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Sunday, May 31, 2009

Hang Seng Index Chart Pattern - May 29, '09

Last week's Hang Seng index chart pattern looked like it was getting ready for a correction because of the dip in volumes and the weakness of the technical indicators. The index was near its 20 day EMA, which had provided support ever since it was penetrated in Mar '09.

The 3 months bar chart pattern of the Hang Seng index will show that the 20 day EMA provided strong support once again:-

Hang Seng_May2909

(Please right-click on the image; open it in a new tab or window for a better view.)

The upward bounce from the short-term average wasn't entirely unexpected. But the striking feature was the sudden upsurge in volumes.

Volume is supposed to move with the index, and go up when the index moves up.  However, a sudden increase in volumes can also indicate a 'buying climax' which indicates the formation of a market top. This usually happens at the end of a fairly long rally - just like the one we have had so far.

Unfortunately, technical analysis can't distinguish the difference between a surge in demand from genuine investors, and a desire by market operators - particularly bears - to create a temporary  buying surge to trap the bulls.

Next week's trading ought to clear up the mystery of the sudden volume increase. The slow stochastic has moved back into the overbought zone. The MACD, ROC, RSI have all risen with the index. But all the indicators have made lower highs. This is a negative divergence between the Hang Seng index and its technical indicators.

Bottomline? Time to be a little cautious. Let your profits ride, but keep maintaining trailing stop losses on your stock investments. Partial profit booking is also recommended.

Saturday, May 30, 2009

BSE Sensex Index Chart Pattern - May 29, '09

In last week's analysis of the BSE Sensex index chart pattern, I had mentioned about the following possibility:-

'For the 'uber' bears, one last straw remains. The crossing of the 50 day EMA above the 200 day EMA. The bears' back should get broken next week.'

The 50 day EMA smoothly moved above the 200 day EMA as expected. All three EMAs are now moving up along with the Sensex - which closed higher for the 12th straight week. Must be a record of some kind.

One last glimmer of hope remains for the bears, but it is a very, very faint hope. I had mentioned about the possibility of an 'island reversal' because the big gap on the Sensex chart created on Mon. May 18, '09 remained unfilled. Last week's trading came no where close to filling the gap.

The 3 months bar chart pattern of the BSE Sensex will clearly show that the last two weeks' trading has been at a significantly higher level leaving the gap untouched:-

Sensex_May2909

(Please right-click on the image above; open it in a new tab or window for a better view.)

The slow stochastic, MACD, ROC and RSI are all moving up. The one-day's correction on Tue. May 26, '09 did bring the slow stochastic below the overbought zone, but looks like it is ready to go back.

Notice how the slow stochastic remained in the overbought zone right through the month of April '09 and it looks like it will remain overbought for a while longer. The bullish sentiment is too strong and may last till the budget presentation in the first week of July '09.

Those who have missed the rally and are feeling desperate about jumping in - don't. Keep watching the slow stochastic for a proper correction. (More about how to use the slow stochastic indicator can be found in this post.)

At some point - may be after the budget belies some of the high expectations of market participants - the bull surge will wane and the Sensex will come down to levels which will be more conducive for a re-entry.

The Sensex is now consolidating around the 50% Fibonacci retracement level (of about 14450) of the entire fall from 21200 in Jan '08 to 7700 in Oct '08. Once it clears this hurdle - and there is no reason why it should not - the next stop will be about 16500. That is the 61.8% retracement level of the entire fall.

Why and how does the BSE Sensex index retrace by these specific percentage levels? Good question. Technical analysis tends to be self-fulfilling. Because many market participants know about these levels, they tend to take profits near these levels. If any one has a logical answer, I would like to hear it.

Bottomline? Enjoy the bull ride, but maintain trailing stop losses and remember to book some partial profits on those stock investments that have gained appreciably during the rally. Remain stock specific, and buy them on dips.

(Next week I plan to write the third installment of the mini-series: 'How to pick stocks for investment'. The first part on general guidelines appeared in this post. The second part was about the top-down approach to stock picking. The third part will discuss the bottom-up approach for stock selection.)

Friday, May 29, 2009

FTSE 100 Index Chart Pattern - May 29, 2009

The previous week's FTSE 100 chart pattern evoked the following comment:-

'Since Apr '09, the index has bounced up every time it has touched or dropped near its short-term average. So another bounce up may not be surprising.'

The FTSE 100 index moved sideways during the week, bouncing up and down between the support of the 20 day EMA and the resistance from the 200 day EMA.

The index seemed torn between the gravitational pull from the technical indicators to go down below the shirt-term average, and the strong incentive to keep up with the Asian markets by trying to move above the 200 day EMA.

Reminded me of the opening sequence from Spike Lee's "Mo' Better Blues" starring Denzel Washington and Wesley Snipes. A young boy was learning to play the trumpet in an upstairs apartment. His friends called him to come down and play, but his mother insisted that he finish his music lessons first. (A 'must see' movie for jazz lovers.)

The 3 months bar chart pattern of the FTSE 100 index will exemplify the analogy:-

FTSE_May2809

(Please right-click on the image above; open it in a new tab or window for a better view.)

The slow stochastic has moved down near its 50% mark, with the gap between the %K and %D lines beginning to widen. The MACD has slipped below its signal line and both are dropping.

The ROC is moving sideways in negative territory. The RSI has also moved down near its 50% mark. The volumes continue to taper off. All the technical indicators are looking weaker than last week.

But the FTSE 100 index is refusing to throw in the towel. Today (May 29, '09) it is making another attempt to conquer the resistance of the long-term moving average.

Bottomline? Stock markets worldwide are ignoring the bad news and continuing the rally. That is a sign of strong bullish sentiment. The fight between the bulls and bears remain inconclusive in the UK market. The odds favour a small downward correction in the coming two weeks.

Thursday, May 28, 2009

India: an attractive investment destination

A conference was recently organised by CLSA in Singapore for investors from all over the world interested in the Asia-Pacific markets. Top management of several companies in Asia made presentations to these investors.

The key takeaways for investors were:

- investors should be overweight in India, China, Hong Kong, Taiwan

- India's GDP growth will be 6.3% in 2008, 4.6% in 2009, 6.4% in 2010; China's corresponding figures will be 9%, 7% and 8%

- the huge drop in the price of oil will benefit India's fiscal position

(Read more details about this conference here.)

Regular readers of this blog may have been wondering why I've been analysing the Asian market indices like the Hang Seng, KOSPI and TSEC. It was to draw attention to the fact that the Asian economies are less dependent on borrowing and more on saving. Therefore, they would be less affected by the global downturn and take less time to recover.

The problem of toxic assets and sub-prime mortgages had little influence on Asia's banking systems. More humane labour laws have prevented large scale unemployment - particularly in India.

The stock markets assessed that and recovered quicker from the bear mauling. Technical analysis indicators are confirming that most Asian stock markets have reversed trend from bear to bull, while markets in the USA and Europe are still struggling. 

Wednesday, May 27, 2009

Stock Chart Pattern - IFCI Ltd

The stock chart pattern of IFCI Ltd provides clear evidence of the popularity of this stock with traders. Right through the bear market, it has provided ample opportunities for making trading profits.

Since I have professed my bias towards investing, and not trading, why am I discussing a stock that makes investors shy away but traders rub their hands in glee? It has got something to do with the concept of a 'mad money' portfolio.

90% of my 'core' portfolio is 'boring' - held in 'safe' large-cap defensive stocks and cyclicals which pay regular dividends. The holding cost of this core portfolio is near zero because of partial profit bookings, bonus issues and rights issues.

But even a gray-haired geriatric needs an occasional feeling of excitement. There are better places - like the race course and card tables - for adrenalin junkies. However, the odds in such places favour the house.

So 10% of my portfolio - my 'mad money' portfolio - comprises fundamentally questionable, 'what-if' and junk stocks. Should all the stocks in this portfolio go down the tube, that is a risk that has been built into my return equation.  But even if a single stock hits it big, the returns will recoup all the losses made by the rest of the stocks.

IFCI belongs to this 'mad money' category. Investors who like to take on more risk may increase the percentage of the 'mad money' portfolio suitably - but it should not exceed 25-30%.

Enough digression about investment philosophy. Let us have a look at the one year bar chart pattern of IFCI Ltd:-

IFCI_May2709

(Please right-click on the image; open it in a new tab or window for a better view.)

After making a bottom at Rs 15 in early Dec '08, the IFCI stock rose to 26 in early Jan '09. Doesn't sound like much, does it? But that is a 73% rise in a month's time! The stock drifted down to touch Rs 16 in Mar '09. This bullish 'double bottom' pattern has been marked on the chart above.

The chart pattern shows a slower rise for the rest of Mar '09, but volumes picked up in Apr '09 and IFCI moved up to Rs 29 in early May '09. A brief consolidation was followed by a huge jump in price and volume.

This time the stock hit Rs 50 - rising more than 200% in 6 weeks! Now you know why it is a trader's delight. There are some headwinds - the zone between 50-52 may provide good resistance.

The technical indicators are indicating caution. The stock has moved sharply above its 20 day EMA, which in turn, has moved sharply away from the 50 day EMA. The divergence between the MACD and its signal line is also increasing.

Both the RSI and slow stochastic are in overbought zones. The ROC, which has been oscillating around the zero line for the past few months, has also rapidly moved up to the 100 mark.

A correction seems to be around the corner. It will give the stock time to catch its breath before conquering the resistance at the 50-52 zone and move up towards the next resistance zone between 65-72.

Bottomline? The stock chart pattern of IFCI Ltd shows a possible drop to the support of the 20 day EMA between 35-40. That dip can be used to re-enter the stock. Caveat: this is strictly for those with a trading bent. The fundamentals of the company do not justify a long term investment.

Tuesday, May 26, 2009

Mutual Funds waiting with cash on the sidelines? What cash?

Last Saturday, May 23 '09, there was an article in the mutual funds news section of the Economic Times that made me sit up and start thinking.

For the 6 months period from Oct 1 '08 to Mar 31 '09, 14 mutual fund houses borrowed almost Rs 21000 Crores to meet investors' redemption requirements. That's over $ 4 Billion.

Biggies like Reliance (Rs 6000 Cr), Religare (Rs 4400 Cr), Birla Sun Life (Rs 3400 Cr) and Tata (Rs 3000 Cr) led the pack. Most of the loans, taken at high interests, have apparently been paid back. But that is small comfort.

Even today, a very articulate and confident lady analyst on CNBC paraphrased an oft-repeated refrain: 'There is plenty of cash waiting on the sidelines'!

If that is correct, then what was the need to borrow huge amounts at high interest rates? What happened to the cash on the sidelines? Or is it one of those enduring myths in the stock market that need to be debunked?

In an article last week, I had debunked another stock market myth. That had sparked off quite a debate in one of the investment forums. So this week I've decided to bring out the heavy artillery.

In Mar 2007, John P. Hussman, PhD (http://www.hussmanfunds.com/wmc/wmc070312.htm) had this to say about the 'Money flow Myth':-

"I am increasingly losing confidence that Wall Street operates on a well-defined base of knowledge. Instead, I am struck by the number of platitudes and false constructs that seem to dominate the investment management industry.

First, we should be very clear that there is no such thing as money going into or out of a secondary market. When stocks are issued in an IPO, or bonds are floated to investors, companies receive funds from investors and, in return, give investors pieces of paper called stocks and bonds, as evidence of the investors' claim on some future stream of cash. This is a “primary market” transaction.

Once those pieces of paper are issued, they are traded between investors in the “secondary market.” When we talk about the stock market, we're talking almost exclusively about the secondary market, because new issues make up a very small part of total activity.

Dear Wall Street analysts and financial reporters – when investors purchase a stock in the secondary market, the dollars that buyers bring “into” the market are immediately taken “out of” the market in the hands of the sellers. It is an exchange. This is why the place it happens is called a “stock exchange.” The stock market is not an air balloon into which money goes in or out and expands or contracts that balloon. Nor is it a water balloon that is expanded by pouring in “liquidity.” Prices are not driven by the amount of money that buyers “put in” or sellers “take out” (as those dollar amounts are identical). Prices are determined by the relative eagerness of the buyer versus the seller.

If a dentist in Poughkeepsie is willing to pay up 10 cents to buy a single share of General Electric, the total market value of General Electric increases by over $1 billion (GE has 10.28 billion shares outstanding - do the math). In this way, market capitalization can be created and destroyed out of thin air and on the smallest of trading volumes. So you'd better be sure that the there is a sound and fairly reliable stream of expected cash flows backing up the value of the securities you're buying.

Cash does not ever find a “home” in a secondary market. Every time you hear the phrase “investors are putting money into…” or “investors are taking money out of …” or “money is flowing out of … and into …,” it is a signal that the speaker is unable to distinguish a secondary market from a primary one.

As I used to teach my students, if Mickey sells his money market fund to buy stocks from Ricky, the money market fund has to sell some of its T-bills or commercial paper to Nicky, whose cash goes to Mickey, who uses the cash to buy stocks from Ricky. In the end, the cash that was held by Nicky is now held by Ricky, the money market securities that were held by Mickey are now held by Nicky, and the stock that was held by Ricky is now held by Mickey. There may have been some change in the relative prices between cash, money market securities and stocks, depending on which of the three was most eager, but there is precisely the same amount of “cash on the sidelines” after that set of transactions as there was before it."

Hussman had written an earlier article on the subject as well: 'There's No Such Thing as Idle Cash on the Sidelines.'   

Guess an old myth becomes as comfortable to use as an old pair of shoes. And mutual fund managers and stock market analysts would rather feel comfortable than do some independent thinking.

Monday, May 25, 2009

Dow Jones (DJIA) Index Chart Pattern - May 22, '09

Last week, the Dow Jones (DJIA) index chart pattern was supported by its 20 day EMA, which led me to comment as follows:-

'The index has been well supported by its 20 day EMA since moving above it in early Mar '09. It is possible that another bounce upwards towards the 200 day EMA may be attempted.'

As if on cue, the DJIA made a feeble effort to move towards its 200 day EMA, only to fall down again. By the end of the week, it was barely hanging on to its short term EMA by its fingertips.

The 3 months bar chart pattern of the Dow Jones index is now looking even weaker than last week:-

Dow_May2209

(Please right-click on the image; open it in a new tab or window for a better view.)

The 200 day EMA is still falling, albeit more slowly than before. The 20 day EMA has flattened and is just above the 50 day EMA. Volumes peaked on Wednesday - another 'reversal day' with a higher high and a lower close.

The slow stochastic has now reached the 50% line with the %K below the %D line. The MACD is still positive but has slipped below its signal line. The ROC is now in negative zone. The RSI has also touched the 50% line on its way down. All the technical indicators are pointing towards a bigger correction.

The fundamental news continues to be disappointing, as the following statistic will confirm:-

Privately-owned housing starts in April were at a seasonally adjusted annual rate of 458,000. This is 12.8 percent (±13.0%)* below the revised March estimate of 525,000 and is 54.2 percent (±6.0%) below the revised April 2008 rate of 1,001,000.

Bottomline? The Dow Jones (DJIA) index chart pattern leaves little doubt that the 'engineered' rally is fast losing its head of steam. Investors should remain patient a little longer for better buying opportunities. But only if they have a long term view. A lot of short term pain still remains in the financial system.

Sunday, May 24, 2009

Hang Seng Index Chart Pattern - May 22, '09

The Hang Seng index chart pattern was showing the signs of a larger correction last week. Instead, the index used its 20 day EMA as a trampoline and tried to bounce up to a new high.

It made a high of 17611 on Wed. May 20, '09 that was slightly below the previous high of 17686 made on Mon. May 11, '09. Two days of down moves followed and the index dropped near its 20 day EMA once again.

This 'double top' formation is bearish - which is confirmed by the lower volume on May 20, '09. But the index has been getting support from its 20 day EMA since the middle of Mar '09 and another bounce up may be on the cards.

The 3 months bar chart pattern of the Hang Seng index will show the exciting tussle between the bulls and the bears:-

Hang Seng_May2209

(Please right-click on the image; open it in a new tab or window for a better view.)

The 20 day EMA is now comfortably above the 200 day EMA but the 50 day EMA has still some climbing left. In the 2 years chart, the Hang Seng index is still below the long term down trend line drawn through the tops made in Nov '07 and May '08. (The BSE Sensex index chart pattern had pierced above its long term down trend line three weeks back.)

The slow stochastic has been moving in and out of the overbought zone. The MACD is a tad below its signal line. The RSI has moved down from the overbought zone and the ROC has dropped almost to the mid-point '0' line.

The technical indicators are all signalling a further correction. The lower volumes are confirming the slowing of the upward momentum. A deeper correction will provide a good entry point.

Bottomline? The Hang Seng index chart pattern may try another bounce up from the short term EMA. But this rally looks like it is on its last legs. Any bounce can be used for taking some profits off the table.

Saturday, May 23, 2009

BSE Sensex Index Chart Pattern - May 22, '09

Last week's analysis of the BSE Sensex index chart pattern was concluded with the following comment:-

'The BSE Sensex index chart pattern shows that the upward thrust can continue some more - but this isn't the correct time to enter. Investors should stay calm and use a rapid up move on election results to book some profits.'

Monday, May 18, '09 created a history of sorts. A huge gap up opening made the BSE Sensex hit two upper circuit limits, followed by a shut down in trading for the rest of the day. The volumes were very low due to the extremely short trading session. The rise was largely due to short covering.

What happened during the rest of the week was quite interesting. Let us look at the 3 months bar chart pattern of the BSE Sensex:-

Sensex_May2209

(Please right-click on the image above; open it in a new tab or window for a better view.)

The Sensex hit an intra-day high of 14930 on Tue. Mar 19, '09 but closed at 14300. This is very near the level of 14450 - which is the 50% Fibonacci retracement level of the entire fall from 21200 to 7700.

Some experts opine that up to a 50% retracement can happen in an intermediate rally without changing the primary trend. In simple English, that means that by the proverbial whisker's width, this remains a bear market rally.

Technically, the crossing of the Sensex above its 200 day EMA was the first sign of trend change. This was followed by the long-term down trend line from the Jan '08 top getting pierced. Next the 20 day EMA went above the 200 day EMA. That makes it three out of three for a trend change from bear market to bull market.

For the 'uber' bears, one last straw remains. The crossing of the 50 day EMA above the 200 day EMA. The bears' back should get broken next week. But bears should not throw in the towel yet. There is one more intriguing possibility left.

The BSE Sensex dropped on profit booking on Wednesday and Thursday. Friday's close was higher than Thursday's, but on lower volumes. End result? The week's trading failed to close the gap made on Monday. This has created an 'island' above the gap.

If, by any chance, a gap down opening happens on Mon. Mar 25, '09 and the BSE Sensex moves further down during the week, then that would cause an 'island reversal', which is very bearish. What is the probability of such an event happening? Very low.

The MACD is moving up and has made a new high. The ROC is also moving up but made a lower high. The slow stochastic has just slipped below the overbought zone. The RSI has also moved down from the overbought zone.

Bottomline? The BSE Sensex index chart pattern seems to be taking a well-deserved rest after a huge up move. Some more correction isn't ruled out. The more likely move may be a sideways consolidation till the budget. Investors should monitor Q4 results and take stock-specific decisions.

Friday, May 22, 2009

FTSE 100 Index Chart Pattern - May 22, 2009

The FTSE 100 index chart pattern tried to defy gravity and made another effort to cross its 200 day EMA. In fact it managed to spend two days just above it.

The effort seemed to take the wind out of its sails, and it dropped down again to seek support from its 20 day EMA. In the process, the index has made a double-top pattern, which indicates bearishness, and may terminate the recent rally.

A look at the 3 months closing chart pattern of the FTSE 100 index will show that the bearishness is being confirmed by the technical indicators as well:-

FTSE_May2109

(Please right-click on the image above; open it in a new tab or window for a better view.)

The slow stochastic has slipped down from the overbought zone. Both the ROC and RSI made lower tops while the FTSE was trying to make a higher top. This negative divergence was followed by both indicators beginning their down moves.

The MACD is touching its signal line and both are moving downwards. The volume is reducing with the down move of the FTSE, as it is supposed to do.

Since Apr '09, the index has bounced up every time it has touched or dropped near its short-term average. So another bounce up may not be surprising.

Bottomline? Watch the 20 day EMA closely. Should the FTSE 100 index chart pattern start to weaken and fall below the short-term average, a stronger down move may follow.

Thursday, May 21, 2009

Now, learn portfolio strategies from a game of stud poker

One of the best ideas for managing your portfolio on an ongoing basis is to treat each stock (or fund) in your portfolio as a hand in a game of stud poker. Not my idea. Peter Lynch mentioned it in his book: "One Up on Wall Street".

Stud poker is a 'man's game', pitting strong-willed men with nerves of steel and expressionless faces against each other across a card table. The game has been immortalised in several Hollywood films.

Two of them - my favourites - come to mind. The old pro, Edward G. Robinson playing against the new kid on the block, Steve McQueen, in "The Cincinnati Kid". And a sophisticated Robert Shaw being taken for a ride by a bumbling Paul Newman in "The Sting".

The game - for the uninitiated - is simple enough. A card is dealt face-down, which can only be seen by the player to whom it was dealt. This is immediately followed by a second card dealt face-up to each player. All players get to see the face-up cards. A round of betting follows. Each bet is for a specific amount.

A player has the option to 'fold' (i.e. take no further part, if the cards he has been dealt are not to his liking); 'call' (i.e. stay in the game by betting an equal amount) or 'raise' (i.e. increase the bet by a pre-determined amount). Every time a player raises the bet, another round of betting follows.

The process is repeated three more times, as a card is dealt face-up to each player remaining in the game. After all five cards for each hand have been dealt (one face-down and four face-up) and the betting is concluded, the players remaining in the game show their hands to the others. The player with the best five card combination wins.

I'm not a gambling man, nor do I advocate a gambling mentality in the stock market. But the analogy - that each stock (or fund) in your portfolio is akin to a hand at stud poker - seems very apt.

The face-down card is like some knowledge or information you may have about the company that may not be known to the general public. Each face-up card is some bit of financial news or company-specific information that becomes available in the market.

As each 'card' is dealt, you need to take some action as an investor. If it is pretty bad news - like the Satyam fraud, or Punj Lloyd's overseas subsidiary delaying a project and incurring a huge penalty - you should fold (i.e. sell) that particular hand.

If it is so-so or good information - like Larsen and Toubro bagging a new order, or Tata Investment declaring a marginal profit and matching last year's dividend - you may hold your stock (or fund).

If it is better news - like 3i Infotech declaring increased profits when most IT companies were struggling in the down turn - raise the bet (i.e. buy some more).

You'll need the mental and physical discipline of tracking each bit of information about each of the stocks (or funds) in your portfolio, analysing the consequences and filing it properly at a place from where it can be retrieved easily.

It is not rocket science, but it has to be followed diligently on a regular basis - at least once a week. That means not only tracking company results and announcements, but also the forex rates and macro-economic and political news to understand the implications and likely effects on your portfolio.

Many intelligent individuals never succeed in their market investments. A probable cause can be the lack of time and/or discipline in following a regular process of updating information about their portfolio holdings.

Life becomes a lot easier if you manage to limit your holdings to 10-12 stocks or 5-6 mutual funds. Keeping track of fewer companies improves your chances of being able to move quickly as the situation demands.

Weekly tracking of a smaller number of companies (or funds) means you will tend to remember the important bits of information necessary for taking buy-sell-hold decisions.

Wednesday, May 20, 2009

Stock Chart Pattern - Maharashtra Seamless

The stock chart pattern of Maharashtra Seamless will reveal that you can not keep a good stock down for too long. It is a market leader in its niche of seamless pipes used in gas and oil exploration in India and overseas.

With low debt, positive cash flows from operations (except a blip in '06), regular dividend payments and steady growth, Maharashtra Seamless should find a place on the buy list of mid-cap stocks for seasoned investors.

The headwinds of the global slowdown and the lower oil prices have curtailed investments and affected most players in the oil and gas segment. Maharashtra Seamless is no exception.

But its credibility in the export and domestic markets, overseas tie-ups coupled with a decent cash hoard will help it to ride out the downturn better than its competition. A recent repeat order from ONGC worth Rs 750 Crores will surely help its cause.

Enough about fundamentals. Now a look at the technicals:-

Mah Seamless_May2009

(Please right-click on the chart; open it in a new tab or window for a better view.)

The stock has broken upwards after making a bullish 'rounding bottom' pattern that indicates gradual accumulation by smart investors.  There are a couple of interesting things to note.

Both the RSI and slow stochastic moved out of their oversold zones and gave 'buy' signals even before the stock price moved above its 20 day EMA. By the time the 20 day EMA crossed above the 50 day EMA, confirming the bullishness, the stock had completed the 'rounding bottom' pattern.

The expected correction followed briefly and formed a 'cup-and-handle' pattern. The correction was well supported by the 20 day EMA as the stock continued to march upwards.

The lower volumes in Mar and Apr '09 were a concern. But the volume has picked up considerably in May '09, supporting the bullish move.

Is it a good time to enter the stock? Yes, if you are an investor with a 3-5 year outlook. If you have a 1-2 year outlook, you may want to wait for the next correction to enter. It is possible that the stock may drop to the 200-220 level to seek support again from its 20 day EMA.

The rise in May '09 has been too steep and the stock looks overbought. Both the RSI and slow stochastic have made lower highs while the stock has moved further up. This is a negative divergence and suggests caution.

Bottomline? If you like mid-caps and are looking for a fundamentally strong, profitable, low debt company with real cash in its books, look no further than the chart pattern of Maharashtra Seamless.

Tuesday, May 19, 2009

Is the stock market reflecting everyone's excessive euphoria on election results?

There is a well-known myth in the stock markets - usually touted by 'experts' when the markets are moving up. It goes something like this: the stock markets always discount the future.

Nothing could be farther from the truth. Just flashback to the month of September 2007. The sub-prime crisis had begun to affect the financial sector as far back as in Feb 2007.  By the summer, it had all the signs of a full-blown crisis.

Indian stock markets had the grand finale of the bull run between Oct - Dec 2007. The markets should have fallen instead because the future was bleak. What the market really does is discount the hopes and aspirations of the buyers and sellers.

The UPA won a mandate that even surprised them. The decimation of the Left parties will surely lead to hastening of the financial reforms process. The sidelining of the third and fourth fronts by the electorate means a comparatively stable government with a set of coalition partners who won't be able to pull much weight because of the few seats they hold.

Please remember that the new government hasn't been formed yet. After it gets its house in order, it isn't going to rush into reforms and privatisations. A budget will need to be placed and approved. That will take 4-6 weeks.

There may be a strong dose of taxation to cover the huge deficits caused by loan waivers, subsidies, pay increases. The Congress party policies have always been socialistic and their poll plank of concern for the 'aam aadmi' ('average Joe') will need to be catered to. That may not be palatable for market participants.

Does all that justify a historic, first ever, double upper circuit in the Indian stock markets, followed by suspension of trading for the day? The video footage of cheering, table-thumping, laptop-kissing traders and business media analysts would probably indicate a resounding  'YES'.

But look at the volumes traded. Barely Rs 3000 Crores. Most of it in F&O. That  seems like a desperate attempt at short covering rather than frenzied buying by investors. Today's up move close to the BSE Sensex index level of 15000, followed by a flat close means there were as many sellers as buyers.

In this post in Feb '09, I had categorised financial news into good, great, bad and worse and discussed their effects on the stock market and advised investors about what they should do.

Where does news of election results fit in? Regular political news have very little impact on the markets - other than wars and terror attacks. But news of a surprising election result bringing back a pro-reform team without the excess baggage of the Left parties is definitely 'good news' for the stock markets.

Why isn't it 'great news'? Not yet. That may happen after a year or two if the pace of reforms and divestments from public sector companies really push-start our economy forward to 9% GDP growth.

Till then, we have to contend with results season. Most companies have postponed results declarations till the end of June '09. Many results will be awful. The real estate and infrastructure companies that have seen an unjustified spurt recently will face selling pressure. (Punj Lloyd has already declared a huge Q4 loss.)

My advice to investors is to stay calm, not feel 'left-out' and use the temporary price spurt on 'good news' to get out of non-performing stocks. Saner voices will prevail and euphoria will evaporate.

The BSE Sensex index is looking overbought. It may not go down to 8000, but may see 10000-12000 levels in the near future. That will be a better time to start buying.

Monday, May 18, 2009

Dow Jones (DJIA) Index Chart Pattern - May 15, '09

My advise to investors last week after analysing the Dow Jones (DJIA) index chart pattern was to take some profits off the table as lower levels may be seen soon enough.

The 3 months closing chart pattern of the DJIA index shows that it did indeed move downwards before taking support at its 20 day EMA:-

Dow_May1509

(Please right-click on the image; open it in a new tab or window for a better view.)

All the technical indicators have simultaneously started to confirm a much-needed correction. The volumes have petered off. The slow stochastic has moved down from the overbought zone. The MACD has slipped below its signal line. The ROC has touched its '0' line from above. The RSI has also moved down towards the 50% line.

The index has been well supported by its 20 day EMA since moving above it in early Mar '09. It is possible that another bounce upwards towards the 200 day EMA may be attempted. But the bear market will not be over as long as the index remains below a still falling 200 day EMA.

Fundamental news hasn't been great. Tax collections in the state of California - which would be the 7th largest economy in the world if it was a separate country - fell $1.8 Billion below expectations in Apr '09. April happens to be the state's largest tax collection month.

Home foreclosures are surging in Chicago's suburbs, jumping between 25% and 70% from the fourth quarter in DuPage, Will, McHenry, Lake and Kane counties, according to this report. Job losses, rather than sub-prime mortgages, are the cause of new foreclosure filings.

Retail sales in Apr '09 fell for a second straight month. The fall of 0.4% is less than the fall of 1.3% in Mar '09,  but when you compare it with a fall of 11.4% from Apr '08, then talk about an early economic recovery seem a little far-fetched.

The stock markets have simply been sweeping the bad news under the carpet. But the carpet is now beginning to bulge in different places.

Bottomline? The Dow Jones (DJIA) index chart pattern is showing signs of tiredness after a long upward ride and looks ready for a drop to saner levels. Stay in cash and await better entry opportunities.

Sunday, May 17, 2009

Hang Seng Index Chart Pattern - May 15, '09

Last week's Hang Seng index chart pattern was not quite confirming a change of trend from a bear market to a bull market. Investors were advised to wait for a correction before entering.

The 3 months bar chart pattern of the Hang Seng index is reflecing the effects of the correction that followed:-

Hang Seng_May1509

(Please right-click on the image; open it in a new tab or window for a better view.)

A 'reversal day' on Monday (May 11, '09) led to a 1000 point correction that dropped the index almost down to its 200 day EMA. Friday's up move took the 20 day EMA marginally above the 200 day EMA. But the low volumes were less than convincing.

Unlike the Sensex, which has been moving up almost without a correction for more than 2 months, the Hang Seng had several corrective moves on the way up. A comparison between the two charts would make it clear - the Sensex 20 day EMA is like a straight line whereas the Hang Seng 20 day EMA is more wave like. A straight line up move is less likely to sustain.

The slow stochastic has dropped below the overbought zone. The MACD has slipped a little and is touching the signal line. The ROC and RSI indicators are both moving down. The technical indicators are all turning negative. Higher volumes on some of the down days are another concern.

Bottomline? The Hang Seng index chart pattern is showing signs of a larger correction than the one we had last week. A good time to stay on the sidelines and wait for more 'green shoots' to appear.

Saturday, May 16, 2009

BSE Sensex Index Chart Pattern - May 15, '09

Last week's BSE Sensex index chart pattern led me to observe:

'The 20 day EMA moved up to touch the flattening 200 day EMA and should pierce through next week to provide the second confirmation of a trend change from bear to bull.'

A look at the 3 months bar chart pattern of the BSE Sensex index will show that the 20 day EMA has comfortably moved above the 200 day EMA, though the index oscillated at the 12000 level:-

Sensex_May1509

(Please right-click on the image above; open it in a new tab or window for a better view.)

The opening 'gap' created on Monday, May 4, '09 remained unfilled. The BSE Sensex moved down and took support at the gap to move back up again. But it didn't manage to go very far.

There were two closes below and three closes above the 12000 level. The bulls and bears seemed to be undecided about forcing the issue either way. Like the battling armies of the olden days, both sides decided to sleep over it till the declaration of results of the recently concluded general elections.

The results announced so far have been quite a surprise from many angles. The decimation of the left parties will be a major relief for market participants and this could lead the bulls to jump start a sharp up move next week.

The situation is also nicely set-up for the bears to initiate a 'sell-on-news' campaign. Should that happen and the gap in the Sensex get closed, the subsequent upward rally may be stronger.

The technical indicators are confirming the indecision in the markets. The slow stochastic has moved in and out of the overbought zone. The MACD played hide-and-seek with its signal line. Both the ROC and RSI are in the positive zones - the former has an upward bias and the latter is inching down.

The huge spike in volume on Wednesday, May 13, '09 was probably caused due to the stake sale to Foreign Institutional Investors (FIIs) by DLF.

The world markets have been boosted considerably by the flow of FII money, and indices have moved up by ignoring the continued weakness in the underlying economies. Since every one was expecting a major correction, Mr Market confounded all the experts and moved up.

Bottomline? The BSE Sensex index chart pattern shows that the upward thrust can continue some more - but this isn't the correct time to enter. Investors should stay calm and use a rapid up move on election results to book some profits. Should the bears take charge instead, wait a couple of days and then enter fundamentally strong large cap stocks or diversified large cap equity funds.

Friday, May 15, 2009

FTSE 100 Index Chart Pattern - May 15, 2009

Last week, the FTSE 100 index chart pattern seemed to have moved up too fast in a rush to conquer the resistance of its 200 day EMA. I had observed as follows:-

'The only note of caution is the rapid rise of the index above its 20 day EMA. Every time it has done that in the past 6 months - in Dec '08, Jan '09 and Apr '09 - it has fallen back to take support on the short-term average.'

The 3 months closing chart pattern shows the FTSE 100 index came to its senses, as if realising that an up move can be sustained only through a series of corrections:-

FTSE_May1409 

(Please right-click on the image above; open it in a new tab or window for a better view.)

The 200 day EMA provided strong resistance and pushed the index down towards its 20 day EMA, just like it had done a few times earlier. Such similarity of patterns often lead analysts to state that 'history repeats itself.' It doesn't, of course. Only the patterns repeat.

The slow stochastic slid a little below the overbought zone. The MACD is still positive and above its signal line. But the ROC has moved down in tandem with the index. The RSI has also slipped from the overbought zone.

Volumes appear OK, but nothing great. Higher volume on a down day followed by lower volume on an up day isn't boosting confidence. The correction may continue for a bit longer.

Bottomline? A decent correction in the FTSE 100 index chart pattern is just what the doctor ordered. Investors can use this dip to enter. The underlying fundamentals of the economy continues to remain weak.

Thursday, May 14, 2009

Stock Chart Pattern - Hindustan Unilever

One look at the stock chart pattern of Hindustan Lever (sorry, Unilever - I'm just too comfortable with the older name) and you will know why it is my all-time favourite 'defensive' stock.

HUL is unlikely to give you multi-bagger returns. The days of super growth in the detergent-soap-toothpaste segment of the FMCG sector are over. That happened back in the 1970s and 80s.

If you want to preserve your capital during vicious bear attacks and like steady returns from tax-free dividends, there are very few stocks that can match HUL. This is not a stock for day traders. But there are plenty of opportunities for longer term trading.

Without further ado, let's take a look at the long term weekly closing chart pattern of Hindustan Unilever:-

 HUL_May1409 

(Please right-click on the chart; open it in a new tab or window for a better view.)

After making a low of 166 on Mar 7, '07 the stock entered a long term bull market of its own, trading within the up trend (green) channel that is not only intact but remained so right through the bear market from Jan '08 onwards.

A 'buy-and-hold' investor would have made a decent gain of 70% in a little less than two years, had he bought at 166 and sold at 267 in Dec '08 (including the dividends in between).

Also look at the trading opportunities for a more adventurous person. Every time the stock has come near the lower end of the channel it has jumped up.

The recent up trend in the Sensex from Mar '09 onwards has seen some selling in HUL and it has once again dropped down towards the lower end of the channel.

The RSI is about to enter the oversold region. The MACD and ROC are just below their zero lines. The slow stochastic is below the 50% line but still above the oversold zone. The stock may drift down a little more before it takes support at the lower trend line.

Bottomline? With the stock market undergoing a much needed correction, the HUL stock chart pattern looks poised for another rise within its bullish channel. Existing investors should hold on and await the dividend of Rs 4 per share announced recently. Bravehearts can enter now with a stop-loss at Rs 200.

Wednesday, May 13, 2009

Stock chart pattern discussions - hits and misses

In my individual stock chart pattern discussions on Wednesdays, 10 stocks have been covered so far. It may be worthwhile to do a reality check to find out what I had observed and inferred and how the chart patterns actually shaped up.

1.  ICI India - ICI had pierced and closed above its 200 day EMA before dropping below, and was consolidating between the 50 day and 200 day EMAs around the Rs 416 level. I had suggested: Good stock to accumulate in small quantities for conservative, long term investors.

ICI_May1109

The stock has slowly but steadily moved up well above its 200 day EMA and added about 15%. Nothing great, but can be counted as a 'hit'.

2.  Suzlon Energy - The stock was looking oversold. There was a possibility of a bounce up, but it could also go lower. My advice: Investors should not go anywhere near this stock. Adventurous traders may want to make a punt with very tight stop losses.

Suzlon_May1109

After going marginally lower, the stock moved up rapidly with the global rally and jumped up by almost 150%! It is still well below its 200 day EMA in spite of the sharp rise. A 'miss'.

3.  State Bank - SBI was looking like a value buy as it was trading at its book value. I observed the strong support at 900, but did not expect an up move to go beyond 1100.

SBI_May1209

SBI moved up 40% with the global rally before facing resistance at a previous top of 1400. Another 'miss'.

4.  Unitech - The stock was being accumulated near its 52 week bottom and I expected a move upwards. But advised: Unless the strong resistance between 50-60 levels is overcome, there is no point in entering Unitech.

Unitech_May1209

The stock did move up to the resistance zone of 50-60, but despite two attempts, was unable to cross it. A 'hit'.

5.  Hero Honda - This was one of the few stocks in a bull phase but at 1100 level was looking overbought and due for a correction. My suggestion: New investors may buy on dips. Existing investors should hang on tight and enjoy the ride.

HeroHonda_May1209

After correcting to Rs 1000, the stock has steadily moved up to Rs 1200 and continues in its bull phase with all three averages moving up.

6.  Reliance Capital - I had expected the stock to face some resistance at 490-500 before moving up to 625 level, and had advised short and long term investors to get in at the next dip.

RelCap_May1209

Reliance Capital sailed upwards to 580, reacted to 490 and then moved up to 625, where it faced resistance. I will count that as a 'hit', though the short term gain was only about 30%.

7.  Infosys - Despite a sell-off due to disappointing results that dropped the stock below its 200 day EMA, I had observed a 'rounding bottom' bullish pattern and advised: Wait for the selling pressure to subside before entering the stock on the dip. Be prepared for a longish wait for profits.

Infosys_May1209

The stock smoothly moved up from Rs 1300 to Rs 1600, well above its 200 day EMA. Another 'hit'.

8.  DLF -  A 'rounding bottom' bullish pattern was observed but the failure to cross the resistance level of Rs 300 led me to suggest: If you haven't got rid of your DLF holding yet, you may get one more chance to do so. There is a possibility that this rally is taking a pause before trying to move higher again.

DLF_May1209

The stock moved down to Rs 220 before moving up to Rs 269 to provide one more chance for investors to get out. A 'hit'.

9.  Bharti Airtel - The upward rally looked too steep. The lower volumes remain a concern. The 20 day EMA did move up above the 200 day EMA as expected. My advice: An existing holder can keep riding the rally or book partial profits.

Bharti_May1209

The stock has continued its upward move with a slight dip for 2 days. A 'hit'.

10. Balrampur Chini - The 50 day EMA did move above the 200 day EMA but instead of a correction, the stock is undergoing a triangular consolidation before the next up move. My suggestion: I would wait till the election results come out before entering.

Balrampur_May1209

It has been only five trading sessions since my discussion - too early to draw conclusions. A 'neutral'.

Without trying to be immodest, not a bad performance at all. Comments are welcome.

(Note: Please right-click on the charts and open them in a new tab or window for a better view.)

Tuesday, May 12, 2009

About Economic tides and Stock Market trends

In a book written nearly 70 years ago but which is still relevant today, Edwards and Magee compared stock market trends to tides, waves and ripples in the ocean.

Major or Primary trends - 'bull market' for an up trend and 'bear market' for a down trend - last for a year or more. A 'bull market' can be compared to an incoming tide 'which carries the water farther and farther up the beach until finally it reaches high-water mark and begins to turn. Then follows the receding or ebb tide, comparable to a Bear Market'.

Intermediate or Secondary trends - that last for 3 weeks to a few months - are declines or 'corrections' in a 'bull market' and rallies or 'recoveries' in a 'bear market'. 'While the tide is rising, each succeeding wave pushes a little farther up onto the shore and, as it recedes, does not carry the water quite so far back as did its predecessor. During the tidal ebb, each advancing wave falls a little short of the mark set by the one before it, and each receding wave uncovers a little more of the beach. These waves are the Intermediate trends - Primary or Secondary depending on whether their movement is with or against the direction of the tide'.

Minor trends are part of Intermediate or Secondary trends that last for only a few days, and are meaningless for investment purposes and often prone to manipulation. 'The surface of the water is constantly agitated by wavelets, ripples and "catspaws"
moving with or against or across the trend of the waves - these are analogous to the market's Minor trends, its unimportant day-to-day fluctuations'.

The vast majority of the world's population have neither any interest, nor any inclination towards investing, in the stock markets. For them, the state of the economy - the rising cost of daily groceries, interest on mortgage payments, cost of petrol are of greater significance.

To extend the ocean analogy further, I would like to compare the ebb and flow of the ocean's tide to the state of the economy. During economic up turns, production booms, jobs are plentiful, consumption of household goods and luxury goods go up - leading to expansion in production, more jobs, more consumption, till finally, inflation and higher interest costs take its toll and the economic tide turns.

Over the past several years, the economic tide is gradually flowing towards the emerging markets and ebbing from the developed markets. It didn't happen in a day and the economic balance has still not shifted completely. But the signs of this shift are becoming apparent.

A look at the world market indices will suffice. While the Shanghai Composite, Hang Seng, TSEC, KOSPI, Sensex, Bovespa are all trading above their long term averages, the Dow, FTSE, CAC, DAX are still struggling to cross their 200 day EMAs.

This gives a clear indication of where the economic recoveries will happen first. Irrespective of whether we are in an intermediate bear market rally or in the primary stages of a bull market.

Monday, May 11, 2009

Dow Jones (DJIA) Index Chart Pattern - May 08, '09

Last week's analysis of the Dow Jones (DJIA) index chart pattern was concluded with the following observation:-

"The Dow Jones (DJIA) index chart pattern seems to be making up its mind which way it wants to go. The index should have corrected by now. But the plethora of bad news from the economy is being ignored. This could lead to another effort at moving up - which will face strong resistance from the 200 day EMA at around the 9000 level."

The index did move up to the 8600 level, but fell short of the 200 day EMA, which is still moving down. A look at the 3 months bar chart pattern of the Dow Jones index will reveal some contra indications to the up move:-

Dow_May0809

(Please right-click on the image; open it in a new tab or window for a better view.)

Thursday's (May 7, '09) trade was a 'reversal day' - a higher high and lower close - on higher volumes. This is bearish and indicates a correction in the offing. For the fourth time during this 2 months rally, a 'reversal day' was ignored by the market. Friday's close was higher, but on lower volumes. This smells of a rally that is being 'engineered'.

The slow stochastic has re-entered the overbought zone; the MACD has made a new high; the ROC has moved up but made a lower high; the RSI has started moving down after making a lower high.

I'm neither a conspiracy theorist nor a die-hard bear. Nothing would please me more than the start of a new bull phase. But this rally looks like a desperate effort to reverse a long bear market into a feel-good bull market.

The DJIA can't keep moving up without a serious correction. A sustainable up move requires it. So for the bulls' sake, we need one quickly. Otherwise, the eventual drop may be precipitous.

Bottomline? Investors on the side lines need not feel left out. The chances for entering this market at lower levels will come soon enough. Existing investors may do well to take some profits off the table.

Sunday, May 10, 2009

Hang Seng Index Chart Pattern - May 08, '09

In last week's analysis of the Hang Seng index chart pattern, I had made the following observation:-

"The chart pattern for the entire month of April '09 shows a sideways consolidation with a slight upward bias within a band of 14000 to 16000."

Just when the technical indicators were beginning to turn negative suggesting a correction, the Hang Seng brushed off the bear challenge and spurted upwards above its 200 day EMA.

It was almost like one of the points in a recent clay court final between Nadal and Djokovich. In a 27 shot rally, Djokovich was controlling the point throughout and making Nadal scamper from one end to the other in the back court. Just when it looked like Djokovich would finally win the point, Nadal hit an outrageous viciously spinning forehand down-the-line  that clipped the outer edge of the line for a winner.

Let us look at the 3 months bar chart pattern of the Hang Seng index:-

Hang Seng_May0809

(Please right-click on the image; open it in a new tab or window for a better view.)

Like the Sensex, the Hang Seng opened with an upward gap on Monday and closed above its 200 day EMA (for the first time since the global rally began). But there was no hesitation around the long-term average.

For the next four days it continued to move up and had 5 straight closes above the 200 day EMA. Both the 20 day and 50 day EMAs moved up with the short-term average poised to pierce through the long-term one.

The slow stochastic jumped up into the overbought zone. The MACD, which had slid below its signal line, moved above it and made a new high. The ROC, which had thrice reacted downwards from the 2000 level smartly moved above it and also made a new high. Only the RSI played spoil-sport by moving only marginally higher to make a lower high.

The longer term downtrend line (connecting the Oct '07 and May '08 tops) is still way above the current index level, while the Sensex had penetrated its long term downtrend line two weeks back.

Bottomline? The Hang Seng index chart pattern is still not quite confirming a trend change from a bear market to a bull market. Friday's rise on lower volumes is indicating tiredness. Investor's would do well to wait for a decent correction before entering.

Saturday, May 9, 2009

BSE Sensex Index Chart Pattern - Week ending May 8, '09

In last week's discussion about the BSE Sensex Index chart pattern, I had shown a penetration of the long-term down trend line. This indicated a possible change of trend from bear to bull.

We will take a close look at the 3 months bar chart pattern of the BSE Sensex to ascertain whether the trend change has indeed occurred or not:-

Sensex_May0809

(Please right-click on the image; open it in a new tab or window for a better view.)

There are several interesting things that happened last week. The Sensex made a sharp upward move with a huge gap on Monday and closed five straight days well above its 200 day EMA.

In the process, the 20 day EMA moved up to touch the flattening 200 day EMA and should pierce through next week to provide the second confirmation of a trend change from bear to bull.

The 50 day EMA is also moving up rapidly and a break above the 200 day EMA will be the final confirmation of the trend change.

The slow stochastic is firmly in overbought territory. The MACD is positive and has risen above the signal line. Both these indicators are supporting the bullishness in the index.

But don't bet the barn yet. Look at the volume. Friday's higher volume accompanied a 'reversal day' - i.e. a higher high but a lower close. This is bearish and indicating an impending correction. The ROC and RSI have also started to move downwards, which are negatives.

Should the correction in the Sensex happen next week, prior to declaration of the general election results, two possibilities exist.

One, the Sensex can move down to close the 'gap' created on Monday; take support around the 11500 level and start moving up again. In which case it can move up to 12500 and then 14500. The election results should be perceived by stock market participants as positive or neutral for that to happen.

Two, the Sensex can move down below 11000 and its 200 day EMA after closing Monday's gap, negating the bear-to-bull trend change for the time being. The election results should be seen as negative for the market for this possibility.

Bottomline? As the election results are just a week away, investors should refrain from placing bets either on the short or long side. (I haven't discussed the other possibility of Sensex flying upwards on a fresh flood of FII money because of the lower probability of that event.)

Friday, May 8, 2009

Why you need to learn about the Stochastic Oscillator

I have been planning to write about the Stochastic oscillator for quite some time. Reader Nikesh deserves special thanks for reminding me about it every once in a while.

In an article last July, identifying stock market trends using exponential moving averages (EMAs) and their crossovers was explained. A problem that one often faces with EMAs is that before they can confirm a change of trend, price levels often rise (or fall) by a significant amount.

I discovered that the Stochastic oscillator worked very well with EMAs to give early buy/sell indications and was very useful for timing entry into (or exit from) individual stocks. There are other indicators that can be used as well. But the stochastic oscillator provides clear and simple visual guidance.

Let us take a look at the 6 months bar chart pattern of Balrampur Chini, a sugar stock which I discussed last Wednesday, to find out the utility of the Stochastic oscillator:-

Balrampur_May0709 

(Please right-click on the image; open it in a new tab or window for a better view.)

The Stochastic oscillator compares the closing price level of a stock (or index) with its price range over a given time period - say 10 days. It comprises two lines - the main '%K' line (in blue) and the '%D' line (in red); the '%D' line is a moving average of the '%K' and acts as a 'signal' line. When the '%K' moves above the '%D', it is considered bullish; when it moves below, it is bearish.

Both the lines 'oscillate' (i.e. alternatively go up and down) between values of 0% and 100%. The zone between 0-20% is considered 'oversold'; the zone between 80-100% is overbought.

(The actual calculations of '%K' and '%D' are slightly complicated, and I don't want to confuse any maths-shy readers unnecessarily. One can use the oscillator without understanding the underlying maths - much like driving a car without any idea of the function of the carburettor. Those who are maths-happy, and love to know the gory details, can email me.)

In Nov '08, Balrampur's stock price was well below the 20 day EMA, which in turn was below the 50 day EMA. The 50 day EMA was significantly below the 200 day EMA and all three EMAs were moving down. The bear grip on the stock was strong.

Look what happened in early Dec '08. The stock had a 'reversal day' (i.e. a lower low at Rs 30 and a higher close) and spurted up on small volumes. The '%K' (blue) line first moved above the '%D' (red) line, and then both lines moved up above the 'oversold' zone. That was a 'buy' signal, much before the stock moved above its 20 day EMA to confirm a 'buy'.

When the stock moved above its 50 day EMA in end-Dec '08, the stochastic oscillator was already in the 'overbought' zone. Before the big market correction came due to the Satyam scam news in Jan '09 (that caused all stocks, including Balrampur, to fall) the stochastic oscillator made an early downward break from the 'overbought' zone.

In Feb '09, the Balrampur stock was making new highs and getting resisted by the 200 day EMA. The stochastic oscillator had a lower high, indicating a negative divergence and a 'sell' signal. A 30% correction followed.

In Mar '09, the stock was consolidating sideways when the stochastic oscillator gave an early 'buy' signal by moving up from the 'oversold' zone. The stock price nearly doubled within a month.

In May '09, the stock made a new high above Rs 80 but the stochastic oscillator made a lower high - again a negative divergence and a 'sell' signal. A price correction should follow.

In the example above the 'slow' stochastic oscillator - that uses a 3 day average of the %K - has been used. I find it more useful than the 'fast' stochastic which tends to fluctuate more, giving false signals.

For timing entry/exit there are few technical indicators that can provide such 'leading' (i.e. early) indications. But I must reiterate that technical indicators work best when several of them are used together to determine trends.

In future posts, I plan to write about two other useful technical indicators - the MACD and the RSI.

Thursday, May 7, 2009

FTSE 100 Index Chart Pattern - May 06, 2009

This is what I had inferred from the technical indicators of the FTSE 100 Index chart pattern last week:-

'The slow stochastics has just moved into the overbought zone, indicating that the rally may have some more upside. The MACD is confirming that, with a gradual upward movement.'

Some times the technical indicators do provide quite accurate insights into the market's underlying strength. Let us have a look at the 6 months bar chart pattern of the FTSE 100:-

FTSE_May0609

(Please right-click on the image above and open it in a new tab or window for a better view.)

Breaking off the shackles of indecision and playing catch up with the Asian markets, the FTSE 100 index seemed to make a dash upwards to enter bull territory. The 200 day EMA is providing the expected resistance.

The slow stochastics is comfortably in the overbought zone. The MACD is still rising. Even the ROC is showing an upward bias. Only the RSI is looking a bit reticent. Volumes are OK.

The index may still have some up side left. The only note of caution is the rapid rise of the index above its 20 day EMA. Every time it has done that in the past 6 months - in Dec '08, Jan '09 and Apr '09 - it has fallen back to take support on the short-term average.

Bottomline? Wait for the correction to enter, if you must. A rush of liquidity is forcing the global markets to go up. The underlying economies don't look out of the woods yet. I am waiting for sanity to prevail.

Wednesday, May 6, 2009

Stock Chart Pattern - Balrampur Chini

Enough of gloom and doom. In this week's stock chart pattern discussion, I will discuss some thing sweet, for a change. Though I've never quite understood the intricacies of the sugar sector, I do know that the one stock to own in this space is Balrampur Chini.

A look at the 3 months bar chart pattern of Balrampur Chini will show how the trend change in an individual stock gradually takes shape:-

Balrampur_May0509 

(Please right-click on the image above and open it in a new tab or window for a better view.)

The stock closed above its 200 day EMA on Apr 8, '09 and since then has stayed above the long term moving average. That was the first indication of the stock entering a bull phase.

Around the middle of April '09, the 20 day EMA moved above the 200 day EMA from below, just about the time that the 200 day EMA flattened out and started rising. Those were the second and third indications that the stock was in a bull phase.

Volumes increased significantly throughout April '09 and hugely spiked up (nearly 5 times its average volumes over the past 3 months) in yesterday's trade. So the volumes confirm the change of trend.

As an investor, what should you do? Is this a good time to enter? To answer those important questions, let us look at the other technical indicators.

The 50 day EMA is moving up but is still below the 200 day EMA. That will be the final confirmation of the trend change. Looks like it will happen soon enough.

The slow stochastics moved down from overbought zone and is again going up, with the %K above the %D line. This is a bullish sign.

(It is interesting to note what happened in early Mar '09. The slow stochastics moved up from the oversold zone with the %K line bouncing off the %D line on Mar 18, '09. That was the first indication of the uptrend to follow. The RSI also moved above the oversold zone around the same time. The MACD and ROC gave 'buy' signals somewhat later.)

Currently, the MACD and its signal line have flattened and are touching each other, indicating indecision. But both the ROC and RSI are moving down while the stock has made a new high. Both are negative divergences, and is bearish.

On the long term charts, Balrampur has moved up from its 52 week low of 30 in early Dec '08 to hit 81.50 today (a rise of more than 160%). The move from its previous and higher low of 42 in early Mar '09 has been a whopping 95%.

But, today's trade was also a 'reversal day' - a higher high and a lower close than yesterday's trade. Even if the stock doesn't have a big fall, it will definitely encounter some profit booking after a huge rise.

Bottomline? Commodity sector investments can give phenomenal returns if you know how to ride the cycle. Sugar is also a sector that has huge political implications, with majority production in the heartland of India. I would wait till the election results come out before entering.

Tuesday, May 5, 2009

About portfolio suggestions and a stock not to be picked

Quite often I receive emails from young readers of this blog, requesting me to suggest a 'good portfolio' or 'some good stocks'.

I enjoy responding to such requests - it is one of the main reasons why I write this blog - but am often hamstrung by the fact that many readers do not reveal details like their age, professional background, risk tolerance, years of investing experience and existing portfolios. 

Without such minimum information, giving any suggestion is worse than shooting in the dark. You don't know who or what you will hit!

Another of my frustrations is caused by the proverbial 'generation gap'. Being a dyed-in-the-wool long-term investor, I believe in large-cap stocks with proven management, a portfolio allocation plan, capital preservation and the concept of accumulating wealth slowly.

Many young investors find such an investment philosophy boring and unexciting. Can't really blame them. I was once single, 27 and earning a reasonable salary also. (It was so long ago that my memory of those happy times are quite dim!) Like young lion cubs in a Discovery channel documentary, the thrill of the chase was more important than the actual prey.

The end result of chasing stocks like Indu Nissan Oxo Chemicals, Albert David, Hanil Era Textiles, and many other equally forgettable and forgotten companies was an empty wallet and a big hole in the pocket. It taught me some important lessons. Just like lion cubs learn that chasing a grown baboon up a tree isn't the smartest idea.

Not every young investor is as clueless as I was. Particularly impressive is young Rishi, who is not yet married but planning to do so in 2/3 years. (I didn't have the heart to dissuade him!)

He came up with a 20 year financial and investment plan for his future that included his marriage costs, his children's education and marriage expenses and his retirement plans! I doubt investors double Rishi's age have thought through and have a plan like his (that we honed over an exchange of several emails).

I will conclude today's post with a real-life example of a stock pick (or, rather, a stock not to be picked). Reader Donald sent me an email with the following information:-

"Came across Temptation Foods. Do you know of this company?
The results are impressive (perhaps due to slew of acquisitions, last acquisition was Everfresh in Jan 2008)

Summary of financials over last 3 years in Rs Crores:

Year
2008-09*
2007-08
2006-07
Revenue 872.0
348.1 40.8
EBITDA 73.4
32.3 6.6
PBT 55.0 27.4 5.8
PAT 52.7 23.8 5.8

* Based on quarterly results

Roughly 8.5% EBITDA margins is not so bad nor so great in this FMCG-like sector. But then the revenue growth is impressive and most importantly, zero debt (as per Mar 2008). But I see 10.28 Cr paid as Interest in FY2009 vs. 0.01 Cr in FY2008, so there is some debt now. BV =70; TTM EPS=21; CMP=33 (Apr 29).

There was some stricture by SEBI against the company in Feb 2009 for failing to disclose key developments.
http://www.thehindubusinessline.com/2009/02/17/stories/2009021751001200.htm

More than the non-disclosure, why would a zero-debt company pledge shares?? So what do you make of this meal??
Rgds"

Many investors would have simply asked me: 'What is your opinion of Temptation Foods?' To which my answer would have been: 'I have no idea about the company or what they do.' And that would have been the end of it.

But Donald is not only enthusiastic, he is also diligent. So he did some digging, came up with facts and news, and then asked for my opinion. This not only made my task simpler, but also motivated me to put in some effort from my side. Here is how I responded:-

"I have no idea about the business of Temptation Foods.

Eye-popping growth is usually to be looked at with suspicion. When it is accompanied by a rapid increase in negative operating cash flows (check out the numbers in money.rediff.com - EBITDA 32 Cr last year; op.cash flow -83 Cr) then you know it is a stock not to be touched with a 10 ft pole. Add SEBI strictures for stock market shenanigans with a competitor's stocks - and you have a perfect example of fraud management who will stoop to any depths to generate some money.

No wonder the stock dropped from 350 to 18! Always remember that there is only one Infosys and one L&T and one Microsoft. Look for the 'next' Infy/L&T/Microsoft at your own peril!

Best wishes"

The moral of the story? By all means send your requests for portfolio and stock suggestions. I welcome such interaction and love to hear from my readers. But please include some basic information about yourself (as mentioned above) and do some homework before asking your questions. You will become a better investor in the process, and help me to provide more meaningful feedback to you.

Monday, May 4, 2009

Dow Jones (DJIA) Index Chart Pattern - May 01, '09

In the previous week's discussion of the Dow Jones (DJIA) Index chart pattern, it appeared that the index was consolidating sideways while the technical indicators were providing bearish overtones.

To get a clearer picture of what the index was up to last week, let us have a look at the 3 months bar chart pattern of the DJIA:-

Dow_May0109

(Please right-click on the image above and open it in a new tab or window for a better view.)

For the entire month of April '09, the Dow has moved sideways, alternatively going above or below the 8000 level. Volumes have been lower than in late Feb '09 and most of Mar '09.

The 200 day EMA has been gradually flattening but still going down. Both the 20 day EMA and 50 day EMA are inching up with the short-term average slightly above the medium-term one. The index has been receiving support from the 20 day EMA from the mid-Mar '09.

The technical indicators are not looking as bearish as they did in the previous week (ending Apr 26, '09). The slow stochastics, which dropped down from the overbought zone has levelled off sideways with an upward bias. The MACD dropped below the signal line but has also levelled off. Both the ROC and RSI are straddling their mid-points.

The Dow Jones (DJIA) index chart pattern seems to be making up its mind which way it wants to go. The index should have corrected by now. But the plethora of bad news from the economy is being ignored. This could lead to another effort at moving up - which will face strong resistance from the 200 day EMA at around the 9000 level.

Bottomline? Short term investors may play for a 10% up move from current levels. Long term investors can start to unload under-performing stocks to generate some cash - which can be redeployed when the DJIA reacts downwards.

Sunday, May 3, 2009

Hang Seng Index Chart Pattern - May 01, '09

Last week's Hang Seng index chart pattern discussion ended with the following statement:-

'The index is back in the sideways consolidation range where it is likely to meander for a while.'

Meander is exactly what the Hang Seng did. In fact, the chart pattern for the entire month of April '09 shows a sideways consolidation with a slight upward bias within a band of 14000 to 16000.

A look at the 6 months bar chart pattern of the Hang Seng index will confirm my earlier assertions that the rally may be ending sooner than later:-

Hang Seng_May0109

(Please right-click on the image above and open it in a new tab or window for a better view.)

The 20 day and 50 day EMAs are both moving slowly upward. The 200 day EMA is flattening. The index is facing strong resistance at the long-term average but also getting supported by the short-term one. The volumes, which had shown a spurt in late Mar '09, have dropped somewhat.

The slow stochastics has slipped down from the overbought zone and is straddling the mid-point. Ditto for the ROC and RSI. The MACD is still above the zero line but is dropping and has fallen below the signal line.

The uptrend line connecting the daily bottoms since the Mar '09 low was broken 8 trading sessions back and the index has failed to attempt a meaningful 'pullback' to the uptrend line. The Hang Seng index and the technical indicators are saying: 'We are not out of the bear market yet.'

Compare the Hang Seng with the BSE Sensex index chart pattern discussed yesterday. In the 2 years weekly charts, the Hang Seng index is below the long-term downtrend line. It is also below its 200 day EMA. Whereas, the Sensex has broken above both these indicators - even if the break is not quite convincing yet.

Bottomline? I'm expecting - like everyone else who isn't convinced by the past 2 months' rally - a wave of selling in the near term. That will provide long-term investors with an entry point. Till then, don't be a bull or a bear - be patient, like an African python.

Saturday, May 2, 2009

BSE Sensex Index Chart Pattern - Week ending May 1, 2009

Last week's BSE Sensex chart pattern discussion ended with the observation that selling pressure may set in before monthly settlement day. On another holiday-truncated week of trading, there was heavy selling on Tuesday, Apr 28, '09 with the Sensex dropping 370 points on high volumes.

But there was a strong bounce back the next day (settlement day), when the Sensex rose 400 points. In the process, the Sensex pierced through the long-term downtrend line drawn from the top made in Jan. 2008 through the tops made in May '08 and Sept '08. Have a look at the Sensex 2 years weekly candlestick chart pattern:-

Sensex_Apr2909_1

(Please right-click on the image above and open it in a new tab or window for a better view.)

As per trendline theory, once a trendline is penetrated, the previous trend is reversed. So one may infer that we are now in an uptrend and it is time to buy.

Now let us have a look at the 6 months bar chart pattern of the BSE Sensex:-

Sensex_Apr2909

(Please right-click on the image above and open it in a new tab or window for a better view.)

If you draw an uptrend line connecting the daily bottoms of the recent rally, you will see an upward sloping line which was broken on the downside by the three down days (Apr 20, 21, 22, '09) the week before. In last week's price action, the Sensex had a 'pullback' to this uptrend line but failed to go above it.

We have an interesting dichotomy here. A break of the long-term downtrend line, with a close above the 200 day EMA. This combination indicates the end of the bear market and the beginning of a bull market - like some experts have been saying. But a break of the short-term trendline followed by an aborted 'pullback' means an end of the recent uptrend.

Confusing, isn't it? No wonder technical analysis is often scoffed at! This makes technical analysis such an interesting challenge. Fundamental analysis is never this exciting - almost like a Hollywood thriller with everyone at the edge of their seats wondering what will happen next.

Let us analyse the 6 months chart. The Sensex has been moving in a sideways channel for the past 13 (unlucky for the superstitious?) days. In the process, it has started forming a 'rounding top' pattern which is bearish.

The 200 day EMA has been penetrated on 8 of those 13 days (Fibonacci enthusiasts will be delighted!), but the Sensex managed a close above the long-term average on only 4 days. The 200 day EMA has flattened but hasn't started rising yet.

Both the 20 day EMA and 50 day EMA are rising but remain below the 200 day EMA. Volumes have been OK at best. The slow stochastics is still in overbought zone. The MACD has stopped rising. But the ROC and RSI have started to drop off.

Bottomline? The BSE Sensex chart pattern shows that we are in a tantalising stage. My guess is that the recent rally might lead to some serious profit booking (finally!). If FIIs pull out because of continued weakness in Europe and USA, or the election results are unexpected, we may see a new lower bottom. However there is plenty of cash floating around - real and printed - that can prevent the market from falling too much. Either way, investors should stay on the sidelines for the next couple of weeks, and then start entering.