Notes from the USA – a guest post

Many investors – specially new entrants to the stock market – get caught up in the exciting but vicious cycle of daily market movements, quarterly results, lure of quick profits, and chasing mythical small and mid-cap multibaggers. They look at a few trees, and think they know all about forests.

For successful wealth-building over the long-term, investors not only need knowledge, patience and discipline, they also need to be aware of the macro trends that are likely to shape the growth of global economies and stock markets. In this month’s guest post, KKP – a successful long-term investor – points out some macro trends that many are aware of but choose to ignore in their rush for short-term profits.

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Build a Portfolio to Capture the Rise of Asia

Investors all over the world are getting tons of unsolicited and solicited input (a.k.a advice) to get in and out of positions. It is a self-fulfilling prophecy that we are dealing with today, since the more people trade, the more it proves to be the right thing to do. The few long-term investors that are left who like to observe ocean-like macro waves of the market, economic weather patterns of planet earth, and review management styles to invest, are starting to question themselves.

Now recall Y2K…..Did we all not get sucked into the markets thinking that investments in information and related technologies are all going to the sky? We moved in with the herd, and what happened then? We all got crushed with this thinking that trees rise to the sky and markets are going to Dow 36000 and Sensex 25000 (at that time in year 2000). Yet, it did not happen. Once everyone is on one side of the thought process, markets prove the ‘majority’ wrong.

So, are we wrong about the short-term trading mentality that has set into most of us? With computers taking over to do the trading for us, are we setting ourselves up for the doom and gloom that can happen with one ‘error trade’, or a group of computers thinking alike and giving out massive buy signals or sell signals?

Looking at the macro trends for a moment, which is clearly the camp I belong to, I see the following unfolding (source Boston Consulting Group). If 3500 more “billion dollar” companies are coming up in 2020, then think where mid-cap mutual funds will trade by that time, even with all of the short-term selling/trading/buying. Earnings (a.k.a making money) always win when it comes to any business environment, and stock markets are primarily driven by EPS growth.

With 670 Mn working class people under age 30 entering the job market, this is going to give a tremendous boost to productivity, consumption, technology demand, and therefore GDP. These are the people that will power the companies forward and make them the billion dollar enterprises within the next 5-7 years (2020 is NOT that far away). Imagine everything that today’s 30 year old lower, lower-middle, middle and upper-middle income earner buys - from food, technology, mobility, housing, consumables, and capital goods. If the world GDP can sustain, and give this group of working class folks a job, then we know they will need all of the above to operate their lives. And, that is just going to happen……Therefore, here comes Sensex 45000 as predicted by some. It might take us until 2021-2025 but even those dates are not too far away from today.

Investing in ‘this’ macro trend is where the money will be made by patient investors. Sure, when people see stocks plummeting, it is tough not to feel discouraged and bearish, but that is the right time to buy with a view of 2020. Suzlon, BHEL, HDIL, Jain Irrign, RelCap, Opto Circ, DLF and many others have been crushed from their 2008 highs, but we should be careful about what we buy when the overall market PE is hanging above 20, and there is a bull-mania in progress. The key trends identified by Boston Consulting Group will unfold for India, China, Brazil, Russia, Africa, and some of the Frontier Markets.

I am sure none of my readers were exempt from getting sucked into the bull-mania in some way, shape or form, but those are life-long learning lessons from which we become better investors. So, right now, keep your powder dry, do not rush out to sell, and hold on for the bumpy ride. If and when the market corrects further, pounce on some of the good mid-cap buys and hold on for a while. Buy in SIP mode, and sell some to feel good when it doubles, but then hold on the majority for a long time.

That is what I am going to do, and I am definitely putting my money where my mouth is and waiting for the next bull run to begin. Pre-election years are good years for investors, and this year might be no different, unless we get hit with a macro event from EU or NA (North America). Stay focussed and keep your eye on the 2020 ball…

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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.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 28, 2013

BSE Sensex index chart

In a holiday shortened week, Thurs. Mar 28 ‘13 turned out to be a ‘quadruple witching day’ for our stock market – F&O expiry day coincided with weekend, month end and financial year end.

After languishing in the red during the first half of the day, the index suddenly spurted higher – sending bears scurrying to cover their shorts. Though the 19000 level could not be regained, the index didn’t breach the support of the 50 week EMA – keeping the bull market alive.

The index traded within the upward-sloping parallel channel through the financial year, making a modest single-digit gain. However, portfolios of many small investors that are overweight mid and small cap stocks, got decimated.

Weekly technical indicators are looking bearish. MACD is positive, but falling below its signal line. ROC is falling deeper into negative territory, below its 10 week MA. RSI has slipped below its 50% level. Slow stochastic has dropped to the edge of its oversold zone.

Some more correction/consolidation can be expected. However, a big correction can be ruled out for now, as FIIs have steadfastly remained net buyers. The index is 500 odd points above the 38.2% Fibonacci retracement level (18300) of the entire rise from the Dec ‘12 low to the Jan ‘13 high.

The ‘gap’ area between 18050 and 18290, marked in last week’s daily chart, should also provide support.

NSE Nifty 50 index chart

The withdrawal of DMK from the UPA alliance had led to a sharp fall in the index a week ago. Last week it was the turn of SP to rock the boat. But better sense seems to have prevailed, and the government may survive for another year.

Whether any important policy decisions will be implemented or not is a moot point. The government is likely to keep fighting fires – like the one that is raging in Maharashtra about NCP leaders diverting water to their factories and causing a drought for farmers.

Daily technical indicators are bearish, but showing some signs of turning around. MACD is below its signal line in negative territory, but starting to turn up. ROC is also negative and below its 10 day MA, but moving up. RSI is just above the edge of its oversold zone. Slow stochastic is trying to emerge from its oversold zone.

Nifty is clinging on to its 200 day EMA in an effort to remain in a bull market. Any upward bounce may induce bears to sell. Some more correction/consolidation is likely till annual results are declared.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are seeking support from their respective long-term moving averages. Some more correction/consolidation is likely. Even if both indices fall further, it may not end the bull markets. Stay invested. Accumulate fundamentally strong stocks that have been beaten down

WTI and Brent Crude Oil charts: an update

WTI Crude chart

The 6 months daily bar chart pattern of WTI Crude Oil seems to have shaken off the bears successfully by preventing the ‘death cross’ of the 50 day EMA below the 200 day EMA. Oil’s price is trading above all three EMAs, and is back in bull territory.

Daily technical indicators are turning bullish, which means a test of the recent top at 98 is a possibility. MACD is rising above its signal line, and about to enter positive territory. RSI has moved above its 50% level. Slow stochastic dropped from its overbought zone, but is rising again.

However, note that RSI and slow stochastic are showing negative divergences by failing to reach higher tops with oil’s price. Strong volumes on down days is another bearish sign. Signs of recovery in the US economy and fall in inventory at Oklahoma seem to have emboldened the bulls.

Brent Crude chart

The 6 months daily bar chart pattern of Brent Crude Oil has been in a downtrend for the past 6 weeks, with not much sign of any recovery. The fall in oil’s price may be a reflection of the state of the UK economy, but is also partly due to improvement in production from North Sea.

Daily technical indicators are looking quite bearish. MACD is in oversold zone below its signal line, though its downward momentum has slowed. RSI is moving sideways below its 50% level, and has received good support from the edge of its oversold zone. Slow stochastic attempted to emerge from oversold territory, but failed.

Bears have been using every rise to sell. Bulls will require special effort to prevent a ‘death cross’ of the 50 day EMA below the 200 day EMA.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 22, ‘13

S&P 500 Index Chart

The 6 months daily bar chart pattern of S&P 500 index spent a week in sideways consolidation – just below its all-time high of 1567. The 20 day EMA provided good support to the index. Higher volumes on down days remain a concern for bulls.

Despite the brief consolidation, the index is trading more than 100 points above its 200 day EMA. Such a wide gap between the index and its long-term moving average has been unsustainable in the past. As long as the index trades above its three rising EMAs, stay invested and enjoy the ride.

Daily technical indicators look bullish, after correcting from overbought conditions. MACD has slipped below its signal line in positive territory. RSI is above its 50% level. Slow stochastic has dropped to the edge of its overbought zone.

The economy is slowly improving – if you believe the jobs data. Read a contrarian view here.

FTSE 100 Index Chart

Negative divergences were observed in all three technical indicators in last week’s analysis of the 6 months daily bar chart pattern of FTSE 100. The index sought support from its 20 day EMA, but dropped below its short-term moving average and the 6400 level by the end of the week.

Is this the beginning of the end of the bull rally? Daily technical indicators don’t seem to suggest that yet. MACD is falling below its signal line, but remains in positive territory. RSI has bounced up from its 50% level. Slow stochastic has dropped to its 50% level.

A bailout package for Cyprus has been agreed upon by the EU. That should calm bearish jitters for now.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 are undergoing correction/consolidation after touching new bull market highs. There are no immediate threats to the bull markets, which are riding a flood of liquidity from QE programs. Stay invested, with suitable trailing stop-losses.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 22, 2013

BSE Sensex index chart

A 25 bps cut in the repo and reverse repo rates announced by the RBI Governor on Mar 19 ‘13 was widely expected by stock market players – and therefore, failed to act as a positive trigger. The sudden withdrawal of support by the DMK on an apparently flimsy issue gave a big shock to the market.

A CBI raid at the premises of the DMK supremo’s son the following day was probably a message sent by Congress troubleshooters to SP and BSP leaders about the likely consequences of pulling out of the UPA – in spite of subsequent condemnations of the timing of the raid by Congress leaders.

Sensex crashed to the lower edge of the resistance zone between 19000 and 19800, but could not sustain inside the zone. By the end of the week, the index had slid down to its 200 day EMA and is threatening to fall further.

Is this the end of the bull market that started from the Dec ‘11 low? Not yet. Even if the index falls below its 200 day EMA, it is likely to receive support from the ‘gap’ area between 18050 and 18290 that was formed back in Sep ‘12. (Note what happened in Nov ‘12.)

What if the index falls further and fills the ‘gap’ area? Since the ‘gap’ was formed during an up move, it is quite likely that Sensex will resume its up move after filling the ‘gap’.

Daily technical indicators are looking bearish. MACD has crossed below its signal line and falling deeper in negative territory – but is showing positive divergence by reaching a higher bottom while the Sensex has fallen to a lower bottom. ROC has fallen a bit too sharply into negative zone below its 10 day MA. RSI has slipped below its 50% level – but is also showing positive divergence by touching a higher bottom. Slow stochastic has entered its oversold zone.

An upward bounce from the 200 day EMA is possible. Bears are likely to use the bounce to sell.

NSE Nifty 50 index chart

Last Friday (Mar 22 ‘13), FIIs were net sellers along with DIIs. The higher volumes on a down week indicates that the correction is not over. Support from the 50 week EMA may get breached.

Divestment of SAIL shares by the government went through successfully – probably with a little help from LIC. If the divestment process had started a couple of months earlier, the government would have realised better prices.

Weekly technical indicators are looking bearish. MACD is still positive, but falling below its signal line. ROC is below its falling 10 week MA, and sliding deeper into negative territory. Both RSI and slow stochastic have slipped below their respective 50% levels after several months.

Which is the level below which all bullish bets should be taken off the table? The 50% Fibonacci retracement level of the entire rally from the Dec ‘11 low of 4531 to the Jan ‘13 top of 6112 is 5320. If Nifty falls below 5320, the bull market may end. (The corresponding level for the Sensex is 17670.)

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are poised at their respective long-term moving averages. Even if both indices fall further, it may not end the bull markets. However, breach of 50% Fibonacci retracement levels could change the trends. Remain cautiously optimistic. Accumulate good quality stocks that have been beaten down.

Nifty and Defty charts: mid-week technical update

Nifty chart

The 1 year daily bar chart pattern of Nifty is testing support from its rising 200 day EMA for the second time this month. Bulls will hope that the support holds. Bears will attempt to push the index down further to fill the gap in the chart – between 5445 and 5525 - formed back in Sep ‘12. (Though the ‘flash crash’ on Oct 5 ‘12 had filled the gap earlier, it was due to an ‘error trade’ and should be ignored.)

Rising volumes on down days is a concern for bulls, because it is usually a sign that the correction will continue. Daily technical indicators are looking quite bearish. MACD has crossed below its signal line in negative territory. ROC has crossed below its 10 day MA in negative zone. RSI is trying to cling on to its 50% level. Slow stochastic has dropped below its 50% level.

Odds of the index dropping further are increasing by the day.

Defty chart

The daily bar chart pattern of CNX Defty (Nifty measured in US Dollars) continues to look more bearish than the Nifty. The rising 200 day EMA has been breached for the second time this month.

FIIs are still net buyers, which has prevented the Defty from falling sharply. But the bearish technical indicators are suggesting that the correction is not over.

The gap in the chart – between 3425 and 3490 – formed in Sep ‘12 is likely to get filled. That should be longer-term bullish because the index should resume its up move subsequently.

Gold and Silver charts: an update

Gold Chart Pattern

Two weeks back, the 6 months daily bar chart pattern of gold was in a bear market and in danger of falling further to test its previous low of 1525. Instead, gold’s price consolidated sideways between 1560 and 1600 for a few days. Finally, the resistance from its 20 day EMA and the 1600 level was overcome on a volume surge.

What caused the sharp change in sentiment? Probably due to fears that the conditions proposed for the bailout package to solve the bankruptcy problem of the small island nation of Cyprus may turn into a contagion in the rest of Europe.

Daily technical indicators are beginning to turn bullish. MACD has crossed above its signal line, and both lines are rising in negative territory. RSI has climbed to its 50% level and looks ready to move higher. Slow stochastic has crossed above its 50% level.

Gold’s price may try to move above its 50 day EMA towards the 200 day EMA. Bears are likely to use the opportunity to sell.

Silver Chart Pattern

Two weeks back, positive divergences in daily technical indicators had led to the following comment: “An upward bounce towards the falling 20 day EMA is likely. Bears may use the bounce to sell.”

The 6 months bar chart pattern of silver has been consolidating sideways for the past month. Note that an attempt to move up was thwarted by the falling 20 day EMA.

Daily technical indicators are giving mixed signals – which is often the case during sideways consolidations. MACD has crossed above its signal line, but both lines are in negative zone. RSI is moving sideways below its 50% level. Slow stochastic rose above its 50% level, but is turning down.

Expect some more consolidation before silver’s price can break out of its narrow range between 28.25 and 29.50.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 15, ‘13

S&P 500 Index Chart

The 6 months daily bar chart pattern of S&P 500 reached within handshaking distance of its all-time high touched back in 2007. Some profit booking near an all-time high is to be expected. But the huge volume surge on a down-day last Friday (Mar 15 ‘13) may be a sign of distribution.

The previous occasion when such high transaction volumes were witnessed was back in Dec ‘12, and it heralded a brief correction that primed the index for a sharp upward surge. Will the pattern get repeated?

May be not. Note that in Dec ‘12, the index had corrected down close to its 200 day EMA. Now it is more than 100 points above its 200 day EMA. Such a big gap between the S&P 500 index and its 200 day EMA has not sustained for long in the past.

Daily technical indicators are correcting from overbought conditions, but remain bullish. MACD is positive and above its signal line, but is beginning to move down. RSI faced resistance from the edge of its overbought zone, and has started to fall. Slow stochastic is well inside its overbought zone but is sliding down.

At the time of writing this post, the index seems already in a corrective mood. No need to sell in a panic. Stay invested, with a stop-loss at the rising 50 day EMA.

FTSE 100 Index Chart

The 6 months bar chart pattern of FTSE 100 surged past the 6500 level to touch a 4-yr high of 6534, but could not close the week above 6500. Strong volumes on Friday (Mar 15 ‘13), which was a down-day, may be the start of another period of correction or consolidation.

Note that all three daily technical indicators are showing negative divergences by failing to touch new highs with the index. At the time of writing this post, the index was down about 0.5%. However, technical indicators are still in bullish zones.

The index is 500 points above its rising 200 day EMA. Such a wide gap has not been sustainable in the past.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 have risen to touch new bull market highs again. Negative divergences are visible in daily technical indicators. Widening gaps between the indices and their long-term moving averages are not sustainable for long. Stay invested – but maintain trailing stop-losses to protect profits.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 15, 2013

BSE Sensex index chart

Bullish daily technical indicators had led to the following comment in last week’s post on the bar chart pattern of Sensex: “A further up move seems likely – provided the FIIs continue buying.”

FIIs continued to be net buyers while DIIs were net sellers last week. The end result was a ‘reversal week’ pattern – a higher high but a lower close. Note that the long-term resistance zone between 19000 and 19800 has come into play once again.

The bull market remains intact as long as the index trades above its rising 50 week EMA. However, unless the index can cross its previous top of 20200 (touched in the week ending on Feb 1 ‘13), bears will try their level best to stall the up move.

Weekly technical indicators look a bit bearish. MACD is positive, but drifting down below its signal line. ROC has slipped into negative territory, and is below its 10 week MA. RSI is resting at its 50% level. Slow stochastic is gradually sliding down below its 50% level.

Expect some more consolidation within the resistance zone, before another attempt at a break out occurs.

NSE Nifty 50 index chart

Contrary to consensus expectations, WPI inflation rose marginally. CPI inflation continues to remain in double-digits. The high inflation numbers may queer the pitch for an expected 25 bps interest rate cut by the RBI Governor in the coming week.

Advance tax receipts have been higher than last year’s, but is short of the collection target for this year. The UPA government has already lowered its target for PSU share divestment by 20% – but despite a successful divestment of NALCO shares they haven’t yet met the revised lower target. Bridging the large fiscal deficit remains a dream.

The daily bar chart pattern of Nifty spent a volatile week within the resistance zone between 5750 and 5950. Even traders were taken aback by the wide daily price swings.

Daily technical indicators are giving mixed signals, but with a slight bullish bias. MACD is rising above its signal line, but both remain in negative territory. ROC is positive and above its rising 10 day MA, but has turned down. RSI is meandering sideways along its 50% level. Slow stochastic has dropped from its overbought zone.

Bulls will be emboldened by the fact that the index is trading above its rising 200 day EMA. Bears will point to the higher volumes on down days – which is a sign of distribution.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are back inside long-term resistance zones. Some more consolidation within the resistance zones is likely. Both indices remain in bull markets, so one should remain invested.

Is buying a car an investment or a liability?

March is the month when the last instalment of advance tax becomes due. Many professionals try to maximise their tax benefits by buying capital assets to avail of depreciation benefits. That is one reason for high demand for 2-wheelers and 4-wheelers in March.

For salaried employees, March is also the month when last minute investments are made by many to avail of tax benefits. Is March a good month to buy a car? In this month's guest post, Nishit explains when and how to go about buying a car to maximise benefits. 

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We talk about investing and preserving wealth.  Buying a car is a necessity for many of us. Is it an investment or a liability?

The value of a car keeps decreasing with every passing day. The minute it is driven out of the car showroom a 10% depreciation happens. So, how does one maximise a depreciating asset?

The trick is to go for the right car at the right time. If one is buying a car with a time horizon of 5-6 years, then which month of the year a car is bought is immaterial. December constitutes the best month for a discerning buyer because of low demand.

April is also a lean month for car sales. Why is this so? Most of the buyers who file income tax returns as professionals (they constitute a major chunk of the car buyers), buy a car in the month of March to avail of depreciation benefits.

The pent-up demand peaks in March thanks to this tax benefit, and also because people tend to wait for tax policy after the budget In February. One can, therefore, get good discounts in April.

Next, what one needs to evaluate is the likely usage. For example if you are going to drive around 750-1000 kilometres in a month, you are better off with a petrol car. This is because the running cost with a mileage of 12 km comes to around Rs 6 a kilometer, whereas for a Diesel variant of same car it will be around Rs 4. Diesel cars are priced at least Rs 1.50 lakhs more than petrol cars of same make. So, your breakeven point is 50000 kms and 5 years by which time you will probably change your car anyway. Also, the Rs 1.50 lakhs saved can be invested and the profits used to pay for the petrol bills.

Another option, especially with Maruti cars, is to go for the Duo option where one gets a CNG tank in addition to a Petrol tank. The cost per kilometer is very low - about Rs 1.50–2.

The next option is whether one pays the entire amount in cash or takes a loan for the car. A full cash payment often entitles one to a bigger discount from the car dealer.

Also, there are a certain car models which are very good but a bit slow moving. One can always get a higher rate of discount here. If one is going to keep the car for a longer time, the make of the car hardly matters as long as it does not break down often. However, one has to also keep in mind the likely resale value of the car.

So, that in a nutshell is how one can maximize the returns on buying a car. Buy at the right time, at the right price squeezing out maximum discounts from the dealer.

Postscript: I just now read that Tata Motors is offering a guarantee to buy back your Tata Indigo Manza car after 3 years and giving you 60% cash back. This scheme looks interesting in the sense that a sedan usually depreciates 50-60% after 3 years. You are being charged only 40% of the car value.

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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.)

WTI and Brent Crude Oil charts: in bear territory

WTI Crude chart

Two weeks back, the 6 months daily bar chart pattern of WTI Crude Oil was trying to seek support from its 200 day EMA. But bearish daily technical indicators led to the conclusion that the correction was likely to continue.

As expected, oil’s price could not hold on to its long-term moving average for long, and dropped into bear territory. After a couple of intra-day drops below the 90 level, a weak pullback towards the 200 day EMA is in progress.

Why weak? Take a look at the volume bars, which are reducing in size as oil’s price gets closer to the 200 day EMA. All three EMAs are beginning to converge. The likely outcome is resistance to the up move from one of the three EMAs and a resumption of the down move.

Daily technical indicators have corrected oversold conditions, but remain bearish. MACD is turning up towards its falling signal line in negative territory. RSI has bounced up from the edge of its oversold zone, but remains below its 50% level. Slow stochastic has emerged from its oversold zone.

The ‘death cross’ (of the 50 day EMA below the 200 day EMA) will technically confirm a bear market. Bulls will try to prevent that. Bears are likely to use the bounce to sell.

Brent Crude chart

Two weeks back, the 6 months daily bar chart pattern of Brent Crude Oil had bounced up from the support from its 50 day EMA. But negative divergences in RSI and slow stochastic led to the following conclusion: “A test of support from the 200 day EMA is a possibility.”

The 200 day EMA failed to provide more than a day’s support, as oil’s price dropped below the 110 level. A brief upward bounce above the long-term moving average gave another opportunity to the bears. Oil’s price fell to a lower intra-day low of 109.

Daily technical indicators are bearish, but looking oversold. RSI and slow stochastic are showing positive divergences by touching slightly higher bottoms. Any attempt at a rally by bulls may encourage the bears to sell more.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 08, ‘13

S&P 500 Index Chart

The 6 months daily bar chart pattern of S&P 500 appears to have shaken off the bears, as it rose to another new high. It is just 1% below its all-time high touched back in 2007. Volumes have not been great. That puts a question mark on the sustainability of the rally.

Daily technical indicators are looking bullish but a little overbought. MACD has crossed above its signal line and started rising in positive territory. RSI has moved up close to the edge of its overbought zone. Slow stochastic is well inside its overbought zone.

Note that MACD and RSI failed to touch higher tops. The negative divergences may lead to some consolidation or correction. Another concern for the bulls is the widening gap between the index and its rising 200 day EMA.

A promising jobs report seems to have encouraged bulls. Addition to non-farm payrolls was higher than expectation. Particularly heartening was the increase in construction jobs. Initial unemployment claims dropped. Overall unemployment percentage also came down from 7.9% to 7.7%.

What may have slipped through the cracks of government statistics is the large number of people who have dropped out of the job market because they just can’t find any employment. People are also working less hours in their jobs.

FTSE 100 Index Chart

The 6 months bar chart pattern of FTSE 100 index has broken out of its sideways consolidation range, and moved up to touch a new high.

Daily technical indicators are looking bullish. MACD has crossed above its signal line in positive territory, and reversed its falling trend. RSI is moving up towards its overbought zone. Slow stochastic has entered its overbought zone.

Note that all three indicators are showing negative divergences by failing to reach new highs with the index. The gap between the index and its rising 200 day EMA continues to grow wider. These are worrying signs for bulls.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 have risen to touch new bull market highs. Negative divergences in daily technical indicators and widening gaps between the indices and their long-term moving averages do not augur well for bulls. Stay invested and enjoy the rally – but maintain trailing stop-losses.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 08, 2013

BSE Sensex index chart

In last week’s post, it was observed that the Sensex had broken down below the ‘neck line’ of a small head-and-shoulders reversal pattern, but had received good support from its long-term moving average. Head-and-shoulders patterns have measuring implications. The Sensex was expected to drop to 18400 (a little below the level of the 200 day EMA).

During last week’s trading, the Sensex started a pullback towards the ‘neck line’ of the head-and-shoulders pattern. Such pullbacks offer selling opportunities – but the pullback continued past the ‘neck line’ and has possibly negated the reversal pattern.

How does one protect oneself from such a pattern failure? By keeping a stop-loss at the level of the ‘right shoulder’ (RS). Note that Sensex has reached the level of the ‘right shoulder’ but has not crossed it yet.

There are two possible moves that the Sensex can make now: 1) continue upwards to touch a new high; 2) turn back and drop below the long-term moving average to meet the downside target of the head-and-shoulders pattern (and fall a little lower to fill the ‘gap’ between 18000 and 18200 formed in Sep ‘12).

Though counter intuitive, a further up move may be bearish. Why? Because there is no denying that Sensex formed a head-and-shoulders reversal pattern (that appears to have failed). Formation of any reversal pattern should be treated with respect. Even if it fails, it is quite likely that a further up move may lead to a much deeper correction.

A turnaround and drop below the 200 day EMA may be bullish. It will meet the downside target of the head-and-shoulders pattern and may even fill the ‘gap’ in the chart. That means the Sensex is unlikely to fall much below 18000. The subsequent up move will be stronger.

Daily technical indicators are looking bullish. MACD is negative, but has crossed above its signal line. ROC has climbed above its 10 day MA into positive territory. Both RSI and slow stochastic have risen above their respective 50% levels.

A further up move seems likely – provided the FIIs continue buying. A few PSU share divestments are planned over the next three weeks. That can divert attention and funds to the primary market.

NSE Nifty 50 index chart

Will he – won’t he? Many market players are wondering whether the RBI Governor will cut interest rates some more this month. The Governor has already shown that he is conservative and can resist pressure from the Finance Minister to cut rates.

CPI inflation remains high, though WPI is beginning to come down (probably more due to base effect). At most a 25 bps cut can be expected, if at all. Such a cut is unlikely to spur an industrial revival in the near term. With Q4 results unlikely to be a great improvement over Q3 results, the stock market will grasp at any straws.

A small reversal pattern generally causes a small correction. But the break down below the small head-and-shoulders pattern visible on the weekly bar chart pattern of Nifty was even smaller than expectation (i.e. failed to meet downside target of 5550).

Good support from the 50 week EMA prevented a deeper fall. A pullback has already breached the ‘neck line’ (marked by blue line) on the up side. Last week’s lower volumes puts a question mark on the sustainability of the up move.

Weekly technical indicators are turning bullish. MACD is below its signal line in positive territory, but has stopped falling. ROC is below its 10 week MA, but has entered positive zone. RSI is moving sideways just above its 50% level. Slow stochastic is also moving sideways just below its 50% level.

Nifty needs to move above its recent top of 6111 to maintain a bullish pattern of higher tops and higher bottoms.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have pulled back after breaking down below small head-and-shoulders reversal patterns. If up moves touch new highs, deeper corrections may follow. If down moves resume, long-term moving averages may get breached. Both indices are in bull markets – but near 2 year highs. No need to panic or feel euphoric. Stay cautiously optimistic.

A look at charts of Asian indices

The slowdown in economic growth in USA and Eurozone countries had a huge impact on the economies of many Asian nations – particularly those that were heavily dependent on inbound tourism and exports to North America and Europe.

Many of these Asian countries are geographically small in size and do not have a sufficiently large population that can sustain growth through domestic consumption. They suffered the most.

Even in China, which is large both in size and population, export-fuelled growth has slowed down somewhat – though growth remains quite high by global standards. The interesting thing to observe is that most stock market indices have suffered less than the respective economies.

This may partly be due to the flood of liquidity unleashed by quantitative easing programmes in USA and Europe. It may also be due to the realisation among investors that the worst is over and growth can only improve from now on.

Here is a look at the one year charts of Asian indices:

Shanghai Composite

The Shanghai Composite shows the greatest disconnect between the state of the economy and the stock market. The economy is still growing better than most in spite of some slowdown – but the index was deep in a bear market till Nov ‘12. Even after briefly returning to bull territory, it has formed a head-and-shoulders reversal pattern that can push the index down below its 200 day EMA.

Hang Seng

The Hang Seng index suffered at the hand of bears from May ‘12 to Aug ‘12, and is currently undergoing some profit booking. But it is clearly in a bull market.

Taiwan TSEC

The Taiwan TSEC index suffered a bear phase from Apr ‘12 to Nov ‘12, but has re-entered a bull market. The index has just about recovered its losses during the year.

Jakarta Composite

Despite a brief drop into bear country during May-Jun ‘12, the Jakarta Composite index has been in a long-term bull market and an outperformer among Asian indices.

Malaysia KLCI

Malaysia’s KLCI index has been in a year-long bull market, but it has been a volatile rally with occasional dips below its 200 day EMA.

Singapore STI

Singapore’s Straits Times index has been in a bull market after suffering a correction during May-Jun ‘12.

Korea KOSPI

Korea’s KOSPI index had a long struggle with the bears, but seems to have returned to a bull market for the past 3 months. It has failed to make any gains during the past 12 months.

Nifty and Defty charts: a mid-week technical update

Nifty chart

The daily bar chart pattern of Nifty shows a break down below a small head-and-shoulders reversal pattern, followed by good support from the 200 day EMA and a pullback towards the ‘neck line’ of the head-and-shoulders pattern.

This is a textbook example of price behaviour of a head-and-shoulders pattern. The pullback is an opportunity to sell for those who may have not sold during the break down below the ‘neck line’.

As explained in last Saturday’s post, the downward target of the head-and-shoulders pattern is 5550 – which is 100 points below the current level of the 200 day EMA, and 250 points below the current level of Nifty.

Can the Nifty fall lower? There is a support zone between 5450 and 5500 (‘gap’ in chart formed during Sep ‘12; the ‘gap’ was filled by an ‘error trade’ in Oct ‘12 – which should be ignored). In the near term, the zone between 5450 and 5550 should be observed closely for support.

Can the Nifty move higher – above the ‘neck line’? Anything is possible in the stock market. But that would mean the correction is over. Let us see if the Defty chart (below) can throw some light.

Defty chart

The daily bar chart pattern of CNX Defty (Nifty measured in US Dollars) is looking more bearish than the Nifty. Note that the break down below the small head-and-shoulders reversal pattern has simultaneously been a break down below the uptrend line and the 200 day EMA. The pullback is likely to face triple resistance from the ‘neck line’, the uptrend line and the falling 20 day EMA.

The downward target from the head-and-shoulders pattern is 3400. If the Defty falls to that level, it will fill the ‘gap’ in the chart formed in Sep ‘12. Filling of the ‘gap’ is not necessarily long-term bearish. Since the ‘gap’ was formed during an uptrend, filling of the ‘gap’ should be followed by a resumption of the uptrend.

Daily technical indicators are looking bearish even after correcting oversold conditions. MACD is below its signal line in negative territory, but showing signs of turning around. ROC is also negative, but has moved up a bit to touch its 10 day MA. RSI and slow stochastic have emerged from their respective oversold zones, but are well below their 50% levels.

One should respect a reversal pattern that is clearly visible and is followed by a break down and pullback. Selling in a panic is not advised, but part profit booking may be a prudent move.

Gold and Silver charts: back in bear markets

Gold Chart Pattern

The one year daily bar chart pattern of gold is back in a bear market. The 50 day EMA has crossed below the 200 day EMA (‘death cross’). All three EMAs are falling, and gold’s price is trading below them. A test of the previous low of 1525 – touched in May ‘12 – is likely.

Gold’s price has been consolidating in a rectangular band between 1525 and 1800 since Sep ‘11. The longer the consolidation, the stronger will be the eventual move out of the rectangle. But in which direction?

Rectangular consolidations tend to be continuation patterns – though they can also be reversal patterns. So, the eventual break out can be in either direction. If the price breaks out above 1800, it may touch 2075; if it falls below 1525, it can fall to 1250.

Daily technical indicators have corrected from oversold conditions, but look bearish. MACD is moving sideways below its falling signal line, and is just above its oversold zone. RSI and slow stochastic briefly emerged from their oversold zones, but are ready to drop back in.

The spectacular rise in gold’s price was fuelled by fears of a break down of Eurozone and US economies. Those fears have subsided, thanks to massive quantitative easing programmes. Longer-term weekly chart (not shown) is still in a bull market, as gold’s price is trading well above its rising 200 week EMA.

Silver Chart Pattern

The one year daily bar chart pattern of silver has fallen back into a bear market. All three EMAs are falling, and silver’s price is trading below them. A test of the previous low of 26 – last touched in Jun ‘12 – is on the cards.

Daily technical indicators are looking bearish. MACD is falling below its signal line in negative territory. RSI is resting on the edge of its oversold zone, after briefly emerging out of it. Slow stochastic has dropped back inside its oversold zone.

However, all three technical indicators are showing positive divergences by touching previous bottom in Dec ‘12, while silver’s price touched a lower bottom. An upward bounce towards the falling 20 day EMA is likely. Bears may use the bounce to sell.

On longer-term weekly bar chart (not shown), silver’s price is just above its 200 week EMA. A drop below 26 can put the long-term bull market under threat.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 01, ‘13

S&P 500 Index Chart

The 6 months daily bar chart pattern of S&P 500 index has been in a corrective mode since touching a high of 1530 in the previous week. Negative divergences in all three technical indicators had warned of a correction or consolidation.

The index bounced up after receiving good support from its rising 50 day EMA, and has been consolidating sideways since then. Bulls may be worried by the higher volumes on down days during the past couple of weeks – which is a sign of distribution.

The index is trading well above its rising 200 day EMA, which often leads to a deeper correction. Daily technical indicators are mildly bullish. MACD is moving sideways below its signal line in positive zone. Both RSI and slow stochastic are above their respective 50% levels, but also moving sideways.

The economy continues to mend, but ever so slowly. Q4 GDP number was a negligible 0.1%. Initial Unemployment claims dropped below the 350,000 mark. ISM manufacturing index rose higher than expectations. However, ‘sequestration’ (automatic budget spending cuts) may push the economy into a recession.

FTSE 100 Index Chart

The 6 months daily bar chart pattern of FTSE 100 index has been consolidating sideways after crossing the 6400 level on an intra-day basis in the previous week.

Note that all three daily technical indicators touched much lower tops. The combined negative divergences pushed the index below its rising 20 day EMA for a day. The brief correction appears to have improved the technical health of the FTSE chart.

A matter of concern for the bulls is that the index is trading almost 450 points above its 200 day EMA. Such a wide gap between the index and its long-term moving average is often a prelude to a deeper correction.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 are consolidating after touching new bull market highs. Both indices are trading well above their long-term moving averages. Some caution should be exercised. Stay invested.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 01, 2013

BSE Sensex index chart

For the past few years, the Budget had become a non-event for the markets – as it should be. It is like reading an Annual Report of a company. Past year’s results are already known. Next year’s projections are full of ‘forward-looking statements’ that will mostly remain unfulfilled.

So, why did the Sensex tank 300 points after the budget provisions were announced? Apparently there was some ambiguity regarding how the tax department may treat tax residency certificates of FIIs (who route investments through Mauritius).

The Finance Minister has promised to clear up the ambiguity during introduction of the Finance Bill in Parliament. That seemed to allay fears of FIIs for the time being, and the index bounced up a bit by the end of the week.

Technically, the damage was done even before the budget. Sensex broke downwards from a small ‘head-and-shoulders’ pattern – with the ‘head’ at the upper edge of the upward-sloping channel; the left and right ‘shoulders’ and the  ‘neck line’ formed within the resistance zone (between 19000 and 19800).

Note that the weekly bar has dropped below the 20 week EMA and the 19000 level. A ‘head-and-shoulders’ pattern has measuring implications. The height of the ‘head’ above the ‘neck line’ is about 900 points. So, the downward target below the ‘neck line’ should be 900 points. That means a downward target of about 18400, which is slightly below the current level of the 50 week EMA.

Weekly technical indicators are beginning to turn bearish. MACD has crossed below its signal line and dropped from its overbought zone. ROC is below its 10 week MA and has fallen into negative zone. RSI is sliding towards its 50% level. Slow stochastic has slipped below its 50% level.

Can the Sensex fall lower – towards the lower edge of the channel? The possibility can’t be ruled out. However, there is a ‘gap’ area between 18000 and 18200 on the daily Sensex chart. That should provide support in case Sensex falls below 18400.

NSE Nifty 50 index chart

The Q3 GDP number was a real disappointment and confirmed that economic growth is slowing almost to a stop. The lack of governance is the main reason – though the FM and many industrialists are adept at pointing fingers towards the RBI.

Creating infrastructure and enabling policies suitable for investments should be the top priority for the government. But it has failed miserably on both fronts. Nothing has been done to curb corruption and the proliferation of a parallel economy. No wonder flow of FDI has come down.

The daily bar chart pattern of Nifty clearly shows the break down below a multiple ‘head-and-shoulders’ pattern. The ‘left shoulder’ (marked LS) actually comprises two small shoulders. Similarly, the ‘right shoulder’ (marked RS) also comprises two small shoulders. In-between, the ‘head’ formed a small ‘double-top’ pattern.

The height of the ‘head’ above the ‘neck line’ (marked by thick blue down arrow) is about 280 points. The downward target below the ‘neck line’ (also marked by blue down arrow) is also 280 points – giving a target of about 5550 (below the current level of the 200 day EMA).

Despite the huge volume bar on budget day (Feb 28) – the highest daily volume since Feb 17 ‘12 – the index didn’t fall below the rising 200 day EMA. Bulls may try to take some solace from that.

Daily technical indicators are looking bearish and oversold. Note that all four indicators showed negative divergences by touching lower tops (marked by slender blue arrows) while the index rose higher from the ‘left shoulder’ towards the ‘head’.

Nifty has a ‘gap’ area between 5450 and 5500 (though it was ‘filled’ by an error trade on Oct 5 ‘12 that should be ignored). This ‘gap’ area is likely to provide support in case the index falls below 5550.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have broken down below ‘head-and-shoulders’ reversal patterns. Both patterns are relatively small in size, so the downside should be limited. This is still a bull market correction – as both indices are trading above their long-term moving averages. Use the dip to add fundamentally strong stocks.