Friday, December 23, 2011

Stock Index Chart Patterns – Jakarta Composite, Korea KOSPI, Taiwan TSEC – Dec 23 ‘11

In my previous analysis of the chart patterns of the Jakarta Composite, Korea KOSPI and Taiwan TSEC index charts, I had made certain observations about the likely moves of the three indices. As it so happened, all three of my ‘guesstimates’ turned out to be correct.

I may pat myself on the back about my ‘predictive’ capabilities – but the fact is that chart patterns can’t really be predicted in advance. At best, one can make educated guesses about likely occurrences based on the way similar chart patterns played out earlier. Some times, patterns turn out exactly as you expect them to; at other times they make a complete fool of you.

Many put the blame on technical analysis as a decision making tool for investing. The fault usually lies with the analyst who boldly ‘predicts’ outcomes which don’t occur. It is necessary to look at several different technical indicators to arrive at a logical conclusion. Still, charts can ‘behave’ in radically different ways because ultimately an index chart pattern represents the collective greed and fear of market participants.

Jakarta Composite Index Chart


My observation about the Jakarta Composite index chart two weeks ago was: “Expect some more sideways consolidation.” The index consolidated between 3700 and 3800 for two weeks, dropping below the 3700 level and the 200 day EMA once on an intra-day basis. The 3800 level was crossed four times on intra-day basis, including the last three days of the current week. But the index failed to close above the 3800 level even once – indicating that the bears are defending it strongly.

Technically, the index is in a bull market and showing signs of wanting to move higher. All three EMAs have started moving up. Today’s intraday high of 3822 is the highest level the index has touched in more than a month. Crossing above the Oct ‘11 top of 3875 will form a bullish pattern of higher tops and higher bottoms.

The technical indicators are suggesting mildly bullish conditions. The slow stochastic is about to enter its overbought zone. The MACD is above its signal line and barely positive. The ROC has just climbed into positive territory. The RSI is above the 50% level, but falling towards it. An interesting tussle is expected between the bulls and bears over the next couple of weeks, with the bulls having a slight edge.

Korea KOSPI Index Chart


The Korea KOSPI index chart was expected to fall below its 20 day and 50 day EMAs. It fell a little further to touch an intra-day low of 1750 on Mon. Dec 19 ‘11 – slightly lower than the Nov ‘11 low of 1767, forming a bearish lower tops and lower bottoms pattern. The index is trading below its falling 200 day EMA and is in a bear market.

The bulls are not quite out of the game yet. Note the positive divergences in the slow stochastic and the RSI, which touched higher bottoms as the index dropped lower. That could lead to another attempt by the index to cross above its 200 day EMA – and probably another failure.

Despite the positive divergences, the technical indicators are looking weak. The slow stochastic is below the 50% level. The MACD is negative and below its signal line. The ROC is also negative, but trying to climb up. The RSI is below its 50% level.

Taiwan TSEC Index Chart


The Taiwan TSEC index was expected to test and fall below its Nov ‘11 low, and it showed no hesitation in doing so as it dropped to a low of 6609 on Mon. Nov 19 ‘11. Note that all four technical indicators touched higher bottoms as the index dropped lower. The combined positive divergences led to a sharp upward bounce and the index had a weekly close above the 7000 level.

In spite of the sharp bounce, the technical indicators remain bearish. That means the falling 50 day EMA may stall the upward move. The slow stochastic and the RSI are below their 50% levels, but rising. The ROC is about to cross into positive territory. The MACD is above the signal line, but negative.

The index is trading well below its 200 day EMA, and is in a bear market.

Bottomline? The Jakarta Composite index is technically in a bull market, but still struggling to keep the bears away. The Korea KOSPI and the Taiwan TSEC indices dropped below their Nov ‘11 lows and are trying to rally. Investors can very selectively look for value in beaten down stocks. It may be more prudent to wait till the indices cross above their respective Oct ‘11 tops.


venkat said...

How can retail investors invest in the above indices? Do ETFs for these indices trade on BSE/ NSE?

Subhankar said...

As far as I know, you can trade Dow and S&P 500 in the NSE F&O segment.

The Nifty is traded in Singapore. I reckon the Asian indices will be traded in India in the not-too-distant future.