. MACD is falling below its signal line in positive zone. RSI is seeking support from its 50% level. Slow stochastic is poised to enter its oversold zone. 

All three indicators have dropped lower than their Mar 27 lows, while the index has touched a higher bottom. The negative divergences can cause some more correction.

Nifty's TTM P/E is still above 23 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has fallen towards the lower edge of its neutral zone.

Bull market corrections provide buying opportunities. However, the likely formation of a reversal pattern means it is better to be circumspect than brave.

Tuesday, April 18, 2017

WTI and Brent Crude Oil charts: bull rallies stop just short of their previous tops

WTI Crude Oil chart


The daily bar chart pattern of WTI Crude Oil had formed a 'triple-bottom' reversal pattern at 47 last month. Reversal patterns had also formed on daily technical indicators. 

That was a trigger for a sharp rally that took oil's price well above its three EMAs into bull territory. The 20 day EMA has crossed above the 50 day EMA, and all three EMAs are moving up - which is a bullish sign.

However, on Apr 12, oil's price rose above 53.50 but fell just short of its previous (Mar 7) top and the 54 level. It formed a 'reversal day' bar (higher high, lower close) that often marks an intermediate top.

Daily technical indicators are in bullish zones, but not showing any upward momentum. RSI has started correcting after facing resistance from the edge of its overbought zone. Slow stochastic is sliding down inside its overbought zone.

A fall below 52 can take oil's price down below its 20 day and 50 day EMAs to the next support level of 50.

US shale oil output is expected to post the biggest monthly increase in two years, raising concerns of undermining efforts to cut oversupply by OPEC countries.

On longer term weekly chart (not shown), oil's price has crossed above its 20 week and 50 week EMAs but closed well below its falling 200 week EMA in a long-term bear market. Weekly technical indicators are in bullish zones, but only Slow stochastic is showing some upward momentum.

Brent Crude Oil chart


After forming a small 'double bottom' reversal pattern at 50, the daily bar chart pattern of Brent Crude Oil rallied sharply to climb above its three EMAs into bull territory.

On Apr 12, oil's price rose to test its previous (Mar 7) top but fell just short and closed lower - forming a 'reversal day' bar (higher high, lower close) that appears to have ended the rally.

Daily technical indicators are in bullish zones, but have started to correct. Oil's price can drop below its 20 day and 50 day EMAs to the support level of 53.

With financial companies investing billions to increase US shale oil production, Arab Sheikhs may be gradually losing control of the oil market.

On longer term weekly chart (not shown), oil's price has closed above its 20 week and 50 week EMAs but well below its falling 200 week EMA in a long-term bear market. Weekly technical indicators are in bullish zones, but only Slow stochastic is showing some upward momentum.

Monday, April 17, 2017

S&P 500 and FTSE 100 charts (Apr 13 '17): consolidating after touching lifetime highs

S&P 500 index chart pattern


The following remarks were made in last week's post on the daily bar chart pattern of S&P 500: "Bears will have the upper hand till the index can move convincingly above the trend line. Daily technical indicators are moving sideways in neutral zones. Some more consolidation below the trend line is possible."

Bears continued to flex their muscles in a trading week truncated by Easter holidays. The index faced resistance from the (purple) down trend line and dropped to close below its 50 day EMA for the first time in 5 months.

The index is trading above its rising 200 day EMA in a bull market. However, daily technical indicators are in bearish zones and showing downward momentum. Some more consolidation or correction is likely.

A fall below the Mar 27 low of 2322 will extend the bearish pattern of 'lower tops, lower bottoms' and open up further downside towards the support zone between 2280 and 2300.

A hit-and-run foreign 'policy' - a few cruise missiles here, a MOAB there - has created jitters in world markets. North Korea is a wild card that may get 'Trump'ed next.

On longer term weekly chart (not shown), the index closed above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators have corrected overbought conditions, and are showing downward momentum.

FTSE 100 index chart pattern


The daily bar chart pattern of FTSE 100 made a couple of abortive attempts to break out above the 'rectangle' pattern within which it has been consolidating for the past four weeks.

The index dropped to its rising 50 day EMA, only to bounce up and close just below its 20 day EMA. The 200 day EMA is rising, and the index closed well above it in a bull market.

As mentioned in last week's post, the index may break out either above or below the 'rectangle'. Since a 'rectangle' is often a continuation pattern, the logical break out is downwards.

Daily technical indicators are not giving clear signals. MACD and Slow stochastic are in bullish zones. RSI has slipped into bearish zone. A test of support from the lower edge of the 'rectangle' is a possibility.

On longer term weekly chart (not shown), the index closed above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones but showing slight downward momentum.

Sunday, April 16, 2017

Sensex, Nifty charts (Apr 13, 2017): forming reversal patterns?

FIIs turned net sellers of equity worth Rs 24.5 Billion in another holiday-shortened trading week. DIIs were net buyers of equity worth Rs 17.9 Billion. Sensex and Nifty closed lower for the week.

Exports jumped 27.6% in Mar '17. However, trade deficit rose to a 4 month high of $10.43 Billion - thanks to surge in imports (particularly of gold). Has black money turned into white and then to yellow?

Infosys Q4 results were below expectations. Despite announcing a Rs 130 Billion bonanza for investors through dividends and buyback, the stock tanked and pulled down other IT stocks and the market with it. 

BSE Sensex index chart pattern

After touching a 52 week high of 30007 on Apr 5 (just short of its lifetime high of 30025 touched in Mar '15), the daily bar chart pattern of Sensex has formed a bearish pattern of 'lower tops, lower bottoms'. 

The index closed below up trend line '2' on Apr 10, followed by a pullback to the trend line on the next two days - giving another selling opportunity. It dropped to close below its 20 day EMA by the end of the week.

Breach of trend line '2' is a clear warning that the bull rally has stalled. But it is too early to call a trend reversal. Why? 

As per theory of 'fan lines', breach of a third up trend line (which has not been drawn yet) will technically confirm the beginning of a down trend.

The index may be in the midst of forming a 'head and shoulders' reversal pattern. A bit more correction may be followed by a rally that can go on to form the right 'shoulder' - and provide a profit-booking opportunity.

If the 'head and shoulders' pattern plays out - and there are no guarantees that it will - Sensex may correct down to 28300. 

All four daily technical indicators are looking bearish and showing downward momentum. MACD has crossed below its signal line in bullish zone. ROC has crossed below its 10 day MA and seeking support from its '0' line. RSI and Slow stochastic have dropped close to their respective 50% levels.

The index is trading well above its rising 200 day EMA in a bull market. So, no need to panic and sell. Short-term players can hold with a stop-loss at 29000. Long-term investors can use any fall below 29000 as a buying opportunity.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty failed to close above the psychological level of 9200 for the 5th week in a row. The index is trading within a small 'rising wedge' pattern from which the likely break out is downwards.

All four weekly technical indicators are showing signs of correcting overbought conditions. MACD's upward momentum has stalled. ROC is falling below its 10 week MA. RSI and Slow stochastic have started sliding down inside their respective overbought zones.

Nifty's TTM P/E remains well above its long-term average at 23.2. The breadth indicator NSE TRIN (not shown) is rising towards its oversold zone. Some more correction is likely.

Keep a close watch on Q4 (Mar '17) results. Stock picking skills will be tested. Use any rallies to rebalance your portfolio by getting rid of non-performers.

Bottomline? Sensex and Nifty charts may be forming reversal patterns after sharp rallies on hopes of better corporate earnings. Both indices are looking overvalued. Stay invested and continue your SIPs. Don't jump in to buy (or sell). 

Friday, April 14, 2017

Is the FMCG sector a good place to hide?

Sensex and Nifty are consolidating near their lifetime highs - moving up one day and down the next. FIIs have stared selling. Market experts are voicing concerns about near-term fundamental and technical headwinds.

What should small investors do? Stay on the sidelines, or continue to invest regularly? Where to invest? Everything appears so expensive!

At times like these, the best place to hide is the FMCG sector. Why? Because companies from the sector have visible earnings, generate a ton of cash, have negligible debt, don't require frequent capital expenditure and pay decent dividends. 

The sector is likely to benefit from GST and pent-up demand following demonetisation. If you have a long-term investment outlook (you should!) then you need to invest in this sector. If FMCG stocks appear expensive now - so did they five years back.

Brittania



The stock has been consolidating in a broad range for two years, but looks poised to break out upwards. The gradually rising 200 day EMA indicates a bull market.

Colgate-Palmolive



Colgate has gone nowhere in the past two years. A strong move above 1037 will be required for bulls to get the upper hand. It may be able to do so after a bit of correction.

Dabur India



Dabur's stock appears to be forming a large 'rounding bottom' pattern that can lead to an upward break out above 308. But it may take 2-3 months more to complete the bullish pattern.

Emami



Emami is trading below its three EMAs in bear territory. The correction may continue till it reaches the support level of 955.

Glaxo Healthcare



Glaxo is trading within a 'flag' pattern below its falling 200 day EMA in a bear market. A convincing move above its Mar '17 top of 5532 is required for bulls to regain control.

Godrej Consumer



The stock is consolidating within an 'ascending triangle' pattern near its lifetime high. The expected break out from the 'triangle' is upwards.

Hindustan Unilever



HUL has been stuck in a broad range for two years. The 200 day EMA is forming a 'rounding bottom' pattern that can propel the stock to a new high.

ITC



The stock is consolidating after touching a lifetime (bonus-adjusted) high. It has entered the dairy business, and plans to enter healthcare business - in an effort to reduce dependence on tobacco.

Marico



Marico is correcting overbought conditions after touching a lifetime high. It should continue to move higher.

Nestle



The stock has been in a down trend for almost 9 months. A false break out above the blue down trend line can lead to some more correction or consolidation.

[So, which of these stocks would be worth adding at current market price? Do a bit of due diligence during the long weekend.]