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Wednesday, February 29, 2012

Is the Q3 GDP growth rate of 6.1% a good or a bad number?

The short answer to the question: It depends on your viewpoint. Such a GDP growth number can not be seen in isolation, but in comparison with what has happened before and what is happening elsewhere.

Here are a few reasons why the number is good, and a few more reasons why the number is bad. The idea is not to confuse readers, but to provoke thinking and debate.

Reasons why Q3 GDP growth of 6.1% is good

If you look at the growth figures in some of the developed economies – particularly those in the Eurozone where even a 2% growth figure is considered gooda 6.1% growth figure should be celebrated with fireworks and champagne. The stark difference in growth figures is one of the reasons FIIs are investing big sums in our stock market.

High growth usually leads to inflation and therefore, high prices for goods and services. A more moderate growth figure has helped to tame inflation to a certain extent.

The Q4 GDP growth figure is unlikely to be much higher, but things are likely to improve from here on as there is usually a spurt in spending by the government sector to utilise left over funds from the previous year’s budget. In other words, the economic cycle may be bottoming out – which it usually does a few months after the stock market bottoms out.

Reasons why Q3 GDP growth of 6.1% is bad

This was the lowest growth figure in nearly 3 years, and almost 35% lower than the heady figure of 9.5% growth seen 5 years back.

There is evidence of economic slowdown everywhere – particularly in the manufacturing sector. Even services sector is slowing down. If growth doesn’t pick up soon, the FIIs may just pull out their money and invest it elsewhere.

Government’s fiscal deficit target for the year has already been exceeded in the first 10 months. That, coupled with the rise in oil prices, means that inflation may rear its ugly head again. The RBI may feel constrained to leave interest rates at the current high levels, or reduce it only marginally. That in turn will lead to slow growth in the next financial year.

Tuesday, February 28, 2012

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

The data flowing out of the US economic indicators have been showing definite signs of recovery from the world-may-come-to-an-end kind of scenario three years ago. Two large doses of Quantitative Easing have prevented a collapse of the financial system. The stock market is soaring and corporate America is flush with cash. Unemployment situation is improving and even the moribund housing market is beginning to show signs of life.

Is this the proverbial light at the end of the tunnel, or is it the headlight of an onrushing train? In this month’s guest post, KKP expresses his apprehensions about the strength and durability of the US economic recovery. He also presents a positive outlook from a recent consumer survey report.

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Beautiful Orange Sky Before Darkness

The sky looks awesome right now since it is 6 pm and we can see the sun setting on the horizon. It is a perfect time when the glare of the sun does not bother our eyes, the heat has reduced to a more comfortable level, and it is all-in-all pleasant to everyone enjoying this moment. The key is to know what happens in a few minutes to an hour. It will be dark and the lights need to turn on. Oh no, the electricity man came earlier and cut off our electricity? Is that possible? Turning to my wife, I ask if we paid the electric bill on time? Huh!

Well, it seems that we are facing such an evening right now in the global economy. The bearish blog writers have portrayed well that ‘patch-work’ solutions of the current debt-related issues are only going to take us so far. One fine day the electricity guy is not going to take our cheques (or bonds) and the darkness is not going to get illuminated with a 100 or 200 watt CFL (tube light) bulb.

Many global economies are running on borrowed time, with times of pleasure and growth in between based on government maneuvering for political reasons. Is the booster shot that Greece just got something that will last, or will it need a 2nd, 3rd, and 4th shots before the antibiotics kick-in? And will the patient be alive when those 3rd and 4th shots are given? Are the other countries after Greece in the PIIGS acronym next to ask for rescue packages? Of course, they are almost ready now. We already have a next acronym after PIIGS and it is CAASH. This is the Canadian, Australian, Hong Kong and other economies that also have their Debt-to-GDP ratios going out of whack. US tax collections are lower than ever, and annual deficits are in the same range as during 1929-1934 (% of GDP). Are we so information overloaded that we cannot see the turmoil in the air, or are we too busy with our daily chores, ‘synch’ing our mobile devices, and playing Angry-Birds on our Tablets/iPhones/Androids?

Take a look at the previous crisis and what happened to Gold. Look at what has happened to Gold even without a ‘real crisis’. I say that the crisis has not happened since we keep averting the ‘root cause’ event with patch-work. In the meantime, we have high tides and low tides in the market and have the emotional roll-coaster associated with it (being left out, or what did I do!). So, let’s watch what is happening in the global markets and react accordingly.

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If you want to see a positive viewpoint of the most current survey that I participate in with ChangeWave, here is partial report. Of course, I was not very optimistic in my input to the survey. We are approx 5000 to 10000 people in this closed group of professionals that provide our input based on our consumer spending or enterprise spending surveys. It will show the minor waves of positive and negativity, and of course, it is showing the positive/optimistic living that we are all experiencing right now. I am all for good living, and benefitting from positive waves, but will it last?

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February U.S. Consumer Spending Report

Spending Accelerates for February as Consumer Confidence and Expectations Improve

by Jean Crumrine and Paul Carton

Overview: In a clear sign of accelerating momentum, U.S. consumer spending has soared in February – the second major upswing of the past three months. Importantly, the February 1-13 ChangeWave survey shows overall spending at a nine month high, and confidence and expectations continuing to improve. ChangeWave Research is a service of 451 Research.

The survey of 2,501 U.S. consumers finds the biggest spending upticks are occurring in Travel/Vacation, Household Repairs and Improvements, Autos, and Restaurants.

Moreover after last month’s post-holiday declines, our latest findings point to renewed momentum for several retailers, including Costco (COST), Target (TGT) and Walmart (WMT).

Consumer Spending Outlook: Three-in-ten U.S. respondents (30%) now say they'll spend more over the next 90 days than they did a year ago – up 6-pts since our previous ChangeWave survey in January.  Only 27% say they'll spend less, a 4-pt improvement from previously.

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Putting the Findings in Context:  As the following chart shows, the net 10-pt jump in February is the second major uptick of the past three months – and the overall reading is higher than any of the previous 9 months.

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Consumer Expectations and Confidence: When we asked consumers about their impressions of the economy, we found confidence and expectations up again to their highest levels of the past year.

Consumer Expectations:  One-in-three consumers (33%) now believe the overall direction of the economy will improve over the next 90 days, while only 21% think it will worsen.  This represents a net 7-pt improvement since January and a striking 66-pt turnaround since the horrendous lows of six months ago.

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Stock Market Confidence:  In a similar positive, 39% say that they’re More Confident in the U.S. stock market than they were 90 days ago, while 19% say they’re Less Confident – an 8-pt improvement since the previous month.

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Respondents were asked about their investing plans going forward, and reported their money inflow into U.S. Stocks (+13; up 6-pts) is accelerating. And although Non-U.S. Stocks (-1; up 6-pts) are still registering a money outflow, the rate is subsiding – a sign that the European Union debt crisis hasn’t immobilized consumer investing.

Bottom Line: The February ChangeWave survey results show consumer spending soaring, and bring into sharp focus the improved spending environment we’ve been tracking in our monthly surveys since November of last year.

Importantly, U.S. consumer confidence and expectations are also improving for the 6th consecutive month. As for the biggest outperformers in February – it’s Travel/Vacation, Autos, Household Repairs/Improvements, and Restaurants.

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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.

Monday, February 27, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Feb 24, ‘12

S&P 500 Index Chart

SnP500_Feb2412

The chart pattern of the S&P 500 index reminded me of an old Cole Porter song: “So near and yet so far.” The index touched an intra-day high of 1369 on Fri. Feb 24 ‘12 and closed marginally higher on a weekly basis, but couldn’t quite cross above the May ‘11 top of 1371. Will the index touch a new 52 week high this week?

The possibility is high. The index is trading above all three of its rising EMAs, and is in a bull market. But volumes are decreasing and the technical indicators continue to show negative divergences, by failing to reach new highs. The index may pause to catch its breath after rising almost non-stop for two months.

Despite large doses of QE1, QE2 and an indirect QE3, growth in the US economy is still tepid. Initial jobless claims were almost flat at 351,000. New hiring isn’t picking up. Inventory of existing homes reduced as existing home sales rose. As per AAII’s Sentiment Survey, bullish sentiment rose by 1% to 43.7% (above its historical average of 39%) and bearish sentiment rose by 0.9% to 27.5% (below its historical average of 30%). The fly in the ointment was ECRI’s reaffirmation of a recession by mid-2012.

FTSE 100 Index Chart

FTSE_Feb2412

The FTSE 100 index chart closed with a higher weekly gain, but the bulls seem to be getting tired as the index nears the 6000 level. All three EMAs are rising with the index trading above them, which indicates a bull market.

The technical indicators are not bearish, but showing some weakness. The slow stochastic is inside its overbought zone, but sliding down. The MACD is positive and touching its signal line, but drifting downwards. The RSI has fallen sharply after touching the edge of its overbought zone, but remains above the 50% level. The ROC dropped to the ‘0’ line, but has bounced up.

The UK economy is teetering at the brink of another recession. The GDP contracted by 0.2% during the last three months of 2011, in spite of a 0.5% increase in household spending and 1% growth in government spending. The full year GDP was revised down to 0.8%.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are in bull markets – even though the GDP growths in the US and UK economies are negligible. Are the stock markets telling us that things will improve later in the year – or is it just that markets are being propelled by easy availability of low-cost money? Who knows, and why bother? Just ride the up trends by maintaining a stop-loss at the levels of the respective 20 day EMAs. Use dips to add.

Sunday, February 26, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 24 ‘12

The seven weeks long rallies on the charts of the BSE Sensex and NSE Nifty 50 indices finally came to a halt last week. There was no dearth of FII buying that had fuelled the rally. Selling by the DIIs overwhelmed the FII buying during the last couple of days. Unless the FIIs also start to sell, the correction should be a shallow one.

BSE Sensex index chart

SENSEX_FEB2412

On the weekly bar chart, the Sensex is trading above its rising 50 week EMA. The 20 week EMA is rising below the 50 week EMA, and an impending cross above the 50 week EMA may seal the fate of the bears. On the downside, the Sensex is likely to receive strong support from the 17000 – 17300 zone (where the 20 week EMA, 50 week EMA and the blue down trend line are congregating). A convincing drop below the down trend line may end the nascent bull market – but as of now, the probability of that happening is low.

The technical indicators are still quite bullish. The MACD is climbing above its signal line in positive territory. But the histogram has dipped a bit. The ROC is positive and rising well above its 10 week MA. The RSI is creeping up towards its overbought zone. The slow stochastic is inside its overbought zone, but showing signs of turning down.

The election results in UP and the central budget after that will be the next triggers for the Sensex to move up or down. Till then, expect some consolidation. Hold on with a stop-loss at 17300.

NSE Nifty 50 index chart

Nifty_Feb2412

There are a couple of technical points to note on the Nifty 50 daily bar chart pattern. First, the small gap on the chart (between 5420 and 5460) was closed on Fri. Feb 24 ‘12. That has probably put paid to another sharp up move for the time being. Second, the ‘golden cross’ (highlighted by the light-blue oval – just below the blue down trend line) of the 50 day EMA above the 200 day EMA is about to confirm the return to a bull market.

The technical indicators are beginning to look bearish. The MACD is positive, but has crossed below its signal line. The ROC has dropped well below its 10 day MA and is about to enter the negative zone. Both the RSI and the slow stochastic have fallen sharply from their overbought zones and seem ready to slip below their 50% levels.

The correction may continue a bit longer and drop the index below its 20 day EMA. The confluence of the 50 day EMA, 200 day EMA and the blue down trend line should provide strong support near the 5200 level. In case the index falls below 5200, the bull rally may take some time to resume.

Rising oil prices will extract a heavy toll on India’s surging balance of payment problem. If the RBI maintains interest rates at current levels, there will be no fundamental reason for a runaway bull market. However, the FIIs are aware that their buying and selling move the Indian market. So remain calm and follow sound investing principles – like remaining true to your asset allocation plan and picking fundamentally strong stocks that do not use too much debt leverage.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices appear to be resting a little after a hectic rise into the first stage of new bull markets. Stay invested with stop-losses at 17300 (Sensex) and 5200 (Nifty). Any bounce up from the blue down trend lines will be buying opportunities. Drops below the down trend lines may stall the nascent bull markets. Be alert and nimble. No need to be gung-ho bullish or bearish.

Friday, February 24, 2012

Stock Index Chart Patterns – Hang Seng, Taiwan TSEC, Korea KOSPI – Feb 24, ‘12

Chart patterns of the Asian indices are in various stages of recovery from their 2011 lows. Technically, only the Korea KOSPI chart has re-entered a bull market. The Hang Seng chart is about to join the Korean index in bull territory. The Taiwan TSEC index is still struggling to get out of a bear hug.

Hang Seng index chart

HangSeng_Feb2412

The Hang Seng index has climbed almost 35% from its Oct ‘11 low of 16170, and closed the larger of the two downward gaps formed on the chart in Aug ‘11. It has sailed past its 200 day EMA and is correcting a bit after almost reaching the 22000 level. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a return to a bull market. Note the bullish pattern of higher tops and higher bottoms from the Oct ‘11 low.

Negative divergences are visible in all four technical indicators – three of which touched lower tops as the index rose higher, while the MACD remained flat. The ongoing correction may continue a bit longer. The dip can be used to add selectively.

Note the head-and-shoulder patterns that formed on the ROC, RSI and slow stochastic during Oct-Nov ‘11 even though such a pattern isn’t visible on the Hang Seng chart. The subsequent correction over the next two months turned out to be a consolidation within a symmetrical triangle.

The upward break out from the triangle in early Jan ‘12 was accompanied by increasing volumes, which validated the break out. However, volumes have been sliding ever since the index crossed above its 200 day EMA – raising questions about the sustainability of the rally.

Taiwan TSEC index chart

TSEC_Feb2412

The Taiwan TSEC index has risen 21% from its Dec ‘11 low of 6609 and past its 200 day EMA on strong volumes, but is facing resistance from the lower end of the large gap formed on the chart in Aug ‘11. The 20 day EMA has crossed above the 200 day EMA, but the 50 day EMA is still a couple of hundred points below the long-term moving average.

The gap on the chart needs to be closed before the index can re-enter a bull market. The technical indicators are suggesting that may not happen in the near term. The slow stochastic is inside its overbought zone, but has started falling. The MACD is positive and touching its signal line, but has also started falling. The ROC is positive but sliding towards the ‘0’ line. The RSI has dropped sharply from its overbought zone.

A correction to the rising 20 day EMA is likely.

Korea KOSPI index chart

Kospi_Feb2412

The Korea KOSPI index chart has gained almost 25% from its Sep ‘11 low of 1644 and is trading well above its 200 day EMA. The lower of the two gaps on the chart, formed in Aug ‘11, has been closed. The 50 day EMA has crossed above the 200 day EMA. The rally has gained strength during Feb ‘12 – as indicated by the rising volumes.

However, all is not well. All four technical indicators are showing negative divergences by sliding down while the index was rising. A correction has started, and may continue a bit more. The dip can be used to add.

Bottomline? The chart patterns of the Asian indices are in the process of recovering from their brief bear markets. The bulls still have some work left. The bears are unlikely to give in easily. The doomsday scenario painted by many - thanks to the sovereign debt problems in the Eurozone – may not turn out to be as bad as expected. Use the ongoing correction/consolidation to buy selectively.

Thursday, February 23, 2012

Is OnMobile Global for sale?

A few weeks back, there was a rumour in the market that TCS was looking at the possibility of buying OnMobile Global. That remained a rumour and did not become news. Those who may have bought the stock on the basis of the rumour may be waiting for an opportunity to sell.

That opportunity may not be far away. As per a recent article in Business India magazine, OnMobile Global is on the block and the latest suitor is Idea Cellular (of the Aditya Birla group). Apparently, Idea is ready to buy a 60% stake in the company at a price of Rs 100 – which is 33% higher than today’s closing price of Rs 74.40.

If this rumour turns out to be true, then investors may be able to pocket a neat gain if they enter at the current market price. Acquisition of a 60% stake – or even a lower stake - will trigger an open offer to existing shareholders.

In a post on the telecom sector a couple of months back, it was observed that the OnMobile stock was trying to form a bottom by consolidating within a rectangular band between 54 and 73. It was suggested that the stock could be a contrarian bet, but with a strict stop-loss at 52.

In Jan ‘12, the stock crossed above the rectangular consolidation zone, rose to an intra-day top of 84 on Feb 15 ‘12 and briefly breached its falling 200 day EMA. It has now pulled back to the top of the rectangular band. An upward bounce can be used to add/enter.

What if the rumour about Idea‘s stake buy remains a rumour – like it happened in the case of TCS? The company is fundamentally strong, and its overseas businesses, which contribute nearly half of its total revenues, are supposedly doing well. Domestic business is under pressure. Q3 results showed 12% top line growth but a 11% dip in the bottom line.

With smart phones becoming cheaper by the day and 3G service roll-outs in progress, OnMobile’s expertise in value-added software services should see growing demand. Even if the stake sale doesn’t go through, it may be worth holding on to the stock. A buy-back by the management, with a ceiling at Rs 85, is currently in progress.

Wednesday, February 22, 2012

Stock Index Chart Patterns - BSE Sectoral Indices, Feb 22, '12

A few days after the previous post two months back on the chart patterns of BSE’s Sectoral indices, the Sensex touched a bottom and embarked on a two months long rally. It may be a good time to check how the Sectoral indices have fared.

BSE Auto Index

BSE Auto Index

The BSE Auto index received good support from the lower end of the rectangular consolidation zone between 8000 and 9700 and rallied smartly to the upper end of the band earlier in Feb ‘12. After a brief consolidation, the index has broken out to test its Jan ‘11 top.

A pullback down to the top of the rectangular band can be expected. The ‘golden cross’ of the 50 day EMA above the 200 day EMA and more than a 20% rise from its recent bottom have confirmed a return to a bull market. Add on dips.

BSE Bankex

BSE BANKEX

The BSE Bankex has risen more than 40% from its Dec ‘11 low, but is yet to test its 2011 tops. The index has moved well past the support/resistance level of 11400 and its 200 day EMA, but the ‘golden cross’ is still awaited. That should not deter investors from accumulating.

BSE Capital Goods Index

BSE Capital Goods Index

The BSE Capital Goods index is struggling to break the stranglehold of the bears. It is trading below the support/resistance level of 12300 and is yet to convincingly move above its 200 day EMA. Accumulate selectively.

BSE Consumer Durables Index

BSE Consumer Durables Index

The BSE Consumer Durables index has risen almost 40% from its Dec ‘11 low and is on the verge of entering a bull market. Three ‘fan lines’ have been drawn through the Nov ‘10 top. Note that the second line drawn through the Apr ‘11 top became a support level in Jun, Aug and Nov ‘11. After getting breached in Dec ‘11, it briefly acted as a resistance level. Accumulate selectively.

BSE FMCG Index

BSE FMCG Index

One look at the BSE FMCG index should make it clear to all why it is my favourite sector. Despite a brief drop below the 200 day EMA in Feb ‘11, the index remained in a bull market and outperformed the Sensex. Nothing spectacular or exciting, just a steady climb along the second fan line. Add on dips.

BSE Healthcare Index

BSE Healthcare Index

After a 13 months long consolidation within a triangle pattern, the BSE Healthcare index has broken out upwards and returned to a bull market. It is currently consolidating within a small ‘falling wedge’ pattern from which it should break out upwards. Accumulate.

BSE IT Index

BSE IT Index

The BSE IT index has sailed above the blue down trend line and back into a bull market. The expected slow down in the Eurozone didn’t happen. Add on dips.

BSE Metal Index

BSE Metal Index

The BSE Metals index is still in a bear market, despite rising 37% from its Dec ‘11 low and a brief foray above the 200 day EMA. The blue down trend line continues to rule the chart. One can be a contrarian, but be very selective in choosing stocks.

BSE Oil & Gas Index

BSE Oil & Gas Index

The BSE Oil & Gas index is trying desperately to stay above the 200 day EMA, but has still not broken its down trend line. Interference by the government has almost ruined this sector. Avoid the oil PSUs. The gas PSUs are in better shape.

BSE Power Index

BSE Power Index

A spectacular rally in the beaten down BSE Power index has almost propelled it into a bull market. The index is trading above its 200 day EMA and has pulled back to the blue down trend line after climbing past it. The ‘golden cross’ is still awaited. Rumours of likely sops in the forthcoming budget has fuelled the rally. Unless coal supply is ensured, the power sector may continue to face headwinds. Avoid.

BSE Realty Index

BSE Realty Index

The BSE Realty index had been hammered to a pulp by the bears, but is trying to make a strong recovery. The chart shows an upward break out from a bullish inverse head-and-shoulders reversal pattern. The ‘head’ of the pattern is itself a mini inverse head-and-shoulders pattern. Note that the minimum upward target from the inverse head-and-shoulders pattern has been met.

After climbing above the 200 day EMA and the support-resistance level of 1900, the index is pulling back towards both. If you want to invest in the sector, you may want to read this recent post.

Tuesday, February 21, 2012

Gold and Silver chart patterns: an update

Gold Chart Pattern


Two weeks ago, gold's price had begun a correction after testing the Dec '11 top of 1770. So far, the 20 day EMA has provided good support to the price. The corrective pattern is looking like the 'handle' of a bullish 'cup and handle' pattern. That means a likely upward target above the 1900 level and a test of the all-time high touched in Sep '11.


The technical indicators are reflecting the effects of the correction. The RSI is sliding, but is above its 50% level. The MACD is positive, but has slipped below its signal line. The slow stochastic is looking bearish by falling below its 50% level, but is trying to turn around. Gold's price is trading above all three EMAs - the sign of a bull market.


Add, with a stop-loss at 1650. Conservative investors can wait for a convincing move above 1770 to enter.


Silver Chart Pattern


Silver's chart pattern shows that despite spending three weeks above the 200 day EMA - which should have been a bullish sign - the 20 day EMA has failed to cross above the 200 day EMA. The formation of a bearish 'rounding top' pattern is another concern for the bulls.


The technical indicators are beginning to look bearish. The RSI is steadily falling towards its 50% level. The MACD is barely positive, and has crossed below its signal line. The slow stochastic is below its 50% level, and still falling. Looks like silver's price is in danger of sliding back into a bear market.


Enter only on a convincing break above 36.

Monday, February 20, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Feb 17, ‘12

S&P 500 Index Chart

SnP500_Feb1712

The following observation was made in last week’s analysis of the S&P 500 index chart pattern: “A correction down to the rising 20 day EMA may be just the impetus that the bulls need to take the index past the May ‘11 top of 1371.” There was no correction – just a sideways consolidation. But the index rose to an intra-day top of 1363, within hand-shaking distance of the May ‘11 top of 1371. The bears have been all but vanquished.

Low volumes as the index rose to a new high, as well as negative divergences in all four technical indicators – which failed to reach new highs with the index - may be the trigger for a correction this week. That doesn’t mean one should short a bull market. All three EMAs are rising and the index is trading above them.

The technical indicators are looking bullish. Only the slow stochastic is looking overbought, but it can remain so for long periods. The MACD has slipped a bit, but is still positive and touching its signal line. The RSI is rising towards its overbought zone. The ROC is positive, but moving sideways.

The US economy continues to improve slowly. Initial weekly unemployment claims dropped to 348,000, its lowest level in almost 4 years. Retail sales increased by 0.4% in Jan. YoY changes in housing starts was positive for the 5th month in a row. Industrial production was marginally higher. All talk about recession is now off the table.

FTSE 100 Index Chart

FTSE_Feb1712

The FTSE 100 index traded sideways during the past week. Despite an intra-day drop to its rising 20 day EMA on Thu. Feb 16 ‘12, the index managed to close about 50 points higher on a weekly basis. All three EMAs are rising and the index is trading above them – indicating a bull market.

The technical indicators are bullish. The slow stochastic is inside its overbought zone. The MACD is positive, and touching its signal line. The RSI has climbed sharply towards its overbought zone. The ROC is positive, but moving down.

There was some good news on the economic front. CPI dropped to 3.6% in Jan. from 4.2% in Dec. Retail spending rose a surprising 0.9% in Jan. - raising hopes of avoiding a double-dip recession. However, Eurozone GDP declined by 0.3% in Q4 ‘11. Even Germany’s growth shrank and increased prospects of a recession that will dent UK’s exports to the EU.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are in bull markets. Stay invested with trailing stop-losses, and use dips to add.

Sunday, February 19, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 17 ‘12

Before getting into detailed analysis of the BSE Sensex and NSE Nifty 50 index chart patterns, I have a confession to make. One of the reasons technical analysis is looked down upon by many well-known investors is because it can not ‘predict’ what will happen next – so why even bother to look through charts?

Well, the fault doesn’t lie in the charts but with the analyst who is interpreting the charts. The sudden rally that started on the Sensex and Nifty charts from the Dec ‘11 lows appeared to come as a bolt from the blue and was attributed to a rush of FII buying. That is only part of the story. On a closer inspection of both short-term and long-term charts over the weekend, it became quite clear that both indices clearly formed symmetrical triangle reversal patterns for about 4 weeks.

Why did I miss these reversal patterns earlier? A combination of hubris and a bid to second-guess the market. Symmetrical triangles are usually continuation patterns. Since the indices were in bear markets, it was expected that the break out from the triangles will be downwards. But triangles are notorious for being unreliable and can break out in either direction. Not often do triangles turn out to be reversal patterns. Also, the reversal pattern lasted only 4 weeks – much shorter duration than expected after a year-long down trend.

BSE Sensex index chart

SENSEX_FEB1712

Is this still a bear market rally or the first phase of a new bull market? Two patterns on the 6 months daily bar chart of the Sensex suggests that the trend has indeed changed. First, the small rectangular ‘flag’ pattern that formed after the index convincingly crossed above its 200 day EMA. Such patterns usually form at the mid-point of a strong up (or down) move. That gives an upward target above the 20,000 level. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market.

The break out above the ‘flag’ happened with a ‘gap’ – which makes the break out a strong and valid one. So, the rally is likely to continue despite the overbought condition. The MACD is positive and above its signal line, but the histogram has reduced in height - correcting the overbought situation a little. The ROC is showing negative divergence by failing to reach a new high and slipping below its 10 day MA. Both the RSI and the slow stochastic are well inside their overbought zones, and can stay there a while longer.

If you are holding from lower levels, don’t sell off in a hurry. Maintain trailing stop-losses and ride the bull. If you have missed the rally, don’t jump in now. At some point, there should be a decent 5-10% correction. Enter then.

NSE Nifty 50 index chart

Nifty_Feb1712

The 4 weeks long consolidation within a symmetrical triangle on the 1 year weekly bar chart pattern of the Nifty was followed by an upward break out on increased volumes. The volumes kept rising even further as the index climbed past the 50 week EMA and the blue down trend line. Strong volume support validates upward break outs.

The technical indicators have turned bullish. The MACD is rising above its signal line and has entered the positive zone. The ROC is also positive and above its 10 week MA. The RSI has moved above its 50% level. The slow stochastic has entered its overbought zone. Any pullback to the blue down trend line – if it happens – will provide a buying opportunity. The ‘golden cross’ of the 20 week EMA above the 50 week EMA will be the final confirmation of a return to a bull market.

The fundamentals remain a matter of concern. Q3 results have shown continued downward pressure on margins of India Inc. The fiscal deficit will end up much higher than announced in the previous budget. Big ticket reforms are pending for a long time. Interest rates remain high.  A Greek sovereign default hasn’t been ruled out. War drums are being beaten - an Israeli attack on Iran can change bullish equations.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices have entered bull markets – thanks to strong buying support from the FIIs. It is unusual to see mid-cap and small-cap stocks making smart moves at the early stage of a bull market. Stock markets move on their own logic – there is no point in trying to second-guess the market. As Steve Winwood sang not too long ago: “Just roll with it, baby” – but remember to maintain trailing stop-losses.

Saturday, February 18, 2012

Chart Patterns of 10 Realty Sector stocks (an update)

If you have the money, buy realty, not realty sector company stocks. Why? Because most realty sector companies lack transparency, need lots of capital, have poor governance and a tendency to take buyers for a ride. Not to forget the nexus of local politicians and the underworld that usually leads to substandard quality of construction.

In the previous bull market, the sector was a favourite of big and small investors, and provided astounding returns to some. Those glory days are long gone, and unlikely to return. If you are stuck at higher levels, use the current rally to exit or switch.

In a previous post more than a year back, brief technicals of 10 realty sector stocks were presented. Not for suggesting investment, but to point out that even in a not-so-great sector, there are a few stocks that can swim against the tide. If you are enamoured by the real estate sector, pick those few exceptions.

Hubtown (Ackruti City)

Hubtown(Ackruti)_Feb2012

A change of name and branding hasn’t changed the fortunes of Ackruti City – now known as Hubtown. The stock has provided no returns for the past year, and is technically still in a bear market. It is showing some signs of life, but the technical indicators are pointing to a correction from overbought condition.

Ashiana Housing

Ashiana Housing_Feb2012

In complete contrast to the Ackruti City/Hubtown stock chart, the chart pattern of Ashian Housing is in an uptrend in a bull market, and touched a 52 week high last week. Note that the Dec ‘11 low, from which the current rally started, was actually a higher bottom than those touched in May ‘11 and Oct ‘11. Technical indicators are looking overbought, but looks like there is some steam left in the rally.

DLF Ltd

DLF_Feb2012

The big daddy of the real estate sector, DLF has provided almost zero returns over the past year and is trying to emerge from its 15 months long bear market. The stock dropped more than 50% from its Oct ‘10 peak, underperforming the Sensex, and is looking overbought.

DS Kulkarni

DSKulkarni_Feb2012

The stock traded within a rectangular band between 46 and 66 during the past year, before breaking out above the 66 level on a volume spurt last week. The stock price immediately pulled back to the 66 level, but the 50 day EMA crossed above the 200 day EMA indicating a possible return to a bull market.

Ganesh Housing

Ganesh Housing_Feb2012

This was one of the better performing stocks in 2010, but suffered badly as the bears took their toll in 2011. The stock has given no returns during the past year and is technically still in a bear market, and the bearish pattern of lower tops and lower bottoms continues. The stock had shaved off 70% from its Oct ‘10 peak.

HCC

HCC_Feb2012

The Lavasa controversy nearly dropped the stock into single digits, as it fell 80% from its Jan ‘10 peak. The current sharp rally, backed by strong volumes, has caused a 100% jump from its Dec ‘11 low but the stock is technically still in a bear market. Technical indicators are signalling an overbought condition.

Omaxe

Omaxe_Feb2012

This is another stock that has been in a bull market, after forming three intra-day bottoms at 120. It has climbed above its previous intra-day high touched in Nov ‘10, and is trading above all three of its rising EMAs.

Purvankara

Purvankara_Feb2012

The stock is desperately trying to get out of a strong bear grip after providing negative returns over the past year. Technically, it is still in a bear market.

Unitech

Unitech_Feb2012

This is one stock that tried to fly too high, like Icarus, and came crashing down to lose 80% from its Oct ‘10 peak. It provided negative returns over the past year and is still in a bear market technically.

Vijay Shanti Builders

Vijay Shanti Builders_Feb2012

A favourite stock of small investors, it lost more than 75% from its Jan ‘10 peak. The current rally has seen a spectacular parabolic rise, but the stock is looking extremely overbought.

Bottomline? The broader market rally from Dec ‘11 lows has propelled beaten down realty sector stocks above their 200 day EMAs, but that doesn’t mean their fundamentals have improved. Caveat emptor.

Thursday, February 16, 2012

Stock Chart Pattern - Canara Bank (an update)

The previous post about the stock chart pattern of Canara Bank was back in Oct ‘09. The stock price was correcting after touching a 52 week high. Due to my aversion to PSU stocks in general, and Canara Bank in particular, I had advised investors to look at a couple of other PSU banks.

One of the mistakes that investors often make is failing to perceive the difference between a company and its stock chart pattern. A stock of a fundamentally sound company can perform poorly; another company that may have a weak balance sheet, can shoot up like a rocket for no rhyme or reason.

I am not ashamed to put up my hand up and say: “Mea culpa.”  I allowed a poor opinion of the customer service standards of the bank to cloud my outlook for its stock chart. A look at the three years closing chart pattern of Canara Bank will show how badly wrong I was:

CanaraBank_Feb1612

Note the two dark grey vertical lines on the chart – the first marks the date of my earlier post and the second marks the date when the stock touched its all-time closing high of 836 (a whopping 470% gain from its Mar 17 ‘09 closing low of 146 – outperforming the Sensex by a huge margin).

Shortly after I wrote the previous post, the stock price completed its correction by bouncing up from its rising 50 day EMA and then entered a 7 months long consolidation within a rectangle pattern before breaking out in July ‘10. The stock had a parabolic rise over the next 4 months and touched its all-time high of 836. Only the MACD touched a new high. The other three technical indicators - ROC, RSI and slow stochastic – failed to reach new highs.

The negative divergences gave advance signal of an impending correction, which turned out to be a change of trend as the stock fell within a downward-sloping channel for more than a year to touch a closing low of 354 on Dec 28 ‘11. The big fall of almost 500 points (58% from the peak of 836) underperformed the Sensex by more than two times.

The current FII driven rally has seen a strong recovery by the stock, which has risen nearly 55% from the low of 354 – this time outperforming the Sensex by two times. Such a performance – outperforming the Sensex during bull periods and underperforming during bear periods – can be expected from a mid-cap stock, but not from a large-cap stock like Canara Bank.

Note the two blue down arrows on the right hand side of the chart. The top one is pointing to the break out above the downward channel (and the 200 day EMA), followed by a pullback and the subsequent vertical rise. The bottom one is pointing to the sharp upsurge in volumes that accompanied the break out and subsequent rise, thus validating the break out.

Interestingly, the pullback to the top of the channel coincided with declaration of disappointing Q3 results. Net profit fell nearly 21% though income rose by 33% compared to the year-ago Q3. Both gross and net NPAs rose on a YoY and QoQ basis, which is a worrying sign. The technical indicators are looking overbought, but they have looked that way for the past month, and may remain so a while longer.

Bottomline? The stock chart pattern of Canara Bank clearly shows that it performs more like a mid-cap stock – providing large gains during bull phases and big falls during bear phases. Looks like another bull phase has begun. Add on dips, but don’t forget to maintain a suitable stop-loss.

Wednesday, February 15, 2012

A strategy to beat that ‘missed out’ feeling

A sudden gush of FII money has propelled the Nifty to a 1000 points gain from its Dec ‘11 low, and caught experts and small investors unawares. What had looked like a typical bear market rally is beginning to look more like the first stage of the next bull market.

Many who failed to buy at the low prices of 2011, and those who booked profits and moved to cash in the hope of buying at much lower prices, are feeling that they ‘missed out’ on the rally. How do investors ensure that they don’t miss out on opportunities to buy (or sell)?

In this month’s guest post, Nishit discusses the FoC (Free of Cost) strategy to beat that ‘missed out’ feeling.

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The stock market has rallied more than 20% from the Dec ’11 bottom. Many of us are feeling left out from this rally. What must one do to avoid such a situation? The stock market is one place where one can create a lot of wealth over the long-term. So, how does one go about doing this?

Step 1: Identify about 10 businesses which you feel will do well over the long term (as in next 5-10 years). Remember you are investing in businesses - not only stock prices.

Step 2: Once these businesses are identified, keep a watch on their stock prices. The strategy one will adopt is to keep investing into these stocks at regular intervals.

Step 3: With knowledge about the stock market and Nifty, buy these stocks at attractive valuations. There are 3 things which can happen to the stock prices. They can go up, go down or remain flat.

  1. If the prices go down, be ready to average the stocks and buy them at a cheaper rate. For doing this, awareness of the broader trend of the market helps a lot.
  2. If prices go up, be ready to book profits. One very effective way of doing this is by making the shares ‘Free of Cost’. Let me give you the example of SAIL. Say 100 shares were bought at Rs 90. Now the price has rallied to Rs 110. I feel I had enough of the ride and expect a correction in the markets. I book out 84 shares and remove my cost price. Now, the remaining 16 shares are free for me (i.e. my holding cost becomes zero). I know that SAIL will continue making steel for the next 10 years (and may be much longer than that). These 16 shares I will not touch unless there is a blow out rally where the Nifty trades in 22 + P/E which would be around 6300+.
  3. If prices remain flat, I just wait and watch.

With this strategy, I will not be sad if prices go up and I have not bought anything fresh. If prices go down, I will be having cash to add to my holdings.

The risks to this strategy are the identification of the companies. If one goes for fly-by-night operators and the company goes bust, then one is in trouble. The ‘Free of Cost’ shares become worthless. Hence one has to keep a watch on the fundamentals of the companies and take a call to move on to other stocks.

This approach combines both fundamental and technical aspects. In the last year itself there were 4 bear market rallies. Even if one had booked with about 15-20 % profits one would have had a sizeable quantity of ‘Free of Cost’ shares right now.

This is one way to create long term wealth in the stock market.

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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.)

Tuesday, February 14, 2012

A common investing mistake - and its remedy

A common investing mistake made by many small investors is to wait far too long, and let buying or selling opportunities slip away. When the stock market is rising, and portfolio values go up in leaps and bounds, the tendency is to hang on to the stocks or funds in the portfolio to try and squeeze out the maximum amount of profit. The wait to sell keeps getting longer and longer and one fine day, the market cracks for no apparent reason. The investor rues the fact that a selling opportunity near the top was missed.

When the stock market is falling, the same psychology plays out in reverse. Investors try to buy a selected stock or fund at the lowest possible price, and keep waiting and waiting to buy at even lower prices. Out of the blue, the market turns and starts to rise - as if throwing caution and common sense to the winds. A buying opportunity near the bottom is missed.

Seasoned professional investors find it tough to correctly time stock market tops and bottoms. Imagine how much more difficult it is for amateur investors to catch market tops and bottoms. It is not worth trying unless one has become adept at identifying technical signals - and that takes years of practice.

There is a simple way to remedy the mistake of waiting too long and losing opportunities. Inculcate the habit of being fully invested. Regardless of whether the stock market is moving up or down. But it requires a bit of planning and a large dose of discipline. First of all, investors require a financial plan based on their income, savings and existing and future financial commitments. Help can be sought from a professional financial planner (for a fee) or a CA friend (for free). But it isn't rocket science. Knowledge of Class 5 arithmetic is good enough to do it yourself.

Then one needs an asset allocation plan, based on risk tolerance. This post explains the concept of an asset allocation plan. Once the plan is in place, investors should have the discipline to stick to the plan at least for two or three years. Change the plan only if things don't work out. Investing without a plan is like travelling without a destination.

If the asset allocation plan indicates it is a good time to buy (because the equity portion of the allocation has fallen below a pre-set threshold level), start buying systematically. By using cost averaging or value averaging concepts. Read about these concepts in this post. Identify a couple of good stocks or funds. Then decide how much of each you want to buy value-wise. Spread out the buying over a few months, till your asset allocation plan is rebalanced.

If the asset allocation plan indicates it is time to sell (because the equity portion of the allocation has exceeded a threshold level), don't wait any longer. Start booking profits partially. To find out more about partial profit booking, read this post. Remember to keep the flowers and cut the weeds in the portfolio first.

Monday, February 13, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Feb 10, ‘12

S&P 500 Index Chart

SnP500_Feb1012

The following observations were made in last week’s analysis of the S&P 500 index chart pattern: “The technical indicators are looking overbought and showing negative divergences. The index can remain overbought for long periods, but the negative divergences in all four indicators hint at a correction.” The index kept inching up through most of last week, till some selling on Fri. Feb 10 ‘12 caused a slightly lower weekly close.

The technical indicators are bullish, but showing signs of weakness. The slow stochastic is inside its overbought zone, but has slipped down a bit. The MACD is positive and just above its signal line. The RSI has dropped from its overbought zone, and is moving down. The ROC is positive but not really going anywhere. All three EMAs are rising with the index trading above them – so there is no threat to the bull market. A correction down to the rising 20 day EMA may be just the impetus that the bulls need to take the index past the May ‘11 top of 1371.

The US economy continues on its slow path to recovery. Initial weekly jobless claims fell to 358,000. ISM manufacturing index rose to 54.1 in Jan ‘12 from 53.1 in Dec ‘11 (a reading above 50 means expansion). Bullish sentiment rose to 51.6% (from 43.8%) while bearish sentiment fell to 20.2% (from 25.1%) in AAII’s sentiment survey. However, the Reuters/Univ. of Michigan Consumer Sentiment index slipped a little to 72.5 (from 75 in Jan ‘12).

FTSE 100 Index Chart

FTSE_Feb1012

The FTSE 100 index chart closed lower for the week due to profit booking on Fri. Feb 10 ‘12, after spending most of the week trading sideways. All three EMAs are rising with the index trading above them – a sign of a bull market.

The technical indicators are indicating bullishness, but not as much as a week ago. The slow stochastic is in its overbought zone, but moving down. The MACD has slipped a bit, but remains above the signal line in positive zone. The RSI is above the 50% level, but falling. The ROC is positive but drifting sideways.

UK’s manufacturing output rose by 1%, somewhat easing recession fears. But unemployment is rising and more job cuts are planned, as per this article. Inflation dropped to 4.1% in Jan ‘12 from 4.8% in Dec ‘11. Worries about a flagging economy forced the Bank of England to inject another 50 Billion sterling in its QE programme.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are back in bull markets – thanks more to easy availability of liquidity rather than any real strength in the respective economies. But as Tennyson wrote in a completely different context: “…Theirs not to reason why…”. Use dips to add, but maintain a trailing stop-loss to ensure that you don’t ride into the valley of death.

Saturday, February 11, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 10 ‘12

In last week's post, the 3% 'whipsaw' leeway confirmation of the breaches of the blue down trend lines ruling the BSE Sensex and NSE Nifty 50 chart patterns were awaited. Confirmations have now been received. The bulls (read FIIs) should have celebrated by taking both indices higher. They did try their level best, but were held in check by bear (i.e. DII) selling. Poor IIP numbers didn't help the bullish cause either. The week's trading ended in a stalemate.

BSE Sensex index chart


The weekly candlestick chart pattern of the BSE Sensex formed a 'doji' (highlighted in light blue), which means that there was indecision among bulls and bears. Coming after a strong rally, the 'doji' may be hinting at a corrective move in the coming week. But a 'doji' by itself does not signify too much, and one needs to await bearish confirmation in the coming week. This is one of the challenges in technical analysis. Buy/sell decisions need to wait for various confirmations - by which time the window of opportunity may close, or considerably reduce in size.


The technical indicators are giving mixed signals. The MACD is still in negative territory, but has risen further away from its signal line - as can be seen from the histogram. The slow stochastic has climbed into its overbought zone. The RSI is meandering along its 50% level. But the ROC has turned down sharply, though it remains above its 10 week MA in positive territory.


A correction may revitalize the energy of the bulls. But a correction may not happen because every one expects it to happen. The 20 week EMA is still trading below the 50 week EMA. A cross above will confirm a bull market. Till then, the bears may keep up their selling efforts.


NSE Nifty 50 index chart


In a mid-week update on the NSE Nifty 50 chart, likely technical reasons for the battle for conquering the 5400 level were explained. That battle has not yet been won or lost. The entire week's trading (within the light blue oval) was restricted near the 5400 level, with only a day's close above it on Thu. Feb 9 '12. 


The technical indicators are showing some signs of weakness - which can be expected during a period of consolidation. The MACD is positive and above the signal line, but the histogram has started falling. The ROC is still positive, but has dropped below its 10 day MA and heading down. The RSI has stayed inside its overbought zone for quite some time and may be trying to come down. The slow stochastic is also inside its overbought zone. A pullback to the blue down trend line, or to the 200 day EMA, won't be surprising.


Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are showing some signs of hesitation after a strong rally. That doesn't mean that a correction is going to happen next week. But if it does, the rally may able to continue for a longer period. Don't fret if you have missed the rally. There are always opportunities to make money in bull and bear markets. But one has to work at it.

Friday, February 10, 2012

Stock Index Chart Patterns – Jakarta Composite, Singapore Straits Times, Malaysia KLCI – Feb 10, ‘12

It has been almost two months since the Asian index chart patterns were last analysed, and it is quite interesting to see how they have fared during the global liquidity-led rally since then.

Jakarta Composite Index Chart

Jakarta_Feb1012

The Jakarta Composite index had been one of the best performers in 2011. Despite the sharp correction during Aug and Sep ‘11, the index did not technically enter a bear market – as can be seen from the behaviour of the 50 day EMA, which bounced off the 200 day EMA and started rising again. The ‘death cross’ that confirms a bear market never happened.

But the rally seems to have run into strong headwinds. The index has dropped to its 50 day EMA, and may fall some more. The technical indicators are looking bearish. The MACD is positive, but falling below its signal line. The ROC is below its 10 day MA and has dropped into negative territory. The RSI and the slow stochastic are sliding and are below their 50% levels.

Singapore Straits Times Index Chart

Straits Times_Feb1012

The Singapore Straits Times index technically fell into a bear market in Aug ‘11, as confirmed by the ‘death cross’ of the 50 day EMA below the 200 day EMA. The index has recovered smartly by rising above its 200 day EMA on strong volume support and formed a bullish pattern of higher tops and higher bottoms, but the 50 day EMA is still below the 200 day EMA. The big gap formed in Aug ‘11 hasn’t been filled yet, and may provide resistance to the rally.

The technical indicators are beginning to correct from overbought conditions. The MACD is positive and above its signal line, but starting to turn down. The ROC has dropped below its 10 day MA, which has made a bearish rounding top pattern. Both the RSI and the slow stochastic are in their overbought zones, but starting to slip down.

Malaysia KLCI Index Chart

KLCI Malaysia_Feb1012

The Malaysia KLCI index is technically back in a bull market. The ‘golden cross’ of the 50 day EMA above the 200 day EMA has confirmed that. After spending the month of Jan ‘12 in a rectangular sideways consolidation, the index broke out upwards on a rapid increase in volumes and filled the gap formed in Aug ‘11.

The MACD is positive and above its signal line. The ROC is above its 10 day MA in the positive zone, but turning down. Both the RSI and the slow stochastic are in their overbought zones. The rally may still have some steam left in it.

Bottomline? Strong liquidity-driven rallies have changed the technical complexion of the Asian index chart patterns. The bulls have gained the upper hand, but the bears are not yet out of the picture and may make a last ditch effort to turn around their fortunes. Use any dips to buy selectively.

Thursday, February 9, 2012

Stock Chart Pattern - IRB Infrastructure (An Update)

The previous update on the stock chart pattern of IRB Infrastructure was posted almost two years back. The stock appeared to have made a double-top at 280, which was much higher than the minimum target of 229 mentioned in a prior post, and readers were advised to book partial profits. Was it good advice?

A look at the two years bar chart pattern of IRB Infrastructure will reveal that the advice was timely, even though the stock did rise another 10% to touch an intra-day high of 313 on Aug 24 ‘10:

IRB Infra_Feb0912

The stock did not form any discernible reversal pattern, except that it formed a ‘reversal day’ pattern (higher high, lower close) on the day it hit its peak of 313. Reversal day patterns typically mark the end of an intermediate rally (or correction), but some times they can form at bull market tops and bear market bottoms – giving a very small window of opportunity to buy/sell.

This is why partial profit booking should be done when targets are met on the upside. Likewise, slow accumulation should be started when downward targets are met. It is next to impossible to catch the exact tops and bottoms.

The stock price started to correct rapidly and dropped below the 200 day EMA in Oct ‘10. It attempted a bounce back above the long-term moving average, but faced resistance form the falling 50 day EMA. A sharp fall below the 200 level in Nov ‘10 coincided with the ‘death cross’ of the 50 day EMA below the 200 day EMA – confirming a bear market.

All up moves faced resistance from the falling 50 day EMA till the stock dropped to an intra-day low of 150 in Feb ‘11. This time, the up move managed to climb above all three EMAs, but failed to clear the 229 level. Interestingly, 229 happened to be the top touched in Aug ‘09 – and the minimum upside target mentioned in an earlier post in Jun ‘09.

The dark blue down trend line drawn through the tops at 313 and 229 ruled IRB Infrastructure’s chart pattern till it touched an intra-day low of 121 on Jan 3 ‘12 - a 61.3%drop from the peak of 313 – underperforming the Sensex by a huge margin. Such are the risks associated with mid-cap (and small-cap) stocks. They tend to outperform in bull markets and underperform in bear markets.

The ongoing rally from the Jan ‘12 low has risen more than 20%, crossed above all three EMAs and the down trend line. The first two of the four criteria of a bull market (mentioned in a recent post) have been met. The rising 20 day EMA has crossed above the rising 50 day EMA and is about to cross above the 200 day EMA.

The technical indicators are correcting from overbought conditions. The MACD is positive, but has changed direction and dropped on to its signal line. The ROC crossed below its 10 day MA and fell all the way down to the ‘0’ line before bouncing up a bit. Both the RSI and the slow stochastic have dropped from their overbought zones. Expect some consolidation and a possible pullback to the down trend line.

Bottomline? The stock chart pattern of IRB Infrastructure is poised to change trend and enter a bull market. Many mid and small-cap stocks are showing similar chart patterns – on the verge of re-entering bull markets, thanks to relentless FII buying. Use dips to enter, but with a strict stop-loss. Q3 result was so-so – flat net profits on a slight increase in turnover.

Wednesday, February 8, 2012

Nifty mid-week update: bears defend 5400

The bulls seem to be facing a ‘last mile problem’ on the Nifty 50 chart – as the 5400 level is being well-defended by the bears. What is so great about the 5400 level? Quite a bit – if you are a regular follower of the technical analysis posts on this blog.

Nifty_Feb0812

For starters, 5400 was a previous top in Apr ‘10 (and again in Oct ‘11). Previous tops have a tendency to act as support/resistance levels. In last Friday’s post, four technical definitions of a bull market were discussed. Two of them are of interest in the context of the 5400 level.

One, a 20% rise from the Dec ‘11 low of 4531 gives a level of 5437 – close enough to 5400. Two, a 50% Fibonacci retracement of the entire fall from the Nov ‘10 peak of 6338 to 4531 gives a level of 5434. To satisfy the technical definition of a bull market, the Nifty has to close above these two levels.

There is another point of technical interest mentioned in last Sunday’s post. Note the blue down trend line that dominated the Nifty chart for the past 15 months, and got breached on the upside during the recent rally. An upward breach of any resistance level is technically valid provided it closes at least 3% above the point of breach.

The down trend line was breached on Feb 1 ‘12, and the point of breach came at about 5220. A 3% higher close means a level of about 5370. In technical analysis, exact levels are not important. Approximately, 5370 is close enough to 5400.

Despite an intra-day breach of 5400 on Feb 7 ‘12, the Nifty has so far failed to close above 5370. Obviously, the bears understand and follow technical analysis and are putting up a fight to defend the 5400 level.

Who will win the battle? Will the bulls propel the Nifty above 5400 soon, or will the bears push the Nifty back into its down trend? What do readers think?

Tuesday, February 7, 2012

Gold and Silver chart patterns: bulls regaining control

Gold Chart Pattern




In an update on gold's chart pattern three weeks back, buying was recommended on a convincing rise above 1700. The down trend line (not shown in chart) connecting the tops touched in Sep, Nov and Dec '11 was near the 1700 level, and was expected to provide resistance. Shortly after that post, gold's price broke above the down trend line and the 1700 level - accompanied by a volume spurt. Volume support on an upward break is a requirement, and ensures that the break out is not a 'false' one.


Gold's price kept on rising, but volumes were falling - till the price reached the level of Dec '11 top of 1770. Falling volumes are not suitable for sustaining a rally, as it indicates lack of buying energy. Hesitation near a previous top isn't unusual. A 'reversal day' pattern (higher high, lower close) marked an intermediate top. A pullback towards the down trend line is in progress. The rising 20 day and 50 day EMAs may provide support on the way down.


Gold is trading above its rising 20 day, 50 day and 200 day EMAs - the sign of a bull market. The technical indicators are correcting from overbought conditions. The RSI has dropped from its overbought zone, but remains above the 50% level. The MACD is positive and above its signal line.  The slow stochastic is about to fall below its overbought zone.


The correction will allow gold's price to rise and test the 1800 level. Use the dip to add, with a stop-loss at 1630.


Silver Chart Pattern



Silver's chart pattern shows that the bulls have made quite a smart comeback after the white metal's price touched a low of 26. After climbing above the 200 day EMA to reach the 34 level within a month, silver's price is taking a breather for the past few trading sessions.


The next resistance is likely from the 36 level - which corresponds to the Oct '11 top. The down trend line (not shown in chart) connecting the Apr, Aug and Sep '11 tops is also near the 36 level - which may make it a strong resistance level.


Note that the 20 day EMA has crossed above the 50 day EMA, and both are rising. That is a bullish sign for the near term. However, both are still below the 200 day EMA. The technical indicators are bullish, but showing weakness. The RSI is above its 50% level, but dropped down after touching the edge of its overbought zone. The MACD is rising above its signal line in the positive zone, but its upward momentum is slowing. The slow stochastic is well inside its overbought zone, but has started drifting down.


The bears have not been routed yet, and may fight back. Enter on a convincing break above 36.