BSE Sensex and NSE Nifty 50 index chart patterns – Jun 29, 2012

BSE Sensex index chart

Stock market sentiments took a turn for the better during the past week. PM taking charge of the Finance Ministry has been well-accepted by the market – in the hope that some much-needed reform measures may follow. The noises emanating from the various economic advisers and experts have also been positive. One needs to await action on the ground before jumping in to buy.

Participants at the Eurozone summit last week agreed to use emergency funds for sovereign debt purchase and provide funds directly to debt-laden banks – thereby cutting procedural hassles and taking a step forward towards solving the debt crisis. A landmark first step towards a European banking union was also taken. Global stock markets celebrated the news with gusto.

The 2 years weekly closing chart of the Sensex has comfortably moved above its 20 week and 50 week EMAs and the blue down trend line. A ‘golden cross’ of the 20 week EMA above the 50 week EMA will technically confirm a bull market. The Sensex needs to move past its Feb ‘12 closing high to form a bullish pattern of higher bottoms and higher tops.

Weekly technical indicators are turning bullish. MACD has crossed above its signal line, and seems ready to enter positive territory. ROC has risen above its 10 week MA to touch the ‘0’ line. RSI has moved up to its 50% level. Slow stochastic has climbed sharply above its 50% level.

The stage has been set for a return to a bull market – but expect one that may grind upwards slowly.

NSE Nifty 50 index chart

Morgan Stanley’s upgrade of Indian equity and strengthening of the Indian Rupee against the US Dollar helped local market sentiments. Rise in oil price was a bit of a dampener.

Nifty’s one year bar chart pattern shows a ‘gap up’ break out above its 200 day EMA. ‘Gap up’ break outs are very bullish, specially if accompanied by good volume support. So, is it time to crack open the ‘bubbly’?

Not yet. Upward break outs are often followed by pullbacks. That may be a better entry opportunity. Note that three of the four technical indicators – ROC, RSI, Slow stochastic – touched lower tops as the Nifty rose higher. The negative divergences could cause a pullback or even a correction.

However, technical analysis can go out the door on a flood of FII liquidity. FIIs bought heavily on Fri. Jun 29 ‘12. If they continue their buying spree in the coming week, Nifty may shoot past its Feb ‘12 top and technically confirm a bull market.

Technical indicators are looking bullish. MACD is rising above its signal line in positive territory. ROC bounced up from the ‘0’ line, and is about to cross its 10 day MA in positive territory. RSI and slow stochastic are at the edges of their overbought zones. Any pullback or correction is likely to be brief.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have crossed above important resistances into bull territories. Whether they will remain in bull territories for long will depend on follow up buying from FIIs and retail investors. Enter slowly in good large cap stocks, and maintain suitable stop-loss levels to avoid getting caught in a bull trap.

Notes from the USA (Jun 2012) - a guest post

Ever since the sub-prime crisis brought the US economy down to its knees 5 years ago, the equilibrium in the global economy got badly disturbed. Growth in China and India kept the global economic engine under control for a while, but once the sovereign debt contagion spread across the Eurozone, things have once again taken a turn for the worse. Stop-gap measures through quantitative easing and debt bail-outs have prevented a global economic collapse for the time being, but underlying problems are yet to be solved.

In this month’s guest post, KKP quotes from an IMF paper about prudent levels of debt-to-GDP ratios that different countries should maintain for long-term sustainability of their economic growth.

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Economic Prosperity based on GDP and Managing Debt

America used to be thought of as the land of opportunity, and we had a lot of debate lately on when US may lose this status. The fact that we are debating means that there is more agreement than disagreement. US constituents worked hard to create the popularly called “American dream of opportunity”, but today, that dream is becoming a dream that we see early in the morning (the one that comes true eventually)!

USA can become a land of opportunity but it cannot become one with the current state of the economy, jobs, politics, educational programs, government spending, and divergences of the top, middle and lower classes. So why do you think that US has got itself into this situation in the first place? To understand that, we have to get into the topic for this month: Gross Domestic Product and Debt Levels.

We had a ton of debate on gross domestic production measures, total ownership of debt by government and maintaining a healthy profile of a country. Well today, a lot of these values and absolutes are being challenged. So, what are the proposed prudential limits on public-debt-to-GDP ratios, and how important is its role for a bright future (of any country)? Based on work put out by an IMF study, a debt-to-GDP ratio of 60% is quite often noted as a prudential limit for developed countries. This simply suggests that crossing this limit will threaten fiscal sustainability/stability, as we are experiencing now in the USA. For developing and emerging economies, 40% is the suggested debt-to-GDP ratio that should not be breached on a long-term basis. Again, this is being challenged by many of the PIIGS and look where that has brought us with those countries (they have their hand out).

It is really a question about how a government, whether in a developed or a developing nation can sustain high debt levels (with respect to their internal production, a.k.a. GDP), and maintain a threat-free environment to economic growth in most sectors of the economy. Fiscal policy in any country has to ensure that its macro-economic model allows for the slow and upward slope of the business cycle, while sustaining an ability to pay for the debt within reasonable rate structures (bond yields); all of it without a major compromise on the underlying strength of the currency. If any of the three angles of the triangle are violated, there is a negative effect on the stock market, and the economic boom expected by its constituents, shaking the confidence of the society (business and personal).

The big question is if the 60% and 40% figures are optimal, sustainable and still works for the ensuing decade. Currently, we see a lot of countries violating these levels grossly, with no realistic target to improve its situation in any major way to return back to these levels recommended by the IMF. In fact, in my opinion, there are countries learning how to ‘challenge’ that thinking and create a domino of patch-work that will band-aid the problem, without resolving the root-cause. Let us look at the current levels of debt/GDP for a few countries:

Prudence from the IMF paper dictates that countries target a debt level well below the limit on the grounds that getting towards the upper end will challenge the stability and also the solvency of a given country. We are experiencing this about Greece, and we had a lot of debate on various Indian Forums about solvency of USA in a similar manner. In reality two key factors affecting solvency are the response of primary balance (i.e. budget balance net of interest payments on the underlying debt) to increases in debt level and the possibility of adverse shocks to the economic system. As we have seen for Greece, it is assumed that when debt gets very large, it may be difficult to generate a primary balance (positive number) that is sufficient to ensure sustainability of the economy; the shock from which pushes a country beyond their debt limits. The underlying debt needs to be sold at unbelievable yields to attract risk-funds (who will give up their precious cash to buy the bonds of a country that may dissolve!). Hence, the advice is to remain well below the limit for the sake of prudence (liquidity levels, rollover risks and also future growth). Liquidity is not an issue for domestic debt as it can always be paid off by printing money, a sovereign right which households or firms do not have, and a practice that the US is teaching the rest of the world by putting its stamp of approval on its own practices.

On a side note, inflation necessarily does not result from doing so initially, but when the growth engine gets in gear, the amount of money in circulation from all the printing, availability of credit to businesses and individuals, and of course, the open money supply available, will totally wreak havoc to the nation’s future. Currency takes a dive and buying power get diminished (Zimbabwe is the poster child).

These are macro events, and do not topple the next dominos within weeks or months, and yet, when the Titanic does turn (in 1-2-3 years), it will finally face the boulder of inflation with a depreciated currency, which the US will not be able to avoid without some dramatic side-effects. Every country, however small or big, is a Titanic by itself. We all have to watch over our investments to ensure that we are not facing the zero to negative percentage returns as is the case for Japan for the last decade, which has grossly violated the prudent practice of being under the 60% marker (graphic above shows that they are at 200%+).

India has a long way to go, but it will face these times when it really gets into gear to ensure that its infrastructure, government/business practices and of course, the growth model produces high organic-growth with significant government borrowing behind it. Let us continue to watch for it and ensure our portfolios stay in check to ensure double digit positive returns to our portfolios in a low single digit inflation environment (with a stable currency)……..Is that a lot to ask?

Please post your views….

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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.

Should small investors follow in the steps of well-known market players?

Many small investors believe that stock market investing is a zero-sum game. Some one buys and some one else sells. If a stock or index goes up after the transaction, the buyer wins and the seller loses. If the stock or index goes down, the buyer loses and the seller wins. Pretty simple, right?

Not quite. The commonly-held belief that ‘for every buyer there is a seller’ may be grammatically correct, but reality is entirely different. Here is an example: Today, the market was agog with the news that HSBC had sold major chunks of its holdings in Axis Bank and Yes Bank. Several hundred thousand shares changed hands.

Was there a single buyer who came forth to buy all the shares of Axis Bank and Yes Bank? No. How do I know that? From the price action. Axis Bank dropped 2.75% and Yes Bank dropped 2.25% after the news hit the market. There were several buyers for the Yes Bank offering. Fewer buyers for the Axis Bank offering.

Against one seller in both bank stocks, there were several buyers. If both stocks continue to fall in tomorrow’s trade, there will be one winner and several losers. A negative-sum game. If both stocks rise tomorrow, there will be one loser and several winners. A positive sum game. It is important to understand this – because it leads to the answer of the question.

Axis Bank and Yes Bank are well regarded and managed private sector banks. Buying their stocks and facing a temporary loss at current market price may not be a big deal because both companies are likely to perform well in future. Chances of making up the loss and moving into profit are high.

Now, replace HSBC in the above example by your favourite market player – RJ, RD, NK, etc. Imagine one of them is holding a large chunk of shares in companies like Bilcare, Delta Magnets, Bartronics. He first lets it be known that he has entered these companies. That attracts the attention of small investors. Then he keeps the market primed with all kinds of positive news – great acquisitions, fantastic prospects, brilliant technology tie-ups.

Small investors get sucked in, because every one loves to ride the gravy train. When the market price of the stock gets pumped up to a sufficiently high level, the selling begins. It’s a hugely negative-sum game. Only one winner, and thousands of losers.

If you want to be on the winning side in the stock market game, you have to work hard. Analyse companies fundamentally and technically, read newspapers and business magazines to keep updated on local and global economic issues, and trust your judgement but not your intuition.

Most important of all, do not try to follow in the footsteps of well-known market players. They are in the market to make money – from people like you and me.

That was the long answer. The short answer is: NO!

Nifty and Defty charts: a mid-week technical update

Nifty chart

Nifty touched a slightly higher intra-day high of 5195 on Mon. Jun 25 ‘12, but formed another ‘reversal day’ pattern (higher high, lower close). The index is consolidating sideways with a slightly upward bias, but has so far been unable to convincingly cross above its 200 day EMA and the support-resistance level of 5175.

The 20 day EMA has moved up to touch the 50 day EMA, but both EMAs are still below the 200 day EMA. The bulls still have a lot of work to do before the bears can be shaken off.

Technical indicators are bullish but showing signs of weakness. MACD has stopped rising and about to touch its signal line in positive territory. ROC crossed below its 10 day MA and dropped to the ‘0’ line, from where it is trying to bounce up. RSI and slow stochastic have dropped from their overbought zones, but are above their 50% levels.

RSI has formed a double-top reversal pattern. ROC is sliding while the Nifty is moving up. These are negative signals. 20 day EMA has formed a rounding-bottom pattern, which is a positive. Nifty appears to be treading water prior to F&O expiry day.

Our former FM is preparing for the Presidential race. PM has taken charge of the Finance Ministry. The market seems to be expecting some big-ticket reforms – which may not happen just yet.

Defty chart

Defty (Nifty measured in US Dollars) is consolidating sideways with a downward bias – thanks to the continued weakness of the Rupee against the Dollar. The index has slipped below its 20 day EMA and is trading below its 50 day and 200 day EMAs – sign of a bear market.

Technical indicators are looking bearish. MACD is about to touch its signal line in negative territory. ROC has dropped below its 10 day MA into the negative zone. RSI and slow stochastic have fallen below their 50% levels.

Another test of the support level of 2960 is likely. Bulls will hope that the support holds. A breach of 2960 will be very bearish, because FIIs – who started the Dec ‘11 rally by buying at 2960 - will probably start to sell.

The next trigger for the stock market may come from the Eurozone summit meeting, but it is better not to hope for a miraculous turnaround of their sliding economies. Q1 results to be declared next month are unlikely to bring much cheer. Monsoon arrived late and is playing truant. Not much positives to look forward to in the near future.

Continue to hold on to existing portfolios. Stay away from speculative and ‘theme’ stocks. Look to enter large-cap stocks that are facing temporary setbacks.

Gold and Silver chart patterns: an update

Gold Chart Pattern

Two weeks back, positive divergences in RSI and slow stochastic on gold’s price chart had indicated a likely continuation of the rally, which had earlier stalled at the 200 day EMA. However, sliding volumes and weak technical indicators did not suggest a strong rally.

It was no surprise that the rally stalled at the 200 day EMA once again, and gold’s price dropped below all three EMAs. Note the higher volume spikes on down days (in red) – a sign of distribution. After a 10 years long bull market, a bout of bear domination is to be expected and will technically improve the ‘health’ of gold’s chart.

Technical indicators are bearish. RSI is below its 50% level. MACD has crossed below its signal line into negative territory. Slow stochastic formed a bearish double-top pattern inside its overbought zone, and plummeted to the edge of its oversold zone.

A test of its previous lows at 1525 – touched in Dec ‘11 and May ‘12 – is on the cards. Gold’s chart is forming a large ‘descending triangle’ pattern. A breach of 1525 can be extremely bearish.

Silver Chart Pattern

Following comments were made about silver’s chart pattern two weeks ago: “Positive divergences in all three technical indicators, which touched higher tops in Jun ‘12 as silver’s price touched a lower top, may help to extend the rally. But not for long.”

Silver’s price oscillated about its 20 day EMA for a few days before falling below all three EMAs on good volumes. Just when it seemed that the previous low of 26 – touched in Sep and Dec ‘11 – may get tested, silver’s price jumped up on a strong volume spike.

Has silver’s price bottomed out? May be not. Technical indictors are bearish. RSI bounced up from the edge of its oversold zone, but is below its50% level. MACD has crossed below its signal line in negative territory. Slow stochastic has entered its oversold zone.

However, all three technical indictors are showing positive divergence by touching higher bottoms as silver’s price touched a lower bottom. Another rally may be in the offing. Unless silver is be able to cross above the 30 level, bulls won’t have much hope.

Silver’s chart is forming a large ‘descending triangle’ pattern. A drop below 26 can be extremely bearish.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jun 22, ‘12

S&P 500 Index Chart

The S&P 500 index chart rode a near 100 point rally from well below its 200 day EMA to the support-resistance level of 1360 in 12 trading sessions. Such sharp rallies typically occur in bear markets – though technical confirmation of a bear market is still awaited. Note that three intra-day bottoms near the 1360 level were touched in Apr ‘12. Previous bottoms often act as resistance levels. This was the reason why readers were warned last week not to enter unless the index crossed the 1360 level.

The rally was partly on expectation of a QE3 announcement from US Fed. An extension of ‘Operation Twist’ was not considered good enough by market players. The continued weakness in Eurozone, Moody’s downgrade of several banks, weaker manufacturing data and weak jobs report in the US contributed to a crash on Thurs. Jun 21.

The index touched a lower top, and a bearish pattern of lower tops and lower bottoms remains intact. A drop below the low of 1267 touched on Jun 4 ‘12 may finally push the index back into a bear market. Technical indicators are turning bearish.

MACD has slipped into negative territory, though it is still above its signal line. RSI has dropped below its 50% level. Slow stochastic is hurtling down towards its 50% level. At the time of writing this post, the S&P 500 index is seeking support from its 200 day EMA. Bears are tightening their grip.

FTSE 100 Index Chart

Bullish technical indicators on the FTSE 100 chart had pointed to a cross above the 50 day EMA and a test of the 200 day EMA in last week’s analysis. Readers were advised to stay away, or use the rally to book profits. Some times chart patterns turn out exactly as you expect.

Technical indicators are still bullish, but showing signs of weakening. MACD is positive and above its signal line, but the histogram is falling. RSI is about to drop to its 50% level. Slow stochastic is in its overbought zone, but turning down.

Note that the FTSE 100 faced resistance from its 200 day EMA and touched a lower top than its May ‘12 top, but all three indicators touched higher tops. The combined positive divergences may prevent the index from falling below its Jun 1 low of 5230.

Bottomline? The S&P 500 index is on the verge of dropping into a bear market. The FTSE 100 index is already in a bear market. This is a time for discretion, not valour. Conserve cash and let the corrections play out.

BSE Sensex and NSE Nifty 50 index chart patterns – Jun 22, 2012

BSE Sensex index chart

There was bad news and not so bad news for the stock market last week. RBI’s hands-off action on interest rates and CRR came as a negative surprise. The Sensex formed a ‘reversal day’ pattern and dropped to its 50 day EMA on Monday, Jun 18 ‘12.

Greece’s election results didn’t turn out as bad as expected. A break-up of the Eurozone has been avoided for now, but Greece’s sovereign debt problem is far from getting resolved. India’s pledge of $10 Billion to IMF’s Eurozone bailout fund evoked caustic comments from many analysts, but was actually a smart and politically correct move.

US Fed’s extension of ‘Operation Twist’ (shorter-term bonds replaced by longer-term bonds) was a decent compromise, though some market analysts were expecting a QE3.

Sensex is knocking at the doors of its 200 day EMA, but has not been able to cross above convincingly. But looks like it is just a matter of time before it enters bullish territory.

All four technical indicators are showing positive divergences by touching higher tops while the Sensex reached a lower top (marked by blue arrows). The 20 day EMA and the signal line of MACD have formed bullish rounding bottom patterns.

Technical indicators are bullish, but showing signs of slowdown in upward momentum. MACD is rising above its signal line in positive territory, but the histogram is falling. ROC is positive, but has dropped below its 10 day MA. RSI and slow stochastic are in their overbought zones.

A slow grind upwards is more likely than a runaway rally. Sensex needs to move above its Feb ‘12 top of 18524 to form a bullish pattern of higher bottoms and higher tops. Bears may put up a good fight to stop that from happening.

NSE Nifty 50 index chart

Our soon-to-become-former FM was known to be close to former-PM Indira Gandhi, who had socialist leanings. Now that he will be ‘kicked upstairs’ and the RBI has returned the economic ball back to the court of the government, one can expect some market-friendly reform announcements. Whether such announcements turn into concrete actions on the ground or not may decide the trend of the stock market.

After spending four weeks below the down trend line, the weekly bar chart of the Nifty has completed three weeks above it. The last hurdle on the up move is the 50 week EMA. Once the 20 week EMA crosses above the 50 week EMA, a return to a bull market will be confirmed technically.

Technical indicators are showing signs of strength, but haven’t turned bullish yet. MACD is rising, but remains below its signal line in negative territory. ROC has crossed above its 10 week MA, but is still negative. RSI has emerged from its oversold zone, but is below its 50% level. Slow stochastic has climbed out of its oversold zone to reach its 50% level.

Why is the Nifty not crashing despite all the bad news and pessimism? One reason may be the current composition of the index. Many high-flying growth stocks which have not been performing well for the past four years have been replaced by more stable and defensive stocks. That has protected the down side.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices seem ready to cross above important resistances into bull territory. Enter slowly, and choose only fundamentally strong large-cap companies. But beware of a bull trap. Keep suitable stop-losses. Dollex and Defty charts are looking weak – thanks to the fall in the value of the Rupee.

Stock Picking Strategies

Some times, I like to watch business TV channels for the sheer entertainment they provide. None more than a financial adviser who hosts a half-hour show twice a week where viewers call in with their queries and the host of the show lambasts them about their stock picks.

I was watching the show last evening. A viewer called in with a query on India Glycol. On learning that the viewer was a marketing professional at a brokerage house, the host asked whether good advice was being provided to the brokerage clients or not.

The viewer responded with a resounding ‘Yes’ only to face a tougher question from the TV show host: “Can you please tell me what India Glycol produces?” After the briefest of hesitations, the viewer said: “I don’t know.”

The next question was even tougher: “What is Mono-Ethylene Glycol?” This time, the viewer responded promptly: “I think some pharmaceutical product.” The TV show host slammed down the phone receiver and went apoplectic! It was too funny for words.

He looked straight at the camera and started shouting at the top of his voice: “Don’t you feel ashamed of yourself? This is the kind of good advice you provide to your clients? What is happening to this country? When will you people learn how to pick good stocks?” On and on he went for a couple of minutes before sitting down in sheer exhaustion.

Part of the anger was an act – but only a part. Most small investors enter the stock market without a clue about how to select a stock for trading or investment. No wonder they end up losing money. Then they compound the problem by ‘averaging’ the stock as it continues to fall – turning a smaller loss into a much bigger one.

If you want to learn stock picking strategies, you can read a 11 part tutorial at investopedia.com. The first part can be found at the following link:

http://www.investopedia.com/university/stockpicking/#axzz1ydDfLEzu

Links to the next 10 parts are available in the above link.

Related Posts

http://investmentsfordummieslikeme.blogspot.in/2009/03/how-to-pick-stocks-for-investment-part.html - Part I

http://investmentsfordummieslikeme.blogspot.in/2009/04/how-to-pick-stocks-for-investment-part.html - Part II

http://investmentsfordummieslikeme.blogspot.in/2009/06/how-to-pick-stocks-for-investment-part.html - Part III

Why our PM ‘gave’ US $10 Billion to the IMF

In a live debate telecast on a local TV channel, an economist who is a spokesperson and supporter of the ruling party was outraged that the PM had given away US $10 Billion (equivalent to Rs 56,000 Crores) to IMF’s Eurozone debt bailout fund when he was reluctant to give less than a quarter of that amount to the debt-burdened local government.

Many fellow citizens must have felt the same way – going by the chatter in different online forums. Has our economist PM gone bonkers, or was there a method to his madness? Digging a little deeper, the facts came out quite clearly. Our honourable PM may be indecisive, and lack charisma but he is nobody’s fool.

First of all, the $10 Billion was not ‘given away’ like a gift or aid. It was a pledge to contribute to an emergency fund, which will be used only if needed. There are other countries who have pledged similar or different amounts. For the complete list of the countries who have pledged to contribute to IMF’s Eurozone bailout fund, click here.

The total pledged amount by different countries comes to $456 Billion, which will be used as a second line of defence only if resources already available are used up. By the way, the ‘available resources’ includes an earlier $13 Billion pledge from India.

What if the available resources are used up and India is called upon to pay the $10 Billion? The amount will come out of India’s foreign exchange reserves – which is currently about $290 Billion. That constitutes less than 3.5% of the current reserves.

IMF will return the money with interest – so it will be a ‘loan’ and not a ‘gift’. How will India benefit from such an arrangement? There are two benefits – one political and the other financial.

For quite some time, the emerging economies – particularly the BRIC nations – have been demanding more say in the way IMF is managed and run. IMF has so far been dominated by European developed economies. It will need to accommodate the aspirations of emerging nations, but is extracting a price in terms of more financial contributions.

In other words, to sit at the table one has to pay a fee. Brazil and Russia have pledged similar amounts as India (as have Mexico and Switzerland). China has pledged more than the other three BRIC nations combined. Remember that it was IMF which bailed India out in 1991 when our forex reserves were near zero.

India’s forex reserves are not stored in some vault in RBI’s headquarters. They are invested mostly in US Treasury bonds that earn a paltry 1.5-2% interest. If and when IMF borrows from India, they are likely to pay a higher amount of interest, say 3-4%. So, a $10 Billion loan to IMF will earn India an extra Rs 800-1100 Crores. A win-win situation for everyone.

Stock Chart Pattern - OnMobile Global (An Update)

Small investors who are stuck holding OnMobile Global stocks, may feel like singing an old hit song by Diana Ross and the Supremes, which begins like this: “Nothing but heartaches, Ooh nothing but heartaches, He brings nothing but heartaches…”

Investing mistakes should be used as learning experiences, and remembered so that similar mistakes can be avoided in future. A company in a high growth sector (telecomm), providing value-added software services, promoted by an ex-Infosys whiz, having overseas VC funding, with top global clients, and a strong balance sheet may appear to be the perfect recipe for success. But even for the best of companies, one should maintain a stop-loss.

So, what went wrong? Leadership position and profits in the domestic business were leveraged to expand overseas. Unfortunately, timing went awry. Competition and lower ARPUs in the domestic market led to a drop in business. Regulatory issues exacerbated the problem. Large expenditure in overseas roll-outs could not immediately cover the revenue and profit gaps. Depreciation and increased taxes ate up profits as well.

Is there no chance of recovery for the stock? From its Jul ‘09 peak of 341 (adjusted for 1:1 bonus) to its recent low of 33.80, the stock has lost 90%. Mid-cap and small-cap stocks rarely, if ever, recover from such huge falls. Even if they do, it may take several years. That is the bad news – and a good reason to avoid the stock.

The good news is that overseas business now accounts for 45% of total revenues, compared to 27% a year ago. In the current year, overseas business will contribute more than 50%. That should add considerably to top and bottom lines, and help the company to turn around.

 

The daily bar chart pattern of OnMobile Global is an example of what a 3 years long bear market looks like – all three EMAs moving downwards, with the stock trading below the three EMAs. The stock appeared to find a bottom at 54 and rallied to touch 84 in Feb ‘12. Though it managed to close above its 200 day EMA on a couple of days, it failed to move higher. This is why ‘sell on rise’ should be a strategy in a bear market.

The subsequent fall hesitated near the previous support level of 54 for a few days during Apr and May ‘12, before the stock resumed its downward journey. A high volume spurt today saw the stock close just above its falling 20 day EMA. Positive divergences in all four technical indicators, which touched flat or slightly higher bottoms as the stock touched a lower bottom (marked by blue arrows), may cause an up move towards the falling 50 day EMA. The 54 level is expected to act as a resistance in case the stock crosses above its 50 day EMA.

Note that technical indicators have corrected oversold conditions, but are yet to turn bullish. MACD is entangled with its signal line in negative zone. ROC has crossed above its 10 day MA to touch the ‘0’ line. RSI has moved up to its 50% level. Slow stochastic is rising towards its 50% level.

Bottomline? The stock chart pattern of OnMobile Global is trying to find a bottom. But a long bear market doesn’t reverse in a day. Await the formation of a reversal pattern to enter. A more prudent move will be to wait for a convincing break out above 84. But remember that the stock will test the patience of most investors.

Nifty and Defty charts: a mid-week update

Nifty chart

Hopes of an interest rate cut or at least a CRR cut by RBI pushed the Nifty above the twin resistances of its 200 day EMA and the 5175 level (that has acted as a support-resistance line for the past 5 months) on Monday, June 18. But with RBI keeping rates unchanged, it was a brief intra-day breach followed by a drop to the 50 day EMA.

A ‘reversal day’ pattern (higher high, lower close) got formed, probably marking the end of the June rally. Note that such a pattern can also form in the midst of a rally – as it did on Jun 11, and was accompanied by higher volumes. So, one needs to wait for a few more days to conclude that the current rally is over.

Volumes on up-days have been good, but are touching lower peaks. Note the difference in volume pattern during Jan ‘12, when up-day volume peaks were supporting the rally by rising higher.

Technical indicators are bullish but showing signs of weakness. MACD is positive and above its signal line, but the histogram is falling. ROC is also positive, but touched a lower top and dropped below its 10 day MA. RSI is rising towards its overbought zone, but touched a lower top as the Nifty rose higher. Slow stochastic has slipped below its overbought zone and also touched a lower top. Negative divergences in three of the four indicators may end the rally soon.

However, bullish rounding-bottom patterns are visible on the 20 day EMA and the MACD signal line. That means the rally may continue for a few more days. Such contradictory signals emanate when the Nifty trades within a broad range (between 4750 and 5630 for the past 5 months).

Nifty is once again testing resistance from its 200 day EMA. Only a move above Monday’s intra-day high of 5190 will keep the bullish pattern of higher tops and higher bottoms intact.

Defty chart

CNX Defty (Nifty measured in US Dollars – hence more relevant for FIIs) twice tested support from the 2960 level and crossed above its falling 20 day EMA on Jun 6 ‘12. For the next 10 trading sessions, it has bounced around between its rising 20 day EMA and falling 50 day EMA. Unlike Nifty, Defty is trading well below its 200 day EMA, and is clearly in a bear market.

Technical indicators are looking bullish, which means the sideways consolidation with a slight upward bias may continue a bit longer. MACD is just below its ‘0’ line in negative territory, but above its signal line. ROC has crossed below its 10 day MA. RSI is above its 50% level, and trying to move up. Slow stochastic has fallen below its overbought zone, and sliding down.

After the disappointment of RBI’s status quo policy, it seems like Nifty and Defty are waiting for a positive trigger from the US Fed in the form of a QE3, which could propel global stock markets upward on another liquidity surge. The more likely outcome is an extension of the ongoing ‘Operation Twist’.

Hold on to your portfolios. No need to take precipitate action.

WTI and Brent Crude Oil charts: an update

WTI Crude chart

Two weeks back, daily bar chart pattern of WTI Crude was technically in a bear market and was trading far below its 20 day and 200 day EMAs. Technical indicators were looking oversold. Such a combination is usually followed by an upward bounce.

The bounce was a weak one, failing to reach the falling 20 day EMA, and turned into a sideways consolidation. Oversold conditions have been corrected, but technical indicators are still quite bearish. RSI and slow stochastic emerged from their respective oversold zones, but their upward momentum is weak. MACD has crossed above its signal line, but remains negative.

The consolidation may continue a bit longer before the down move resumes.

Brent Crude chart

Two years weekly closing chart pattern of Brent Crude oil shows a double-top reversal pattern with some interesting variations. The first top formed in Apr ‘11 – which itself was a small double-top at 126. The second top formed during Feb and Mar ‘12 as a small head-and-shoulders pattern with a downward-sloping neckline.

Note that RSI and MACD touched much lower tops and slow stochastic touched a slightly lower top during Feb-Mar ‘12. The combined negative divergences plus the head-and-shoulders pattern gave ample warning of a likely correction/trend change. Also note the bearish rounding-top patterns on the 20 day and 50 day EMAs as well as on MACD and slow stochastic.

The lowest point (‘valley’) between the two tops was 103, touched in Sep ‘11. Once oil’s price dropped below 103 in May ‘12, second of the two technical conditions for a double-top reversal got confirmed. The first condition - higher volumes during the formation of the first top – had been confirmed earlier, though the volume difference wasn’t large.

Double-top patterns have measuring implications. Brent crude’s price has a downward target of 80, as per the following calculation: Double-top at 126 less ‘valley’ point of 103 = 23; ‘Valley’ point of 103 – 23 = 80. Unfortunately, chart patterns do not always follow arithmetic – specially in a controlled market. Also, downside targets often fall short in bear markets.

Note that Brent Crude’s price is exactly at the critical support level of the 200 week EMA – which is considered a trend-decider on long-term charts. Technical indicators are looking oversold. An upward bounce from the 200 week EMA is a possibility. A convincing breach below the 200 week EMA at 96 can drop oil’s price to 80.

In last week’s OPEC meeting in Vienna, it was decided that despite the 24% fall from the peak level of 126, the current combined output of the 12 OPEC member nations will be maintained at 30 million barrels per day to aid the global economic recovery. If Brent Crude’s price drops to 90 before the next meeting in Dec ‘12, another OPEC meeting may be scheduled to reduce output. Unless a ‘black swan’ event occurs, a drop below 90 looks unlikely in the near term.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jun 15, ‘12

S&P 500 Index Chart

The S&P 500 index chart dropped below all three EMAs on Mon. Jun 11 ‘12, but quickly bounced up and closed the week above all three EMAs on a volume spurt. In last week’s analysis, bullish technical indicators had pointed to the possibility of a continuation of the rally, provided there was volume support.

The 20 day EMA has turned up. So has the 50 day EMA. ‘Death cross’ of the 50 day EMA below the 200 day EMA has been averted for now, which means the index is technically in a bull market down trend.

Technical indicators continue to look bullish. RSI is above its 50% level. MACD is climbing above its signal line towards its positive zone. Slow stochastic is inside its overbought zone, where it may remain for some time.

The economic recovery is quite weak. Initial claims of unemployment benefits have started inching up again. Manufactured goods orders are down. Market players are expecting an extension of ‘Operation Twist’ or even a dose of QE3 to revive the economy. If neither happens, the rally may stall.

FTSE 100 Index Chart

A bear market rally on the FTSE 100 chart is facing strong resistance from the falling 50 day EMA – a possibility mentioned in last week’s analysis.

Technical indicators are looking bullish, which means the rally may try to cross above the 50 day EMA and test the 200 day EMA. RSI has moved above its 50% level. MACD is negative, but rising above its signal line. Slow stochastic is at the edge of its overbought zone.

The ‘positive outcome’ of the elections in Greece may provide a temporary impetus to global markets. An economic catastrophe – which a break-up of the Eurozone would have caused – has been avoided. But Eurozone sovereign debt problems are yet to be solved, and economic growth remains a distant dream.

Bottomline? The S&P 500 index is technically in a bull market down trend. The rally during the past two weeks managed to keep the bears at bay. Enter on a cross above 1360 level. Bears are still ruling the FTSE 100 chart. Stay away, or use the current rally to lighten up.

BSE Sensex and NSE Nifty 50 index chart patterns – Jun 15, 2012

BSE Sensex index chart

Q4 results have come and gone, without creating much of a ripple on the stock market. As expected, top line growth wasn’t matched by bottom line growth by most companies. Capital expenditure and new projects have been shelved.

Pathetic IIP number of 0.1% raised hopes of an interest rate cut. But rising inflation snuffed out such hopes. Mar ‘12 inflation figure was revised upwards, and there is every possibility that Apr ‘12 and May ‘12 inflation will face the same fate.

It may be disastrous for the Indian economy if interest rates are cut when inflation is rising. The government needs to get its act together on the fiscal and reform fronts – instead of wasting time on useless politicking over who will be the next president.

The weekly bar chart of the Sensex shows a higher bottom in May ‘12, but RSI and slow stochastic touched lower bottoms (marked by blue arrows). The negative divergences may impede upward progress of the rally.

The index has managed to cross above the 20 week EMA, but any further up move will need to cross above the twin resistances from the 50 week EMA and the blue down trend line. Unless the index climbs above the Feb ‘12 intra-day top of 18524, a bullish pattern of higher bottoms and higher tops won’t get formed.

Technical indicators have corrected oversold conditions, but haven’t turned bullish yet. MACD is below its signal line in negative territory, but has started rising. ROC has crossed above its 10 week MA, but remains negative. RSI and slow stochastic are below their 50% levels.

NSE Nifty 50 index chart

Elections in Greece over the weekend and RBI’s policy announcement on Monday (Jun 18 ‘12) are being eagerly awaited by market players. Some sort of a resolution of the debt crisis in Greece and at least a 25 bps interest rate cut by the RBI seem to have been ‘discounted’ by the market. Any negative surprises may strengthen the hands of bears.

On the daily bar chart of the Nifty, a higher bottom in May ‘12 has only been matched by ROC. MACD and slow stochastic touched flat bottoms while RSI touched a lower bottom (marked by blue arrows). Negative divergences in three of the four technical indicators do not augur well for the bulls.

Last week’s rally was accompanied by falling volumes as the Nifty climbed above its 50 day EMA and tried to overcome resistance from its 200 day EMA. Market players are hoping for some positive triggers in the coming week to take the index higher.

Technical indicators are bullish, but looking overbought. ROC and slow stochastic have reached overbought levels. RSI turned down after briefly entering its overbought zone. Only MACD, which has risen above its signal line into positive territory, is not looking overbought.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are poised near important resistance levels. Overcoming those resistances convincingly may change the trend to a bull market. Market breadth indicators are not supporting such a possibility. NSE A-D line touched a lower top in Jun ‘12 and NSE TRIN is in overbought territory. Await events to unfold next week before deciding to jump in or out.

Stock Index Chart Patterns: Jakarta Composite, Singapore Straits Times, Malaysia KLCI – Jun 15, ‘12

Three weeks back, chart patterns of the Jakarta Composite, Singapore Straits Times and Malaysia KLCI indices were reeling under strong bear attacks. Straits Times was already trading below its 200 day EMA; Jakarta had just closed below its long-term moving average and KLCI was trying to bounce up from its 200 day EMA.

Jakarta Composite Index Chart

Jakarta Composite tried to cling on to its 200 day EMA for a couple of days before dropping sharply to touch an intra-day low of 3635 on Jun 4 ‘12 – its lowest level since Oct ‘11. An equally sharp pullback found twin resistance from the 200 day EMA and the falling 20 day EMA.

Such pullbacks provide good opportunities to sell. The index has been consolidating sideways between the 3800 level and the falling 20 day EMA. A bear market will be technically confirmed by the ‘death cross’ of the 50 day EMA below the 200 day EMA.

Technical indicators have corrected oversold conditions but are still looking bearish. RSI and slow stochastic are below their 50% levels. MACD is just above its signal line, but deep inside negative territory. ROC has resumed its fall inside the negative zone. The index may fall to much lower levels.

Singapore Straits Times Index Chart

Singapore’s Straits Times index is trying to form a ‘rounding bottom’ reversal pattern, which is clearly visible in the slow stochastic and the MACD signal line. The index is facing resistance from the 20 day EMA, and needs to move above all three EMAs to return to bull territory.

Technical indicators are beginning to look bullish. Slow stochastic and RSI have climbed towards their 50% levels. MACD is negative, but rising above its signal line. ROC is straddling the ‘0’ line. All four technical indicators touched higher bottoms as the index dropped to a lower bottom of 2712 on Jun 6 ‘12. Positive divergences in all four indicators may help to push the index upwards.

A small entry can be made, with a stop-loss at 2712.

Malaysia KLCI Index Chart

Malaysia’s KLCI index successfully withstood a bear attack by bouncing up from its 200 day EMA. But after crossing above its 20 day and 50 day EMAs on a volume spurt, the upward momentum dissipated. The index has been moving sideways in a narrow range between 1552 and 1582.

Only a convincing move above the 1610 level, backed by good volume support, can restore the earlier bullishness. The technical indicators are beginning to weaken, though they remain bullish. Slow stochastic has slipped down from its overbought zone. MACD is above its signal line and barely positive. ROC is dropping towards the ‘0’ line. RSI is sliding towards its 50% level.

Some more consolidation is expected before the KLCI can climb above 1610.

Bottomline? Asian index charts have reacted differently to the recent bear attacks. Jakarta Composite seems ready to fall deeper into a bear market. Stay away for now. Singapore’s Straits Times is technically in a bear market, but forming a bullish reversal pattern. A small entry can be made. Malaysia’s KLCI index is in a bull market, but stuck in a broad range between 1520 and 1610 for the past 5 months. Hold.

To cut, or not to cut, that is the question: for the RBI Governor

“Whether 'tis nobler in the mind to suffer
The slings and arrows of (outraged industrialists and analysts),
Or to take arms against a (policy-paralysed government)
And by opposing end them…..” (with due apologies to William Shakespeare).

It wouldn’t be at all surprising if the RBI Governor is thinking like Hamlet prior to the policy announcement on Jun 18 ‘12. On the one hand, the abysmal IIP figure of 0.1% raised hopes of an interest rate cut among various stock market participants, who went on a buying spree. On the other, rising inflation poured cold water on rate cut expectations, and the stock market tanked.

 

What is so great about an interest rate cut, and why are market participants getting swayed by opposing possibilities? There was a greater–than-expected 50 bps (0.5%) repo and reverse repo rate cut in April – what happened after that? The stock market dived in May! Even if there is a 25 bps or 50 bps rate cut in June, it is highly unlikely that the sluggish economic growth engine will suddenly spring back to full speed.

 

Rate cuts tend to have a lag effect on the economy. Only after several rate cuts can one expect the captains of industry to start investing again and revive stalled expansion projects. Also, rate cuts alone can’t stimulate the economy. The government has to play an enabling role by cutting wasteful expenditure on subsidies and populist programmes, and make it easier for entrepreneurs and businessmen to start and expand businesses by reducing red tape and corruption.

 

From one extreme of doling out coal blocks and mining rights to all and sundry after duly lining their own pockets, government mandarins have gone to the other extreme of not sanctioning anything because they are afraid of being put behind bars on graft charges. Where bold policy decisions are the order of the day, senior ministers and opposition members are turning themselves into a laughing stock by their idiotic bickering and posturing over who will become the next President of India.

 

The great Indian growth story is being stymied by self-serving, thick-skinned representatives of the people who think it is their birth-right to loot the country’s resources. And they have the gall to blame the RBI Governor because without growth there will be no new projects, and without new projects the politicians can’t make money!

 

The RBI Governor should stick to his guns and conscience (he seems to be the only one with a conscience) and not succumb to any pressure about cutting interest rates in June. In fact, if inflation continues to rise – which is a good possibility because of the delayed monsoon – he should raise rates.

 

Will that be bad for the stock markets? Sure it will. The market seems to have factored in some sort of a cut – either in the interest rate or the CRR. Leaving rates unchanged may be taken as a negative.

 

Investors should take the motto of the Boy Scouts to heart: Be prepared. A drop below 4700 on the Nifty would provide a good buying opportunity. A spurt to 5200 can be used to sell.

Who is paying the price for oil subsidies?

It costs about the same to produce a litre of petrol and a litre of diesel. In developed countries, the price of petrol and diesel at a filling pump is almost the same. Why is it different in India?

The logic goes like this. Diesel is used by locomotive engines of goods trains. Diesel is also used by trucks for transporting goods. By keeping the price of diesel artificially low, transportation cost of goods are kept low – otherwise inflation would be even higher. Prices of kerosene and LPG cooking gas are also kept artificially low because these are fuels of everyday use by the ‘aam aadmi’ (that means: vote bank).

Government-owned oil marketing companies are dependent on government subsidies to survive. But the consequence of subsidy payments is a burgeoning fiscal deficit. Ultimately, it is you and I who will pay the price through direct and indirect taxes. In this month’s guest post, Nishit exposes the government’s faulty oil subsidy policy and suggests an alternative to level the playing field for middle-class vehicle owners.

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Today, I write about Petrol and Diesel subsidies and what a rip-off the so-called subsidies are. For Petrol, the share of the taxes is about 46% and for Diesel it is 32%. This means for the Rs 76 one pays at the pump, Rs 35 are taxes and Rs 41 is the actual cost of Petrol. There are multiple levels at which the rip-off happens.

1. Every time petrol prices are hiked by the government, the taxes are also hiked as they are a percentage of the total petrol price. If the government was so concerned about easing the problems of the common man then the tax should be a fixed amount so that the hikes would not include hikes in the taxes.
2. The Oil companies had claimed an under-recovery of Rs 8 on every litre of petrol sold in March 2012 when crude oil prices were ruling at 125 dollars to a barrel. Since, then crude oil prices have fallen by 21% and the rupee has weakened by about 10%; which means a net drop of about 11%. If the prices in March were Rs 70 + Rs 8 under-recovery then a fall of 11% means the price of petrol should be back to Rs 70 right now whereas we are paying Rs 76.
3. The Government claims that the fiscal deficit is increasing due to subsidy on petroleum products but the tax collection has always been more than the petroleum subsidies. For example in 2008-2009, the government collected Rs 1.45 lakh Crores as taxes and spent about Rs 1.05 lakh Crores as subsidies.
4. This has been the story for other years as well.
5. Diesel car sales have gone up by 15% and Petrol car sales have gone down by 11%. The government claims that only 15% of diesel is consumed by Diesel cars and SUVs. Even if it is only 15%, why should people who can afford cars worth Rs 5 lakhs and much more get subsidised fuel which the Petrol vehicle owners are not getting?
6. LPG is being sold at Rs 400 less than its market price. In this case also, there is no limit on the number of cylinders a consumer can buy. A person who needs subsidies will definitely not consume more than 4-6 cylinders per year. A simple way to plug this anomaly is to ensure that the gas cylinders are booked only through the Oil companies and the dealers are used only for delivery purposes to avoid misuse and end the subsidy above 4-6 cylinders a year.
7. Since it is almost impossible to enforce dual pricing of Diesel for trucks and cars, a more rational argument would be to jack up the excise duty on Diesel cars and use the same amount to subsidize petrol. This will have a twofold benefit. More people will switch to Petrol based cars and the demand for the more subsidized Diesel will fall. Currently, the break-even for buying a Diesel car is roughly 40000 Kms; by increasing the excise duty and pushing the break-even point to 60000 Kms, demand will peter out. This is because most folks replace cars every 5 years and do not drive more than 12000 Kms every year.

Thus, the issue of Petroleum subsidies is at multiple levels and the government refuses to take even simple steps to resolve it. Politically toughest is the equalisation of taxes on Petrol and Diesel. The simplest and the politically easiest would be imposing additional excise duty on Diesel cars. People buying diesel cars do not form a significant percentage of the voting population. However, small cars and two-wheelers mostly run on petrol, and their owners form a larger percentage of the voting population. Their interests are being sacrificed at the altar of political expediency.

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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.)

Gold and Silver chart patterns: bear market rallies face resistance

Gold Chart Pattern

A sharp bounce on a high volume spike – probably on expectation of QE3 - took gold’s price above its falling 20 day and 50 day EMAs and the 1630 level, but fell short of the falling 200 day EMA. A couple of days of consolidation was followed by an intra-day breach of the 200 day EMA and the 1640 level but formation of a lower top.

A drop below all three EMAs and the 1600 level, accompanied by high volumes, seemed to stall a typical sharp and swift bear market rally. Note the positive divergences in RSI and slow stochastic, which touched higher tops in Jun ‘12. That may lead to a continuation of the rally. However, volumes have started sliding and technical indicators are looking weak.

RSI is struggling to cross its 50% level. MACD is negative and above its signal line, but its upward momentum has slowed down. Slow stochastic has dropped from its overbought zone and quickly descending towards its 50% level.

Once the ‘death cross’ of the 50 day EMA below the 200 day EMA technically confirms a bear market, it may be prudent to sell on rallies or stay away. Gold’s price appears to be consolidating within a large ‘descending triangle’ pattern on the 1 year chart (not shown). A break down below 1520, which is the lower edge of the triangle, can drop gold’s price to 1200. There are no certainties in technical analysis, but one should be aware of the possibilities. If you are a die-hard gold bull, maintain a strict stop-loss at 1520.

Silver Chart Pattern

The bulls tried to engineer a rally on silver’s price chart, but failed to climb past the falling 50 day EMA. Positive divergences in all three technical indicators, which touched higher tops in Jun ‘12 as silver’s price touched a lower top, may help to extend the rally. But not for long.

Technical indicators are beginning to look bearish. RSI is below its 50% level, after a brief foray into bullish zone. MACD is negative and rising above its signal line, but its upward momentum is slowing down. Slow stochastic turned back before reaching its overbought zone, and is about to drop below its 50% level.

A bearish ‘descending triangle’ seems to be forming on silver’s 1 year chart (not shown). A strict stop-loss should be maintained by silver bulls at 26, which is the lower edge of the triangle.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jun 08, ‘12

S&P 500 Index Chart

In last week’s analysis of the S&P 500 index chart pattern, positive divergences in RSI and slow stochastic (which touched higher bottoms as the index dropped lower) and the support zone between 1250-1300 were expected to provide some consolidation or an upward bounce.

A strong bounce took the index above its 200 day EMA and 20 day EMA, but is facing resistance from the 50 day EMA. The good news for the bulls is that the 50 day EMA is 20% above the 200 day EMA; only when the 50 day EMA falls below the 200 day EMA can a bear market be confirmed technically. The bad news is that volumes were highest on the only down day during the week.

Technical indicators are looking bullish. RSI is just above its 50% level. MACD is negative, but rising above its signal line. Slow stochastic has entered its overbought zone. There is still some steam left in the up move, but without volume support the rally is likely to stall.

FTSE 100 Index Chart

Positive divergences in all three technical indicators, which touched higher bottoms while the FTSE 100 index dropped lower, propelled the index above its 20 day EMA. The falling 50 day EMA is likely to resist a further up move.

Technical indicators are turning bullish. RSI is just below the 50% level. MACD is negative, but rising above its signal line. Slow stochastic has risen sharply above its 50% level and is ready to enter the overbought zone. The FTSE 100 is in a bear market, so such counter-trend rallies are good opportunities for selling.

Bottomline? The S&P 500 index is technically still in a bull market and is trying to stay above the 200 day EMA. Another drop to the support zone of 1250-1300 can’t be ruled out. Bears are in control over the FTSE 100 index. Remain cautious and preserve cash.

BSE Sensex and NSE Nifty 50 index chart patterns – Jun 08, 2012

BSE Sensex index chart

It was FII buying that had triggered the rally on the BSE Sensex index chart during Dec ‘11 and Jan ‘12. At that time, some questions were raised about the identity of such FIIs. Similar questions are cropping up once again now that another FII-fuelled rally seems to be under way. Why are the questions being raised now?

From different interviews of prominent FII representatives it is quite apparent that money is not flowing into India-specific funds. In fact, money is flowing out. FIIs appear fed up with the lack of progress in policy making and dithering on taking tough measures to curtail deficit. So, who is buying, and should small investors care?

The younger of the Ambani siblings had to pay a hefty fine to SEBI for round-tripping of funds disguised as Mauritius-based FII money to invest in his own company shares. Several politicians (some behind bars) have used similar strategies in an effort to launder ill-gotten wealth. Such inflows are not long-term funds and are likely to flow out quickly. Small investors should think twice about jumping on to the rally, and be very careful about the stocks they choose.

Technically, the weekly closing chart of the Sensex has pulled back to the blue down trend line. Such pullbacks provide selling opportunities. Any further up move needs to overcome resistances from the 20 week and 50 week EMAs. Only a close above 18289, the closing high touched on the week ending Feb 17 ‘12, will form a bullish pattern of higher bottoms and higher tops.

The technical indicators have corrected oversold conditions, but are still bearish. MACD is below its signal line in negative territory. ROC has crossed above its 10 week MA, but remains negative. RSI and slow stochastic have emerged from their oversold zones. Note that two of the technical indicators – RSI and slow stochastic – touched lower bottoms as the Sensex touched a higher bottom. The negative divergences may stifle the rally.

NSE Nifty 50 index chart

There is a lot of talk that RBI may cut repo and reverse repo rates by 25 bps. But it is not a given, and will depend on the IIP and inflation numbers next week. More likely is a cut in the CRR rate.

The expectation of some form of QE3 in the US was belied, though it is not completely off the table. There are hopes in some quarters that Greek elections won’t end in a tragedy; even if Greek exits the Eurozone, it would be an orderly exit and not a sudden one. Investors have little choice but to wait for events to unfold.

On the daily closing chart of the Nifty, things are beginning to look bullish. The index has closed above the blue down trend line, the 20 day and 50 day EMAs. It needs to close above the 200 day EMA backed by strong volumes. But volumes are dropping off as the index is rising – putting a question mark on the sustainability of the rally.

Technical indicators are looking bullish. MACD is rising above its signal line, but remains in negative territory. ROC is positive and above its 10 day MA, but has stopped rising. RSI is above its 50% level, but its upward momentum is slowing down. Slow stochastic has entered its overbought zone.

What does it mean technically: the Nifty daily indicators are looking bullish but the Sensex weekly indicators are bearish? The famous RARE bull explained it in a TV interview yesterday: “I’m short-term bullish and long-term bullish. Medium-term, I don’t know.”

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are in the midst of another FII-fuelled rally. Unless the indices manage to move above their Feb ‘12 tops, a trend reversal from bear to bull market won’t get confirmed. Those who are not convinced that the bears are still dominating should take a look at the charts of Defty and Dollex 30 (Sensex measured in US Dollars). Carry on with regular investments, but avoid impulsive bets on ‘cheap’ stocks.

Stock Chart Pattern - Bharat Bijlee (An Update)

Like most companies in the capital goods sector, Bharat Bijlee, a small-cap electrical transformer and motors manufacturer, has been facing turbulent times. It is a credit to the financial prudence of its management that the balance sheet hasn’t deteriorated too much. However, cracks are clearly visible.

Top line remained almost flat for year ending Mar ‘12 but profit at the operating and net level fell by 38% and 22% respectively, thanks mainly to a large increase in manufacturing costs. Cash flow from operations turned negative for the first time in 5 years. Consequently, debt/equity ratio almost doubled – though it remains well within manageable limits.

The bears have pulverized the stock, as will be evident from the one year daily bar chart pattern of Bharat Bijlee:

In the previous update more than a year back, a “hold with a strict stop-loss of 880” was recommended. The stock broke down decisively below 880 in Jul ‘11 and continued its downward trajectory till it found some support at 695 in Aug ‘11.

For the next two months, the stock price tried to cling on to the 695 level but failed. The downward journey resumed in Nov ‘11 and the stock finally formed a small ‘double-bottom’ reversal pattern at 511 in Dec ‘11. Such small reversal patterns deep within a bear market usually don’t reverse the trend.

The rally in the stock during Jan and Feb ‘12 coincided with the rally in the broader market, and the stock price managed to climb above all three EMAs to an intra-day high of 767 on Feb 17 ‘12 – an impressive 50% gain from its Dec ‘11 low. 

But the stock formed a ‘reversal day’ pattern, which marked an intermediate top. Note that three of the four technical indicators touched lower tops as the stock rose higher (marked by blue arrows). Negative divergences in three out of the four indicators warned of an end to the rally.

A huge volume surge on Apr 18 ‘12 couldn’t propel the stock price above the Feb 17 ‘12 high of 767, and the stock fell back in a bear market. At today’s closing price of 600.55, the stock is still 85% below its Jan ‘08 peak of 3950.

Is it a good idea to enter the stock now? Two of the technical indicators – RSI and ROC – are showing positive divergences by touching higher bottoms as the stock price dropped lower. But that isn’t clinching evidence of a turnaround. Though the ROC has crossed above its 10 day MA into positive territory, MACD is negative and both RSI and slow stochastic are still below their 50% levels.

The stock price needs to move above 767 (Feb ‘12 top) to form a bullish pattern of higher tops and higher bottoms. Even if it achieves that, it may have a tough time crossing the 880 level.

Bottomline? The stock chart pattern of Bharat Bijlee is in a bear market, and there is a possibility that the Dec ‘11 low of 511 will be tested and broken. Wait for a clear sign of trend reversal and check Q1 results next month before taking a decision to enter. The main problem with small-cap stocks is that they trade in small volumes which make entry/exit difficult. However, a revival in the power sector and lower commodity prices can change the fortunes of the company dramatically. A good stock to keep on your ‘watch list’.

What to do when the stock market is bearish and volatile?

When stock markets are bearish and volatile, small investors feel anxious and unsure of what to do. Activity, innovation and endeavour are useful in business and employment – but they detract from wealth building. One has to be passive, dispassionate and patient to be able to make correct investment decisions when there is chaos and bad news flying around.

Having a financial plan with clear goals, and an asset allocation plan to meet those goals, helps investors to remain calm and resolute under adverse conditions. A proper asset allocation plan should include an equity component, a fixed income/debt component, a small allocation to gold and some cash. If you don’t have a plan yet, the time to start is now.

The equity component can comprise equity funds, balanced funds, index funds, sectoral funds, company stocks or any combination of these – depending on an investors risk tolerance and investing skills. The debt component can comprise PPF, Post Office MIS and other small savings schemes, bank fixed deposits, debt funds or any combination of these – depending on an investor’s risk tolerance and tax bracket.

The importance of the tax bracket should be remembered in choosing the constituents of the debt component. PPF (Public Provident Fund) scheme is available at post offices and banks. It allows an investment of a minimum of Rs 500 upto a maximum of Rs 1 Lakh per year. The entire investment is tax free under Section 80(C) of the Income Tax act. The dividends (around 8.5% per annum) are also tax free. For small investors, it makes sense to utilise the PPF avenue to the limit. The holding period is 15 years – which allows compound interest to work its miracle. Part withdrawals are permitted after 5 years. Investment can be extended beyond 15 years.

Interest on Post Office small savings schemes (7-8% per annum) and bank fixed deposits (8-9% per annum) are taxable. The tax will depend on an individual’s tax bracket. Rs 9000 earned on a Rs 1 Lakh bank fixed deposit will entail a tax of Rs 900/1800/2700 for tax bracket of 10/20/30%. So, the effective return will be 8.1/7.2/6.3% after tax instead of 9%.

For those in the highest tax bracket, and even for others, investment in debt funds – particularly gilt funds – is advisable. Gilt funds mainly invest in government securities, so there is negligible chance of shrinkage in the principle amount invested. Dividends are not taxable in the hands of investors, but the funds pay a dividend tax. Tax is payable at the time of withdrawal and is treated as short-term (for holdings of 1 year or less) or long-term (for holdings beyond 1 year) capital gains tax. Indexation is allowed for long-term capital gains, which can be a great advantage for long period of holding.

Another benefit of a gilt fund over a Post Office/bank fixed deposit is that you can add to or withdraw from your holdings at any time. A couple of gilt funds – IDFC GSF PF regular and Kotak Gilt Investment regular, which gave 12.5% and 14.2% returns over the past 12 months – beat fixed deposit returns comfortably. They may not do so in future, but the Kotak fund has given 10.35% returns since its launch in Dec 1998.

The importance of an asset allocation plan can’t be emphasised more. The most common query received from investors is: “Is this a good time to start buying?” The answer should be provided by the individual investor’s asset allocation plan – not by me!

A mid-week technical update: Nifty and Defty charts

Nifty chart

A 130 points rise in a single day on the Nifty chart was backed by a volume spurt. Are happy days here again? Not yet, as the resistance from the blue down trend line hasn’t been convincingly breached. There is likely to be overhead resistance from the falling 50 day and 200 day EMAs.

The technical indicators are turning bullish. MACD is rising above its signal line, but remains in negative territory. ROC has climbed sharply above its 10 day MA into positive territory, but such sharp rises are rarely sustained. RSI and slow stochastic have moved above their 50% levels.

Only a move above 5630 – the top touched in Feb ‘12 – will form a bullish pattern of higher bottoms and higher tops. Till then, such a rally should be treated as a bear market rally. That means selling the rise. The Defty chart below will show that the bears are still dominant.

Defty chart

For the uninitiated, the Defty index has the same constituents as the Nifty but is measured in US Dollars. FIIs have the money-power to control index movements in the Indian stock market, and Defty is the more relevant chart from the point of view of FIIs.

Note that the Defty is deep in a bear market – well below its 200 day EMA and the blue down trend line. It is trying to find a bottom at the 2960 level (low touched on Dec 20 ‘11 – marked by the grey vertical line on the left). Can it be a ‘double-bottom’ reversal pattern?

The technical indicators are suggesting otherwise. Though all four indicators are beginning to look bullish, two of them (MACD, RSI) have touched lower bottoms and one (slow stochastic) has touched a flat bottom while the Defty touched a slightly higher bottom at 2969 (low touched on May 23 ‘12 – marked by the grey vertical line on the right). Negative divergences in three of the four indicators is a warning to bulls not to raise their hopes too high.

There is talk in the market about a likely rate cut by the RBI and a possible QE3 in the USA. But it is the situation in Europe that is hanging like a proverbial Damocles’ sword over global stock markets. Till the talk becomes reality, treat the current rally as a relief rally. 

Crude oil chart pattern: WTI and Brent

WTI Crude chart

WTI Crude oil price dropped like a stone during May ‘12, accompanied by high volume spikes on down days. A probable sign of smart money getting out. The ‘death cross’ of the 50 day EMA below the 200 day EMA has confirmed a bear market. A drop below the Aug ‘11 low of 76 will form a bearish pattern of lower tops and lower bottoms.

All three technical indicators are looking bearish and oversold. MACD is falling below its signal line in negative territory. Both RSI and slow stochastic are deep inside their oversold zones. WTI Crude price has fallen too far below its 20 day and 200 day EMAs.

A technical bounce can be expected, and appears to have started already. Such a bounce will correct oversold conditions, and can be used as a selling opportunity. As long as oil’s price doesn’t fall below 76, bulls may have some hope left.

Brent Crude chart

In the previous update on Brent Crude’s price chart pattern, the following comments were made: “All eyes should be glued to the 98 level – the previous low touched in Aug ‘11 and Oct ‘11. If crude oil’s price falls below 98, it will technically confirm a double-top reversal pattern, which is very bearish and a trend changer. The downward target of the double-top is 68 – the low touched back in May ‘10.”

Brent Crude’s price touched a new intra-day low of 96, where it found support from the 200 week EMA (not shown in chart above) and bounced up a bit to close above the 98 level. Oversold technical indicators and a drop far below the 20 day and 200 day EMAs may cause a stronger upward bounce. Bears are likely to use the opportunity to sell.

‘Death cross’ of the 50 day EMA below the 200 day EMA has confirmed a bear market. A drop below 96 may cause a fall to the support zone between 80-90. Looks like ‘game over’ for the bulls.