Stock Index Chart Patterns - Shanghai Composite, Hang Seng, Taiwan TSEC - Nov 27, '09

Shanghai Composite index chart

Another clear instance of how relying totally on technical analysis can be hazardous to your wealth! Last week, the technical indicators of the Shanghai Composite index chart was looking very bullish, and the only question was when it would go past the previous high of 3478.

Out of nowhere, the bears attacked viciously, as a 'reversal day' pattern on Tue, Nov 24 '09 brought the renewed bull rally to a quick halt. An attempt at a recovery the next day proved short-lived. The bears used the news of the Dubai loan default to take the index below the 20 day EMA. The week ended with the index dropping down to the 50 day EMA.

The technical indicators turned around quickly from strongly bullish to bearish. The RSI dropped steeply from the overbought zone. So did the slow stochastic. The ROC has slipped into the negative zone. The MACD has started to fall and dropped below the signal line.

Hang Seng index chart

When the big brother sneezes, the younger brother and cousin catch a cold - or so it seems from the chart pattern of the Hang Seng index. Actually, the Hong Kong index started to correct in the previous week after making a new high of 23100 on Nov 18 '09.

The fall on Thur, Nov 26 '09 had taken the index below the 20 day EMA and today's near 5% drop meant the index closed below the 50 day EMA for the first time since July '09. Will the Hang Seng be able to bounce up from the support of the 50 day EMA, as it has done several times during this bull rally?

The technical indicators don't seem to suggest that. The slow stochastic is moving down towards the 50% level. The MACD is falling and has gone below the signal line. The ROC has dropped into the negative zone. The RSI showed negative divergence by failing to make a new high and is moving sideways above the 50% level.

Taiwan (TSEC) index chart

The Taiwan (TSEC) index was looking quite bullish as it recovered from a drop below the 50 day EMA to make a new high of 7875 on Nov 17 '09. A brief correction down to the 20 day EMA was followed by another up move. Today's near 250 points (3.2%) drop once again forced a close below the 50 day EMA.

As long as the index remains well above the rising 200 day EMA, there is no threat to the bull market. The technical indicators are looking less bearish than the two mainland indices.

The RSI is just below the overbought zone. The ROC is falling but remains in the positive zone. The slow stochastic has fallen less sharply from the overbought zone. The MACD is positive and above the signal line, but note the negative divergence as it failed to make a new high.

Bottomline? The Asian indices suffered from FII selling. I had hinted about the possibility last week. The Dubai loan default news was used as a trigger for the selling, but not entirely without reason. HSBC bank is reported to have a big exposure in Dubai. All three indices are near their 50 day EMAs. An upward bounce could be on the cards next week. Adopt a wait-and-watch policy.

Stock Chart Pattern - Reliance Capital Ltd. (An Update)

When I looked at the stock chart pattern of Reliance Capital Ltd in Apr '09, it seemed to be lagging the BSE Sensex chart, but was recovering well from the bear market mauling. It was expected that the stock could hit the 600 mark in the short term.

The stock did hit the 600 mark in early May '09, where it struggled for a few sessions before the euphoria following the surprisingly positive election results propelled the stock past the 1000 mark.

Let us take a look at the one year bar chart pattern of Reliance Capital Ltd to assess whether it is a 'buy' or a 'sell' or a 'hold':-

The stock could not sustain above the 1000 mark for long. It was too steep a rise in too short a time. The correction in Jul '09 took the stock below its 50 day EMA, but it found support at the top of the 'gap' between 600 and 700.

A sharp jump took the stock near the 1000 mark, after which a sideways consolidation followed, with the 1000 level acting as a strong resistance. The Oct '09 correction took the stock below the 50 day and 200 day EMA, but for the second time the stock found support at the 700 level.

To assess the likely direction of the chart pattern, let us look at the technical indicators. The 50 day EMA has remained above the rising 200 day EMA, and the stock price is above both EMAs. So the bull rally is under no immediate threat.

The MACD has just inched into the positive zone and is above the signal line, which is mildly bullish. The slow stochastic has slipped below the 50% level with the %K below the %D, which is bearish. The OBV is moving sideways, indicating that the bulls and bears are evenly matched.

Bottomline? The stock chart pattern of Reliance Capital Ltd shows that the inconclusive battle between the bulls and bears is continuing, and may remain unresolved for some more time. Existing holders can stay invested with a stop-loss at 680. New entrants should await a convincing cross above the 1050 mark. Traders can play the 700-1000 range.

How to generate income and build wealth

It is important for all investors to clearly understand the difference between income generation and wealth building. Confusions arise since both income and wealth are classified in terms of money: Mukesh Ambani is a multi-billionaire; my nephew works for a multinational company where his CTC (cost to company) is Rs 15 lakhs per year.

Having a substantial income - whether from salary or business - doesn't necessarily make a person wealthy. Why? Because building wealth is a well thought out process that needs to be followed with intelligence and discipline.

Many young investors think that the stock market is a place where one can get rich (read: wealthy) quickly without spending too much effort. All you need is some luck and a few good tips. Every one has a cousin or a friend that has made a killing in the stock market.

Most older investors shy away from the stock markets. They look upon it almost as a vice den, where unscrupulous people take part in nefarious activities which are much worse than gambling in a casino. They all have a colleague or relative that has been reduced to penury by losing all his savings in the market.

Both views are extreme and do not help in building wealth. The younger group find their thrills in the stock market - where they lose as much as they gain, and look down upon bank fixed deposits and post office monthly income schemes as boring and old fashioned. The older group stick to risk-free fixed income streams that get eaten away by taxes and inflation. Neither end up being wealthy.

To build wealth over the long term, a system that combines these extreme views needs to be developed. The simplest and most effective way is to have an asset allocation plan. A certain portion has to be allocated to equity shares to hedge against inflation and taxes. One also needs to allocate a substantial portion to fixed income avenues, that can generate a regular stream of income to supplement the salary or business income.

Think of income as a cash inflow that is spent on bills, home and car monthly installments, eating out, watching movies, buying stuff at malls. If one manages to save something after all these 'important' expenditure, only that saving can contribute towards building wealth.

So one needs to have a plan that works backwards. First of all, have a goal about the amount of money you will require at different stages of your life. Your marriage, children's schooling, aged parents' medical expenditure, family holidays, your old age retirement requirements.

Then calculate how much you need to save every month to invest it as per your asset allocation plan to achieve your various financial goals. This amount - it need not be an exact figure as a rough estimate would suffice - should be taken out of your pay check or business income every month before you begin your monthly expenditures.

This may sound like an easy plan to implement, but believe me, it isn't. It would mean a lot of sacrifices - both small and large. A simple 'thali' dinner instead of one at a fancy restaurant; a DVD watched at home instead of a family outing at the multiplex; a holiday in Goa or Puri instead of at Malaysia or Mauritius; buying a 5 years old car instead of a spanking new one from the showroom.

At the end of the day, it is your mindset and prioritisation that will determine whether you have 'enough' money and can retire a wealthy person.

Related post

How to reallocate your assets

Dow Jones (DJIA) index chart pattern - Nov 20, '09

Last week I had mentioned the level of 10360 in the Dow Jones (DJIA) index chart pattern as the barrier that needed to be crossed convincingly for the bull rally to continue.

The technical indicators were favouring the bulls and they took full advantage to take the Dow above the 50% Fibonacci retracement level of the entire bear market fall. The bulls look unstoppable now.

Let us have a look at the 6 months bar chart pattern of the Dow Jones (DJIA) index and check if the bears have been routed completely:-

A sharp jump by the index on Mon, Nov 16 '09 led to three consecutive closes above the 10400 level. But the up move on low volumes - which has been a feature of this bull rally - could not sustain.

The bears managed a token fight back by pulling the Dow below the crucial 10360 level on the last two days of the week. The index still managed to close about 48 points higher for the week.

All three EMAs are moving up. The sequence of higher tops and bottoms continue. The periodic bear attacks have only strengthened the resolve of the bulls. The technical indicators are continuing to support them.

The RSI has moved up and is about to enter the overbought zone. The MFI is above the 50% level and moving sideways. The slow stochastic has dipped a bit but remains in the overbought zone. The MACD is positive and above its signal line.

The state of the economy remains a concern. Unemployment is still in double digits. Insider buying picked up but insider selling far outweighs the buying, as per this article. The capital adequacy ratio of most banks are far from adequate, mentions this article.

Bottomline? The Dow Jones (DJIA) index chart pattern continues to climb a wall of worries. That is the sign of a bull market. Bears can hope that the lack of follow-up buying (i.e. low volumes) and insider selling will lead to a healthy correction soon. Partial profit booking recommended.

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Nov 20, '09

FTSE 100 index chart

Last week, the technical indicators of the FTSE 100 index were looking strong, but the negative divergences and low volume on Fri, Nov 13 '09 gave the bears an opportunity to fight back.

The index jumped to a new high of 5397 on Mon, Nov 16 '09 and managed to close above the 5300 level on the first three days of the week. What began with a bang, ended with a whimper. The FTSE 100 index not only closed below the 5300 mark, but ended 45 points lower for the week.

Bulls may try to take heart from the fact that the sequence of higher tops and higher bottoms have not yet been broken; the index received good support from the 20 day EMA and the 50 day and 200 day EMA are still moving up. Bears will rejoice that the down days had higher volumes.

The RSI is above the 50% level and trying to move higher. The MFI made a lower high and is moving down towards the 50% level. The slow stochastic has dropped from the overbought zone and the %K line had a bearish cross below the %D. The MACD has started dropping and made a lower high, but it remains in the positive zone and just above the signal line.

DAX index chart

The bull rally in the DAX index is in greater danger of faltering. The high of 5843 made on Nov 18 '09 fell short of the Oct 20 '09 high of 5888. Unless the Oct '09 high is crossed soon, the bears will regain control.

The correction on the last two days of the week got support from the 20 day EMA, but Friday's down-day volume was the highest of the month. The index closed 24 points lower for the week.

The RSI is above the 50% level and moving higher. The MFI is also above its 50% level but is moving sideways. The slow stochastic turned down after touching the overbought zone and the %K is about go below the %D line. The MACD is just about positive and above the signal line, but has started falling.

CAC 40 index chart

The CAC 40 index is looking the weakest of the three. The high of 3868 made on Nov 16 '09 was 46 points (1.2%) below the Oct 20 '09 high of 3914. The bull rally will be over if a new high isn't made soon.

The index has dropped below the 20 day EMA and got support at the 50 day EMA. Down-day volumes on the last two days were higher than the up-day volume on Monday, as the index closed 77 points (2%) lower for the week.

The RSI is above the 50% level and moving up. The MFI is touching the 50% level and failed to sustain above it. The slow stochastic is falling after a brief sojourn into the overbought zone, and the %K has gone below the %D. The MACD is barely positive and just above the signal line.

Bottomline? The technical indicators in the European indices are favouring the bears. The bull rally is under real threat. Only another dose of fiscal stimulus can stop the bear attack, because the European economies aren't improving fast enough. Book profits.

BSE Sensex Index Chart Pattern - Nov 20, '09

The technical indicators of the BSE Sensex index chart were looking bullish last week, but the slowing upward momentum near the 17000 level and lower volume on Fri, Nov 13 '09 were concerns that haven't been dissipated.

The BSE Sensex spent the week playing hide and seek with the 17000 level, finishing the first two days above it, the next two days below and then, with a final surge on short-covering on Fri, Nov 20 '09,  ended on 17022 - 173 points (1%) higher for the week. Interestingly, FIIs were net sellers on Friday.

Let us take a look at the 3 months bar chart pattern of the BSE Sensex index to try and figure out where it is headed:-

Though the index closed higher for the week, it was more of a sideways consolidation, with the index twice seeking support from the 20 day EMA. Compare the higher volumes during the corrective down move in Oct '09 with the lower volumes during the up move in Nov '09.

The bulls are unable to muster enough volume support (i.e. follow-up buying) to sustain the rally. The previous high of 17493 (made on Oct 17 '09 during 'Diwali muhurat' trading) is the barrier that needs to be crossed convincingly, for the higher-bottom-higher-top bullish pattern to continue.

The technical indicators are looking stronger. The 20 day EMA has started moving away from the 50 day EMA. Both remain well-above the 200 day EMA. The RSI and MFI have moved above their 50% levels. The slow stochastic is well inside the overbought zone. The MACD has moved into positive territory and remains above the signal line.

The bulls seem to have the upper hand. But remember that next week has two important events. The first is the settlement day in the Indian markets. The second is the long Thanksgiving weekend in the US markets. It won't be surprising if the FIIs start their end-of-year profit booking.

Bottomline? The bulls are trying their best to revive the happy times of 2007. But the BSE Sensex index chart pattern is looking a bit exhausted after a prolonged bull rally. Continue to book partial profits.

Stock Index Chart Patterns - Shanghai Composite, Hang Seng, Malaysia KLCI - Nov 20, '09

Shanghai Composite index chart

The Shanghai Composite chart shows that the bulls are charging again and the bears have retreated. The index is yet to regain its Aug '09 high of 3478. But the bullish cross of the 20 day EMA above the 50 day EMA indicates that a new high may not be too far away.

All the three EMAs have resumed their up moves and the index is well above them. The correction is fading into history. The technical indicators are supporting the bullish fervour.

The slow stochastic is well inside the overbought zone. The RSI has just entered the overbought zone. The ROC is in positive territory, though it has moved down from its recent peak. The MACD continues to move up in positive territory and remains above the signal line.

A few FIIs have recently sold in the Indian markets and invested in China. That explains the sluggishness in the BSE Sensex and the buoyant mood in the Shanghai Composite.

Hang Seng index chart

The Hang Seng index chart not only shook off the bear attack but also made a new high of 23100 on Wed, Nov 18 '09. The index could not sustain above the 23000 level and closed almost 650 points below the new high, and about 100 points lower for the week.

Any further fall in the index is likely to find support at the 50 day EMA, which has not been penetrated since July '09. All three EMAs are moving up, so the bull rally is likely to continue. Volumes remain a disappointment.

The slow stochastic is about to drop from the overbought zone with a bearish cross of the %K below the %D. The RSI is looking quite positive as it moves up towards the overbought zone. The ROC is in positive zone though its upward momentum has slowed. The MACD is positive and above the signal line, but has started to drop.

The index may correct a bit more next week. The negative divergences in the technical indicators are also a concern. As long as the Hang Seng index keeps making higher tops and bottoms, the bull rally will remain intact.

Malaysia (KLCI) index chart

The Malaysia (KLCI) index chart pattern looks the most bullish of the three. Since June '09, the rally has got firm support at the 20 day EMA, and made a new high of 1288 on Tue, Nov 17 '09.

All three EMAs are moving up, as the index makes higher tops and bottoms. The upward momentum is slowing. Volumes remain low. The slow stochastic is about to drop from the overbought zone, even as the RSI is trying to enter its overbought area. The ROC is in positive zone but moving sideways. The MACD has stopped rising and is touching the signal line.

Bottomline? Continued bullishness in the Shanghai Composite index chart pattern can have a beneficial effect on other Asian bourses. But this is the time of year when FIIs are likely to start booking profits. Investors may want to do likewise, and wait for better opportunities to re-enter.