Dow Jones (DJIA) index chart pattern - Nov 27, '09

The Dow Jones (DJIA) made another attempt to climb away from the important 10360 level, mentioned last week as the barrier to cross for the bull rally to sustain. In a holiday-shortened week, the Dow twice moved above the 10500 level, but Friday's profit booking brought the index down below the 10360 level. It finally closed marginally lower for the week.
The 6 months bar chart pattern of the Dow Jones (DJIA) index isn't looking that different from a week back:-

The bull rally on lower volumes continues as the bulls have managed to brush aside all efforts by the bears to bring the index down. All three EMAs are still moving up and the index is above them.

The technical indicators are looking slightly weaker. The slow stochastic is in the overbought zone, where the %K has moved slightly below the %D. The RSI moved down after touching the overbought zone. The MFI is above the 50% level but moving down. The MACD has moved down a bit and is touching the signal line.

So is it time for the bears to throw in the towel? As per this article, market sentiments are turning overly bullish, which could provide just the contrarian opportunity that the bears could try and exploit. Fundamentals are yet to catch up with a market that has been driven upwards by a flood of liquidity and dollar carry-trade.

Bottomline? The Dow Jones (DJIA) index chart pattern is maintaining the bullish sequence of higher tops and bottoms. Ride the rally, but keep booking partial profits.

(Note: At the time of writing this post, the Dow is marginally up but still below the 10360 level.)

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Nov 27, '09

FTSE 100 index chart

Last week's analysis of the FTSE 100, CAC 40 and DAX index chart patterns was concluded with the following comments:-

'The technical indicators in the European indices are favouring the bears. The bull rally is under real threat.'

The FTSE 100 chart made a valiant attempt to go past the previous top of 5397. Four days in a row, it came within handshaking distance but failed to move higher.

The Dubai loan re-scheduling news tilted the scales towards the bears. The index once again closed the week marginally lower and below the 5300 level. Friday's sharp drop below the 50 day EMA was followed by a rapid recovery back up to the 20 day EMA. That, and the rising 200 day EMA should give the bull's some encouragement.

The technical indicators may belie their hopes. The volumes on down days continue to be higher. The RSI and MFI have both dropped to their 50% levels and show negative divergence. The slow stochastic has dropped from the overbought zone after entering it earlier in the week. The MACD has slipped below the signal line and also shows negative divergence.

DAX index chart

The DAX index chart actually managed to close 22 points higher for the week, but failed to get past even its Nov 18 high of 5843. The Dubai effect caused almost identical price action to that of the FTSE 100 on the last two days of the week - sharp falls on higher volumes.

The slow stochastic has dropped from the overbought zone. The RSI is headed down to the 50% level. The MFI is at its 50% level. The MACD is barely above the signal line. For the bull rally to sustain, the German index needs to cross its Oct 20 '09 high of 5888 soon.

CAC 40 index chart

The bears seem to have mauled the CAC 40 index chart the worst. A bearish lower-top-lower-bottom pattern has formed. The French index dropped close to the 200 day EMA and closed marginally lower for the week, just below the 50 day EMA.

The slow stochastic has dropped to the 50% level. The RSI has slipped below its 50% level, while the MFI is barely clinging on. The MACD has moved into the negative zone and below the signal line.

Bottomline? The European indices are under bear attack. Watch out for the lows made in the first week of Nov '09. If those levels get violated, the indices will fall deeper. Book profits.

BSE Sensex Index Chart Pattern - Nov 27, '09

In last week's analysis of the BSE Sensex index chart pattern, I had mentioned some concerns about the continuation of the bull rally, even as the technical indicators were looking bullish. These included:-

• low volumes that indicated lack of follow-up buying
• slowing momentum near the 17000 level
• double-whammy of settlement day in India and the Thanksgiving holiday in the USA that could lead to FII selling

All of the above contributed to the sharp correction on higher volumes on Thursday and Friday (Nov 26 and 27 '09). But the real trigger for the world-wide selling was the Dubai World loan repayment re-scheduling. A classic case of the 'butterfly effect'!

The question is: Will the FIIs continue with their profit booking due to end-of-year considerations, or will they use this dip to start buying? Let us have a look at the 6 months bar chart pattern of the BSE Sensex index to find the answer:-

Observe the volume bars in Jun '09 and Jul '09, and compare them with those of Oct '09 (when the Sensex made a new high of 17493) and Nov '09 (the high last week was 17290 on Wed, Nov 25 '09). Bull markets can't sustain on low volumes.

Remember that the BSE Sensex index had broken downwards from a bearish 'rising wedge' formation in Oct '09. A pull-back attempt in Nov '09 failed to reach the previous high, and provided an excellent opportunity to sell. FIIs and smart investors did exactly that by using the Dubai fiasco as an excuse.

The correction dropped the index below the 50 day EMA but short covering ensured a close above the medium-term average. For the week, the BSE Sensex closed 390 points (2.3%) lower. The 200 day EMA is still moving up and the Sensex is more than 1100 points above it, so the bull market remains in tact.

The technical indicators have turned a lot weaker. The RSI has fallen from its overbought zone. So has the slow stochastic. The MFI has dropped to the 50% level. The MACD is falling but remains positive and just above the signal line.

Bottomline? The BSE Sensex index chart pattern looks poised for a deeper correction. Watch out for the previous low of 15331. If that gets broken, the index may fall to the Jul '09 low of 13220. Likely support will be at the 200 day EMA. Those levels will provide good opportunities to re-enter.

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.

The Hare (investor) and the Tortoise (investor)

The fable about the race between the hare and the tortoise is one of the better known amongst Aesop's fables. These fables not only provide entertainment to young children, but usually end with a moral that has relevance for adults.

But does the fable have any relevance to the world of investments? To find out, let me recap the story:-

The hare once ridiculed the tortoise for its slow pace. Upset, and knowing the frivolous nature of the hare, the tortoise challenged the hare to a race. The hare promptly accepted the challenge.

On the appointed day, the race began and the hare was off and running. As it came near the finishing point, it decided to rest a bit and soon fell fast asleep. The tortoise, way behind, was slowly but surely plodding along. It didn't stop even once, and kept right on going with its measured steps till it got near the finishing point. The other animals that had gathered to witness this incongruous race, started to cheer.

The noise woke up the hare. It realised that the tortoise was about to reach the finishing point, and made a mad dash to try and win the race. But it was too late. The tortoise won. The moral of the fable? Slow and steady wins the race.

Is investing a race? Yes, it is. The race is against time, which doesn't stand still. Remember the saying, time is money? The more time you can spend in making money, saving money and investing it appropriately, the more money you will have for your enjoyment and old age.

When we are young, we tend to be frivolous about our money. And our time. We spend both on useless pursuits - haring off after a inside tip or, a sure shot winner or, a great swing trade opportunity. We end up losing money and wasting time.

In one investing lifetime, only a handful of bull and bear markets can be fully utilised for generating large profits. To be able to do that, you need to do your homework, develop proper strategies, and have the discipline to stick to stop-losses. Otherwise, you will choose exactly the wrong times to enter or exit the market.

As we grow older, we tend to value our time and money a lot more - may be because we do not have enough left of either! So, to be successful as an investor, don't be like the hare. Don't run after get-rich-quick or multi-bagger schemes. One fine day, you will realise that the slow and steady tortoise-like investing can amass a lot of wealth through sheer discipline and the ability to stick to a plan.

Stock Chart Pattern - Sulzer India

Before we take a look at the stock chart pattern of Sulzer India, here are some facts to consider about the company and its business:-

1. A small-cap stock (market cap < Rs 300 Cr) which is 80% owned by its Swiss parent
2. Wide economic moat due to a high-tech niche area of process engineering, with technology support from its parent
3. Products and value-added services that serve diverse industries like chemical, oil and gas, water and waste water, energy, foods, polymer production, fiber production, resins and adhesives, pulp and paper, cosmetics and detergents
4. Positive cash flows from operations in 4 of the past 5 years; zero debt; P/E < 11; double-digit net margins; regular dividend payments

All these seem to point to a gem, asking to be picked up by value investors. The 1 year closing chart pattern of Sulzer India shows a good up move from the low made in Mar '09:-

After moving quickly above the 200 day EMA in Mar '09, the stock received strong support from the 50 day EMA, till it broke down below it in Oct '09. The medium-term average has now turned into a resistance level, as the bulls try to regain their control.

The slow stochastic has moved below the 50% level with the %K below the %D line. The MACD is in the negative zone, though it has crossed above the signal line. The RSI bounced off the oversold level and is trying to move above the 50% level. The technical indicators are pointing to a continuation of the correction.

There are other concerns as well. The most serious being the overseas parent's interest, or the lack of it, in its Indian subsidiary. A delisting plan that had gone awry earlier may be revived in future. The management isn't particularly investor-friendly, with sketchy and infrequent investor communications.

The stock only trades in the BSE, and volumes are thin. About 15% of the equity capital is held by the public. This often leads to wild swings in prices. That may explain why a fundamentally strong company with a strong balance sheet is trading at a comparatively low valuation.

Bottomline? The stock chart pattern of Sulzer India is trying to fight off the bears. Risk-averse investors should note that fundamentally strong companies need not be investment-worthy. The low equity capital and thin trading volumes makes entry and exit difficult. Intrepid investors can buy the dips.

(Note: Thanks to reader Sanjeev for suggesting this stock for analysis.)

Dow Jones (DJIA) index chart pattern - Nov 13, '09

In last week's analysis, two likely resistance levels to the bull rally of the Dow Jones (DJIA) index was mentioned. One was the previous high of 10158 (made on Oct 21, '09). The other was the 50% Fibonacci retracement level of 10360.

The bears chose not to defend the previous high, but put up a strong fight as the Dow Jones (DJIA) index chart pattern approached the 10360 level.

In spite of the falling volumes, the technical indicators had been giving a boost to the bull rally. Will the 10360 level be taken out this week? A look at the 6 months bar chart pattern of the Dow Jones (DJIA) index may provide the answer:-

All the three EMAs are moving up nicely and the index remains above them. Note how the 50 day EMA has provided solid support during recent corrections. The bull charge seems unstoppable.

Both the RSI and MFI are above their 50% levels. The MACD has moved above the signal line. The slow stochastic has entered the overbought level. The technical indicators continue to favour the bulls.

It is not a hopeless situation for the bears. The low volumes and the negative divergences in the RSI and MACD can enable them to fight back.

Unemployment continues to rise. The Consumer Confidence index sank to 47.7 in October. During the recession in 2001, which included the 9/11 attacks, the index was at 84.9 - as per this article.

Bottomline? The Dow Jones (DJIA) index chart pattern is trying to reach higher altitudes without the oxygen tank of volumes. Partial profit booking recommended. This isn't the time for investors to enter.

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Nov 13, '09

FTSE 100 index chart

In last week's analysis, I had pointed out that the previous top of 5300 could be a potential barrier that the FTSE 100 needed to cross with conviction for the renewal of the bull rally.

The bears seemed to be well aware of it. A couple of minor forays above the 5300 mark on Wed, Nov 11 '09 and Thurs, Nov 12 '09 was all that the index managed to accomplish, before closing at 5296 (its highest close since Sep '08).

The volume dipped considerably on Fri, Nov 13 '09, striking a discordant note. All three EMAs are moving upwards together, and the index is above them, so there seems to be no immediate threat to the bull rally.

The slow stochastic has moved sharply up into the overbought zone, supporting the bulls. The MACD has moved above the signal line. The MFI has moved above the 50% level. The RSI has dropped back to the 50% level after moving above it.

The technical analysis indicators are looking a lot stronger than last week. But bears can take heart from the negative divergences (lower highs, as the FTSE made higher tops), and try to put up a better fight next week.

DAX index chart

The DAX index took a cue from  the bullishness in the FTSE 100 and moved above both the 20 day and 50 day EMAs, but failed to get anywhere close to its Oct '09 highs. The falling volumes doesn't look too encouraging, though the bulls have regained the upper hand for the time being.

The technical indicators are favouring a continuation of the rally. The slow stochastic has crossed above the 50% level. The MFI is at its 50% level. The RSI is just below the mid-point. The MACD has moved above the signal line, though it is still in negative territory.

CAC 40 index chart

The CAC 40 index is emulating its neighbour in several respects. It moved above the 20 day and 50 day EMAs on falling volumes, but failed to regain its Oct '09 highs. The slow stochastic has moved above the 50% level.

The other indicators seem to have traded levels. The RSI is at the 50% level and the MFI is just below the mid-point. The MACD is above the signal line and has entered positive territory.

Bottomline? The technical indicators of the European stock indices are favouring the bulls. But the negative divergences in the FTSE 100 chart can pull the index down, and have a negative influence on the DAX and CAC 40 indices. Partial profit booking recommended. This isn't a great time to enter.

BSE Sensex Index Chart Pattern - Nov 13, '09

The level of 16412 mentioned last week didn't prove much of a hurdle as the BSE Sensex chart pattern sailed past it on Mon, Nov 9 '09. It also went above both the 20 day and 50 day EMAs as the bulls fought back strongly, aided by FII inflows.

The 20 day EMA provided good support during the rest of the week, but the short-term average failed to move away from the 50 day EMA. The upward momentum slowed down from Wed, Nov 11 '09, even as the Sensex made new highs every day.

The index gained 690 points (nearly 4.3%) for the week, but the three months bar chart pattern of the BSE Sensex index hasn't quite shaken off its corrective mood:-

The 20 day and 50 day EMAs are moving sideways, close together. The Sensex is above both, and well above the rising 200 day EMA. The long-term bull market is in no trouble.

The slow stochastic is looking quite bullish. It has smartly moved above the 50% level. The MACD has also moved up nicely above its signal line, but still remains in the negative zone. The RSI has moved up to to touch the 50% level, but the MFI remains below the 50% level.

The lower volume on Fri, Nov 13 '09 and the wide gap between the 50 day and 200 day EMA may lead to another down leg of the correction from the top of 17493 made on Oct 17 '09. The slowing upward momentum of the BSE Sensex chart as it came near the 17000 level is another point of concern.

Bottomline? The BSE Sensex chart pattern had broken down from a bearish 'rising wedge' pattern, and may correct some more. Partial profit booking is advised. Watch for FII buying. That can always negate the sluggishness in the charts.

Dow Jones (DJIA) index chart pattern - Nov 6, '09

The Dow Jones (DJIA) index chart pattern had received support at the 50 day EMA the previous week, had an expected bounce up above the 20 day EMA and regained the 10000 level after 10 sessions, gaining 3.2% (311 points) for the week.

The index is approaching two important levels - the previous high of 10158 (made on Oct 21 '09), and 10360 (the 50% Fibonacci retracement of the entire bear market fall). Resistance to the up move can be expected at those two levels.

Let us have a look at the 6 months closing chart pattern of the Dow Jones (DJIA) index:-

 

Will the bulls muster enough strength to cross the two resistance levels mentioned? Or, will the bears be able to beat them back? The technical indicators are decidedly mixed.

All three EMAs have resumed their up moves and the index is above them. That shows the bull rally is intact. But the falling volumes tell a somewhat different story. The recent volume peaks occurred on down days.

The slow stochastic has moved above the 50% line after a bullish cross of the %K above the %D. The MACD has moved up to touch the signal line in positive territory. The ROC has moved above the '0' line. The RSI has moved up to the 50% level. The bulls have the edge.

But look at the negative divergences in the MACD, ROC and RSI. Since Jul '09, they are making lower highs while the Dow made higher tops. This raises a big question mark about the continuation of the bull rally.

The unemployment figures entered the dreaded double-digits at 10.2% - the highest since 1983. The market didn't seem too affected by it and closed slightly higher last Friday (Nov 6 '09). Read why here.

Bottomline? The Dow Jones (DJIA) index chart pattern had broken below a rising wedge pattern, and is trying another pull back towards the trend line. Use the opportunity to book profits.

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Nov 6, '09

FTSE 100 index chart

The FTSE 100 index chart behaved a lot like the Hang Seng index chart last week, gyrating between the support of the 50 day EMA and the resistance from the 20 day EMA - finally edging above the short-term average, closing less than 2% (98 points) higher for the week.

The down day on Nov 3 '09 had higher volumes than the up days during the rest of the week. That means the bear grasp hasn't been shaken off fully. The 20 day EMA has flattened after falling a little. The 50 day EMA has also flattened after a long rise from Jul '09. But both remain well above a rising 200 day EMA - keeping the bull rally alive.

The top of 5300 made on Oct 23 '09 needs to be crossed convincingly for the bulls to regain complete control. Till then, the bears will harbour hopes of making a fight back.

The slow stochastic turned around from just above the oversold zone and the %K line has crossed above the %D, though both remain below the 50% level. The MACD managed to remain in positive territory, but is below a falling signal line. The ROC is moving sideways in the negative zone. The RSI is below the 50% level.

DAX index chart

The DAX index chart is looking a lot weaker than the the FTSE 100 chart, failing to move above the 50 day EMA and closing only 1.3% (73 points) higher for the week. The 20 day EMA has fallen down to the flattened 50 day EMA. Have a look at a similar pattern made in Jul '09 - when the 20 day EMA fell to the 50 day EMA, only to bounce back up. Will the bulls be able to wrest back control again?

The slow stochastic has moved out of a brief sojourn in the oversold zone, with the %K line crossing above the %D. The MACD remains in negative territory and below the signal line. The ROC is moving sideways well inside the negative zone. The RSI bounced off the oversold zone, but is below the 50% level.

CAC 40 index chart

The CAC 40 index chart pattern is in better shape than the DAX index chart, closing 2.8% (about 100 points) higher for the week and moving above the 50 day EMA, where it met resistance from a falling 20 day EMA. The falling volume bars are a concern for the bulls.

The technical indicators appear similar to those of the DAX, but not as weak.

Bottomline? The chart patterns of the FTSE 100 and CAC 40 indices seem to have survived the bear attack better than the DAX index. The bulls are attempting to regain lost ground and have the edge, but the bears haven't given up the fight. Avoid getting caught in the middle. Wait for the dust to settle before acting.

BSE Sensex Index Chart Pattern - Nov 6, '09

Last week, I had mentioned several possibilities about how the BSE Sensex chart pattern might develop during another holiday shortened week. A bounce up from the 15500-15600 was expected, based on oversold technical indicators and an about-turn made in Jul '09 when the index had previously dropped below the 50 day EMA.

The Sensex dropped a little further to 15331 on Nov 2 '09, and then bounced up sharply to 16284 on Nov 6 '09 - where it faced resistance from the flattened 50 day EMA. The index closed at 16158 - about 260 points (1.6%) higher for the week.

The BSE Sensex index is poised at an important resistance zone between the 50 day EMA and the 50% Fibonacci retracement level (of 16412) of the decent 12% correction from the high of 17493 made on Oct 17 '09.  The 16412 level needs to be crossed for the Sensex to attempt a test of the previous high.

The lower levels mentioned in last week's post should be kept in mind if the index fails to move up with conviction. Let us have a look at the 6 months bar chart pattern of the BSE Sensex index:-

The 200 day EMA is still moving up, the index remains well above it, and the pattern of higher tops and bottoms hasn't changed yet - so there is no threat to the bull market as of now.

The slow stochastic has moved up sharply above the 50% level from the oversold zone. A bullish sign. The RSI had a 'V' shaped jump from the oversold zone, but couldn't cross the 50% level. Mildly bullish. The MACD is looking more bearish, as it is in the negative zone and below the signal line. On balance, the bulls seem to have a slight edge that could move the index higher.

The overall economy and corporate India seem to be improving their performance gradually. The profits of most companies have increased more than their top line in percentage terms. That means sales growth is yet to pick up. The export-import businesses remain under-performers.

Bottomline? The BSE Sensex index chart pattern is poised at an interesting cross-road. Will it head north or south? Riches can be made if you guess correctly. As usual, FII buying will hold the key. Wait and watch, but stay nimble.

Stock Index Chart Patterns - Shanghai Composite, Hang Seng, Singapore Straits Times - Nov 6, '09

Shanghai Composite index chart

The index chart pattern of the Shanghai Composite bounced up smartly from the support provided by the 50 day EMA and comfortably moved above the 3000 level, as the bulls regrouped to overwhelm the bears. The index made higher highs and higher closes each day, closing 5.6% (168 points) higher for the week.

The 20 day EMA has moved above the 50 day EMA, and all three moving averages have started moving up - supporting the bullishness. The previous high of 3478 made on Aug 4 '09 needs to be challenged and conquered for the bull rally to regain its strength.

The slow stochastic has turned around sharply and re-entered the overbought zone. The MACD is in the positive territory and above its signal line. The ROC bounced off the '0' level and is in the positive zone. The RSI remains above the 50% level. The correction, followed by the sideways consolidation seems to be over.

Hang Seng index chart

Some more sideways consolidation for the Hang Seng index, as it bounced around between the support from the 50 day EMA and resistance from the 20 day EMA before closing 77 points (< 1%) higher for the week.

The volumes have eased off and the technical indicators have weakened further. The slow stochastic and RSI are both below their 50% levels. The MACD has moved down some more and is below the signal line. The ROC has dropped further down into negative territory. The sideways consolidation doesn't seem to be over yet.

Straits Times (Singapore) index

The chart pattern of the Singapore Straits Times index shows continued sideways consolidation, wrapping around the 50 day EMA, with a marginal 7 points higher close for the week. The index failed to close above the 20 day EMA.

The technical indicators look weaker than those of the Hang Seng index. The slow stochastic and the RSI are both below their 50% levels. The MACD has entered the negative zone for the first time since Mar '09, and remains below the signal line. The ROC is in negative territory. The index is having trouble crossing the 2700 level.

Bottomline? The Shanghai Composite chart pattern shows that the bulls have managed to thwart the bear attack. Not so for the Hang Seng and Straits Times indices, which are still in consolidation mode. Investors should wait and watch. This is not the opportune time to jump in.

What does the Interest Coverage Ratio signify?

The Interest Coverage ratio (also called Times Interest Earned) is another measure of a company's financial health. It signifies the ability of a company to meet its debt obligation.

In earlier posts, I have covered Current Ratio, Quick Ratio and Debt/Equity ratio. These financial ratios, together with cash flows from operations give a clear view of the financial soundness of a company.

The definition of the Interest Coverage Ratio is simple enough. It is the EBIT divided by interest expense:

EBIT is the earnings (or Profits) before interest and tax payments. It is calculated by adding the interest expense to the PBT (Profits Before Tax). The PBT and interest figures can be obtained from the Profit and Loss statement in any Annual Report of a company.

Let us look at Maharashtra Seamless' Mar '09 annual figures. PBT was 385 Cr; interest expense was 11.6 Cr. That gives an EBIT of (385+11.6=) 396.6 Cr. The interest coverage ratio is 34.

What does that mean? Maharashtra Seamless can pay its debt obligation 34 times with its earnings before interest and taxes. Let us look at another company - 3i Infotech, which is quite popular with small investors.

PBT was 288.5 Cr; interest expense was 95 Cr for year-ending Mar '09. EBIT = 383.5 Cr, not much lower than that of Maharashtra Seamless. But the difference in the interest coverage ratio is startling - an adequate 4, against a very comfortable 34!

An interest coverage ratio of less than 1.5 means that the company may have trouble meeting its debt obligations and may need to borrow more to pay its previous debts. A ratio less than 2.5 should be treated as a warning sign. Avoid companies with a ratio less than 1.

It is important to check a company's financial health over the past 5 years or more. A decreasing interest coverage ratio - even if it is above the threshold values mentioned - is a red flag. Look for companies with consistency of earnings. They can afford to have a lower interest coverage ratio - though the higher the ratio, the better their financial health.

Conservative investors can use a more stringent ratio, by using only EBI on the numerator. That is, they should deduct the tax amount from EBIT before calculating the Interest Coverage Ratio.

This concludes the series of posts on how to evaluate the financial health of a company. Readers may want to go through an exercise of calculating the financial soundness of stocks in their portfolios. The time spent will be well worth it.

Stock Chart Pattern - Hero Honda Ltd (An Update)

Seven months back, when the rest of the market was trying to emerge out of a long bear phase, the stock chart pattern of Hero Honda Ltd was in a full-blown bull phase, looking overbought after moving up from 630 (in Jul '08) to almost 1100 (in Mar '09).

A short correction to 1000 was followed by a sustained up move to 1550 in Jun '09. A decent correction to 1300 ended with a quick spike to the high of 1780 in Jul '09. A spectacular gain of 180% in one year.

Let us have a look at the 2 years bar chart pattern of Hero Honda Ltd:-

The stock has been in a consolidation phase since hitting the Jul '09 high of 1780, making a low of 1345 in Aug '09 - correcting 37.8% of the entire rise from 630 to 1780, just short of the Fibonacci retracement level of 38.2%. The subsequent rally failed to make a new high and stopped short at 1746.

A 'rounding top' like bearish pattern coincided with the on-going correction in the Sensex. One can expect the stock to correct some more - to the 200 day EMA at 1350, and below that, to the 50% Fibonacci retracement level of 1200. The zone between 1200-1350 may provide good opportunities to enter this fundamentally strong stock.

The RSI has just entered the oversold zone. The MACD is in the negative zone and below the signal line. The OBV has dipped marginally. The slow stochastic is just above the oversold region. The weakness in the stock is getting reflected in the bearish technical indicators.

Q2 '09 results were fantastic. 27% increase in top-line from 3200 Cr to 4060 Cr. Most of the increase went to the bottomline, which nearly doubled from 306 Cr to 597 Cr - an all-time quarterly high. With a 59% share of the domestic 2-wheeler market, the company sold 1 million units for the second quarter in a row.

Product and branding innovations and operational efficiency were the main reasons for the excellent performance. Strong cash flows from operations, growing profits and dividends, low debt/equity ratio makes this a must-have in any long-term investor's portfolio.

Bottomline? The stock chart pattern of Hero Honda Ltd is going through a much-needed correction, providing a good opportunity for serious investors to enter.

Some practical examples of Behavioural Finance

Some practical examples of Behavioural Finance will show a different aspect - more from the psychological point of view - at how and why investors buy and sell stocks. It goes against the grain of Efficient Market theory that is built upon rational decision making taking into account all available information.

One of the interesting advantages of writing a blog is that readers get an opportunity to react almost immediately and let the writer know what they think about his opinions. Thereby opening a direct window to the workings of their minds.

In a recent post, I had suggested that investors should bail out of the telecom sector stocks, instead of jumping in after the price correction. In another post, I suggested investors should sell the Punj Lloyd stock at every rise, after it posted awful Q2 '09 results.

The reactions were swift. While some agreed with my views, many did not. The arguments were strong and apparently 'rational'. But what about investment behaviour?

"Bharti Airtel is the best in customer service, has a pan-Indian network, is a leader with a stash of cash, will be less affected by the price war and number portability. So, the stock was a 'steal' at 350 and more should be bought if it slipped below."

Why 350? Because it was 30% lower than its recent high of 500? Possibly. The human mind likes to work with nice round numbers. A classic example of 'recency bias' in Behavioural Finance. The price of 500 had remained in the investor's mind as a 'recent high'.

A few more readers thought 350 was a good price to enter. An example of 'confirmation bias' - investors looking for confirmation of a 'buy' decision. What happened when the stock dropped to 340?

"I sold at 340 so that I can buy it back at 325", was one comment. An example of 'loss aversion'. This is one of the most insidious biases for long-term investment success. Instead of admitting a mistake and booking the small loss, an investor tries to take on additional risk to avert the loss.

I'm not sure what this particular investor did when the Bharti Airtel stock first fell to 325 and then went below 300.

A comment about Punj Lloyd was:

"I sold the stock at 290 and was happy to buy it back at 240. Will buy more if it goes further down. The company has a huge order book, has global operations and is a Larsen and Toubro in the making."

Now that the stock has dropped below 200, 'Regret theory' in Behavioural Finance suggests that the investor has probably avoided selling the stock and is holding on to it to avoid the regret of making a bad decision.

'Prospect theory' in Behavioural Finance postulates that investors behave differently in situations depending on whether they are faced with a loss or a gain. They feel more pain at the prospect of losses than they feel elated by an equivalent gain. In other words, a 10 point loss in a stock costing 100 may cause more distress, than a 10 point gain causes happiness.

In actual experiments with different groups of investors, when evaluating the prospect of a sure gain, most investors become risk-averse; but faced with sure loss, they become risk-takers.

No wonder, Benjamin Graham has written: "The investor's chief problem - and even his worst enemy - is likely to be himself."

Dow Jones (DJIA) index chart pattern - Oct 30, '09

The Dow Jones (DJIA) index chart pattern failed to reach anywhere close to the 10360 resistance level mentioned in last week's analysis. The weight of the 'reversal week' pattern, the low volumes and negative divergences - all contributed to a 2.5% (259 points) correction for the week.

The volumes increased quite a lot on a down week, coupled with a rise in volatility. The VIX index rose sharply, indicating nervousness among market players. The correction may deepen this week.

A look at the 6 months closing chart pattern of the Dow Jones (DJIA) index will show that the bulls need not throw in the towel just yet:-

The index fall got good support at the 50 day EMA - just as it did earlier in the month. So, the likelihood of a bounce up can't be ruled out. That would provide a good opportunity to sell.

The 20 day EMA has turned down and the 50 day EMA has flattened. The 200 day EMA is still rising. The bulls will hope that the market turns around quickly.

The slow stochastic has dropped below the 50% level. The MACD has fallen below the signal line. The ROC is well into the negative zone. Only the RSI is showing a bit of positive move by bouncing off the 50% level. A further correction to the 9500 level, and below that to the 200 day EMA, is a possibility.

Despite signs of the worst being over and Q3 '09 results apparently confirming that, neither job opportunities nor consumer spending seem to be improving. Even companies are holding more cash - and a greater percentage of assets in cash - than at any time in the past 40 years, as per a recent WSJ article. The economic growth will be severely hampered if spending doesn't pick up soon.

Bottomline? The Dow Jones (DJIA) chart pattern may correct some more. Use any upward bounces to book profits. Start work on your 'buy list'.

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Oct 30, '09

FTSE 100 index chart

Some times, stock markets start to fall when the load of concerns becomes too heavy. After weeks of rising ever higher by defying technical signals and economic fundamentals, the FTSE 100 index had a decent correction last week. The FTSE dropped about 200 points (3.8%).

The index fall was supported by the 50 day EMA. But bulls have no reason to feel optimistic. The fall has been on increased volumes, which indicates that the correction is likely to continue next week. Rising volume tends to support the index direction.

The 20 day EMA has turned down. The 50 day EMA has flattened. But both remain above a rising 200 day EMA. Technically, the bull rally is not under threat.

The technical indicators have turned quite negative. The RSI and MFI are below the 50% levels. The slow stochastic has dropped sharply below the 50% level and seems headed for the oversold region. The MACD has also fallen steeply and is well below the signal line.

DAX index chart

The 'reversal day' on Oct 23 '09 took a heavier toll on the DAX index, which fell 325 points (more than 5.5%) below the previous week's close. Higher volumes during the week means the correction may not be over yet.

The 20 day EMA is moving down towards the flattened 50 day EMA. The 200 day EMA is still rising. The bulls will be hoping that the DAX index doesn't drop below the long-term average.

The RSI and MFI are both below their 50% levels. The slow stochastic is about to enter the oversold zone. The MACD has dipped into negative territory and is well below the signal line. The technical indicators of the DAX look weaker than those of the FTSE.

CAC 40 index chart

The CAC 40 index also succumbed to the 'reversal day' pattern made on Oct 23 '09 as it tumbled 200 points (5.3%) below its previous week's close. The fall on increasing volumes is not a good sign for the bulls.

The EMAs and technical indicators all look bearish and very similar to those of the DAX index.

Bottomline? The chart patterns of the European indices have turned quite bearish, and the corrections are likely to continue next week. Use any upward bounce - likely from the 200 day EMA - to reduce holdings. Wait for the correction to play out.