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Friday, December 31, 2010

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Dec 31, ‘10

Before discussing the BSE Sensex and Nifty 50 index chart patterns, a quick aside. Dec 31 falling on a Friday means we have a weekly, monthly and yearly closing on the same day. For both the Sensex and the Nifty, we will take a look at the 6 months daily chart for the shorter-term outlook and the 1 year weekly chart for a longer term outlook.

BSE Sensex Index Chart

SENSEX_6m_Dec3110

In last week’s analysis of the daily Sensex chart, I had drawn a symmetrical triangle from which a break out seemed imminent. I had also given a couple of possibilities each for bullish and bearish break outs. The bulls seem to have won this round, which is not too surprising since the Sensex is in a bull market.

The technical indicators are looking bullish. The MACD is above the signal line, and rising in positive territory. The ROC is positive and above its 10 day MA. The RSI and slow stochastic are well inside their overbought regions. The 20 day EMA remained entangled with the 50 day EMA for a month before both started moving up. All four EMAs are rising, and the Sensex is rising above them. The bulls are back in control.

Have the bears been routed? May be not – as per the 1 year weekly chart.

SENSEX_1yr_Dec3110

Note that the weekly Sensex chart also shows an upward break out from a symmetrical triangle. The Sensex is rising above its 20 week and 50 week EMAs (the latter is equivalent to the 200 day EMA). The bulls definitely have the upper hand.

The technical indicators paint a slightly different picture. The MACD is positive, but below the signal line. The ROC has just entered the positive zone but is below its 10 week MA. The RSI is barely above the 50% level. Note that it has been falling while the Sensex was rising. The slow stochastic was moving sideways while the Sensex was moving up.

NSE Nifty 50 Index Chart

Nifty__6m_Dec3110

The volume data on the Nifty 50 chart adds a different dimension. The rise from the previous bottom was on receding volumes. There was a volume spike on Thu. Dec 30 ‘10, but today’s rise was on reduced volumes. Bull markets need volume support to sustain.

Nifty__1yr_Dec3110

The volume data on the weekly chart is more revealing. The break out from the triangle was on lower volumes. Break outs on low volumes may turn out to be ‘false’. Note that volumes have been receding since the Nov ‘10 top. Of greater concern is the higher volumes on ‘down weeks’ and lower volumes on subsequent ‘up weeks’.

What does the volume data indicate? I had warned of a bearish possibility that may be worth repeating:

‘If volumes remain thin due to lack of FII buying, then an upward break out from the triangle may be ‘false’ and the up move may get reversed by an ‘end run’ (a high volume drop).’

The possibility of an ‘end run’ remains open. Another interesting bit of statistics is that all 10 Decembers since 2001 were ‘up months’ but 7 out of the previous 10 Januarys were ‘down months’.

There is no reason to sell off expecting a high-volume drop, or that Jan 2011 will be a ‘down month’. The best way is to stay invested and preserve your profits by maintaining trailing stop-losses and/or booking partial profits.

Happy investing and have a great 2011!

Wednesday, December 29, 2010

Notes from the USA (Dec 2010) – a guest post

Despite QE2 and the combined efforts of Bernanke, Geithner and Obama, the American consumer is not spending as much as is required for the US economy to get back on track. Corporations are sitting on cash but job openings are few. Consumers have become debt-shy and are using debit cards or cash – as KKP elaborates in this month’s guest post (written before the Christmas holidays).

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How’s the 2010 Shopping Season shaping up in the US?

Santa is out there packaging the gifts for all the deserving kids……How good is he going to be this year? Well for Santa to be good, the parents have to be out there shopping and hiding the gifts in the attic or basement!

People who live in Asia are very used to using cash, although some have started to leverage the ‘other people’s money’ concept. In the US, consumers are all used to leveraging the plastic money and soon moving to electronic money. It seems that with all the debt default issues of the past three years, and the advent of ‘debit’ card, people are shunning credit cards like never before in history. Card issuers are fighting back with huge incentives to get people charging again, as they used to do pre-2008. So far in 2010, it’s not working!

The New York Times reports that the lowest percentage of shoppers in the 27-year-history of a national survey have used credit cards over the Thanksgiving weekend (Nov 21 to 28), while the use of general credit cards like Visa and MasterCard fell 11 percent in the third quarter from a year earlier, according to the credit bureau TransUnion. One of the biggest reasons developing this season is an extremely cold winter season. Temperatures in the upper northern part of the US is between -20 degree and 0 degree Centigrade (bone chilling cold). My friend who called me from the mall today told me that there are barely 200 people including employees in a huge mall with 100 stores (some of them being multi-story department stores).

The consumer has been feeling the pinch in a huge way and just like the 2009 shopping season, we will see the 2010 shopping season to be weak relative to the go-go years. These consumers are just trying to come out of the hole, and there are many avenues teaching the consumer to cut those cards and get back to basics, i.e. debit card or cash. Debit cards allow purchasing to be done if there is money available in the checking account where the card is directly linked.

In the US, the Thanksgiving weekend kicks off the ‘shopping season’ where family and friends buy gifts for people they love, they like and they are related to……This sounds like a big list, and for millions of families, it is a big list. My kids buy gifts for all of their cousins and friends at school. It does get expensive, which is why the normal American spending pattern has shown an average spending of $250 to $500 per family during this season. This used to be $800 to a $1000 per family a few years ago. $250-$500 might not sound a lot, but this is an average. Middle income to high middle income families spent way in excess of this number in the great years, with the ‘replace or upgrade’ attitudes of American consumers.

We have already bought the gifts and handed them to the kids this year, so our Christmas tree is not going to have any surprise gifts on Christmas Eve! It was Aero-jeans, Aero-face jacket, iPod external speakers, Cell phone and fancy head-phones for their iPods. Per Asian tradition, they will probably get some cash on Christmas day, which they will appreciate very much……Kids enjoy the gifts at Diwali and also at Christmas in most Indian families in the US.

In reality, some people are shunning credit cards for budgeting reasons, while others do not have a choice. More than 15 million Americans lost their cards because of strict credit-card regulations that were passed last year, or when issuers cut back on credit during the recession. My tenants at the apartments do not carry credit cards. They all deal with cash or a check book. As per my annual tradition, I closed out many of my cards that we do not use, since it is usually a risk to have them open. After this recent clean-up (closing 7 credit cards), I still have approximately 12-14 cards open for one reason or another. This might be a bit high for an Asian, but I take ‘huge’ advantages of the ‘promotional offers’ that are offered from time to time.

As an example, the “Chase Freedom” and “Discover More” cards are offering $100 bonuses when new credit card customers spend a certain amount within the first three months, along with 5 percent cash back on holiday purchases at department stores and other categories. See, this is what makes me a sucker for these kinds of cards! $100 is enough to get me to act for 20minutes of work (to open, shop and close card)! And, of course, I now have an extra card in my wallet.

Citibank is giving Dividend cardholders 5 percent cash back on spending at department, clothing and electronics stores through Dec 31, 2010. Stores like Target is giving its cardholders a 5 percent discount on purchases, Neiman Marcus is advertising extra rewards points on most purchases on certain days this month, and Sears has been running a variety of no-payment, no-interest offers on its credit cards throughout the holidays.

Back to the report…….it showed that credit-card debt fell for a 26th consecutive time, showing Americans continue to pay down debt, one reason spending has been slow to recover. Revolving debt, which includes credit cards, dropped by $5.64 billion in October, according to the Fed. Non-revolving debt, which in addition to student borrowing also includes loans for cars and mobile homes, rose by $9.02 billion.

Total Revolving Credit

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Worries Still Out There

All the worries that we were facing in 2008, 2009 and 2010 are still around. They are masked by the stimulus spending, renewal of tax-cuts, extension to unemployment payments, reconstruction of highways (with stimulus money), and other government programs. If this stays in place long enough while the economy revives, we are out of the woods. If not, then we will go into a much deeper recession/depression again, and will be compounded with the fall in US$. Obama and Bernanke are really struggling to keep the economy going, but the undertone is really still very grim. See stats released recently….

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Bottom line is: Attitudes Rule

It's consumer attitudes that Bernanke is fighting in a huge way since he cannot seem to give this economy the kick start, even with all of these finance infusions rolling out. Corporations are also very leery in doing new hiring and according to an ex-CIO I met today, Corporations with job openings are looking for ‘purple monkeys’! This means that they all look for a ‘perfect candidate’ who does not exist and hence delay hiring for months. The QE2 (quantitative easing part 2) is coming out although consumers are still not feeling the ‘comfort’ to spend. So, it is a battle that Bernanke seems to be losing. Let us see what the rest of December brings to this season, and is it credit, debit or cash….

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Tuesday, December 28, 2010

What is wrong with the Mutual Funds industry in India?

A few cynics may say that everything is wrong with the Mutual Funds industry in India. They may even ask: What is right about the Mutual Funds industry? I’m not one of them. Neither do I believe that all is well.

As per recent reports, 65 fund managers have left the Mutual Funds business over the past two years – including some with ranks of CEO or CIO. Well-known stalwarts of the industry, like Ved Chaturvedi, CEO of Tata Asset Management, Nilesh Shah, Dy. MD of ICICI Prudential Asset Management and Madhu Kela, Head of Equities at Reliance Capital Asset Management, have left their jobs (though the last-named remains with the Reliance ADAG group).

One of the most famous fund managers of all time, Peter Lynch, spent the major part of his career with a single fund house (Fidelity). Anthony Bolton, another famous fund manager, also spent practically his entire career at the same fund house. There is a certain amount of stability and investor trust that builds up when the same fund manager stays at a fund house for a long period. Why are Indian fund managers leaving in droves?

Stringent regulations introduced by SEBI over the past few years have taken a lot of the ‘fun’ out of fund management. Entry loads are gone. Along with it went the fancy agency commissions. Confusing the public with a rash of New Fund Offers (NFOs) with esoteric names is a thing of the past. Not only have inflows reduced, outflows have increased as a large number of new funds promised the moon but failed to reach even the tree top.

Trying to produce results under strong regulatory scrutiny in an environment where fund inflows were drying up must be very stressful. Opportunities of earning fat performance bonuses have reduced. Lucrative opportunities in less-regulated areas of hedge funds,  private portfolio management services and investment banking may be bigger attractions for fund managers.

Anecdotal evidence from a few established distributors of mutual funds point to a shift in emphasis to selling specially packaged insurance products – particularly those with an added equity element – where day-to-day market fluctuations do not affect the investment outcome too much. Commissions are also higher. It is diverting cash that would have flown into fund houses.

But these are really secondary causes. The primary reason for the current state of affairs in the mutual funds industry is the maturity of the industry. Thanks to the barrage of information available from the pink papers, business TV channels and web sites, Indian investors can no longer be taken for a ride. They can’t be induced to part with cash with the promise of ‘dividends’ that are not dividends at all but a return of a portion of the invested funds. That means fewer opportunities for making easy money.

Is the mutual fund industry over-regulated? Some may say ‘Yes’. I think the balance has been shifted towards investors, which is good. Fund managers are realising that they should try to help investors become rich, instead of becoming rich at the expense of investors.

What do you think? Have the regulators gone overboard and started the decline of the mutual fund industry, or have they levelled the playing field in favour of investors?

Monday, December 27, 2010

Stock Index Chart Patterns – Dow Jones (DJIA) and FTSE 100 – Dec 24, ‘10

Dow Jones (DJIA) Index Chart

image

The Santa Claus rally continued in the chart pattern of the Dow Jones (DJIA) index. The index breached the 11600 level on intra-day basis and closed the holiday-shortened week at another new high of 11573 on Dec 23 ‘10.

Volumes have thinned out considerably, which isn’t of great concern because of the long weekend. But the technical indicators are hinting at a correction, or at least a consolidation. The MACD is positive and above the signal line, but has made a lower top. The slow stochastic is well inside the overbought zone. The RSI is on the verge of falling below the overbought zone.

The bull market is under no threat, but the index is looking overbought. Stay invested, with trailing stop-losses.

FTSE 100 Index Chart

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The current rally in the FTSE 100 index chart pattern from the Jul ‘10 low has already lasted 6 months. Last week’s bearish possibilities were ignored as the index rose smartly to close above the 6000 level for the first time in more than 2 years – but on low volumes.

Bearish concerns haven’t gone away. The MACD is above the signal line and rising in positive territory, but failed to reach a higher top. The slow stochastic is inside its overbought zone. So is the RSI.

The index is looking overbought. A short period of correction or consolidation will strengthen the bull market. But corrections do not happen because we may want them to happen. Till then, keep your seat belts fastened and enjoy the ride.

Bottomline? The chart patterns of the Dow Jones (DJIA) and FTSE 100 indices reached fresh new highs last week. Both indices are beginning to look a little overbought. Stay invested, but maintain trailing stop-losses to preserve profits.

Saturday, December 25, 2010

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Dec 24, ‘10

BSE Sensex Index Chart

SENSEX_Dec2410

The BSE Sensex index chart pattern broke out of the downward sloping channel within which it was trading for the past two months. Such break outs should be accompanied by a volume surge – but that was not the case this time. The pattern has been redrawn as a consolidation within a symmetrical triangle (lower tops and higher bottoms). The break out criterion from a triangle – four reversal points with two on the top and two on the bottom – have been met.

This opens up several possibilities – with a couple of bullish and a couple of bearish outcomes. Let’s evaluate them:

1. The merged 20 day and 50 day EMAs are beginning to show an upward bias. Both the 100 day and 200 day EMAs are moving up. The Sensex has closed above all four EMAs. The bull market is intact. The expected break out from the triangle should be upwards.

2. The technical indicators are showing positive divergences. All four made higher tops as the Sensex made a lower top. Only the MACD is showing weakness as it remains in the negative zone. The ROC is positive. The RSI is just above its 50% level. The slow stochastic has entered its overbought zone. Another reason for a likely upward break out.

3. Triangles are not very reliable in gauging future direction. However, they tend to be continuation patterns. In other words, the break out is likely to be in the direction in which the index was headed before entering the triangle. In this case – downwards.

4. The break out from the downward sloping channel was on low volumes. FIIs have turned net sellers due to year-end profit booking considerations and relative outperformance of the Dow and FTSE. If volumes remain thin due to lack of FII buying, then an upward break out from the triangle may be ‘false’ and the up move may get reversed by an ‘end run’ (a high volume drop).

Stay invested with a stop-loss at 18500.

NSE Nifty 50 Index Chart

Nifty_Dec2410

In last Tuesday’s update of the Nifty 50 chart pattern, I had expressed certain concerns regarding the continuation of the bull market. Though the technical indicators have improved and are sending bullish signals, the previous high of 6069 is yet to be crossed and volumes are petering off.

Volumes are supposed to reduce during periods of uncertainty represented by triangle patterns. The real concern is the higher volumes during down days and lower volumes during subsequent up days. In case there is a high volume break down below the triangle, it may be the sign of a ‘shake out’ and the index may start a rapid rise shortly thereafter.

Stay invested with a stop-loss at 5550.

Bottomline? The chart patterns of the BSE Sensex and Nifty 50 indices are consolidating within symmetrical triangles after 10% corrections from their tops. Since break outs from triangles can happen on either side, it is best to remain circumspect and stay invested. As Warren Buffet has mentioned, money gets transferred from active to patient investors. Let the correction and consolidation play out before jumping in, but continue with your regular planned investments.

Thursday, December 23, 2010

Stock Index Chart Patterns - BSE Sectoral Indices, Dec 23, '10

I had taken a look at the chart patterns of the BSE Sectoral Indices two months back, when the Sensex was heading towards its new high. Not surprisingly, many of the sectoral indices reached their new highs simultaneously. But some had already started to correct.

Time to take another look after the corrective move of the past two months to check where the strengths and weaknesses lie for investing in 2011.

BSE Auto Index

BSE Auto Index

The BSE Auto index continues its strong performance, consolidating sideways rather than correcting down too much. Note that the RSI failed to make a new high with the index in Nov ‘10, and has dropped below the 50% level. As long as the index stays above the support level of 9670 and the rising 100 day EMA, the bull market will be under no threat.

BSE Bankex

BSE BANKEX

The BSE Bankex has taken quite a knock on the chin – thanks to the bribe-for-loan scam, and is trying to cling on to the support level of 12640. The RSI is on the verge of dropping back into the oversold zone. The correction may continue for a while longer. Investors need to be very stock specific.

BSE Capital Goods Index

BSE Capital Goods Index

The BSE Capital Goods index corrected all the way down to the 200 day EMA, and is struggling to stay above its long-term moving average. The RSI has dropped below the 50% level and is hinting at another test of support from the 200 day EMA. Rising interest rates and tightening liquidity situation may be hurting profitability.

BSE Consumer Durables Index

BSE Consumer Durables Index

The BSE Consumer Durables index has corrected nearly 25% from its peak, underperforming the Sensex. High input costs have started affecting wafer thin margins in spite of good sales. The RSI is at the edge of the oversold zone, indicating that there may be another drop towards the 200 day EMA.

BSE FMCG Index

BSE FMCG Index

The FMCG index formed a bearish double-top pattern, but the correction has received good support from the rising 100 day EMA. But up moves are finding resistance from the sliding 20 day and 50 day EMAs. The RSI is below the 50% level. The index may consolidate sideways for some time. The index corrected 8% from its top and marginally outperformed the Sensex during the recent correction.

This is my favourite sector because of its strong cash flows, good dividends and low volatility.

BSE Healthcare Index

BSE Healthcare Index

The BSE Healthcare index also formed a bearish double-top pattern but found support at its rising 50 day EMA. It has barely corrected 5% from its peak and has outperformed the Sensex. No wonder the sector is called ‘defensive’.

BSE IT Index

BSE IT Index

The BSE IT index has been a spectacular outperformer, though the RSI is indicating an overbought situation. The gradual economic recovery in USA and Europe have boosted sentiments. Investors would do well to stick to frontline stocks. Employee attrition has become a problem that affects the small and mid-cap IT companies a lot more.

BSE Metal Index

BSE Metal Index

The BSE Metal index hasn’t made any progress in the past two months. The bullish pattern failed to play out, and the index continues to oscillate around its 100 day EMA. Unless it clears its Apr ‘10 top, investors may not reap much gains. However, Tata Steel and Hindalco looks good and may be bought on dips.

BSE Oil & Gas Index

BSE Oil & Gas Index

The BSE Oil & Gas index fell steeply below its 200 day EMA after reaching a new peak in Nov ‘10, but has recovered quickly above all four EMAs. Note that the RSI made a lower top in Nov ‘10, heralding the correction. This time around it has made a higher top while the index made a lower one – which is a bullish sign. Investors can look at Indraprastha Gas on dips.

BSE Power Index

BSE Power Index

The BSE Power index corrected steeply to its 52 week low within two months of hitting its 52 week high in Oct ‘10, and hasn’t been able to recover much at all. The sector has been overhyped and it is finally dawning on investors that most of the expansion projects are behind schedule, and profits are likely to be muted. The sector has dropped into a bear market. Avoid.

BSE Realty Index

BSE Realty Index

The less said about the BSE Realty index the better. This darling of the previous bull market is down where it belongs – in the dumps. Prices were artificially boosted through cartelisation and hoarding of commercial and residential inventory. The time for reckoning has arrived. Stay far away.

Wednesday, December 22, 2010

Stock Chart Pattern - Bartronics India (An Update)

The previous analysis of the stock chart pattern of Bartronics India was mainly to warn my readers about the deteriorating fundamentals of the company, so that those still invested in the stock could get out before it became too late.

Every bull run in the stock market throws up a few ‘favourites’ which are strongly backed by broker and analyst recommendations. These tend to attract small investors with little or no prior experience of stock selection. They get enamoured by the ‘theme’ and invest in droves without doing due diligence about the company, its promoter’s track record, and the business fundamentals.

The more esoteric and ‘high tech’ sounding the theme, the more attractive the stock appears. Some of these ‘theme’ stocks of the previous bull run have taken many small investors to the cleaners. Cranes Software (engineering software), Suzlon Energy (wind power), Praj Industries (alternative fuel), and Bartronics (bar code readers and smart cards) are a few examples.

The Bartronics stock was hovering near its 200 day EMA around the 150 mark when I wrote the previous post back in Mar ‘10. Those who heeded my advice and sold out have saved themselves a lot of money. The one year bar chart pattern of Bartronics shows that the stock has lost 50% of its value:

Bartronics_Dec2110

The stock desperately tried to cling on to its long-term moving average – some times dropping below, then recovering above – till it convincingly broke down in Aug ‘10 and quickly dropped to 100, which happened to be a long-term support level.

A high-volume bounce in Sep ‘10 raised bullish hopes, and took the stock above its falling 20 day EMA. The respite was brief. The stock started sliding down towards the 100 level with the 20 day EMA acting as a strong resistance.

Another bounce from the 100 level on decent volumes in Nov ‘10 saw the stock briefly clear both the 20 day and 50 day EMAs. With all four EMAs falling in unison, bears used the upward bounces as opportunities to sell.

Once the stock fell convincingly below 100, bears took control and the stock slid sharply down to a low of 72 on Dec 20 ‘10, losing more than 50% in 9 months. The technical indicators are all bearish. The MACD and ROC are negative. The RSI and slow stochastic are in their oversold zones.

If you are one of the unfortunate few who are still holding on with hope and a prayer, I’m afraid I can’t provide any solace. There is not much hope of any improvement, and prayers don’t work too well when a stock is fundamentally and technically weak.

Bottomline? The stock chart pattern of Bartronics – as well as the other stocks mentioned – are in strong bear markets. Just goes to show that a bull market does not necessarily drive up prices of all stocks. Small investors should do their homework before investing in popular ‘themes’. Better still, avoid well-publicised ‘theme’ stocks completely.

Tuesday, December 21, 2010

Nifty 50 update – downtrend broken, but a hurdle remains

The two months long downtrend in the Nifty 50 index has been reversed technically. The index has broken out of the downward sloping channel within which it has been trading, and has overcome the combined resistance from the 20 day and 50 day EMAs. But all is not well yet.

The short-term Nifty 50 bar chart pattern will reveal a few concerns and at least one important technical hurdle that the bulls need to overcome:

Nifty_Dec2110

The first concern is the volume. An upward break out from a correction or consolidation pattern should be accompanied by a surge in volumes. That hasn’t happened – which keeps the door ajar for a ‘false break’ and a drop back into the downward sloping channel.

The second concern is that the FIIs are still net sellers in the market. The DIIs have been net buyers. Unless the FIIs resume their buying, new highs may not be reached in a hurry. That may not happen till the middle of Jan ‘11 when Q3 results will also start hitting the market.

The next concerns are the state of three of the four technical indicators. The MACD has moved above its signal line, but hasn’t yet moved into positive territory. The ROC is touching its 10 day MA and the ‘0’ line and hasn’t entered positive territory either. The RSI is above its 50% level, but didn’t rise higher with the index. Only the slow stochastic is looking bullish.

The Nifty 50 reached its previous intra-day high of 6069 on Dec 6 ‘10. Till that hurdle is crossed convincingly, a bullish pattern of higher tops and higher bottoms will not get formed. There is every possibility that the index may spend some time consolidating, before resuming the up move in earnest.

Just to put things in perspective, both the 100 day and 200 day EMAs are rising with the index moving up above them. That is the sign of a bull market. What the Nifty 50 experienced for the last two months was a very normal 10% correction from the peak of 6338 (touched on Nov 5 ‘10) to the trough of 5690 (touched on Nov 26 ‘10).

Such corrections are needed periodically to get rid of some of the excesses that were becoming increasingly visible, with questionable companies that changed their names and started shooting up like rockets, and investors’ in-boxes getting flooded with emails and messages touting ‘sure-shot’ small-caps.

Note that some fundamentally strong stocks have recovered quickly and have started to outperform the Nifty 50. Tata Steel comes to mind. A few other big names should start leading the next leg of the rally. Bet on proven performers and stay away from less known stocks that are looking ‘cheap’.

Monday, December 20, 2010

Stock Index Chart Patterns – Dow Jones (DJIA) and FTSE 100 – Dec 17, ‘10

Dow Jones (DJIA) Index Chart

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Last week, I had expected the Dow Jones (DJIA) index chart pattern to reach a new high sooner than later. On Thu. Dec 16 ‘10, the index touched a new intra-day high of 11554 and closed at 11499. The Nov 5 ‘10 closing level of 11444 has been overcome. The bulls ought to be celebrating, but where is the champagne?

The technical indicators show that the bears may be planning their own celebrations. The transaction volumes on Dec 16 ‘10 were considerably less than those on Nov 5 ‘10. New highs on the MACD and slow stochastic are conspicuous by their absence. The RSI is in the overbought zone – a place where it doesn’t like to stay for long. The widening gaps between the 50 day and 200 day EMAs may lead to another round of correction and consolidation.

The economy is in better shape than it was around this time last year. Housing starts and unemployment numbers showed slight improvements. But the market’s bullish sentiments are indicating a return back to glory days. The bullishness seems a bit overdone. Stay invested, but maintain trailing stop-losses to conserve profits.

FTSE 100 Index Chart

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The FTSE 100 index chart pattern is throwing up intriguing possibilities. The index touched a new intra-day high of 5907 on Dec 16 ‘10 and closed at 5891 on Dec 14 ‘10 – both levels marginally higher than the Nov ‘10 levels, but on lower volumes. New highs are usually accompanied by higher volumes.

The slightly higher levels in the FTSE saw much higher levels on the slow stochastic and RSI. That should normally indicate a positive divergence. Note that the MACD is displaying negative divergence. Also, the lower volumes during the Dec ‘10 top leaves open the possibility of a bearish double-top formation.

The double-top will not get confirmed unless the index drops below the Nov ‘10 low of 5519 – and it seems unlikely at this point. The Eurozone sovereign debt problems haven’t been solved yet. That can rear its head and spoil the bull party at any time. But those are ‘may be’s.

The current trend is bullish with the FTSE making higher tops and higher bottoms. Investors need to be aware of the likely problems, and ride the trend with suitable stop-losses.

Bottomline? The chart patterns of the Dow Jones (DJIA) and FTSE 100 indices reached new highs last week, as expected. Some amount of hesitation and consolidation near new highs is also expected. Stay invested, and maintain trailing stop-losses.

Saturday, December 18, 2010

Stock Index Chart Patterns – Hang Seng, Singapore Straits Times, Malaysia KLCI – Dec 17 ‘10

Hang Seng Index Chart

HangSeng_Dec1710

Five weeks ago, the Hang Seng index chart pattern was correcting after touching a new high of 24988. The technical indicators were looking bullish and I had suggested that investors should use the dip to add, but to maintain adequate stop-losses.

The benefit of setting stop-losses, particularly near new highs, can be seen from the Hang Seng chart above. The index has formed a bearish head-and-shoulders topping pattern with a downward sloping neckline. The neckline and the 100 day EMA were both breached intra-day on Thu. Dec 16 ‘10 and Fri. Dec 17 ‘10, but the index did not close below the neckline. That may be a small mercy.

Note the lower tops formed on the MACD and RSI as the index rose from the left shoulder to the head of the pattern. All four technical indicators are bearish. The MACD and ROC are both in negative territory. The RSI has slipped below the 50% level. The slow stochastic has entered the oversold zone.

A technical breach of the neckline seems imminent. Should that happen, the index may drop well below the 200 day EMA and head down to the 20000 level. That could lead to a trend reversal. Long-term investors can set a stop-loss at 21900.

Singapore Straits Times Index Chart

Straits Times_Dec1710

The chart pattern of the Singapore Straits Times index is also displaying a bearish head-and-shoulders pattern. The difference with the Hang Seng is that the neckline has not been breached yet. Head-and-shoulders patterns often do not play out as expected, but the volumes are in favour of a deeper correction.

The technical indicators are looking bearish, but are in slightly better condition than those of the Hang Seng. If the index drops below the neckline, it can fall to 2900 (below the 200 day EMA). The height of the top of the head from the neckline is subtracted from the level of the neckline to arrive at the downside target. 

Malaysia KLCI Index Chart

KLCI Malaysia_Dec1710

The Malaysia KLCI index chart pattern is looking the most bullish among the three Asian indices, but is facing bearish headwinds. The index has been trading in a downward sloping channel since hitting a top of 1532 in Nov ‘10, but remains above the long-term support-resistance level of 1480 and has not closed below the 50 day EMA since Jul ‘10.

The ROC has dropped into negative territory, but the MACD is still positive. The RSI and the slow stochastic are both above their 50% levels – but barely. The index may trade within the downward sloping channel for a while.

Bottomline? The chart patterns of the Asian indices are undergoing corrections. The Hang Seng and Straits Times indices may test or even breach their 200 day EMAs. The KLCI looks more bullish and may not face as deep a correction. Investors may wait for the correction to play out. Any upward bounces on strong volumes from the necklines of the head-and-shoulders patterns (in the Hang Seng and Straits Times) or the lower end of the channel (for the KLCI) can be used to add.  

Friday, December 17, 2010

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Dec 16, ‘10

BSE Sensex Index Chart

SENSEX_Dec1610

In last Tuesday’s update of the BSE Sensex index chart pattern, I had mentioned three hurdles for the bulls on the upside. These were the combined resistances from the 20 day and 50 day EMAs at 19800, the upper edge of the downward sloping channel at 19900, and the previous high of 20218.

The FIIs were net sellers on Thu. Dec 16 ‘10 – which was the last day of trading in a holiday-truncated week. But buying by the DIIs and short-covering before the long weekend led to the index breaching the upper edge of the channel intraday, and a close exactly on it.

Technically, only the first hurdle has been crossed. The second has not. Will it? The bulls may say ‘yes’, because the index has made a higher bottom, and the RSI and slow stochastic are both rising above their 50% levels. The bears may say ‘no’, because the MACD and ROC are still in negative territory, and the two-months long downward sloping channel is still intact.

A penetration above the downward sloping channel may lead to a sideways consolidation before the up move resumes. On the down side, the 200 day EMA should provide support.

NSE Nifty 50 Index Chart

Nifty_Dec1610

The Nifty 50 index chart pattern closed at an interesting place – at the confluence of the entangled 20 day and 50 day EMAs and the upper edge of the downward sloping channel. The combined resistances may prove too strong for a further up move.

The volume data is a continued concern for the bulls. Note that the three days of up move following the bounce up from a higher bottom of 5721 (touched on Dec 10 ‘10) was on receding volumes. Also, the down day volumes preceding the two recent up moves (on Nov 26 ‘10 and Dec 9 ‘10) were higher than the subsequent up day volumes.

The 1% decrease in the SLR announced by the RBI will inject some much-needed liquidity in the banking system. That, and the unchanged repo and reverse repo rates were seen as  positives by market participants. The advance tax numbers were also in line with expectations. If the FIIs keep selling – their ‘home’ markets have been outperforming of late – then the correction will continue.

Bottomline? Both the BSE Sensex and Nifty 50 indices are struggling to get out of bear attacks.The 100 day and 200 day EMAs are still rising, so there is no threat to the bull market as yet. Any external ‘black swan’ event may change things for the worse. But one should not panic and sell. Particularly at times like these, patience is a virtue.

Thursday, December 16, 2010

Risk Management in Investing – a guest post

In last month’s guest post, Nishit had covered the important topic of asset allocation. Without a proper asset allocation plan, investing becomes a hit-and-miss affair. You never know how much of what asset to buy, when to buy and when to book some profit. Often, the end result is missed opportunities and losses.

In this month’s guest post, Nishit covers the related topic of Risk Management. Properly assessing and understanding the risks involved in one’s investment plan and taking appropriate steps to mitigate those risks helps in formulating a proper asset allocation plan to suit one’s individual investment style and risk tolerance level.

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One of the most important topics that every person who makes any investments should be aware of is Risk Management. A good investor who is poor at Risk Management can get wiped out. Let us try to define risk and risk management.

Any activity you perform in life has a best case scenario and a worst case scenario. The worst case scenario is the risk, and the steps you take to minimise it is Risk Management. In investing, the worst case scenario is loss of capital and returns. The steps for managing risk can be:

(1) avoiding it – e.g. not indulging in day trading

(2) reducing the negative effects - learning the art of setting stop-losses and selling when the stop-loss is hit

(3) accepting the consequences – realizing that to be successful in day trading, a lot of small losses will have to be absorbed

(4) transferring it – buying insurance against trading losses

Risk in investments should be linked to the reward it offers. Risk-reward ratio is the reward which is being offered for the risk you are willing to take. Equity as an investment is risky as compared to investment in government securities, but the rewards are much higher. A 10 year government security will give you a return of 8% whereas investing in blue chip equities may give you 20% annual returns. The G-Sec investment is risk free whereas you face the risk of capital erosion in equity investments.

Risk varies as per the age and the needs of an individual. A 30 year old with a secure job that gives him a steady cash flow can take a higher amount of risk, and a riskier asset class like equity can form a higher percentage of his portfolio. A 60 year old who has just retired may have a larger capital to play with but has no steady income coming from a job. He will need to invest a much higher proportion in debt, giving him a steady income. Also, he has to guard against capital erosion as he will not be in a position to earn back the lost capital from a full-time job.

The table below illustrates the risk-reward ratios of various asset classes:

                     Reward

Risk

High

Medium

Low

High

Mid-cap Equities

Real Estate

Nil

Medium

Gold

‘A’ group Stocks in BSE

Nil

Low

Nil

Good Corporate Debt

Government Debt

Sunil Gavaskar has a favourite saying about percentage shots. He says the batsman has to consider what risk he takes of getting out when he plays a particular shot, and how many runs he scores. Sehwag plays in a very high risk-reward ratio style, whereas Sachin plays low risk shots. In IPL 3, he scored fast but scored mostly in boundaries. This is a classic example of a low risk and high reward strategy.

A good way of protecting your risks is by taking a term insurance cover which has a low insurance premium but high cover in case of your unfortunate demise. The first step of financial planning is to find out how much risk you can take. To play the game, you must remain in the game. In a game of poker, the poker player cannot afford to get wiped out. It is always better to get rich slowly rather than stake all. Twice the government yield of 10 yr paper (8% returns), which will give 16% annual returns when compounded over 10 years will turn Rs 1 lakh into 4.5 lakhs. That is the power of compound interest. Over 25 years, the same amount will turn into 40 lakhs!

Suggested Asset allocation for a 35 year old, considering the volatile state of the markets today:

Asset

% Allocation

Equity

20

Debt

40

Gold

30

Cash

10

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Wednesday, December 15, 2010

Stock Chart Pattern - IFCI Ltd (An Update)

The previous update of the stock chart pattern of IFCI Ltd was back in Feb ‘10. The stock was consolidating within an ascending triangle pattern (flat top at 60 and higher bottoms) and I had expected an upward break with a minimum upside target of 70. But I had warned investors that the counter was speculative and not for the faint of heart.

Consolidations within a triangle pattern occurs quite frequently on stock charts but are notorious for being unreliable in gauging the future direction. The general rule for consolidation patterns is a break out in the original direction. If an index or stock enters a consolidation zone after a bull rally, it is expected to move up after the consolidation is over. A consolidation after a correction is usually followed by another down move.

That doesn’t always happen in triangle patterns. However, ascending and descending (lower tops and flat bottom) triangles tend to be more reliable with the break out occurring above (or below) the flat side. Ascending triangles have measuring implications. The difference between the lowest point within the triangle and the flat top is added to the flat top.

The stock had touched a low of 37 in Jul ‘09, dropping 23 points below 60. Adding 23 to 60 gives an upward target of 83. Why then did I mention a target of 70? Because that was a long-term support-resistance level where selling was likely. The bar chart pattern of IFCI Ltd from May ‘09 onwards shows that the stock crossed 70 but fell short of 83:

IFCI_Dec1510

The ascending triangle pattern was confirmed by the multiple tops at 60 in Sep ‘09, followed by a higher bottom at 41 in Nov ‘09. The stock continued its consolidation on gradually reducing volumes, which is typical of consolidation patterns, till volumes started picking up from Jul ‘10.

The upward break out from the ascending triangle on Jul 16 ‘10 was not accompanied by significantly strong volumes, and led to a sideways consolidation within a rectangle pattern (between 57 and 64) upto the end of Sep ‘10. A high volume break out from the rectangle on Oct 1 ‘10 saw the stock touch a high of 77 on Oct 13 ‘10 followed by a higher top of 81 on Nov 11 ‘10.

Note that all four technical indicators – MACD, ROC, RSI and slow stochastic - made lower tops while the stock moved higher. The combined negative divergences warned of a correction – which came soon and the stock swiftly dropped to 52, giving up almost all the gains it made from the level of 50 back in Feb ‘10. Now you know why this stock is not for the faint of heart!

What next? The stock is consolidating around the level of 60 and the 200 day EMA within another triangle pattern. As per the general rule of consolidation patterns mentioned above, the stock is likely to break down below the triangle. The technical indicators are also looking bearish. If you are still holding, maintain a strict stop-loss of 54 (previous bottom). A better idea may be get out and not go anywhere near this stock again.

Bottomline? The stock chart pattern of IFCI Ltd seems to have enjoyed its few days of limelight and has reverted back to its no-return days. The periodic news about inducting a white knight and getting a banking licence have sustained investor (or should I say speculative?) interest. Far better stocks are available in the financial sector.

Tuesday, December 14, 2010

Have the bulls regained control of the Sensex?

Looking at short-term Sensex movements can cause unnecessary confusion, specially for small investors whose portfolios are overweight on mid-cap and small-cap stocks. Those who have joined the bull party late are unsure whether to book their meagre profits before they disappear into thin air, or use the correction to buy.

However, Sensex movements do provide an indication of overall market sentiments. The FIIs are still sellers, and the DIIs have now turned buyers. Are they trying to front-run the index with the hope that FIIs will resume their buying soon? Or, are they trying to ensure that the government can push through its disinvestment proposals?

Whatever may be the reasons, the fact is that unless the FIIs resume buying, we may not see new highs in a hurry. A quick look at the 3 months bar chart pattern of the Sensex shows that the index has hit a technical fork on the road:

SENSEX_Dec1410

The index touched a higher bottom of 19074 on Fri. Dec 10 ‘10 – which is a positive sign. But it is still trading within the downward channel, and has three immediate hurdles. The first is the combined resistance from the 20 day and 50 day EMAs at 19800. Then comes the resistance from the upper end of the channel at 19900.

Even if the Sensex breaks out above the downward channel, it needs to cross the previous high of 20218 touched on Dec 6 ‘10. That will form a bullish pattern of higher tops and higher bottoms. Till then, the bulls will not regain full control.

Both the RSI and slow stochastic are above their 50% levels, which are bullish signs. But the MACD is still negative and merged with its signal line, and the ROC is barely positive and has failed to move up. Bears may try to stall the up move and the Sensex can test support from the 200 day EMA. An interesting tussle is expected to play out over the next couple of days.

Monday, December 13, 2010

Stock Index Chart Patterns – Dow Jones (DJIA) and FTSE 100 – Dec 10, ‘10

Dow Jones (DJIA) Index Chart

image

In last week’s analysis of the Dow Jones (DJIA) index chart pattern, I had made the following comments:

“It may be a good idea to remain a little circumspect… the Dow is close to its Nov ‘10 top, and previous tops tend to provide resistance to up moves.”

On Tue. Dec 7 ‘10, the Dow touched an intra-day high of 11507 on strong volumes, testing the high of 11506 of Nov 5 ‘10. But the index could not sustain at the higher altitude, and just about managed to clear the 11400 level by the end of the week. The Nov 5 ‘10 closing level of 11444 needs to be cleared convincingly before the bulls can regain control.

With easy liquidity provided by Bernanke’s QE2, a new high on the Dow chart may be reached sooner than later. But the bears are not out of the game yet. Note the lower tops in the MACD and RSI even as the Dow tested its Nov ‘10 top. The negative divergences may lead to some more sideways consolidation, if not a correction.

At the week’s close of 11410, the Dow has retraced just about 63% of its bear market fall from 14280 in Oct ‘07 to 6547 in Mar ‘09. That is less than a 100 points above the 61.8% Fibonacci retracement level of 11326. These technical levels are well-known to market participants, and could explain the reason why the Dow fell after touching 11309 in Apr ‘10, and why it is still hesitating at current levels.

FTSE 100 Index Chart

image

Last week, the technical indicators of the FTSE 100 index chart had overcome their weaknesses but were not looking bullish. I had expected the index to consolidate a bit before moving up. The FTSE closed around the 5800 mark through the week, and the technical indicators have turned bullish.

The MACD is above the signal line and both are rising in positive territory. The slow stochastic is already in the overbought zone. The RSI has risen above the 50% level. At the time of writing this post, the FTSE is trading at 5870, just about 30 points below its Nov ‘10 top. A new high on the index is just a matter of time.

Bottomline? Both the Dow Jones (DJIA) and FTSE 100 chart patterns have recovered from their recent corrections and have embarked on Santa Claus rallies. New highs above the Nov ‘10 tops seem imminent. The dips were good opportunities to add. Now is the time to maintain trailing stop-losses and enjoy the ride.

Sunday, December 12, 2010

Chart Patterns of 10 Banking Sector stocks

The tightly regulated Indian banking sector has been one of the better performers during the bull rally. It forms one of the strong pillars that supports the India growth story. The competition and service standards of private sector banks have helped to improve the outlook of PSU banks towards customers from ‘doing a favour’ mode to ‘providing a service’ mode.

Still, there is plenty of room for improvement – both in customer service standards as well as in doing due diligence before handing out loans to corporates. The bribe-for-loans scam by some realty companies that was unearthed recently came as no big surprise to the Indian public. Many have run pillar to post to get a loan sanctioned before bowing to the malaise of greasing palms.

Many banks, particularly the ones linked with sanctioning loans to real estate and microfinance companies, have taken it on the chin during the ongoing correction in the Indian stock markets. Here are the one year bar chart patterns of 10 stocks from the banking sector – 5 of them from the PSU group and 5 from the private sector group. The ones that haven’t corrected a lot are the ones that are likely to lead the next rally in the banking sector.

Punjab National Bank

Punjab National Bank_Dec1010

The second largest PSU bank had been in a bull market till it hit 1400 in Nov ‘10 and started to correct. A high volume fall to the 200 day EMA was followed by an upward bounce to the falling 20 day and 50 day EMAs. The stock has started falling again and is trading between the 100 day and 200 day EMAs. The technical indicators are looking weak. Another test, and a possible break, of the 200 day EMA is likely.

Bank of Baroda

Bank of Baroda_Dec1010

This chart pattern looks the strongest of the PSU bunch. The stock is consolidating around the 100 day EMA. The technical indicators don’t hold out much bullish hope. A drop to the 200 day EMA may be on the cards.

Central Bank

Central Bank_Dec1010

The chart pattern of Central Bank remained in a sideways consolidation for 6 months, before breaking upwards on good volumes. It formed a bearish double-top after reaching the 250 mark and has corrected sharply. The stock had back-to-back closes below the 200 day EMA and has wiped out all the gains it made in the recent break out.

Corporation Bank

Corporation Bank_Dec1010

The stock had been in a bull market till it hit the peak of 814 in Nov ‘10. The subsequent correction seems to have ended with a sharp intra-day drop below the 200 day EMA, following which it managed to close above the long-term moving average and remains technically in a bull market. The technical indicators are hinting that the correction may not be over yet.

Indian Overseas Bank

Indian Overseas Bank_Dec1010

The chart pattern traded in a range for seven months before breaking upwards on good volumes in Aug ‘10. After twice facing resistance from the 180 level, the stock is seeking support from its 200 day EMA. Any recovery may be short-lived and the stock is likely to correct some more.

HDFC Bank

HDFC Bank_Dec1010

This is a favourite stock of the FIIs, and the chart pattern shows why. The stock is in a bull market, and the recent correction looks more like a sideways consolidation. However, a test of support from the 200 day EMA seems imminent.

ICICI Bank

ICICI Bank_Dec1010

This stock is another FII favourite, but is more volatile than the HDFC Bank stock. Though the correction has been steeper, the stock hasn’t dropped to the 200 day EMA yet.

Axis Bank

Axis Bank_Dec1010

The Axis Bank stock had an excellent bull run till it hit its peak in Oct ‘10. The correction has been just as strong, and the stock is struggling to move above its 200 day EMA.

Kotak Mahindra Bank

Kotak Mahindra Bank_Dec1010

The Kotak Mahindra stock traded in a range of 85 points for 8 months. It finally broke upwards after the stock split and reached the 530 mark in Oct ‘10. The correction has not yet tested the support from the 200 day EMA, but may do so soon.

Yes Bank

Yes Bank_Dec1010

FIIs hold majority stakes in Yes Bank, which had a spectacular run from a low of 41 in Mar ‘09 to a high of 388 in Nov ‘10 – gaining 850% in 20 months. The correction has been sharp, and the stock has closed three days in a row below its 200 day EMA. The correction may not be over yet.

Bottomline? All 10 banking sector stocks are undergoing correction. Bank of Baroda, ICICI Bank and Kotak Mahindra Bank have not suffered as much from the bear attack. The corrections may continue a little longer. Investors can wait a bit or buy in small lots.

Friday, December 10, 2010

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Dec 10, ‘10

BSE Sensex Index Chart

SENSEX_Dec1010

Last week’s upward bounce in the chart pattern of the BSE Sensex index had turned the technical indicators mildly bullish, but the spate of scams and corruption incidents had changed the market sentiments towards bearishness. FII selling due to year-end profit booking considerations were not helping the bull cause either.

It was no great surprise when the index briefly moved above the 20200 mark intra-day (but short of the 20300 mark mentioned), only to drop towards the support from the entangled 20 day and 50 day EMAs on Mon. Dec 6 ‘10. The next leg of the down trend began in earnest from Tuesday.

By Thu. Dec 9 ‘10, the index had fallen sharply to close below the 100 day EMA – the second time it had done so in 2 weeks. Today’s partial recovery took the Sensex to a close above the 100 day EMA. But the index is now trading within a downward sloping channel, and the technical indicators are signalling a continuation of the correction.

The MACD is in negative territory and has slipped below its signal line. The ROC has bounced back into the positive zone after receiving support from its 10 day MA. Both the RSI and slow stochastic are below their 50% levels. Note that the 200 day EMA is still rising and the index is trading above it. So, there is no reason to panic.

The expected good advance tax collections next week may provide some hope to the bulls. But the downtrend will remain in force till the index breaks out upwards.

NSE Nifty 50 Index Chart

Nifty_Dec1010

A couple of things had made me sceptical about the upward bounce in the chart pattern of the Nifty 50 index last week. The bounce was on declining volumes and the technical indicators were displaying negative divergences.

The volume data is still a concern. This week’s correction has been on increasing volumes. Thursday’s down-day volume was greater than today’s up-day volume. In a bull market, up-day volumes are usually stronger than those on down-days.

The technical indicators, except the ROC, are bearish. More importantly, the Nifty is now trading within a downward sloping channel. A test of support from the 200 day EMA is quite likely. If the support breaks, there is stronger support in the 5400-5500 zone.

Bottomline? Both the BSE Sensex and Nifty 50 chart patterns are in intermediate down trends. Investors can book partial profits or just wait this correction out. Fundamentally strong stocks can be bought if the valuations are appealing. The market sentiment will turn bullish only after a high-volume break out above the downward sloping channels.

Thursday, December 9, 2010

Some questions and answers about the current state of the Sensex

Things have suddenly taken a turn for the worse. Instead of moving up to touch new highs, as all the experts were predicting, the Sensex has made an about turn and started falling like a stone. Small investors who joined the bull party a little late and were enjoying a merry upward ride, have been totally taken aback. Should they sell at a loss? Should they ‘average’ their cost as the Sensex falls by buying at lower levels? Should they wait?

Lots of questions and very few answers. The experts are talking about 5500 instead of 6500 on the Nifty. Some are saying this is a good opportunity to buy. Others are saying it is best to wait the correction out. Here is an effort to demystify the current state of the Sensex through a Q&A format.

Q1: Is the Sensex in a bull market or a bear market?

A1: As long as the Sensex remains above its rising 200 day EMA, it is technically in a bull market. Like now.

Q2: What if the Sensex falls below its 200 day EMA?

A2: If it falls below the 200 day EMA and quickly recovers – like it did in May ‘10 – it is considered a test of support from the long-term moving average. If it falls below and stays below for 10-15 days, then it could be a trend reversal from bull to bear market.

Q3: What exactly is a trend reversal?

A3: A trend is supposed to remain in force till it reverses. A bullish trend is distinguished by higher bottoms on the Sensex chart. A bearish trend is distinguished by lower tops.

Q4: Can there be a short-term bearish trend within a long-term bullish trend?

A4: Yes, and that is exactly what is happening now. The long-term trend is bullish because of the higher tops and higher bottoms pattern since Mar ‘09. However, after touching 21108 on Nov 5 ‘10 the Sensex dropped to a low of 18955 on Nov 26 ‘10. It bounced up to reach a lower top of 20218 on Dec 6 ‘10 and started to move down again – confirming a short-term down trend within a long-term up trend.

Q5: Can the short-term down trend turn into a long-term bear market?

A5: Sure it can. It did so in 2008, when the FIIs started to sell heavily.

Q6: Aren’t the FIIs selling heavily now?

A6: Yes, they are. But that has more to do with year-end profit booking considerations, because most FIIs follow the Jan-Dec calendar year as their accounting year. End of year profits will enable them to declare dividends on their funds and give fat bonus cheques to their fund managers.

Q7: What about all the scams and corruption stories hitting the markets at regular intervals? Won’t they dampen FII investing sentiments?

A7: May be for some new entrants. But existing FIIs know how this country works. They are investing here because they believe in the India growth story. And corruption is considered part and parcel of India’s growth. Indonesia is far more corrupt than India, but FII buying has led to the Jakarta Composite index performing much better than the Sensex.

Q8: Aren’t the FIIs selling because valuations in India are stretched compared to those in Europe and USA?

A8: That could very well be a part of the reason for their selling. They can deploy their money anywhere they want. Buying a Walmart at a P/E ratio of 14 makes a lot more sense than buying a Trent or a Pantaloon at a P/E ratio of 44.

Q9: When and where will this correction end?

A9: That is a tough question. The immediate downside target is the previous top of 18500. The 200 day EMA is quite close to that level. It is possible that the Sensex may bounce up from the twin support of the 18500 level and the 200 day EMA. Or, it may drop down a little lower to 18000.

Q10: Should small investors wait out the correction or start buying now?

A10: It is very difficult to time the market. Most investors buy individual stocks, and not the Sensex. The index provides a guideline. Some fundamentally good stocks have fallen a lot more, and valuations are becoming more attractive. Small investments can be made now. Other stocks – with questionable fundamentals and management - may fall a lot more and it may be better to wait or avoid them. If you are in doubt, stay out.

The most disastrous practice is to buy a fundamentally questionable stock, and then average down as the stock price plummets. That is a sure ticket to penury.

Wednesday, December 8, 2010

Stock Chart Pattern - Cummins India (An Update)

When I wrote an update about the stock chart pattern of Cummins India back in Feb ‘10, the stock was correcting from a double-top at around the 485 level after a year long bull rally from a low of 150. In the 3 year chart also, the stock appeared to be forming a long-term bearish double-top. It seemed like a good opportunity to book partial profits, since the stock had more than tripled in value within a year.

Hope investors did not book out completely! The stock has performed remarkably well in the interim and has multiplied more than 5 times since its Mar ‘09 low, becoming one of the shining stars of the current bull market. What should investors be doing now? For the answer, let us look at the one year closing chart pattern of Cummins India:

Cummins_Dec0710

The stock price rose steadily from the date I wrote my previous post, alternately taking support from the rising 20 day and 50 day EMAs. Sharp up moves on volume spurts were followed by periods of sideways consolidation. The pattern of higher tops and higher bottoms remained unbroken – a sign of a stock in a strong bull market.

After closing at an all-time high of 803 on Nov 1 ‘10, the stock has entered another period of sideways consolidation during which it has tested support from the rising 50 day EMA. But there have been three technically significant differences this time around that are hinting at a slightly deeper correction.

Through the past 12 months, the stock closed at a new highs after bouncing up from the 50 day EMA. This time, it bounced up but closed at a slightly lower level of 797 on Nov 30 ‘10. It has been sliding down since then.

A bigger concern is the negative divergences in all four technical indicators. Note that when the stock closed at an all-time high of 803, all four indicators made lower tops (marked by blue arrows).

Subsequently, the stock tested the previous high but stopped short at 797 – forming a possible bearish double-top pattern. The double-top won’t be confirmed unless the stock price falls below the recent low of 756 (which is the ‘valley’ between the two tops).

The MACD is positive but has slipped below its signal line. The ROC has entered negative zone and about to move below its 10 day MA. The RSI failed to remain above its 50% level. The slow stochastic has dropped down from the overbought zone. All four are signalling short-term bearishness.

There are a couple of bullish counter arguments as well – just to keep matters interesting. The recent bottom of 756 was higher than the low of 725 touched in Oct ‘10. A higher bottom and a flat top at around 800 forms a bullish ascending triangle pattern, from which the likely break out will be upwards, with a target of about 850.

Also, the stock is trading well above its rising 100 day and 200 day EMAs, which is a clear sign of a bull market. Three bearish signs against two bullish ones should tip the scale in favour of the bears in the near term. The down side target from the possible double-top is around 715, which is close to the 100 day EMA. An upward bounce from the 100 day EMA or even the 50 day EMA, on decent volumes, can be used to add.

Bottomline? The stock chart pattern of Cummins India is in a strong bull market, but facing temporary technical headwinds. Q2 results have been excellent and fundamentally the stock is a good portfolio choice. Existing holders may take some profits home, or hold on. New entrants should await a bigger correction, as the stock has already run up substantially.

Tuesday, December 7, 2010

Gold Chart Pattern: another new high

The one year gold chart pattern encouraged me to paraphrase an old proverb: You can’t keep a good commodity down. Nothing seems to be able to halt the impressive rise in gold prices. The debasement of the US dollar – thanks to the Fed’s busy money printing machines – has ensured a flight to safety that easily absorbed the IMF’s selling.

So, who has been doing the buying? Apparently every one whose name isn’t Warren Buffett or Rakesh Jhunjhunwala. But one of the biggest buyers in recent times has surprisingly been China. The government wants to protect the value of its huge trade surplus with the USA and its citizens’ fears of rising inflation. The head of the Shanghai Gold Exchange told a conference that Chinese imports of gold for 2010 through October were 209.7 tonnes, compared to 45 tonnes for the whole of 2009.

Why were gold experts surprised by Chinese buying? Because China happens to be one of the biggest producers of the yellow metal. India, which is one of the largest gold importers, has also stepped up its buying – thanks to the strengthening Rupee. Its imports are likely to be almost 50% more than last year, and is expected to hit the 700 tonnes mark.

No wonder the gold chart pattern continues its parabolic rise and has touched an all-time high once again. Time to take a look at the one year chart pattern of gold:

image

After reaching an all-time high of 1421 last month, the gold chart made a small, bearish head-and-shoulder pattern that more than met its down side target as gold’s price dropped steeply to 1340, a near 6% correction from the peak.

A smart upward bounce found resistance from the 14 day SMA and the chart seemed to form a larger bearish head-and-shoulder pattern. Before the price could fall to the upward sloping trend line, strong buying emerged and the falling 14 day SMA was pierced from below.

At the time of writing this post, gold’s price oscillated a bit near the previous high before moving up to touch a new all-time high of 1424, only to drop down to 1421 again. It seems only a matter of time before the 1500 mark will be surpassed.

Should investors jump in and start buying? Unfortunately, without volume data it is difficult to provide a clear ‘yes’ or ‘no’ answer. On the ‘yes’ side of the argument is the weight of the massive Chinese and Indian purchasing. On the ‘no’ side are two technical reasons – hesitation near a previous top and significant and widening distance between gold’s price and its rising 200 day SMA.

Prudence suggests that one should follow bull market tactics – i.e. buying on dips.

Sunday, December 5, 2010

Stock Index Chart Patterns – Dow Jones (DJIA) and FTSE 100 – Dec 03, ‘10

Dow Jones (DJIA) Index Chart

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Last week, the technical indicators of the Dow Jones (DJIA) index chart pattern were hinting at a further correction. A downward break from the triangle and below the 50 day EMA was expected. But I had advised investors to buy the dip because the index was in a bull market.

On the first two days of the week, the Dow dropped below the 50 day EMA on intra-day basis and closed marginally below on Tue. Nov 30 ‘10 – a lower close on a monthly basis. But strong supports from the 50 day EMA and the 11000 level saw a smart upward bounce that took the index well above the rising 20 day EMA and a 2.5% higher weekly close.

The MACD is back in positive territory and touching the signal line. The ROC re-entered the positive zone after several days. The slow stochastic has moved above the 50% level. The RSI has risen to touch its 50% level.

Are happy days here again for the bulls? It may be a good idea to remain a little circumspect. Jobless claims are increasing, foreclosures are accelerating, and inventory is accumulating. Not to forget that the Dow is close to its Nov ‘10 top, and previous tops tend to provide resistance to up moves.

FTSE 100 Index Chart

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The FTSE 100 index chart pattern touched a two month low when it dropped to 5519 intra-day on Nov 30 ‘10 on strong volumes, and closed 2.5% lower on a monthly basis. Just when it seemed that the index would test support from the 200 day EMA, the bulls engineered a smart pull back that took the index above the flat 20 day EMA and back into a bull market.

But the pull back was on decreasing volumes, which is a concern for the bulls. The technical indicators have started to improve but remain weak. The slow stochastic has moved up from the oversold zone but is yet to move above the 50% level. The RSI is also below the 50% level. The MACD is negative and below the signal line. The ROC is hesitating after moving up to the positive zone. The FTSE 100 may consolidate before moving up.

Bottomline? Both the Dow Jones (DJIA) and FTSE 100 index chart patterns are recovering after a bout of correction. The economic recoveries on both sides of the pond have been anaemic so far. Bullish vigour will return after the Nov ‘10 tops are overcome. Time to stay put.