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Thursday, September 1, 2011

Stock Index Chart Patterns - BSE Sectoral Indices, Aug 30, '11

A sharp rally during the last two trading days of Aug ‘11 – thanks to FII buying – saw the Sensex gain more than 800 points. Questions in the mind of many small investors, specially those without prior experience of bear markets, are: “Has the bear phase come to an end?”, and “Is this a good time to start buying?”

The short answer to the first question is: “No” – which a look at the chart patterns of the BSE Sectoral indices will confirm. The second question has already been answered in a post on Aug 11 ‘11. If you missed it earlier, it may be a good idea to go through it now.

BSE Auto Index

BSE Auto Index

The BSE Auto index has technically not broken down below the large descending triangle yet – unlike the Sensex. The gap in the chart was followed by a test and intra-day breach of the 8115 support level. The quick recovery closed the gap, but faced resistance from the falling 20 day EMA. Another test and a closing breach of the support level is a warning that worse may follow.

The subsequent upward bounce closed above the 20 day EMA. There is strong overhead resistance from the falling 50 day and 200 day EMAs, and the blue down trend line. The technical indicators are showing some bullish signs, but the support level may get breached technically (i.e. by more than 3% on a closing basis). Time to head for the exit door.

BSE Bankex

BSE BANKEX

The BSE Bankex has slipped into a bear market – the ‘death cross’ and the breach of the support level at 11330 have confirmed that. The current bounce is likely to face resistance from the falling 20 day EMA and the broken support level. Use the bounce to exit.

BSE Capital Goods Index

BSE Capital Goods Index

The BSE Capital Goods index has been technically in a bear market since the ‘death cross’ back in Jan ‘11. It has now broken below the Feb ‘11 lows, only to pull back to the support level of 12160. It is also facing resistance from the falling 20 day EMA. Even if it rallies some more, it may not be able to cross the hurdle of the falling 50 day EMA. Sell.

BSE Consumer Durables Index

BSE Consumer Durables Index

The BSE Consumer Durables index failed to test its Nov ‘10 top, broke below the blue up-trend line and is in danger of dropping into a bear market. The technical indicators are not holding out much hope of a speedy recovery. As per trend line theory: a trend remains in force till it is broken. The closing chart pattern (not shown) reveals a small head-and-shoulders reversal pattern with a downward-sloping neckline, with the head formed by the Jul ‘11 top. The ‘death cross’ will confirm a bear market. Sell.

BSE FMCG Index

BSE FMCG Index

The BSE FMCG index has been the star performer among the BSE sectoral indices, and appears to have escaped the bear attack with minor bruises. The blue up-trend line was breached with a gap, but the index is consolidating within a symmetrical triangle, and is trading above its rising 200 day EMA.

Technically, the bull market remains in force. The ROC, the RSI and the slow stochastic are showing positive divergences (reaching higher tops while the index made a lower top). The FMCG sector may not give spectacular returns in bull markets, but its resilience in bear markets makes it my favourite sector. It is a pity that most investors don’t find it an attractive investment option. Accumulate, with a stop-loss at 3720 (200 day EMA).

BSE Healthcare Index

BSE Healthcare Index

The BSE Healthcare index is supposed to represent a defensive sector, but it has broken down sharply below the blue up-trend line and the 200 day EMA. Note the classic pullback to the 200 day EMA before dropping further. The imminent ‘death cross’ and a drop below the Feb ‘11 low will confirm a bear market. The attempt at a recovery is likely to be thwarted by the 50 day and 200 day EMAs. Reduce.

BSE IT Index

BSE IT Index

The question mark about the growth in the US and Eurozone economies have worsened the outlook of the BSE IT index, which has broken sharply below a downward-sloping channel, and is in a bear market. Could this be a contrarian play? Anecdotal evidence suggests that overseas clients haven’t cut down on IT expenditure. Bet on TCS or Infosys, if you must – not on HCL Tech or Wipro. It may be more prudent to await Q2 results before entering.

BSE Metal Index

BSE Metal Index

The BSE Metal index has also broken below a downward-sloping channel, and slipped deeper into a bear market. In spite of the recovery effort, more pain is likely. Avoid.

BSE Oil & Gas Index

BSE Oil & Gas Index

The BSE Oil and Gas index also breached a downward-sloping channel, but is attempting a recovery. With inflation still not in control, diesel and kerosene prices have not yet been raised – adding to the subsidy burden. Reliance may face investigation for inflating costs of the KG-D6 basin exploration to avoid paying taxes and sharing profits with the government. Avoid.

BSE Power Index

BSE Power Index

The wind has gone out of the sails (or, more appropriately, the steam has gone out of the boilers) of the BSE Power index. Capacity additions have been way behind target; State Electricity Boards are in deep financial trouble due to mismanagement and power theft; new land acquisition laws will put a further spanner in the works. The index is going steadily down hill. Avoid.

BSE Realty Index

BSE Realty Index

The BSE Realty index didn’t fall during the six months period between Feb ‘11 and Jul ‘11. But all hopes of revival of the sector has been belied. The CCI slap of a huge fine on DLF came as a further blow to an already-beleaguered sector, and pushed the index below the support level of 1895. Buy real estate; avoid realty sector stocks.

5 comments:

nifty-trade said...

This bear market is going to be far more painful than the earlier one. No buying of stocks should be started (nibbling, as the so called experts say) in the next one year at least. This bear phase has many more legs to be unfolded... but gradually. Experts sometimes forget that a bear phase can last as long as 20 years... and the prevailing economic scenario has the potential to make it a prolonged bear market, isn't it right Subhankar? According to me it's necessary to know whether it's a secular bear or cyclical bear.

Dear Subhankar, you tend to disagree that it's going to be a secular bear... like most other experts. But this time it's going to be different... something not happened in the last 25 years of Indian stock market history... and in the world economy as well.

Who bought following your August 11 analysis, even if it's only 20%, still it's their hard earned money. And if they plan to invest the remaining 80% in the next six months, and by then if Nifty dips towards 3000 (I'm predicting that's a strong possibility) and threatens to break the 3000 level, what would you say?

By the way... gold is going to register more new highs... simply because dollar and euro will become worthless day by day and Chinese Yuan or Indian Rupee are not yet mature enough to replace dollar as world's reserve currency. This is already evident from the fact that Indian Rupee depreciated after S&P's downgrading of US credit rating from AAA to AA... and by that time gold jumped from $1600+ to $1900+.

Please dare to publish this comment!

Jasi said...

Ok, taking a very simplistic view of what you just surmised, should one liquidate one's portfolio and holdings barring may be FMCG and sit on cash right now?

Subhankar said...

@n-t: In a democracy, every one has a right to a view - and you have expressed yours very clearly.

Some people have the ability (or luck) to predict the future, and some don't. I belong to the latter category - so chart patterns are observed and an analysis is presented based on what is visible on the charts today. As of now, there are no signs of a huge collapse in global stock markets. That doesn't mean it won't happen. So, I neither agree nor disagree with your views - but will wait for chart patterns to play out.

'This time its going to be different' - now, where have I heard that before?! At some point in time, valuations fall to levels where people are motivated to buy, and a new bull phase starts. That is what happens every time. I have experienced several bull and bear markets. It is never different.

At the end of the day, it doesn't matter who is right and who is wrong. There are no Oscar awards for guessing - or predicting - market movements. All that matters is who is making money.

By the way, you don't have to dare me to publish any comment - it will be published if it is worth publishing.

@Jasi: Your asset allocation plan should help you to answer that question!

VIPAN said...

Hi Guys, Good to see diverse point of views on the market !!! My sense is that without going into technicals or fundamentals when every body is one side then market always does some thing else... At this point of time every Tom , dick and harry asking to short the market with the call of nifty reaching 4000 or even below. WHen this happens markets rally always....Even if has to go down it will do gradually not like 2008 as that point of time risk wasn't highlighted...

Subhankar said...

Good point, Vipan.

Most often, a consensus view of the market is proved wrong. In Oct '10, consensus view was Sensex would move to 25000. The market cracked. This time, a fall to 14000 or even lower is being talked about. Which could mean that the Sensex may not fall that far.

Let us wait for the drama to unfold. Unless the majority is wrong, you don't get to make much money!