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Monday, April 30, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Apr 27, ‘12

S&P 500 Index Chart

SnP500_Apr2712

In last week’s technical analysis of the S&P 500 index chart pattern, the following observations were made: “… S&P 500 index shows consolidation within a symmetrical triangle for the past two weeks … Triangles tend to be continuation patterns, which means that the likely break out will be below the triangle. But triangles are quite unreliable, so it may be better to wait for the break out.”

The technical indicators were bearish, so the likelihood of a downward break had seemed higher. However, as often happens with triangles, the actual break out was upwards – probably a bear trap planned by bulls. Short covering aided the break out.

Upward break outs require strong volumes to sustain. Have a look at the last three volume bars as the index broke out above the 20 day EMA and the triangle. Volumes were not significantly higher. In fact, on Fri. Apr 27 ‘12, volumes dropped as the index rose above the 1400 level. That keeps open the possibility of a ‘false’ break out.

The technical indicators have turned bullish. The slow stochastic and the RSI have both climbed above their 50% levels. The MACD has crossed above its signal line into positive territory. The ROC has also entered positive territory, but is turning down. The bears can be expected to fight back. But remember that the S&P 500 is in a bull market. So, corrections should be used as adding opportunities.

FTSE 100 Index Chart

FTSE_Apr2712

The 6 months bar chart pattern of the FTSE 100 index shows another brave effort by the bulls to loosen the bear stranglehold. Once again, the 50 day EMA played spoilsport by thwarting the bull rally. Technically, the index is in a bull market as it is trading above the 200 day EMA. But the bulls are standing on thin ice.

The technical indicators are mildly bullish. Both the slow stochastic and the RSI have just about crossed above their 50% levels. The MACD has moved above its signal line, but remains negative. The ROC made a sharp recovery to climb into positive territory, but is turning down. The bears may be in temporary retreat, but can fight back at any time.

Bottomline? The chart pattern of the S&P 500 index shows that the bulls are regaining the upper hand. Buy the dips. Not so for the FTSE 100 chart, where the bears are pressing the sell button every time there is an attempt to mount a rally. Sell the rallies or sit out the correction.

Sunday, April 29, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 27 ‘12

BSE Sensex index chart

Not much has changed on the weekly closing chart pattern of the BSE Sensex index, other than the fact that the index has once again dropped below the 50 week and 20 week EMAs. That has prevented the 20 week EMA from crossing above the 50 week EMA. The index is technically back in a bear market.

Though the Sensex is drifting downwards, it has remained above the blue down trend line – keeping bullish hopes alive. Despite all the negative sentiment due to constant supply of bad news – whether it be Eurozone debt problems, high oil prices, falling value of the Rupee, ballooning deficits, policy inaction, scams, growth slow down – the index has not crashed. That doesn’t mean it won’t. A fall below the blue down trend line will extinguish any bullish hopes.

Sensex_Apr12

It was FII buying that pulled the Sensex out of its prolonged down trend. Of late, the FIIs have turned net sellers – thanks to the uncertainty caused by the GAAR provisions. The government has created unnecessarily complicated procedures for foreigners to invest in India. No wonder they try to exploit loopholes to their benefit. FII and FDI investments should be welcomed with open arms by a government reeling under a current account deficit. Complicated procedures keep out genuine investors. ‘Hawala’ transactions are not affected. How else will politicians become rich overnight?

The weekly technical indicators are beginning to look bearish. The MACD is still positive, but has merged with its signal line and not moving up. The ROC is negative and has dropped well below its 10 week EMA; an upward bounce often follows. The RSI has fallen from its overbought zone towards the 50% level. The slow stochastic has slipped below the 50% level.

NSE Nifty 50 index chart

The break out above the ‘falling wedge’ pattern on the daily bar chart pattern of the NSE Nifty 50 index turned out to be a ‘false’  break out. The wedge has accordingly been redrawn. This is one of the challenges in technical analysis. Patterns don’t always play out as planned, and one has to be flexible enough to adjust one’s buy/sell decisions suitably.

However, there is little doubt that the index has been consolidating within a ‘falling wedge’ since reaching an intermediate top in Feb ‘12. The typical break out from such a wedge pattern is gradual and sideways before the up trend is resumed in earnest. The wedge will need to be discarded only if the index falls convincingly below the blue down trend line.

Nifty_Apr12

The technical indicators have turned bearish. The MACD has crossed below its signal line in negative territory. The ROC is also negative, and touching its falling 10 day MA. The RSI is trying to move up after dropping below its 50% level. The slow stochastic has entered its oversold zone.

What can cause an upward break out? Better than expected Q4 results – like the one announced by Maruti last week. Positive policy action on reforms and reducing fiscal deficit will help too. India Inc. have tightened their belts by reducing capex and hiring. While that has led to a slow down in growth, profits may not be affected as badly.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are trying to shake off the persistent bears. Even if the bulls prevail eventually, a runaway rally is unlikely. Stay invested with proven performers. This is not a good time for speculation.

Saturday, April 28, 2012

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

If you are like most small investors who have been in the investing game for some time, you probably have an unplanned and unwieldy portfolio of funds/stocks with a lot of losers and a few winners. Loss aversion may motivate you to hang on to the losers with the hope that they will somehow by some miracle turn into winners – or, at the very least, allow you to break even. The few winners are quickly disposed off at small profits lest they turn into losers as well.

How does one break out of this losing cycle of ‘cutting the flowers and watering the weeds’? Learning the rules of the game before playing it is a necessary pre-condition – but it isn’t sufficient. Not knowing the rules is courting disaster, but just knowing the rules won’t turn you into a good player. For success in your investments, you must be dispassionate and learn to be patient and disciplined. Easier said than done?

In this month’s guest post, KKP suggests how you can generate better returns by actively managing your investments with an asset allocation plan that takes some of the emotion and guesswork out of your investment decisions.

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Active Management of Investments

Everyone knows that managing investments can be a complicated and overwhelming affair, and for many investors, entrusting the management of their portfolio to a broker or an advisor may seem like the smart thing to do. In the end, very few investors have found that to be as successful as per expectations. So, is it an issue with our expectations, or are these brokers and advisors in that position where they need to make money from doing a ‘job’, as opposed to generating high returns of the invested cash? I think that with the help of powerful new tools commonly available over the net (for free and fee), self-directed investors like you and me can invest more confidently and be better informed about actively managing our investments and can greatly improve our long-term financial well-being.

Entrusting portfolios to mutual funds might be the right thing to do for some investors, but even that route has not proven to be as good. Hence the invention of passive indexed portfolios which has commonly turned into ETFs (Exchange Traded Funds). This simply means that they are like mutual funds, but are traded all day, with total transparency to the investor. Transparency comes from the fact that they are following a predetermined mix of stocks or bonds created by one of the brokerage houses under the name of one of thousands of indices. Besides ETFs provide this simplicity generally at a lower cost of operation than Mutual Funds, hence the popularity.

When we become more informed, we get deeper into being an active investor. As we become more active, we can get deeper into picking a basket of stocks, a few ETFs, and finally some other asset classes. So, the more knowledge about investing and the financial markets that we gain (and it comes over time), the better it serves us and our families. Best part of all is that this passion will last a lifetime, and especially serve us well at a time in our lives when our kids have grown, and we have more time on our hands.

Every investor whether young or mature, rich or middle class, needs to have an investment plan that is documented to lead to financial success. Defining life’s goals, financial needs, current disposable assets, risk tolerances and knowing the benchmarks that we wish to beat is the key to going ‘independent’. This 360 degree plan is needed to determine which investments are best for us, and of course, the plan changes over time. After all, how can we accomplish our goals, if we don’t know what they are or how to get there?

Asset Allocation: Spreading investments across a variety of asset types that react differently (and this is critical) from each other in both bull and bear markets can give you good overall returns, year after year, while reducing the overall risk. Young investors miss out on this, as I missed out also, in my younger na├»ve days. Once ours goals, risk tolerance, and benchmarks (that we want to beat) are documented, it is time to decide/develop a portfolio with weights. The most important step then is to rebalance with ‘new’ ideas, but essentially keep the asset allocation percentage constant from year to year (apart from making overall changes every 5 years – more to come on this). Annual rebalancing works for most, but if you want to be active, then quarterly rebalancing is also OK. This will allow you to keep your overall portfolio oriented towards the long-term goals with which the asset weightings are aligned to your thinking. Also, it will avoid the emotional mood swings that we all go through when the markets are too far up or too far down.

Allocation changes every five years are necessary by taking your laptop / iPad / Tablet to a coffee shop and thinking this through with a ‘strategic mind-set’. Look at my previous post on ‘strategic thinking’. Once you get good at both strategic thinking, and evaluations of everything every 5 years, the Asset Allocations should match your age, need for funds, and also re-alignment with the then-current-goals. What if you were planning to do a huge upgrade on the housing front? What if the kids are now talking about going to a Private University instead of a Public University (delta between these in the US is approx $30,000 per year). Or what if the wedding of your son/daughter is coming up earlier than you planned. All of these are big events that don’t have a fixed date or expense amount. In addition, we are all aging. So, these changes need to be incorporated into your Asset Allocation, over time.

In summary, allocate your assets, keep some assets aside for ‘playing with the market’, and keep the discipline and faith in the longer term performance of the markets. Also, do not forget to have bonds, real estate, gold/silver/diamonds, rental-real-estate, FMP/FDs etc in your portfolio as a permanent aspect of your assets (change allocations only). For those who do not believe in investing in gold/silver/diamond, these assets can be worn to make you feel good. An FMP feels good inside the heart, but a gold pendant with a 1 carat diamond looks good right outside the heart on your wife!

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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.

Related Post

How to reallocate your assets

Thursday, April 26, 2012

Does India deserve the ratings downgrade by S&P?

The answer to the question will depend on who is answering it! The Finance Minister and a Deputy Governor of RBI brushed the S&P ratings downgrade aside as if it was a fly buzzing around while you were trying to enjoy your breakfast. An irritation at best, but of no particular significance.

Adrian Mowat of JP Morgan had a different view. He didn’t expect that FII or FDI inflows would be affected by much. The GAAR provisions, if applied retrospectively, would cause much greater damage to overseas investor sentiments.

However, those companies that had borrowed large sums of money through the FCCB route during the hey-days of 2006-2007 may be in a spot of bother. Most of their share prices are trading at a small percentage of the soaring heights they reached during the final stages of the previous bull market. Converting the FCCBs to equity at current lower prices may not be an option because the promoters may lose control.

The other option is to repay the amounts borrowed. This is where the problem may lie. Since several companies don’t have the cash to repay their borrowings, they have been trying to negotiate a rollover of their loans with the lenders. The S&P downgrade has put paid to that option.

There is a third option – which the unscrupulous Ruias of Essar group availed. Default on the loans, and buy time while the matter meanders through the courts. A few companies may have no alternative but to default. Those who value their reputation may be forced to sell some of their assets to raise the cash.

Why did S&P downgrade India’s credit rating in the first place? And was the downgrade fair? There should be no doubt in any one’s mind that India’s fiscal and current account deficit situation is in danger of spinning out of control. Faulty policies that placed politics ahead of economics, and inability to introduce tough and unpopular legislation has caused a financial mess and an unmanageable rate of inflation.

So, S&P’s downgrade should not have come as a great surprise. In fact, it may just be the kick on the backside needed to propel the moribund financial reforms process back to life. But was the downgrade fair? Aren’t countries like Spain and Ireland - which have much more precarious debt-to-GDP ratios than India’s - enjoying better credit ratings? Is it because they are ‘developed countries’ while India is still an ‘emerging economy’?

Moody’s came up with a credit rating that was more optimistic than S&P’s. That calmed some of the initial shock that the stock market experienced. But S&P’s downgrade should be treated as a wake-up call by the Finance Minister. Blaming the opposition and coalition partners won’t get us anywhere. It is time for precipitate action. The stock market is awaiting bold policy actions to resume its up trend. It will also help accelerate the government’s disinvestment policy and fill some of the fiscal gap.

Wednesday, April 25, 2012

Stock Chart Pattern - Indraprastha Gas (An Update)

The previous update (date marked by gray vertical line on the chart below) to the technical analysis of the stock chart pattern of Indraprastha Gas (IGL) was concluded with the following cautionary statements: “… there may be more selling pressure on the stock. Partial profit booking may be prudent. New entrants should bide their time.”

The stock was trading at 310, after correcting from a peak of 374 (reached on Jan 3 ‘11). The correction continued till the stock price dropped below all three EMAs to an intra-day low of 285 on Feb 25 ‘11. The final leg of the spectacular bull run in the stock culminated with a small head-and-shoulders reversal pattern that touched an intra-day peak of 453 on Sep 7 ‘11.

Regular readers may be aware that barring a few exceptions, PSU stocks are not my favourites. Most are not investment-worthy because of their poor performances – whether due to management incompetence or government apathy. The few that do perform well often turn sick because the government either treats them as ATMs to withdraw cash from, or because of decisions that give priority to politics over economics.

Indraprastha Gas (IGL) was one such exception, because of its monopoly status as gas supplier in the Delhi-NCR area, as well as its good growth, low debt and strong cash flows. The past tense suggests that it is no longer an exception. An impractical order by PNGRB, which has since been challenged in court by IGL, has put a huge question mark over the company’s future.

If you thought that the PNGRB order and the subsequent price crash had pushed the IGL stock deep into a bear market, then you will be only partially correct. A look at the bar chart pattern of Indraprastha Gas for the 15 months period from Feb ‘11 to Apr ‘12 will clearly show that the stock was already in a firm bear grip:

Indraprastha Gas_Apr2512

The small head-and-shoulder reversal pattern that formed during Aug-Sep ‘11 was the first signal of a likely change of trend. But that wasn’t the only technical signal to sell. A series of five ‘rising wedges’ – which are bearish consolidation patterns – gave ample opportunities to investors to book their profits.

Note that shortly after the stock price broke down below the 4th rising wedge, the ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by small blue circle) technically confirmed a bear market. The 5th and final rising wedge formed after the technical confirmation.

Even more interesting is the fact that the stock price broke down below the 5th rising wedge on Apr 9 ‘12 – the day before the PNGRB ruling hit the stock market. I can’t think of a better example that proves that technical analysis works, and a combination of fundamental and technical analysis can give investors an edge in the market.

The high volume fall with a big gap on Apr 10 ‘12 – the day of the PNGRB ruling – touched a ‘panic bottom’ at 170, followed by a ‘dead-cat bounce’. A text book example in technical analysis. What is special about 170? It acted as a strong resistance during Aug-Oct ‘10, before the stock price climbed above it. Since panic bottoms seldom hold, the stock price can be expected to fall below 170.

Three of the four technical indicators – MACD, RSI, ROC - reached extremely oversold levels. Not so for the slow stochastic, which is at the edge of its oversold zone. The stock is deep inside a bear market, so all upward bounces are likely to attract selling.

Bottomline? The stock chart pattern of Indraprastha Gas was already in a bear market when the PNGRB ruling caused a price crash. Investors should not rush to enter. Unless the court ruling favours the company, the stock price will not be able to recover its lost glory.

Tuesday, April 24, 2012

Gold and Silver chart patterns: an update

Gold Chart Pattern

Gold_Apr2412

Gold’s price is pretty much where it was two week’s back. In between, a mini rally didn’t attract much follow-up buying and met with strong resistance from the falling 50 day EMA. Bears are selling at every rise, and gold’s price has once again dropped below the 200 day EMA. A bearish pattern of lower tops and lower bottoms continues. The 20 day EMA is on the verge of crossing below the 200 day EMA.

The three technical indicators are bearish, but showing positive divergences. They touched higher tops while gold’s price chart reached a slightly lower top. But the sentiment has turned negative, so any up move is likely to attract more selling. A bear market is looming.

Silver Chart Pattern

Silver_Apr2412

The following observations were made in the previous post: “Silver’s price chart pattern shows a consolidation within a rectangular band between 31 and 33. Consolidation patterns tend to be continuation patterns, which means the price should break down below 31 sooner than later.” A break down occurred on Apr 23 ‘12. A pullback to the 31 level is likely.

Silver bulls should be concerned about the high volumes on the break down. Note that several down days during the past two months have been accompanied by high volumes, which is a sign of distribution from strong to weak hands.

All three technical indicators are bearish, and pointing to a deeper correction. The three EMAs are falling and silver’s price is trading below all three EMAs. Bears are ruling. Stay away.

Monday, April 23, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Apr 20, ‘12

S&P 500 Index Chart

SnP500_Apr2012

The 3 months bar chart pattern of the S&P 500 index shows consolidation within a symmetrical triangle for the past two weeks, after correcting from the peak of 1422 reached on Apr 2 ‘12. Triangles tend to be continuation patterns, which means that the likely break out will be below the triangle. But triangles are quite unreliable, so it may be better to wait for the break out.

Can the S&P 500 fall a lot? It seems unlikely at this stage. Note that the 200 day EMA is rising and the index is trading well above its long-term moving average. No need for bulls to panic. The 1340 level had acted as a support in Feb and Mar ‘12. The Jan 26 ‘12 top of 1333 is another support level. The downward target from the symmetrical triangle is also around 1340.

The technical indicators are bearish and supporting a likely break below the triangle. The slow stochastic and the RSI are both below their 50% levels. The MACD is below its signal line and has entered the negative zone. The ROC is close to its oversold level of –50.

A drop below the support zone of 1333 – 1340 will form a bearish pattern of lower tops and lower bottoms, which can open the doors to a deeper correction.

FTSE 100 Index Chart

FTSE_Apr2012

The 3 months bar chart pattern of the FTSE 100 index shows a spirited fight back by the bulls, but to no avail. The 200+ points rally from the intra-day low of 5576 (on Apr 11 ‘12) to the intra-day high of 5792 (on Apr 19 ‘12) failed to cross the resistance of the falling 50 day EMA. The index continues to trade in a bearish pattern of lower tops and lower bottoms and should resume its down trend.

The technical indicators are still bearish, but showing some signs of a turn around. The slow stochastic has risen from its oversold zone but is yet to cross the half-way mark of 50%. The RSI has just managed to get its nose above the 50% level. The MACD has crossed above its signal line, but is inside the negative zone. The ROC found strong resistance from the ‘0’ line and is falling deeper into negative territory.

Technically a bear market has not been confirmed yet, but things are not looking good for the bulls.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are still under bear attacks. The bulls are still in reasonably good shape in the US market. But the bears are gaining ground in the UK market. Stay on the sidelines and let the corrections play out.

Sunday, April 22, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 20 ‘12

BSE Sensex index chart

For the second Friday in a row, the Sensex suffered an intra-day crash that unnerved traders and investors alike. On the previous Friday,the 13th, some of the blame could have been assigned to the superstitious. This time, it was supposed to be a trading ‘error’ or may be even a ‘short and distort’ scam.

Whatever it was, the bulls refused to get chased away. Despite a close just below both the 20 week and 50 week EMAs a week ago, the Sensex has climbed back above both its moving averages. The 20 week EMA is still below the 50 week EMA. Once it crosses above, the bulls will be back in control after a long period of bear dominance.

Sensex_Apr2012

The 50 bps cut in the repo and reverse repo rates by the RBI caused some cheer in the stock market, but the good mood was tempered because the underlying fundamentals are not showing much improvement. Oil prices have drifted down a bit, but remain high. Industrial growth is definitely slowing down. There is every possibility of inflation rising once the base effect begins to wear off. Already food prices are showing an up trend. That puts a question mark on further rate cuts that are required to stimulate economic growth.

The weekly technical indicators are looking weak, but not bearish. The MACD is slightly positive, but moving sideways and about to touch its rising signal line. Both the RSI and the slow stochastic have dropped from their overbought zones but remain above their 50% levels. Only the ROC is looking a bit bearish by falling well below its 10 week MA into the negative zone, but it is showing signs of turning around.

NSE Nifty 50 index chart

RBI’s interest rate cut provided the trigger that caused a break out above the ‘falling wedge’ pattern last week. Upward break outs above known resistance levels are usually sharp and accompanied by strong volumes. Not so for a break out above a ‘falling wedge’. Such break outs tend to be more gradual and in the form of a ‘saucer’ (note the saucer-like pattern visible in the signal line of the MACD indicator below).

The challenge with such a tepid break out is that one can’t be sure whether the index will drop back within the wedge pattern or not. The good news is that investors may get several opportunities to enter, which is not always possible on a sharp upward break out.

Nifty_Apr2012

The technical indicators are slowly turning bullish. The MACD has inched above its signal line and is just below the ‘0’ line which demarcates positive (bullish) and negative (bearish) territory. The ROC has slipped a bit below its 10 day MA into the negative zone. The RSI and the slow stochastic have both moved above their 50% levels, but their upward momentum has waned.

For the sake of the economy and the stock market, the government needs to set aside its socialistic inclinations and take some much-needed decisions on reforms. Trying to act tough with FIIs will only chase them away. FIIs should be made to feel welcome by making transparent and enabling legislations – with due safeguards. Likewise with FDI. Investors get irritated and frustrated by the unnecessary bureaucracy and corruption at various levels.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are gradually shaking off bear strangleholds. A lot of work is still left for the bulls. To be on the safe side, concentrate on well-established and cash-rich companies for now. More speculative bets can be made once the bull market revives fully. 

Saturday, April 21, 2012

Was it a freak ‘error’ trade or a ‘short and distort’ scam?

For those who don’t have much experience in the stock market, the trading anomaly observed last Friday (Apr 20 ‘12) may have come as an unpleasant surprise - specially for those who prefer to trade in the F&O segment. Here are the facts, as already published in news media:

  1. The Nifty (and the Sensex) were drifting along sideways in a very narrow range for the better part of 5 hours, when suddenly the bottom seemed to fall out.
  2. Apparently Nifty’s future contract for April saw a freak trade that valued the contract 300 points lower than the Nifty spot price. Earlier, Infosys stock futures dropped more than 400 points in another freak trade.
  3. The two freak futures trades taken together caused spot Nifty (and the Sensex) to plummet.

Several traders tried to explain away the anomaly by calling them trading ‘errors’. But the NSE authorities denied that there were any ‘errors’ and said that the existing systems have enough checks and balances. If there had been only one freak trade, it could have been attributed to an ‘error’. But two freak trades in the same day were too many.

So, what really happened? The answer will get revealed after the SEBI and/or the NSE authorities investigate the freak trades. But circumstantial evidence may be pointing to a well-planned ‘short and distort’ scam. This is a less known scam than the ‘pump and dump’, but the underlying logic is the same - to separate inexperienced investors from their hard-earned money.

How does the scam work? Scamsters first open short positions in an index/stock, and then spread unsubstantiated rumours or distorted facts through email, SMS messages and message board postings in investment groups. In this case, a message doing the rounds earlier in the week predicted that the market will crash on Apr 20. No reasons were given. Some hints about a negative astrological configuration were dropped. When the actual crash came, the short positions were quickly covered. The Nifty bounced up smartly, and closed higher on a weekly basis.

Some times, the scam is also used to get out of tight situations. If some operators had shorted Nifty prior to RBI’s policy announcement and had been caught unawares by the surprising 50 bps rate cut and the subsequent rally, how would they cover their losses? By pushing down the index level below their shorting level – by hook or by crook.

Those who panicked and sold off learned a painful lesson: Do not pay attention to unsubstantiated predictions about the market – even if such predictions turn out to be correct at a later date.

Thursday, April 19, 2012

Crude oil chart pattern: an update

In the previous post about Brent Crude oil’s 2 years weekly chart pattern, the possibility of a correction and a drop in price to the level of the 50 week EMA (at 112) was mentioned. The 6 months daily chart pattern below shows a bearish ‘descending triangle’ reversal pattern.

Note the sharp fall on Apr 10 ‘12 below the twin support at 121 provided by the lower (horizontal) edge of the ‘descending triangle’ and the 50 day EMA. A pullback towards the triangle followed on Apr 12 and 13. Such pullbacks are quite common after downward breaks below a technical support level, and provide a selling opportunity.

Oil’s price has since dropped convincingly below the 50 day EMA, and is getting ready to test support from the 200 day EMA. Will the long-term moving average stop the price fall or can the price drop even further?

Brent Crude_Apr1812-001-001

The level of the 200 day EMA (at 114) coincides with several tops made in Jan ‘12. Previous tops tend to provide support. The downward target from the ‘descending triangle’ is also at 114. Strong support at 114 can be expected.

The technical indicators are looking bearish. The RSI has dropped below its 50% level. The MACD is below its signal line and both lines are in negative territory. The slow stochastic has entered its oversold zone. The price correction isn’t over yet.

Let us now have a look at the 3 years weekly bar chart pattern of Brent crude oil:

BrentCrude_Apr1812

The longer term chart is still looking bullish, but there are definite signs of weakness. Oil’s price formed a small ‘rounding top’ pattern and dropped to the 20 week EMA, where it appears to be getting some support. The 50 week EMA is currently at 113, which is just below the support level of 114 mentioned above.

The technical indicators are beginning to look a bit bearish. The RSI has almost dropped to its 50% level. The MACD is touching its signal line in the positive zone. The slow stochastic has fallen sharply from its overbought zone.

In case oil’s price falls below 113, then bullish bets will be off and the door will be opened for a deeper fall to the 200 week EMA (at 95) or even lower. OPEC members will surely curtail production to prevent such an outcome.

Wednesday, April 18, 2012

Retirement planning with the Public Provident Fund (PPF)

With the 50 bps cut in the repo and reverse repo rates announced by the RBI, fixed deposit rates in banks are likely to get revised downwards soon. No one really looks at bank fixed deposits as part of retirement planning anyway, since there are no tax benefits on the principal or the accrued interest.

For those who have recently entered the work force – whether in a job or a business - retirement planning may not be the top priority right now. But it should be. That is the best way to let the magic of compound interest work in your favour. The sooner you start saving and the longer you stay invested, the more money you will accumulate.

In this month’s guest post, Nishit extols the virtues of investing regularly in the PPF scheme to help accumulate a tidy amount after retirement.

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Today we re-visit a very old, boring and vanilla investment instrument called the Public Provident Fund (PPF). PPF is a Government of India scheme which is deployed through PSU Banks, post offices and some of the Private Banks.

The money is safe as per the Sovereign guarantee and cannot be attached by anyone even if someone is declared bankrupt. The proceeds are tax free and the amount invested is also tax free.

The last year brought about two very important changes in the PPF scheme: (1) the investment limit was raised from Rs 70000 per year to Rs 1 lakh; (2) the rate of interest is floating linked to the 10 year Government bonds. PPF will carry about 0.25% more interest than the average yield of the G-Sec. G-Sec yield typically is in the range between 7.75 % and 9%. Accordingly the PF rates have gone up to 8.6% and 8.8% in the 2 years.

I have enclosed the chart of 10 year G-Sec over the past few years and for most of the times it is ruling around 8%. The government will be very careful in letting the interest rate of PPF drop below 8% since it is a very sensitive issue politically. Many of the middle class voting public of India invest in the PPF. For the sake of calculation I have taken the interest rate as 8.2%.

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If one invests Rs 1 lakh (Rs 100,000) every year at the beginning of the year, after 20 years one will accumulate Rs 50 lakhs. Even if someone takes the interest rate as 8%, he will end up with Rs 49 lakhs.

PPF is definitely one of the pillars of investing for one’s retirement. The total amount becomes Rs 81 lakhs after 25 years. Now, taking into account inflation and the government dearness methodology Rs 100 after 25 years will be equivalent to Rs 500 today. So, you are left with a corpus equivalent to Rs 16 lakhs in today’s terms. That can provide a decent monthly income of Rs 12000 in today’s terms.

The other pillars of investment will be your equity portfolio and other savings. PPF is a simple, straightforward and tension-free way of preparing for one’s retirement.

The following table indicates the amounts accumulated after every five years:

Year Amount invested at the beginning of the year (Rs) Interest earned at the end of the year (Rs) Total amount accumulated (Rs)
1 100,000 8,200 108,200
5 589,000 48,300 637,300
10 14,62,500 119,900 15,82,400
15 27,57,850 226,150 29,84,000
20 46,78,850 383,650 50,62,500
25 75,27,650 617,250 81,44,900

------------------------------------------------------------------------------------------------------------

(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, April 17, 2012

What message did RBI convey with the 50 bps interest rate cut?

In a move that pleasantly surprised the market, RBI’s governor announced a 50 bps (0.5%) cut in the repo and reverse repo rates, while keeping the CRR unchanged. The consensus estimate, after announcement of a slightly lower WPI inflation rate on Monday (Apr 16 ‘12), was a 25 bps cut. The repo and reverse repo rates are back to levels last seen in Jul ‘11.

RBI had made it quite clear through several previous policy announcements and interest rate hikes that controlling inflation was its top priority, even if it curtailed growth. Of late, it had come under a lot of criticism from corporate bigwigs and analysts for being too hawkish, since the rate hikes didn’t help in bringing down inflation by much.

Monetary policy alone can not help moderate inflation in a situation where the country’s current account deficit (currently at 4.3% of GDP) and government’s fiscal deficit (now at 5.9% of GDP) are at unsustainable levels. RBI had pretty much exhausted its policy options. Unless the finance ministry reduced its wasteful expenditure on subsidies and took bold decisions on economic reforms, there wasn’t much the RBI could do. Note the status quo that existed from Nov ‘11 to Mar ‘12 in the chart below:

RBI Policy Rates_Apr12

Q3 GDP figure of 6.1% – down from the heady days of 9-10% growth a few years back – and WPI inflation falling below 7% probably forced the RBI’s hand. They were being made the scapegoat for India’s sliding GDP growth, when the blame should have been laid squarely on an inept and scam-ridden government.

Today’s 50 bps rate cut is a clear message to the finance ministry from the RBI: “We have done more than was expected; now it is your turn.” Unless efforts are made to curtail deficits and bold policy initiatives are taken to attract overseas investments, inflation will start rising again as the base effect of the previous year wears off. The RBI governor has clearly mentioned the possibility in his policy statement. Further rate cuts that are required to stimulate the economy and incentivize capital expenditure by corporate India will then be kept on hold.

The following chart depicts the relation between the repo rate, WPI inflation and industrial production over the past eight quarters:

Inflation vs Repo_Apr12

It is quite clear from the chart that industrial growth has been affected in a high interest regime. Will corporate India jump up and open its purse strings because of the 0.5% lowering of interest rate? Not very likely. That means slow growth will continue for another quarter or two. It is now up to the government to take policy decisions that will be good economics rather than good politics.

The proposed ban on prepayment penalty of floating rate loans will be welcomed by EMI payers. For the stock market, any drop in interest rate is good news. The bulls should come charging with renewed vigour.

Related Posts

RBI tries a ‘shock and awe’ tactic to tame inflation
Market celebrates RBI interest rate hike – why?

Monday, April 16, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Apr 13, ‘12

S&P 500 Index Chart

SnP500_Apr1312

In last week’s analysis of the 6 months bar chart pattern of the S&P 500 index, the following observations were made: “The correction may not be over yet. A test of support from the 50 day EMA is a possibility. Only a drop below the Mar ‘12 low of 1340 can change the bullish outlook.” The chart has followed expectations so far. Despite a day’s close below it, the 50 day EMA has provided good support. The index hasn’t fallen below its Mar ‘12 low of 1340 either, and is trading above its rising 200 day EMA.

The technical indicators are looking bearish. The MACD is barely positive and well below its signal line. The RSI and the slow stochastic are both below their 50% levels. The ROC is sliding deeper into negative territory. A breach of the 50 day EMA seems likely. If the 1340 level is breached, a drop to the 200 day EMA can’t be ruled out.

The US economy continues its growth at a snail’s pace. Initial jobless claims rose to 380,000 – higher by 13,000 over the previous week’s upwardly adjusted figure of 367,000. AAII’s Sentiment survey showed a 10% drop in bullish sentiment to 28.1% (below the historical average of 39%) while bearish sentiment jumped by 13.8% to 41.6% (above the historical average of 30%). It wasn’t all bad news. House prices rose 3.8% from a year ago. The trade deficit at $46 Billion was lower than the consensus estimate of $52 Billion.

FTSE 100 Index Chart

FTSE_Apr1312

In a holiday-shortened week, the 6 months bar chart pattern of the FTSE 100 index dropped below its 200 day EMA and the 5600 level. The subsequent bounce above the 5700 support level met with more selling and the index closed the week below its long-term moving average. The 20 day EMA has crossed below the 50 day EMA, and both EMAs are falling. The index is in danger of dropping back into a bear market.

The technical indicators are looking quite bearish, but not oversold. The slow stochastic emerged from its oversold zone and is struggling not to fall back in. The MACD is negative and below its signal line. The RSI is below its 50% level. The ROC has been in a down trend from the beginning of the year, as it continues a bearish pattern of lower tops and lower bottoms.

UK’s economy may avoid a double-dip recession by a whisker, thanks to growth in exports, but GDP growth is likely to be less than 0.5%. British businesses are wary of investing and that is not helping growth. CPI inflation is expected around 3.5% for Mar ‘12, and may come down during the year. High oil price remains a worry.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are reeling under sustained attack by the bears. The bulls are still holding their ground in the US market but are on the verge of being routed in the UK market. Time to be cautious and conserve cash.

Sunday, April 15, 2012

Is this a good time to enter FMCG stocks?

The answer to that question has already been provided in the previous update on FMCG sector stocks: “FMCG is my favourite sector to invest in, regardless of the state of the stock market and the economy. Strong brands, positive cash flows, low debt, generous dividends, bonus issues and stock splits make this sector worth every Rupee you invest in it.”

The secret to making money in the stock market was revealed by Warren Buffett: Be fearful when others are greedy and be greedy when others are fearful. In investing terms, it means buy when there are a lot of sellers and sell when there are a lot of buyers. That doesn’t mean all the stocks in a sector are worth buying – one has to use discretion.

Given below are the daily closing chart patterns of 10 stocks from the FMCG sector for the period Nov ‘10 till date. The period was chosen for comparison with the Sensex, which touched its all-time high in Nov ‘10 and is currently trading almost 20% lower.

Brittania

Brittania_Apr1312

Brittania’s chart looks very bullish, but ripe for a correction. After dropping below all three EMAs in Feb ‘11, the stock spiked up sharply in May ‘11 after all three EMAs came close together (marked by light blue oval). Several months of sideways consolidation was followed by another sharp up move in Feb ‘12. However, all four technical indicators touched lower tops as the stock moved higher. The negative divergences can lead to a correction. Use the likely dip to enter.

Colgate-Palmolive

Colgate_Apr1312

After briefly slipping below its three EMAs in Feb ‘11, Colgate’s stock has been in a steady up move, touching higher tops and higher bottoms. Negative divergences in all four technical indicators can cause a correction or sideways consolidation. This is a stock that one can buy on a regular basis instead of chasing after mythical multibaggers.

Dabur India

Dabur_Apr1312

Dabur’s stock hasn’t performed as well as its MNC peers, but it has still outperformed the Sensex by moving higher than its Nov ‘10 high. The stock had a long correction from its Jun ‘11 peak to its Jan ‘12 trough – probably due to the unrest in the Middle East where Dabur has manufacturing and distribution facilities. The stock appears to be resuming its bull market and can be bought on dips.

Emami

Emami_Apr1312

Emami is the only stock that is trading below its Nov ‘10 peak. Though it reached a higher top in Jul ‘11, the subsequent correction dropped the stock’s price to a lower bottom, which is bearish. The rally from the Jan ‘12 bottom has not yet confirmed a return to a bull market. The technical indicators are looking overbought. The main promoter, who is also a director in a private hospital, was arrested due to a fire incident that caused many deaths. Avoid.

Glaxo Healthcare

GlaxoHealth_Apr1312

Glaxo Healthcare’s stock has been in a steady up trend after the correction from the Nov ‘10 top got support from the rising 200 day EMA. Just goes to show what strong brands (e.g. Horlicks) can do to stock’s fortunes. Technical indicators are looking overbought. Use dips to add.

Godrej Consumer

GodrejCons_Apr1312

After trading sideways for more than a year, Godrej Consumer’s stock has finally broken out upwards. Negative divergences in the technical indicators may lead to a correction or consolidation. Dips can be used to enter.

Hindustan Unilever

HUL_Apr1312

HUL’s stock formed a bullish cup-and-handle continuation pattern from which it has broken out upwards to touch an all-time high. The cup-and-handle break out has a target of 460. Hold with a trailing stop-loss.

ITC

ITC_Apr1312

ITC’s stock dropped below its 200 day EMA in Feb ‘11, giving a great entry opportunity. It recovered quickly and has been in a steady up trend ever since. Of late, the stock has moved up quite rapidly to touch an all-time high and is looking overbought. Hold with a trailing stop-loss.

Marico

Marico_Apr1312

Marico’s stock price is in a bull market. It formed a cup-and-handle continuation pattern from which it has broken out upwards. The upward target is 196. Hold with a trailing stop-loss.

Nestle

Nestle_Apr1312

Nestle’s stock chart pattern should be an example for those who don’t believe in a long-term buy-and-hold investment strategy. Buy-and-hold doesn’t work for all stocks, but stalwart stocks can give fabulous returns over many years. This is another stock that can be added on a regular basis.

Related Post

The futile quest for the mythical 'multibagger'

Saturday, April 14, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 13 ‘12

BSE Sensex index chart

Despite the sharp fall on Fri. Apr 13 ‘12, which sent the superstitious scurrying for safety, the 6 months bar chart pattern of the BSE Sensex index is still consolidating within a ‘falling wedge’ pattern. Bulls may heave a sigh of relief since it is a bullish pattern, and the likely break out from it is upwards. Bears will point out that the index closed below all three EMAs.

Note that all three EMAs are converging together. A sharp move usually follows. Will it be an up move or a down move?

SENSEX_Apr1312

The technical indicators are looking a bit bearish. The MACD has slipped below its signal line in negative territory. The ROC is touching its 10 day MA at the ‘0’ line. Both the RSI and the slow stochastic are below their 50% levels. The odds are favouring the bears slightly. The bulls successfully defended the lower trend line of the ‘falling wedge’ (currently at 16850) twice last month. Can they do it again? A convincing drop below 16850 will negate the ‘falling wedge’.

Why the sudden fall last Friday? Different people may come up with different reasons. It could be due to the poor IIP numbers, or high oil prices, or a financially-strapped Spain, or poor results from Infosys, or basket-selling by a large investor/FII, or all of the above. There is no point in looking for reasons. That is the nature of stock markets – some times they rise and some times they fall.

The rush towards ‘defensive stocks’ – the usual suspects being FMCG and Pharma stocks – indicates a lack of confidence within the investing community. All eyes and ears will now be on the inflation number to be announced on Mon. Apr 16 ‘12 and RBI’s policy announcement on Tue. Apr 17 ‘12. 

NSE Nifty 50 index chart

In last week’s analysis, two technical confirmations of a bull market were awaited. The 2 years closing chart pattern of the NSE Nifty 50 index shows that those confirmations haven’t occurred yet. The 20 week EMA moved up to touch the 50 week EMA, but failed to cross above it. The Feb ‘12 peak (of 5565) is yet to be breached.

Nifty_Apr1312

The index received good combined support from the 20 week and 50 week EMAs. An upward bounce will keep bullish hopes alive. A drop below the two EMAs may go down to the lower edge of the ‘falling wedge’ shown in last Wednesday’s post (at 5100), and below that to the blue down trend line (currently at 5000). The zone between 5000 and 5100 is where the Nifty is likely to get strong support. 5100 also happens to be the 50% Fibonacci retracement level of the rise from the Dec ‘11 low of 4624 to the Feb ‘12 peak of 5565.

Can the Nifty fall below the blue down trend line? Sure it can, but the probability appears low at this stage. The technical indicators are still bullish but showing signs of weakness. The MACD is positive and above its signal line, but the histogram is clearly falling. Both the RSI and the slow stochastic have fallen from their overbought zones, but remain well above their 50% levels. Only the ROC has slipped into the negative zone. It has fallen well below its 10 week MA, which could be a precursor to an upward bounce.

Eurozone debt problems are periodically sending jitters through world markets. Of greater concern should be our inept government’s failure to tackle its own finances. Appeasement and status quo seem to be the operating principle instead of taking tough but decisive action. Blaming everything on coalition politics is a cop out. That India’s economy is still growing better than that of many developed countries is a testament to the resilience and management skills of Indians. It is one of the main reasons why one should be more bullish than bearish about the future.

Bottomline? Chart patterns of the Sensex and Nifty indices are still in consolidation mode. Something’s gotta give, and soon. Short-term indications are bearish, but things may change quickly. Better to wait and watch for RBI’s policy announcement and Q4 results before jumping in feet first. Even in present uncertain conditions, a few stocks have been hitting 52 week or all-time highs. So, there are always opportunities – but one needs to be choosy and patient.

Thursday, April 12, 2012

Should you ignore the Feb ‘12 IIP number?

For the uninitiated, the Index of Industrial Production (IIP) is one of the many indicators that policy makers look at to assess the strength or weakness of the broader economy. So, why should investors ignore the IIP number declared today? The short answer is: The figure is unreliable at best, and fiction at worst.

Am I being harsh? Sure. But how else can I describe an important indicator if the Jan ‘12 number is revised downwards from 6.8% to 1.14%? The reason for the sharp downward revision was an ‘error’ in the calculation of production data for sugar. Production figures from all the sectors don’t always come in on time. A ‘best guess’ is often made for the numbers from the missing sectors. That still doesn’t justify an 83% error!

What about the Feb ‘12 number of 4.1%, which was much lower than the consensus estimate of 6.6%? It is better than the revised Jan ‘12 figure of 1.14%, but who can say whether another ‘error’ won’t crop up after a month? Either way, 4.1% is not worth cheering at all. It shows that industrial growth remains sluggish.

Why did the stock market celebrate a not-so-great number? It was probably on the expectation that next week the RBI will be forced to cut the repo rate after almost three years to help stimulate growth. But the RBI is in the horns of a dilemma.

They have taken a stance that controlling inflation is their top priority. While inflation is no longer in double digits and is expected to fall some more, it is still quite high and may start going up once again as the base effect kicks in. The RBI also expects the government to take worthwhile steps in curtailing its huge deficit, which is partly responsible for causing inflation.

But the government is showing no inclination to cut down wasteful expenditure on populist measures. Instead, the Finance Ministry is desperately trying to generate revenue by milking cash-rich PSUs and by introducing measures that may cut-off FII inflows (which will further compound the deficit problem).

If RBI cuts the repo rate and inflation goes up after a couple of months, they will look like fools. If they don’t cut rates and growth slows down further, they will be made a scapegoat for all ills. They may compromise by reducing the CRR once again to inject more liquidity into the system. Alternatively, they may cut the repo rate by a token 25 bps (0.25%) – which seems to be already priced in by the market.

What could be a positive surprise for the market? A CRR cut and a 25 bps repo rate cut or a repo rate cut of 50 bps. If either of those two events occur, the stock market may trend upwards from its current consolidation range.

Wednesday, April 11, 2012

A mid-week Nifty chart update

The Nifty has lost nearly 100 points since last Wednesday’s close. Technically not too much change is visible on the 6 months bar chart pattern of the Nifty. The index is still consolidating within a ‘falling wedge’ pattern from which the likely break out is upwards. There are no certainties in technical analysis, so one needs to wait for the break out to occur before turning bullish.

Nifty_Apr1112

Note that the volumes have been falling during the formation of the wedge pattern. This is typical during periods of consolidation. Ever since it crossed above the 200 day EMA in end-Feb ‘12, the 50 day EMA has managed to remain above the long-term average – which is technically a bullish sign.

The technical indicators are not bullish. The MACD is below its signal line in negative territory. Both the RSI and the slow stochastic are below their 50% levels. Only the ROC is looking a bit bullish by climbing into the positive zone above its 10 day MA.

Despite bad news all around – Europe falling into a likely double-dip recession with Spain perched precariously on a financial precipice, US growth continuing to remain anaemic, the GAAR issue shaking the confidence of FIIs who have turned net sellers of late, another tsunami warning following a big earthquake off the western coast of Indonesia – the Nifty hasn’t fallen as sharply as it should have. That itself is good news!

If some good news hits the market at this stage, the Nifty may break out above the ‘falling wedge’. The likely triggers could be better than expected results from Infosys and TCS, and  a repo rate cut to go with a CRR cut by the RBI. But do not expect a runaway bull market. It could be more of a gradual grind upwards.

Downside risk hasn’t gone away. A drop below 5100 could be followed by a test of the Dec ‘11 low of 4500.

Tuesday, April 10, 2012

Gold and Silver chart patterns: bears taking a firm grip

Gold Chart Pattern

Gold_Apr1012

In the previous update three weeks back about gold’s chart pattern, readers were advised against using the drop to the 200 day EMA as a buying opportunity. The technical indicators were pointing to a deeper correction. Things have become a little more murky for the bulls. Two attempts by gold’s price to move up were thwarted by the falling 50 day EMA.

Since touching the Feb ‘12 peak of 1790, gold’s price has been forming a bearish pattern of lower tops and lower bottoms and is in danger of falling into a bear market. The 20 day EMA is falling below the 50 day EMA, and both EMAs are moving down towards the 200 day EMA. Note that strong buying in Jan ‘12 had prevented the 20 day EMA from crossing below the 200 day EMA. The ‘death cross’ of the 50 day EMA below the 200 day EMA was also avoided. Bulls may not be so lucky this time.

All three technical indicators are bearish. The RSI is below its 50% level. Its up moves over the past month have found strong resistance at the 50% level. The MACD is negative and below its signal line. The slow stochastic managed to cross above its 50% level twice in succession, only to drop down to the edge of its oversold zone.

Bulls may try to seek solace from the positive divergences in the three technical indicators, which touched higher bottoms while gold’s price dropped lower. But the upward bounce from the recent low of 1610 has been accompanied by falling volumes and has stalled at the 200 day EMA. A test of the Dec ‘11 low is very much on the cards. Book profits.

Silver Chart Pattern

Silver_Apr1012

Silver’s price chart pattern shows a consolidation within a rectangular band between 31 and 33. Consolidation patterns tend to be continuation patterns, which means the price should break down below 31 sooner than later. The 50 day EMA failed to cross above the 200 day EMA. All three EMAs are falling and silver’s price is trading below its three EMAs – sign of a bear market.

The bears appear to have regained control after the two months long rally from the Dec ‘11 low of 26. The fall from the Feb ‘12 peak of 38 has already retraced more than 50% of the rally.

The technical indicators are looking bearish. The RSI is below its 50% level. The MACD is negative and below its signal line. The slow stochastic is falling sharply towards its oversold zone. A test of the Dec ‘11 low looks likely. Sell.

Monday, April 9, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Apr 6, ‘12

S&P 500 Index Chart

SnP500_Apr0612

The 6 months bar chart pattern of the S&P 500 index touched new intra-day and closing highs on Mon. Apr 2 ‘12, but corrected down to its 20 day EMA on a holiday-shortened week. Volume support was lacking as the index rose higher and all four technical indicators showed negative divergences by touching lower tops. May be it was the combined effect of the negative divergences; the tendency of traders to lighten up before a long weekend; and the realisation that there wasn’t going to be another round of Quantitative Easing that caused the correction.

The technical indicators are looking bearish. The slow stochastic has dropped sharply from its overbought zone and looks ready to drop below its 50% level. The MACD has fallen below its signal line in positive territory. The RSI has slipped below its 50% level. The ROC has entered the negative zone. The correction may not be over yet. A test of support from the 50 day EMA is a possibility. Only a drop below the Mar ‘12 low of 1340 can change the bullish outlook.

Private sector job growth was lower than expectation, but weekly jobless claims are falling. Companies have a lot of cash on their books to tide over the weak economic fundamentals, so there should be no immediate threat to the bull market. Q1 results will be hitting the market any time now. Stock specific buying with appropriate stop-losses may be a good idea.

FTSE 100 Index Chart

FTSE_Apr0612

The 6 months bar chart pattern of the FTSE 100 index made a valiant effort to return to its bull market by rising above its 50 day and 20 day EMAs. But it touched a lower intra-day top and fell all the way down to its 200 day EMA. In last week’s analysis, the possibility of bears using any upward bounce to sell, and the 5700 level acting as a possible support were mentioned.

The support level did hold on a closing basis. The 200 day EMA is just below it. Both together should provide good support. Another upward bounce is likely, but it will be a selling opportunity. Though the index is still above its 200 day EMA, it is clearly in a down trend.

Bearish patterns of lower tops and lower bottoms are clearly visible in all four technical indicators. The slow stochastic is just above its oversold zone. The MACD is negative and below its signal line. The RSI has fallen below its 50% level. The ROC is inside the negative zone. A drop below the 200 day EMA will raise the spectre of a bear market.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are undergoing corrections. The US index is in the midst of a bull market correction. The dip can be used to buy. The UK index is in a down trend, and a ‘sell on rise’ strategy seems appropriate. Whichever strategy is adopted, be stock specific instead of worrying too much about index gyrations. And please do not forget to maintain stop-losses.

Sunday, April 8, 2012

Are you emotional or logical in your investment decisions?

Should you be emotional or logical in taking investment decisions? That is an easy question. Every one is, or should be, logical in their investing decisions, right? Wrong! Even seasoned investors with 20 years experience in the stock market make silly mistakes by letting their ‘gut feel’ overrule their own logic.

This is what makes making big money in the stock market such a challenge. How can you overcome the mental impulses that lead to poor decision making? It takes patience, discipline and several years of effort to reach a stage where one can be dispassionate enough to buy or sell a stock purely on the basis of logic, and not get swayed by what is happening in the market or in the country or in the world.

One way to approach the problem is to have a plan. First a financial plan where you set out short-term and long-term goals for achieving different commitments such as buying a car, an apartment, children’s education, etc. The financial plan will lead to an Asset Allocation Plan, where a certain percentage of your portfolio gets allocated to different asset classes, like stocks, fixed income, real estate, gold.

Of course, you should not take my word for it. Assess if you have a problem at all – the ‘problem’ being emotional decision making while investing. So here is a little and apparently easy test that you can undergo to determine if you think emotionally or logically.

Shane Frederick of MIT’s Sloan School of Management introduced a three-question Cognitive Reflection test in his paper ‘Cognitive Reflection and Decision Making’. The three questions – modified for an Indian readership – are:

  1. A bat and a ball costs Rs 110 in total. The bat costs Rs 100 more than the ball. How much does the ball cost?  Answer: Rs ……..
  2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets?  Answer: ……….minutes
  3. In a poultry, eggs are being collected in baskets. The number of eggs in a basket doubles every minute. If a basket gets filled in 48 minutes, how long will it take to fill half the basket? Answer: ……..minutes

Please take a sheet of paper and a pencil and do not take more than 30 seconds to answer all three questions. Then take a minute or two to reflect on your answers. Did you get the answers right the first time? Did you get the correct answers after thinking about the questions a bit more?

Don’t feel bad if you didn’t get correct answers the first time. After testing several thousand people, Frederick found that less than 20% got all three answers right. Among professional fund managers, traders and analysts less than half managed to answer all three questions correctly!

Frederick also found that those who do well on the cognitive reflection test tend to be more patient in decisions between smaller sooner rewards and larger later rewards.

(Note: You don’t have to send me the answers. This is supposed to be a self-assessment test. But your comments are most welcome.)

Related Post

How to reallocate your assets

Saturday, April 7, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 06 ‘12

BSE Sensex index chart

The two years weekly closing chart pattern of the BSE Sensex index is showing text-book price patterns: A long down trend marked by the dark blue downward-sloping trend line; ‘death cross’ of the 20 week EMA below the 50 week EMA in Jul ‘11 that technically confirmed a drop into a bear market; a sharp bear market rally that climbed above the two EMAs and the down trend line; a pullback after the break out above the down trend line, followed by a bounce off the 50 week EMA.

SENSEX_Apr0412

Why is the rally from the Dec ‘11 low being termed a ‘bear market rally’ instead of the first upward leg of a new bull market? Because a couple of technical confirmations are still awaited. The ‘golden cross’ of the 20 week EMA above the 50 week EMA will be the first bullish confirmation. A rise above the Feb ‘12 top of 18290 will form a bullish pattern of higher tops and higher bottoms.

Wouldn’t awaiting the two bullish confirmations mean missing out on a 3000 points rally from the Dec ‘11 bottom? Yes, but that is the price one pays to reduce risk. Otherwise, one can enter at any time with a suitable stop-loss – which may lead to too many trades and possible losses.

Can the Sensex dive back below the dark blue down trend line, and go down to test the Dec ‘11 low? The possibility can’t be ruled out entirely. The rally has been fuelled by a gush of FII money. The likely passing of the GAAR provisions in the Finance Bill may force many of the FIIs to sell-off.

The technical indicators are still bullish, but giving contradictory signals. The MACD is positive and above its signal line, but has stopped rising. The ROC has crossed well below its 10 week MA, and is barely in positive territory. The slow stochastic has dropped from its overbought zone. The RSI has entered its overbought zone, and showing positive divergence by touching a higher top.

NSE Nifty 50 index chart

The 6 months bar chart pattern of the NSE Nifty 50 index is consolidating within a ‘falling wedge’ pattern. The ‘falling wedge’ is usually a continuation pattern that forms during a bull market rally, so the logical break out is upwards. Positive divergences in three of the four technical indicators are also pointing to an upward break out. The ‘golden cross’ of the 50 day EMA above the 200 day EMA has technically confirmed a bull market.

Nifty_Apr0412

The bears are on the back foot, but not out of the picture yet. Despite the ‘golden cross’, the 50 day EMA has not pulled away from the 200 day EMA; it is hovering slightly above the long-term average and moving sideways. The MACD is entangled with its signal line in negative territory. The ROC is just above its 10 day MA but both are in negative zone. The RSI has tried but failed to move above its 50% level for a month. The slow stochastic has climbed above its 50% level and the only one looking bullish.

The holiday-shortened week caused some profit booking and lower volumes. Q4 results and RBI’s forthcoming policy action are the next triggers for the market. A normal monsoon forecast is a positive. A tepid jobs report from the US is a negative.

Bottomline? Chart patterns of the Sensex and Nifty indices are still consolidating after sharp rallies. A continuation of the up moves from the Dec ‘11 bottoms is likely, but it may be prudent to wait for the actual upward break outs. Enter stocks of fundamentally strong companies that have broken out, or are about to do so. Cummins and Exide come to mind. Remember the old market adage: Bull markets climb a wall of worry.

Friday, April 6, 2012

Pursue the Explosive Indian Stock Market With Care

The above title is borrowed from an article by William Samuel Rocco of Morningstar published a month back. It was buried in my mailbox and discovered during spring cleaning. Many of this blog’s readers who live outside India may find the information presented in the article useful.

Here is an extract:

Matthews India … has handily outpaced the index and all its peers that existed over the trailing three years and the trailing five years. And it has suffered rather average volatility - for an Indian-stock offering - along the way. Meanwhile, Matthews India is in the hands of a seasoned and skilled management team; the team employs a sound growth strategy that has earned strong long-term results at other single-country funds from Matthews.

Matthews India is clearly a top choice for investors who are seeking a pure India vehicle, … and who have long time horizons. But before climbing aboard, India fans should make sure they understand just how rough it can get for even a superior India-stock offering. Though it held up better than the MSCI India Index and its two rivals that existed at that time, Matthews India still lost 62% in terrible 2008.

Finally, India fans should also bear in mind that there are a few excellent diversified emerging markets and Pacific/Asia ex-Japan funds that provide significant India exposure, considerable upside potential, and a far smoother ride than any pure India vehicle. Oppenheimer Developing Markets (ODMAX) regularly invests around 15% of its assets in India, for example, while Mathews Pacific Tiger (MAPTX), which is co-managed by Sharat Shroff (the lead manager of Matthews India), often devotes a bit more of its assets there. And Virtus Emerging Market Opportunities (HEMZX) frequently invests around one fourth of its assets in India.

Thursday, April 5, 2012

Would you rather be a Jesse Livermore or a Warren Buffett?

Every one who has ever bought a company share or a mutual fund must have heard of Warren Buffett – one of the wealthiest men on earth and a firm proponent of long-term value investing principles. His holding company, Berkshire Hathaway, has made immense amounts of money for its shareholders and owns stocks is some of the largest and most well-known companies. His annual letters to shareholders – liberally sprinkled with worldly wisdom - are avidly read by investors and fund managers all over the world.

But who is Jesse Livermore, and why should he be compared with Warren Buffett? Those who have already read ‘Reminiscences of a Stock Operator’ by Edwin Lefevre may skip to the last paragraph. For the less informed, here is Jesse Livermore’s fascinating story:

A farmer’s son, Jesse left home in 1891 and joined a brokerage firm in Boston, USA posting stock quotes. He was 14 years old. He started placing small wagers in a ‘bucket shop’ – a gambling establishment that accepted bets on stocks and commodities without actual physical delivery. Sort of like our earlier ‘badla’ and current F&O trading. In a year, he had made $1000 (equivalent to about $25000 in today’s money).

He continued betting for a few more years till he got banned from the ‘bucket shops’ for making too much money. He left for New York and started proper trading in the stock market. In 1901, within a year of his first of three marriages, he went broke. His wife refused to lend him her jewellery to start afresh and their marriage fell apart.

In the crash of 1907, Jesse observed a liquidity crunch and heavily shorted the market. He ended up with a profit of $3 Million – a huge amount in those days – and promptly blew most of it away on a bad cotton trade. He had developed certain trading rules for himself, but forgot them in his panic. He listened to other people’s advice and kept adding to his already losing position. By 1912, he had debt of $1 Million. During and after World War I, he not only made good all his losses but had multiple homes and cars in different parts of the world. At age 41, he married an 18 year old dancing girl.

Then came the crash of 1929. Liquidity conditions were similar to that of 1907, and Jesse shorted stocks as if there was no tomorrow. Almost every one lost money in the great crash. Livermore ended up with a whopping $100 Million profit. In 1933, he married for the third time. It was his wife’s 5th marriage. All her previous husbands had committed suicide.

By 1934, Jesse Livermore went bankrupt again. No one knows how he managed to lose such a large sum of money. In 1940, he shot himself. A suicide note for his wife stated that he was a failure and this was the only way out.

Those of you who do not like the boring, long-term buy-and-hold investing style of Buffett and prefer the excitement and adrenaline rush of short-term trading, here is a famous quote from Jesse Livermore: “The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”

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Wednesday, April 4, 2012

Stock Chart Pattern - Indian Hotel (An Update)

The previous update of the stock chart pattern of Indian Hotel – better known as the Taj Group – was posted back in Feb ‘11 (marked by the grey vertical line on the chart below). The following concluding comments were made then:

“The stock chart pattern of Indian Hotel is in a bear market. There is good support at 70, and below that, at 55. A bounce up on good volumes from those levels can be good entry points. This company is the crown jewel of the hotel industry, well-managed and in a class of its own - but is strictly for long-term investors.”

The stock has thoroughly tested the patience of long-term investors. But the usefulness of technical analysis is clearly exemplified below in the bar chart pattern of Indian Hotel:

Indian Hotels_Apr0412

The stock price consolidated within a rectangular zone between 67 and 74 for nearly 3 months (Aug to Oct ‘11), as it struggled to hang on to the support level of 70. Consolidation patterns tend to be continuation patterns, so the likely break out from the rectangle was downwards. Not surprisingly, the stock price dropped sharply below the rectangle in Nov ‘11 and proceeded towards the next support level of 55.

In Dec ‘11, the stock price dropped briefly below 55, only to form a double-bottom reversal pattern at 51. Observant readers will note the positive divergences in all four technical indicators, which touched higher or flat bottoms as the stock dropped lower from its Nov ‘11 low to its Dec ‘11 double-bottom. Even during the actual double-bottom, all four technical indicators touched higher bottoms.

These positive divergences signalled a rally, which coincided with the rally in the broader market. The stock rose past its three EMAs to touch an intra-day top of 80 on Feb 17 ‘12. But it turned out to be a ‘reversal day’ (higher top, lower close) that marked the end of the rally. The stock dropped below all three EMAs to return back to its bear market.

All isn’t lost for the bulls. In fact the drop to the recent low of 60 and the subsequent bounce appears to be a good entry point. Three of the four technical indicators are showing positive divergences (marked by blue arrows) by touching higher bottoms as the stock price dropped to 60 last month. 60 is a higher bottom than the previous bottom of 51. If the stock price can rise above its recent top of 80, a bullish pattern of higher tops and higher bottoms will get formed.

The technical indicators are hinting at such a possibility. The MACD is negative, but it has crossed above its signal line, and both are rising. The ROC has climbed above its 10 day MA into positive territory. The RSI is rising towards its 50% level. The slow stochastic emerged from its oversold zone, and moved sharply above its 50% level.

Bottomline? The stock chart pattern of Indian Hotel is trying to climb out of its long bear market. A move above 80 followed by the ‘golden cross’ of the 50 day EMA above the 200 day EMA will technically confirm a bull market. Conservative investors can wait for the confirmation to enter. The less risk averse can enter now with a stop-loss at 60.

Tuesday, April 3, 2012

Is oil’s price ready for a fall?

In an article in Financial Times last week, Ali Naimi, Saudi Arabia’s Minister of Petroleum and Mineral Resources wrote: "High international oil prices are bad news. Bad for Europe, bad for the U.S., bad for emerging economies and bad for the world's poorest nations… It is the perceived potential shortage of oil keeping prices high…Supply is not the problem…there is no rational reason why oil prices are continuing to remain at these high levels."

Gasoline (petrol) price in the US is hovering near $1 per litre, which has led to lower consumption in an economy still in recovery mode. 50% higher price in India has not curtailed consumption much, but has pushed the government’s current account deficit deeper into the red. Eurozone countries - where petrol prices are much higher than India’s – are facing a double-dip recession.

High oil prices are taking their toll on global economies. So, who is benefitting from the high prices, and will the prices come down any time soon? The oil producing nations are minting money – as evidenced by the lapping up of real estate in and around London by sheikhs from Middle-East. But they are smart enough not to kill the goose that lays golden eggs.

Production is being increased by OPEC members like Saudi Arabia, Libya, Iraq and Angola to cool prices down but the effect may only be visible over the next few months. Some new oil fields in South America and Africa should start production soon. But don’t expect oil’s price to fall by a lot.

BrentCrude_Apr0212

The two years weekly chart pattern of Brent Crude Oil shows that the price is struggling to cross its year-ago top of 127. All three EMAs are rising and oil’s price is trading above them – a typical bull market chart. Note that the gap between the 50 week EMA and the 200 week EMA is widening and oil is trading far above its 200 week EMA. A correction may be around the corner.

Is oil’s price forming a bearish double-top reversal pattern? Or, is it forming the ‘handle’ of a bullish ‘cup and handle’ continuation pattern? Those are good questions that need to be taken up separately.

A ‘double-top’ will be confirmed only if oil’s price falls below its previous low of 98. If it does, then a test of its 2 year low price of 70 is a possibility. But the probability of such a steep fall is low. Why? Because a double-top has to fulfill the volume criteria – lower volumes during the formation of the second top. That doesn’t seem to be the case here.

What about the ‘cup and handle’? There is a good possibility of the price dropping to the 50 week EMA – which is half-way between the recent peak of 128 and the trough of 98 – to complete the ‘handle’. A subsequent rise above the 128 level should be accompanied by a significant increase in volumes. A fall below the 50 week EMA can negate the ‘cup and handle’ pattern.

The technical indicators are bullish. The RSI is above its 50% level. The MACD is positive and above its signal line. The slow stochastic is in its overbought zone. However, all three indicators are showing negative divergences by touching lower tops during the recent consolidation around the 125 level.

The levels to watch are 98, 112 and 128. A fall below 112 and/or 98 will be bearish. A rise above 128 will be bullish.

That was the long answer. The short answer is: Looks like it – both from fundamental and technical points of view.

(Note: This is my first post on oil’s chart pattern. It will be nice to receive some feedback from you – whether you liked reading this information and found it relevant. Unless oil’s price starts to fall, inflation won’t come down. Neither will government’s deficit. Both are inconducive for a rising stock market.)