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Friday, September 3, 2010

Stock Index Chart Patterns - Shanghai Composite, Malaysia KLCI, Hang Seng - Sep 03, '10

Shanghai Composite index chart


The chart pattern of the Shanghai Composite index played hide-and-seek with the entangled 20 day and 50 day EMAs and finally ended the week with a 45 points gain on a weekly basis. The week’s skirmish was won by the bulls.

Could this be a prelude to a strong rally? There are no real signs of it yet, though the technical indicators are mildly bullish. The slow stochastic and RSI are just above their 50% levels. The ROC is at the ‘0’ level. The MACD has moved up a little to touch the falling signal line.

As long as the Shanghai Composite remains below a falling 200 day EMA, the bear market will continue. The index has been in a narrow trading range of about 100 points for the past month, and the likely break out from the range should be upwards.

Will the bulls be able to gather enough momentum to move the index above the resistance of the 200 day EMA? The recent lower bottoms in the slow stochastic, RSI and ROC may spoil bullish hopes.

Hang Seng index chart


The chart pattern of the Hang Seng index shows why awaiting technical confirmations is the safer route in investing. In last week’s analysis, I had observed that the index had fallen below the 200 day EMA, and the weak technical indicators had hinted that the 20 day and 50 day EMAs would follow suit.

But the technical confirmation of a bear market never came. The bulls staged a smart rally that saw the index close the week almost 375 points higher at 20971. More importantly, the index closed above all the three EMAs. So is it time to turn bullish?

Not yet. The higher volumes on a down day (Aug 31, ‘10) doesn’t provide the confidence. Also, the index made a higher bottom than the ones in early Jul ‘10, but the four technical indicators made lower bottoms. Negative divergences from all four indicators should not be overlooked.

The slow stochastic and RSI have emerged from their oversold zones. The ROC is rising in the negative zone. So is the MACD, which is below the signal line. The Aug ‘10 high is more than 800 points away. Till that peak is conquered, the threat of a bear attack will remain.

Malaysia (KLCI) index chart

KLCI Malaysia_Sep0310

The Malaysia (KLCI) index chart is in a raging bull market, in stark contrast to the struggling Chinese indices. During my previous analysis, the index was looking strongly bullish. This time around, the bullishness seems to be a bit overdone.

All three EMAs are rising, but the index has moved too far above the 20 day EMA. In similar situations earlier, corrections have followed. The rising volumes during the recent up move show that the correction is unlikely to be a deep one.

The slow stochastic and RSI are both in their overbought zones. The RSI rarely spends any time at higher levels – which is another hint of a correction round the corner. The MACD is above the signal line, and rising in positive territory. The ROC is also positive but has stopped rising.

Bottomline? The Shanghai Composite index is in a bear market, but the bulls seem ready for some action. The Hang Seng index almost slipped into a bear market, and some how managed to escape a strong bear grip. For both indices, selling on rises, or holding, may be the better options. The Malaysia (KLCI) is in a strong bull market, but looking ripe for a correction. Buy the likely dip.

1 comment:


A study carried-out by a reliable global research firm has confirmed that global economy has bottomed out and the recovery has commenced.

Baltic Dry Index is considered as the most reliable leading indicator of global economic activity. This index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers, such as building materials, coal, metallic ores, and grains. Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. This has bottomed out at 1700 levels and is presently at 2750.

The next global economic growth cycle which has just commenced and may run a 7-8 year cycle, has shifted its Center of Gravity. The run-up of next three decades will be primarily driven by China, India & Brazil. The shifting of investment capital into these regions will surely take place, but after lot of initial resistance. This is because investors are seeing the wrong direction and reading wrong indicators.

Auto sales in Asian region is surging. Confidence level of Entrepreneurs in Asia especially India & China are surging. Consumption is booming. Prosperity levels are on the rise. Employment rate is rising.

If so, what are the implications? The stock markets are yet to pick up the signal. But it is just a matter of time. Along with rising equity markets, commodities will move up. Crude prices and coal prices will soon commence their rally. Stock markets will pick up. But the point being conveyed is that one should not keep an eye on Dow and Nasdaq. Yes, they will rally but there isn't enough headroom. Sensex, Bovespa, Hang Seng etc will lead the rally and hit new highs. The old order will change gradually. It is time world starts tracking monsoons in India, commodity exports from Brazil, Russia, IIP numbers of China etc. So, when Dow touches 11000 Sensex will touch 22000.

What are the stocks to look for. Here are our six top picks:-
1. Reliance Industries
2. Larsen & Toubro
3. Mercator Lines
4. SBI
5. Pantaloon Retail
6. Mahindra & Maindra

An investment of Rs one lakh invested in each of the stock will return Rs 12 lakh in 12-14 months time. The midcap stock Mercator lines is added in the portfolio to spruce up the return ratio.

Here are the reasons why we have picked the stocks. The common reasons running through all these stocks are their able management. All these companies are well-diversified and yet with clear visibility of steady cash flows. All of them are in sectors which pose heavy entry barriers and there are difficulties in starting or replicating similar businesses. All of them reflect India growth story and will be befitted directly or indirectly through this. All the large cap stocks will give 50% return in a year. Mercator Lines will reward investor very handsomely. Our immediate target is Rs 75/ - One can expect a price of Rs 120/- in one year period and Rs 240/- in two years. The reasons are good cash levels, high institutional holding and diversifications which are on the verge of pumping additional cash into the company, exposure to commodity space - i.e coal & oil

Incidentally all of them are F&O stocks.

Three cheers to India and its investors!