Technical updates – Sanghvi Movers and Sintex Industries

Shareholders of infrastructure stocks had a rough time over the past couple of years. Most stocks suffered badly at the hands of bears as India’s economic growth slowed down and investments in infrastructure and capital goods petered off.

In a previous post on Thermax and Voltas, it was seen that the closing charts of both companies had shaken off the bears to touch new 2 year highs. The situation on the two charts below tell a different story.

Both stocks bottomed out and re-entered bull territory – the ‘golden cross’ of the 50 day EMA above the 200 day EMA technically confirm that. Both have also doubled from their respective bear market lows. However, they are struggling to cross long-term support/resistance levels.

Sanghvi Movers

The stock price of Sanghvi Movers touched a bottom of 37.35 on Aug 21 ‘13 and then a slightly higher bottom of 37.85 on Aug 27 ‘13. The small ‘double-bottom’ reversal pattern ended the long bear market. After consolidating sideways with a slight upward bias for the next 6 months (‘accumulation’ phase), the stock rose sharply above its 200 day EMA on a volume surge on Mar 10 ‘14, and continued to rally strongly till it approached its long-term support/resistance level of 85.

Note how the 85 level provided strong support in Aug ‘12 and Nov ‘12 (marked by green up arrows). After a convincing downward breach in Feb ‘13, the 85 level remained untested till the stock rose to touch a 52 week high of 83.45 on Apr 29 ‘14 (marked by red down arrow). Technical indicators are in overbought territories. ROC, RSI and Slow stochastic are showing negative divergences by failing to touch new highs. A correction is likely.

Sintex Ind

The stock of Sintex was a darling of small investors 4-5 years back. Its bear market ended with a classic ‘inverted head-and-shoulders’ bottom reversal pattern that formed during Aug-Sep ‘13. Why classic? Because the pattern formed at the end of a long down move. Any ‘reversal’ pattern must have something to reverse. (Some times a pattern may look like a head-and-shoulders pattern, but if it doesn’t form at the end of a long up/down move then the pattern should be rejected.)

Note the strong volumes as the stock broke out above its ‘neck line’ (marked by blue line). That technically confirmed the pattern. The 52 level had provided good support during May ‘12, Aug ‘12 and Mar ‘13 (marked by green up arrows). But after 52 level got convincingly breached, it became a resistance level in May ‘13 (marked by red down arrow), and has not been tested since.

Overbought technical conditions have been corrected and all four indicators are still in bullish zones, but looking bearish. Expect some correction/consolidation.

WTI and Brent Crude Oil charts: an update

WTI Crude chart

The following comments were made in a previous update to the daily bar chart pattern of WTI Crude oil: “Though oil’s price is trading well above its three EMAs in a bull market, the hurdle at 105 needs to be crossed before bulls can regain full control.” 

Oil’s price failed to cross 105. Bears used the opportunity to press sales and push oil’s price below its 20 day and 50 day EMAs. However, the 200 day EMA is still rising and oil’s price is trading above it. Bulls may use the support of the long-term moving average to mount another rally.

Daily technical indicators are looking bearish. MACD is still positive, but is falling swiftly below its signal line. RSI has slipped below its 50% level. Slow stochastic is ready to enter its oversold zone.

Oil’s price may be forming a bearish ‘double top’ pattern – which will be confirmed technically only if it drops below its Mar ‘14 low of 97.50. If 97.50 gets breached, oil’s price can drop to 93.

On longer term weekly chart (not shown), oil’s price is trading above all three weekly EMAs in a long-term bull market.

Brent Crude chart

In the previous update to the daily bar chart pattern of Brent Crude oil, the following remarks were made: “The rally may continue a bit longer. However, a failure to move above its Mar ‘14 top of 112 would mean a continuation of a bearish pattern of lower tops and lower bottoms that began in early Dec ‘13.”

The rally did continue a bit longer, but oil’s price failed to reach even the 111 level. A sharp fall on high volumes has taken oil’s price back into bear territory (below its three EMAs). The bearish pattern of lower tops and lower bottoms continues.

Daily technical indicators are turning bearish, which means the correction may not be over yet. MACD is about to drop from its overbought zone and cross below its rising signal line. RSI has just slipped below its 50% level. Slow stochastic has dropped from its overbought zone.

On longer term weekly chart (not shown), oil’s price has dropped below its 20 week and 50 week EMAs, but is trading above its 200 week EMA.

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 25, 2014

It was another holiday-shortened trading week that included an early F&O settlement on Wed. Apr 23 because Thursday was a holiday. That did not prevent Sensex and Nifty from touching new intra-day, intra-week and closing highs.

Many small investors are worried about the sustainability of the rally. Is it a good time to book profits or should one hold on till the election results come out? What if the market crashes after May 16? What if there is a 2009-like ‘gap’ up surge?

There is a simple answer to these questions: Worry about things you can control – like your own portfolios. If you can’t stomach a 20-30% correction, you should not invest in stocks. Corrections should be welcomed as buying opportunities since both indices are in bull markets.

Have that ‘missed-the-bus’ feeling? Not to worry. More buses will be arriving soon. Q4 results announced so far show that the usual suspects – IT services, private banks - are doing well. Pharma and FMCG should announce decent results as well. Those are the buses to get on.

BSE Sensex index chart

Daily bar chart pattern of Sensex touched new lifetime intra-day and closing highs during the week. However, Friday’s bar has formed a ‘reversal day’ pattern, which may lead to some correction or consolidation. All three EMAs are rising and the index is trading above them. The bull market is under no threat.

Daily technical indicators are correcting from overbought conditions. MACD is below its falling signal line and about to drop from its overbought zone. ROC is touching its 10 day MA in positive territory. RSI is falling towards its 50% level. Slow stochastic is ready to drop from its overbought zone.

All four indicators are showing negative divergences by failing to touch new highs. But a deep cut is not expected. FIIs were net buyers on all four days of the week. DIIs were net sellers of an equal amount.

NSE Nifty 50 index chart

Weekly bar chart pattern of Nifty is struggling a bit near the 6800 level, though the index did touch new intra-week and weekly closing highs. The long-term up trend line and the two weekly EMAs are rising, with the index trading above them – which is the sign of a long-term bull market.

Weekly technical indicators are inside their respective overbought zones and not showing any inclination to climb down. That doesn’t mean a correction can’t happen at any time. Be prepared for it but don’t worry about it.

As mentioned in last week’s post, markets can remain overbought for long periods. So, selling now in the hope of buying back at a lower price later may not be a good idea. However, part profit booking and investing the proceeds in fixed income – i.e., if your asset allocation plan demands so – is always a good idea.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices continue to touch new highs. Still many small investors are staying away from the market. That means the indices are likely to go even higher! Those who are in the market should stay invested with appropriate stop-losses. Continue with your SIPs in funds and use any dips to add.

Stocks in the news this week (Apr 25, ‘14)

Electioneering ‘tamasha’ is gradually winding down, with NaMo camp confident of victory and all the others hoping for a piece of the pie post May 16 results. Focus is now shifting to Q4 results of India Inc.

An early F&O settlement day (due to election holiday on Thursday) saw both Sensex and Nifty close at new lifetime highs on Wed. Apr 23 – thanks to strong FII buying. Different analysts are trying to outguess each other about the election outcome and suggesting appropriate investment strategies.

The smart thing to do would be to stick to current financial and asset allocation plans without getting swayed by what catastrophe/euphoria may follow after May 16. The market always provides money-making opportunities.

Given below are charts of some stocks in the news this week. Please do not fail to do your due diligence before buying or selling.

Astral Poly

The stock of Astral Poly has been in a strong bull rally for more than 2 years. It has more than doubled in price since the previous stock split 9 months back. The management is considering another stock split, which is the reason for the sharp high volume price spurt. All four technical indicators are looking overbought and showing negative divergences by failing to touch new highs. Some correction/consolidation may follow.

Cera Sanitary

The stock of Cera Sanitary has been in a spectacular bull rally since touching a low in Dec ‘11. Of late, it was correcting after forming a small double-top above the 900 level. Today’s high volume price surge occurred after declaring very good Q4 results. Technical indicators are in bullish zones. New highs are likely soon.

Tata Tele

 

The Tata Tele stock has been struggling to get out of a strong bear grip. News about NTT Docomo’s plan of selling its 26% stake in the company led to a high volume rise in price. There are rumours about Vodaphone’s interest in picking up the stake. ROC and RSI are in their overbought zones. MACD and Slow stochastic are in bullish zones. Some more buying may follow.

Yes Bank

The stock of Yes Bank had dropped into a bear market back in July ‘13 because of control issues between the families of the original promoters. The stock price had already doubled from its Aug ‘13 low and re-entered a bull market earlier this month. Good Q4 results and a higher dividend announcement caused a price rise on good volumes. All four technical indicators are showing negative divergences. Expect some consolidation or correction.

Key risks for the stock market – a guest post

When stock market indices keep touching new highs on a daily basis, the biggest risk that small investors face is getting the urge to jump in by throwing caution to the winds.

Unexpected election results and possibility of El Nino conditions that can cause a less-than-adequate monsoon are other risks that are being faced by the market.

The stock market appears to be discounting the most optimistic post-election scenario – a NaMo led NDA government with a majority. That may or may not happen.

In a guest post, Nishit introduces a note of caution by discussing less optimistic post-election scenarios that can derail the current rally.

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The market is going up as if there is no ceiling. Every day one sees their portfolios increase in value and everyone seems to be getting swept up by the Modi wave. Now, let us try and see what can derail this rally.

The level of 6350 is a very critical level on the Nifty. It has been broken upwards after being tested 3 or 4 times over a 6 year period. In technical parlance, this is known as a major breakout and 6350 becomes a key support level for the market now.

This also means that since Nifty has broken 6350 level convincingly and stayed above for several weeks now, it may not go below that level.

What could be the key risks for the market now?

1. No Modi or BJP led Government at the centre

The Congress fights back just to garner enough seats to prop up a third front government. Not out of the realms of probability if the Congress manages 130-140 seats. In this case, the market would tank straight away.

2. Modi wins and El Nino causes a drought

In this case, the markets would rally after the elections, stay in the 7000+ zone for a few weeks and by mid June start drifting down when reality strikes. The upside would remain capped then.

3. BJP has to hunt for allies to cobble up a majority

If the BJP led NDA ends up with 200-225 seats and have to take on board allies who will demand an alternative PM candidate than Modi, the rally would get tempered. It would again lead to a scenario where there is a weak Prime Minister in place, say someone like a Rajnath Singh.

By rallying before the election results, the markets have moved to the side of extreme optimism. Remember the rally is based on FII inflows which is banking on a Modi-led stable Government in place which is investor friendly making India a good place to do business.

A drought like scenario will push up inflation, raising interest rates and delaying the economic recovery. The markets at 7200-7500 will not factor all this.

Nifty will definitely test 6350 once - whether before the elections or after the elections is the question. Also, the question remains what happens to the 3700-3900 ‘gap’ of the previous election results? Will it remain unfilled or will these elections results close that ‘gap’?

Penny stocks have started rallying now. It could be a good chance to remove the junk from the portfolio. If one is holding quality stocks in the portfolio they can always be averaged out at a later date. Good businesses always bounce back.

All eyes will now be on May 16^th 2014.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Gold and Silver charts: an update

Gold Chart Pattern

In the previous post on the daily bar chart pattern of gold, a ‘reversal day’ pattern formed on Mar 17 ‘14 and the failure of the 50 day EMA to cross above the 200 day EMA (‘golden cross’) were mentioned as technical reasons for explaining gold’s slide back into bear territory.

However, bullish ‘rounding bottom’ patterns formed on RSI and Slow stochastic indicators pointed to a likely attempt at a rally by bulls. Note that the rally faced stiff resistance from the 200 day EMA, and gold’s price crashed down below all three EMAs on a volume surge.

The zone between 1260-1280 acted as a support/resistance zone during the past 6 months. Some buying interest may emerge there. But bears are likely to use any rally to sell. If 1260 gets breached, then the previous low of 1180 is likely to be tested.

Daily technical indicators are in bearish zones. MACD is negative, and has crossed below its signal line. RSI and Slow stochastic are falling below their respective 50% levels. Time for gold bulls to go into hiding.

On longer term weekly chart (not shown), gold’s price is trading below all three weekly EMAs. Weekly technical indicators have just entered bearish zones.

Silver Chart Pattern

The following comments were made in the previous post on the daily bar chart pattern of silver: “Silver’s price is consolidating within a bearish ‘flag’ pattern from which the likely break out is downwards.”

A high-volume break down below the ‘flag’ occurred last week. Silver’s price is trying to form a bottom at 19.25, but is likely to slip further down to breach its previous low of 18.75.

Daily technical indicators are in bearish zones – suggesting further downside. There seems to be no silver lining to dark bearish clouds.

On longer term weekly chart (not shown), silver’s price is trading below all three weekly EMAs in a bear market.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Apr 18, ‘14

S&P 500 Index Chart

The following comments appeared in last week’s analysis of the 6 months daily bar chart pattern of S&P 500: “The index is just above a support zone between 1800-1810. Buying interest may emerge here.”

The index found good support at the 1815 level – just above the support zone mentioned – and climbed above its 20 day and 50 day EMAs in a truncated trading week. The short but sharp correction from the Apr 4 peak of 1897 should enable the index to move to new highs.

Technical indicators are turning bullish. MACD is about to cross above its signal line into positive territory. RSI and Slow stochastic have risen above their respective 50% levels. Bulls are trying to regain control of the chart.

On longer term weekly chart (not shown), the index received support from its rising 20 week EMA and is trading above all three weekly EMAs. However, weekly technical indicators are in down trends. The correction may not be quite over yet.

FTSE 100 Index Chart

The 6 months daily bar chart pattern of FTSE 100 was expected to test the 6500 level once more, which it did by dropping to an intra-day low of 6507 on Apr 14. By the end of a short trading week due to Easter holidays, the index managed to close above its 200 day and 20 day EMAs, but remained below its 50 day EMA.

Daily technical indicators are showing some bullish signs. MACD moved up to touch its signal line in negative territory. RSI has just crept above its 50% level. Slow stochastic is rising towards its 50% level.

Bears aren’t ready to loosen their grip yet, but bulls need not lose heart as long as the 6500 level holds.

On longer term weekly chart (not shown), the index is trading well above its rising 200 week EMA in a long-term bull market. The index may be in the process of forming a large ascending triangle, which has strong bullish implications.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 are recovering from sharp corrections. Both indices are in long-term bull markets. Ignore near term volatility. Stay invested.

Sensex Possibilities: a guest post

WIth Sensex touching new highs on a regular basis, analysts of all shapes and sizes have started to predict fantastic index levels without really explaining how and why those levels can be reached.

Despite the past few years of slowing GDP growth – a worldwide phenomenon – India continues to show positive growth. Things can only improve from here onwards – more so if a decisive government comes to power.

In a guest post, Niteen takes a look at likely Sensex levels now and in the future, based on the Market Cap to GDP ratio. History shows that Sensex doesn’t rise continuously to higher levels without occasional sharp down turns. However, the analysis provides a long-term view of possibilities.

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As the market started taking cues from the election outcome possibilities, market players started predicting various Sensex levels. Some are predicting 40,000 and others talking about 60,000. But they all are unanimous that the Sensex is going to reach new highs.

Let’s have a rational approach and try to understand the Sensex level possibilities keeping in mind GDP and Market Cap. This is the classic ratio used by Warren Buffett over a period of time to understand the valuation of the market.

India’s GDP is US$2.16 Trillion which was $1 Trillion in Nov 2007. This is a phenomenal growth because many would not have expected us to touch $2 trillion so early. GDP size-wise we are amongst the top 10 nations in the world. If we had continued to grow at 9% per annum then we would have become a $5 Trillion economy by 2024.

We all know that the growth rate came down from above 9% levels to now below 5% and reasons are known, discussed and debated widely. Having said that, we could still achieve an average growth of 7% which is a very conservative number considering the aspirations of people of India. If we could continue to achieve just an average growth rate of 7% YoY then the $5 Trillion economy number will come by 2027 instead of 2024.

In fair market scenario, GDP to Market Cap ratio is 1 or 0.9. Presently, the Sensex is at 22600 levels with Market Cap of US$1.38 Trillion and GDP is $2.16 Trillion. The current ratio of total Market Cap to GDP is 0.64. The historical high was 1.65; the historical low was 0.41 and fair market value will be around 0.9.

I have taken three scenarios: best case (GDP to Market Cap ratio of 1.5), worst case (GDP to Market Cap ratio 0.4) and base case (GDP to Market Cap ratio 0.9) and drawn the Sensex levels keeping in mind the average GDP growth rate of 7% starting from 4.5% of this year in the below table. I have provided the projected Sensex levels under all the three scenarios.

Sensex levels
Year	Best Case	Worst case	Base case
2014	53061	14150	31837
2015	55714	14857	33428
2016	59057	15748	35434
2017	63191	16851	37914
2018	67930	18115	40758
2019	73364	19564	44019
2020	79600	21227	47760
2021	86764	23137	52059
2022	94139	25104	56484
2023	101671	27112	61002
2024	108788	29010	65273
2025	115859	30896	69515
2026	123390	32904	74034
2027	131410	35043	78846

If the economy reaches $5 Trillion then the Sensex number should cross 50,000 while maintaining the same Market Cap to GDP ratio of 0.64. If the ratio goes up from 0.64 to 0.9 or 1.0 the market could cross 80,000. Looks ambitious but still very much possible…

The scenario presented above is especially important to highlight the importance of long term investment v/s short term gains. In short term, we have several hiccoughs which come in our way. So just basing our decision on the election outcome may not be a good idea. During last few years the market had been hammered with lot of negativity. It is not that many of them were not true. It is also true that the scenario will not remain the same. Good old days of 9% GDP growth is not there today but the next government, whosoever comes to power (Modi/Congress/Third front), will have to start initiatives to take the economy out of its slumber. Most analysts are predicting numbers based on best case scenario. However, a likely possibility is of base case scenario over a longer period.

I look forward to receiving your views.

P.S.: I have taken an average 7% GDP growth. The government is expecting a GDP growth rate of around 4.5-5%. I have taken a GDP growth rate of 4.5% for the current year and gradually increased it while keeping the average of 7% for the duration. We might have some period when the economy may grow faster than average and vice-a-versa.

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(Niteen is an MBA and cleared CFA Level 2, CFA Institute USA. He also conducts investor education sessions, writes blogs. A firm believer in long-term financial planning, and a 20 years veteran of the stock market, he likes to analyse the economy, and individual stocks.

Niteen blogs at Investment ideas.)

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 18, 2014

In a holiday-truncated week, Sensex and Nifty were not expected to go anywhere – and they didn’t. Both indices closed flat for the week. However, intra-week gyrations kept small investors on tenterhooks.

When stock indices are trading at life-time highs, some caution is warranted. However, both indices are in long-term bull markets – which means the indices are likely to move higher, and dips provide opportunities to add.

Results season is upon us. First off the block were the large IT services companies, which revealed a good set of numbers. Even Reliance came up with decent profits, though top line growth was negative. Glaxo Pharma’s Q1 numbers disappointed.

BSE Sensex index chart

Sensex faced profit booking from FIIs and DIIs during the first 2 days of a short 3-days trading week, but found good support from its rising 20 day EMA and bounced up to close absolutely flat for the week. All three EMAs are rising and Sensex is trading above them, which is the sign of a bull market.

Daily technical indicators have corrected from overbought conditions, but remain in bullish zones. MACD has crossed below its signal line, and about to drop from its overbought zone. ROC has bounced back into positive territory, but is below its 10 day MA. RSI dropped from its overbought zone after almost 6 weeks, but has turned up again. Slow stochastic has fallen from its overbought zone, and is just above its 50% level.

LIC reportedly sold heavily during Jan-Mar ‘14, but FIIs have clearly absorbed all the selling. Now that a new financial year has started, LIC can be expected to re-enter the market with its huge cash pile. No points for guessing which way Sensex will move when they do.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty consolidated sideways in a holiday-shortened, low-volume week. For the second week in a row, the index crossed the psychological 6800 barrier intra-week, but failed to close above it. However, the weekly close of 6779 was a life-time high.

Why is 6800 a ‘psychological’ (as opposed to a ‘technical’) barrier? Because Nifty is in ‘blue-sky’ territory with no known resistances. Under such circumstances, index levels with easily recognisable round numbers tend to provide resistance. Once 6800 is crossed – which can happen at any time – expect some resistance at 7000.

Weekly technical indicators are well inside their respective overbought zones. Markets can remain overbought or oversold for long periods. But some correction or consolidation may start at any time. Nifty is in a long-term bull market, so any dips can be used to add.

Selling at every rise is a good strategy in a bear market. In a bull market, it could mean that you may either miss a major rally or, may be forced to re-enter at higher levels.

What if the market suddenly turns bearish without any rhyme or reason? Such things do happen. For instance, NDA may fail to get a majority and NaMo may not become the PM of a coalition government. Just keep a stop-loss at 6350 (previous resistance) or 6150 (current level of the 50 week EMA) and stay invested.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in long-term bull markets. This is not the time to sell off fearing a market crash. Stay invested with appropriate stop-losses. Continue with your SIPs in funds. Use dips as opportunities to add selectively.

Stocks in the news this week (Apr 17, ‘14)

As human beings and investors, we are prone to biases in our decision making. ‘Recency bias’ clouds our minds if a recent event had caused a lot of pain – like losing money by buying or selling near a market top.

Three days of profit booking by FIIs (they can’t go on buying all the time) sent shivers down the spines of many investors. Was this the beginning of the big crash? Should they be exiting the market?

Fear impedes rational decision making. Remember the famous Gabbar Singh quote from ‘Sholay’: If you are afraid, you are as good as dead. And the one from Warren Buffett: Be greedy when others are fearful.

This post is not about being greedy or fearful about the stocks in the charts below. Please do your own analysis if you wish to buy or sell.

Hathway Cable

The stock has been trading sideways for most of the past year. It slipped into a bear market in Feb ‘14. The sharp spike in price today was caused by a ‘buy’ call from a foreign brokerage. Technical indicators remain in bearish zones.

Hind. Construction

The stock had dropped deep in a bear market to ‘penny’ status in Jul ‘13. It has recovered since then and returned to a bull market in Mar ‘14. Some recent big orders have boosted the rally. Technical indicators have corrected overbought conditions and remain bullish.

Sadbhav Engg.

The stock had a long struggle with the bears, but has more than doubled from its Sep ‘13 low. Today’s sharp rise in price was on clarification about a frivolous allegation before the Company Law Board. Technical indicators are looking overbought and three of them are showing negative divergences by touching lower tops. Some correction or consolidation may follow.

Shasun Pharma.

Bears had a stranglehold on this stock. Though it has moved above its three EMAs on good volume support, the ‘golden cross’ of the 50 day EMA above the 200 day EMA is still awaited. A PE investor has bought a minority stake in a JV. Technical indicators are looking overbought. Expect some profit booking.

WTI and Brent Crude Oil charts: bulls fight back

WTI Crude chart

In a previous update to the daily bar chart pattern of WTI Crude oil, a bearish ‘rising wedge’ pattern was forming. It was expected that oil’s price would break downwards from the wedge. Since technical analysis is not a science but based on empirical observations, patterns don’t always play out as expected.

Note that oil’s price broke out upwards from the ‘rising wedge’, but there was no accompanying surge in volumes to validate the upward break out. Oil’s price soon broke down sharply below its 20 day and 50 day EMAs and the lower edge of the wedge, but found good support from its 200 day EMA.

The subsequent rally took oil’s price above its 20 day and 50 day EMAs – supported by good volumes. But the rally seems to be stalling near its previous high of 105. Though oil’s price is trading well above its three EMAs in a bull market, the hurdle at 105 needs to be crossed before bulls can regain full control.

Daily technical indicators are looking bullish. MACD is rising above its signal line in positive territory. RSI is moving sideways above its 50% level. Slow stochastic is inside its overbought zone, but turning down.

On longer term weekly chart (not shown), all three weekly EMAs are rising and oil’s price is trading above them in a long-term bull market.

Brent Crude chart

The daily bar chart pattern of Brent Crude oil had dropped below all three EMAs into bear territory on Mar 5 ‘14. For the next 5 weeks, the falling 200 day EMA provided strong resistance to all attempts by bulls to rally.

A high volume day on Apr 2 ‘14 took oil’s price down to a low of 104 – but it turned out to be a sign of selling exhaustion. The subsequent rally has propelled oils’ price above all three EMAs back into bull territory. However, the rally has been accompanied by sliding volumes, which raises questions about its sustainability.

Daily technical indicators are looking bullish. MACD has just entered positive zone above its rising signal line. RSI has moved above its 50% level. Slow stochastic is inside its overbought zone. The rally may continue a bit longer.

However, a failure to move above its Mar ‘14 top of 112 would mean a continuation of a bearish pattern of lower tops and lower bottoms that began in early Dec ‘13.

On longer term weekly chart (not shown), oil’s price bounced up from support of its rising 200 week EMA and is trading above all three weekly EMAs.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Apr 11, ‘14

S&P 500 Index Chart

Several bearish signals led to the following concluding comments in last week’s analysis of the daily bar chart pattern of S&P 500: “Maintain a stop-loss at 1840 to protect profits. A drop below 1840 would confirm an intermediate top at 1897. A deeper correction may follow.”

After bouncing up from the 1840 level in the early part of last week, the index succumbed to selling pressure and dropped sharply below its 20 day and 50 day EMAs and the 1840 level. The index is just above a support zone between 1800-1810. Buying interest may emerge here.

Daily technical indicators are looking bearish. MACD has slipped into negative territory below its falling signal line. RSI has dropped below its 50% level. Slow stochastic is about to enter its oversold zone.

The index is trading more than 50 points above its rising 200 day EMA. There is no immediate threat to the long-term bull market.

FTSE 100 Index Chart

The 6 months daily bar chart pattern of FTSE 100 forayed into bull territory briefly – only to face strong volume of selling by bears, and ended the week below the 6600 level and all three EMAs. The only good news for the bulls is that the stop-loss level of 6500 didn’t get breached.

Daily technical indicators are looking bearish. MACD is negative, and about to cross below its signal line. RSI is falling below its 50% level. Slow stochastic is about to drop below its 50% level.

The 6500 level may be tested soon.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 are facing sharp corrections. Both indices are near support levels, but deeper corrections can not be ruled out. Wait for the corrections to play out before considering re-entry.

Sunday musings: have an exit strategy from a ‘Chakravyuha’

Of all the stories and incidents related in the epic ‘Mahabharata’ there are none more valiant nor tragic than the story of Abhimanyu. While still in the womb of his mother, Subhadra (who was Lord Krishna’s sister), the yet unborn son of Arjuna heard and remembered the details of a defensive military formation - called ‘Chakravyuha’ - being related by his father.

Unfortunately, Subhadra got bored by her husband’s military discourse and dropped off to sleep. Seeing this, Arjuna stopped his explanation right at the most crucial part of how a warrior can extricate oneself after successfully penetrating the ‘Chakravyuha’ formation.

Abhimanyu grew up to be a valiant and skilled warrior under the able guidance of Arjuna and Lord Krishna. He was considered an equal of his father in archery. In spite of all his knowledge and skills, there was a fatal flaw in his education. He never had the occasion to learn the exit option from the ‘Chakravyuha’.

During the Kurukshetra war, the Pandavas were decimating the Kaurava army and annihilating their strongest warriors. In desperation, the Kauravas decided to kill Yudhishthira by luring him inside a ‘Chakravyuha’ formation. Since Arjuna was the only one who knew how to break through a ‘Chakravyuha’, the Kauravas distracted him in battle and challenged Yudhishthira to enter the ‘Chakravyuha’.

Sensing danger to the life of the Pandava king, a teenaged Abhimanyu volunteered to enter the ‘Chakravyuha’ with his own army. But he fought so skillfully and valiantly that he progressed well inside the spiral formation leaving much of his army far behind. The Kaurava warriors used the opportunity to surround him. Alas, Abhimanyu did not know how to extricate himself and died fighting.

Many small investors enter the stock market without having a proper exit strategy. Entering the ‘Chakravyuha’ is easy. But inside the formation are skilled and experienced warriors like Rakesh Jhunjhunwala, Ramesh Damani, mutual funds, FIIs – just waiting to slaughter investors who don’t know how and when to get out.

How to sell, when to sell, how to stop a small loss from becoming a larger one, when to stay invested with a trailing stop-loss are skills that must be learned before committing big money in the market. Otherwise, like Abhimanyu, survival in the stock market will be a short one.

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 11, 2014

For the financial year ended Mar 31 ‘14, India’s exports grew by 4% (to $312.35 Bn); imports dropped by 8% (to $450.94 Bn), leading to a 27% drop in the trade deficit. However, for the month of Mar ‘14 the trade deficit rose by 29% over Feb ‘14 due to lower exports. With visible recovery in the global economy, exports are likely to pick up in the current year.

The IIP number dropped to –1.9% in Feb ‘14 – its lowest level in 5 months – because of a sharp 3.7% YoY drop in manufacturing production. Car and CV sales contracted. Consumer demand and investment environment remains weak. It will be a real challenge for the new government to put economic growth back on rails.

Sensex and Nifty continued their climb over a wall of worry – as a bull market is prone to do. Both indices touched new lifetime highs during the week. What should small investors do when indices touch new highs but there is not much euphoria? Let us see what the charts are suggesting.

BSE Sensex index chart

After breaking out of the ‘rectangle’ pattern 5 weeks ago, the daily closing chart pattern of Sensex has continued to move up above its three rising EMAs – a clear sign that bulls are in control. Note that it hasn’t been a one way rise. A few days of sideways consolidation and a couple of short corrections have provided adding opportunities.

Daily technical indicators are bullish. MACD, RSI and Slow stochastic are in their overbought zones. Only ROC is showing a bit of bearishness by crossing below its 10 day MA in positive territory. Is there a possibility of a sharp correction – like what happened in global markets?

Corrections are part and parcel of trading in the stock market – and can happen at any time for no particular reason. One must learn to take them in stride. The best way is to have an asset allocation plan and a slightly-detached long-term view.

Remember that despite poor governance, rampant corruption, bureaucratic red-tape, high interest rates India’s economy continues to grow, albeit at a lower rate. The better managed companies are improving their top and bottom lines. Sensex is reflecting that.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty touched new lifetime highs on intra-week and closing basis. Despite a holiday-shortened trading week, volumes were very strong. Anecdotal evidence suggests that retail investors are returning to the market.

All four technical indicators are in their overbought zones, which could lead to a correction or consolidation. The index is clearly in a long-term bull market, as it is trading above the long-term up trend line and its two rising weekly EMAs. Any correction or consolidation can be used to add.

Many small investors make the mistake of buying too late and selling too soon. Investment is all about building wealth over the long term with a proper plan. Frequently moving in and out of the market with small gains makes your broker rich.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in the firm grip of bulls. One makes money in a bull market by picking stocks carefully and staying long. If you are thinking about selling and buying back at a lower rate – drop the idea. That strategy is meant for a bear market.

Stocks in the news this week (Apr 10, ‘14)

Bulls (i.e. FIIs) have been on the rampage for a while, with market indices scaling new highs regularly. All kinds of stocks are ‘getting discovered’ by those who could not or did not buy when indices were at lower levels.

Though absolute values of Sensex and Nifty are at their highest ever levels, the numbers need to be adjusted by the earnings of the index constituent companies. On P/E basis, indices are not overvalued yet because earnings have grown more than index levels in percentage terms.

The charts below will exemplify why investors need to concentrate on their own portfolios instead of getting excited about index levels. Each of the four stocks is at a different stage in the bull/bear cycle.

These are not buy/sell recommendations.

Sun Pharma

The stock was undergoing a bull market correction when news of the Ranbaxy acquisition hit the market. Ranbaxy is about the same size as Sun Pharma and has several pending quality issues. Integration of such a large acquisition will take quite some time, and may be negative for the stock in the near term.

Supreme Petro

The stock was trading sideways with a slight downward bias. The sudden price spike was on news of a possible share buyback. MACD and ROC are showing overbought conditions. RSI and Slow stochastic are showing negative divergences by failing to move higher. Some correction can be expected.

MAN Ind.

The stock has been in a bear market for quite some time, but the chart shows gradual accumulation since Dec ‘13. News of a good order book build-up propelled the stock price above its falling 200 day EMA on strong volumes. Note the negative divergence in Slow stochastic, which failed to rise higher. ROC and RSI are overbought. Profit booking is likely.

Prime Focus

This stock was a favourite of the market once upon a time. It has been under the control of bears for 3 years. The recent price spurt – on news of a private placement by a tech. subsidiary – has failed to overcome the resistance of the falling 200 day EMA. ROC, RSI, Slow stochastic are overbought. Bears are likely to sell on the rise.

Gold and Silver charts: bears regain control

Gold Chart Pattern

The 6 months daily bar chart pattern of gold rallied splendidly from the beginning of the year and gained more than 200 points before topping out with a ‘reversal day’ pattern on Mar 17 ‘14.

Gold’s price rose convincingly above its 200 day EMA – supported by a volume surge. But that wasn’t enough to shake off the bears. Note that the 20 day EMA had managed to cross above the 200 day EMA, but the 50 day EMA could not.

The ‘golden cross’ of the 50 day EMA above the 200 day EMA is one of the technical confirmations of a bull market. Bears ensured that the time wasn’t ripe yet for a trend change. Gold’s price is trading below all three EMAs in a bear market.

Daily technical indicators are bearish. MACD is below its signal line in negative territory, but turning up. RSI failed to move above its 50% level. Slow stochastic is trying to emerge from its overbought zone. Bulls may attempt another rally.

On longer term weekly chart (not shown), gold’s price is trading below all three weekly EMAs in a bear market.

Silver Chart Pattern

The 6 months daily bar chart pattern of silver shows the strong resistance put up by the 200 day EMA to all attempts at a trend reversal.

Silver’s price is consolidating within a bearish ‘flag’ pattern from which the likely break out is downwards. All three EMAs are falling and silver’s price is trading below them in a bear market.

Daily technical indicators are bearish. MACD is inching up towards its falling signal line in negative territory. RSI is moving sideways below its 50% level. Slow stochastic is trying to come out of its oversold zone.

On longer term weekly chart (not shown), silver’s price is trading below all three weekly EMAs in a bear market.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Apr 04, ‘14

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 broke out above the rectangular range within which it was trading since the beginning of Mar ‘14 – but it turned out to be a joke on All Fool’s Day. There was no accompanying surge in volumes to validate the upward break out.

The index managed to move up to touch a new intra-day high of 1897 on Apr 4 ‘14, but formed a ‘reversal day’ pattern (higher high, lower close) and plunged back inside the rectangle. At the time of writing this post, the index is trading below its 20 day EMA.

Daily technical indicators are still in bullish zones, but beginning to look bearish. MACD has crossed below its signal line in positive territory. RSI is resting at its 50% level. Slow stochastic is falling towards its 50% level. Note that all three indicators showed negative divergences by failing touch new highs with the index.

Maintain a stop-loss at 1840 to protect profits. A drop below 1840 would confirm an intermediate top at 1897. A deeper correction may follow. The index is trading well above its rising 200 day EMA – so the long-term bull market is intact.

FTSE 100 Index Chart

The following comments were made in last week’s analysis of the daily bar chart pattern of FTSE 100: “The index is consolidating within a rectangular band between 6500 and 6630. Rectangles tend to be continuation patterns but are unreliable. That means a downward break below 6500 is likely. However, waiting for the eventual break out would be prudent. Stay invested with a stop-loss at 6500.”

The index rally from the recent bottom formed at 6500 continued past its 20 day and 50 day EMAs into bull territory – closing just below the 6700 level by the end of the week. However, at the time of writing this post, the index has corrected down to the 6620 level – back inside the rectangle. The bears are refusing to give up without a fight.

Daily technical indicators are looking bullish. MACD is rising above its signal line in negative territory. RSI has moved above its 50% level. Slow stochastic has entered its overbought zone, but showing signs of turning down.

Stay invested with a stop-loss at 6500.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 broke out above ‘rectangle’ patterns within which they were consolidating. But the break outs turned out to be ‘false’. Both indices are trading within their respective rectangles again. Deeper corrections can not be ruled out. Stay invested with suitable stop-losses.

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 04, 2014

RBI maintained status quo on interest rates – as was widely expected by economists and analysts. The stock market treated it as a non-event. With predictions of El-Nino doing the rounds, a weak monsoon during Jun-Sep period is a possibility.

If the predictions do come true, food prices are going to move up. RBI may have no option but to raise interest rates once again to contain inflation. Whether an NDA-led government comes to power or not, a rapid turnaround in the economy is unlikely.

That is the bad news. The good news is that valuations are still at reasonable levels even though Sensex and Nifty are trading near life-time highs. FII buying has not only improved bullish sentiments, it has helped India’s forex reserves to cross the $300 Billion mark after many months.

BSE Sensex index chart

The daily bar chart pattern of Sensex met the upward target of 22500 (mentioned in last week’s post), and moved higher to touch a new intra-day high of 22621 on Apr 3 ‘14. But the index formed a ‘reversal day’ pattern (higher high, lower close) and started to correct.

Daily technical indicators are correcting overbought conditions, but remain in bullish zones. MACD is touching its rising signal line inside its overbought zone. ROC is about to cross below its 10 day MA in positive territory. RSI and Slow stochastic are inside their respective overbought zones, but have started falling.

A few more days of correction will be good for the technical ‘health’ of the Sensex chart, allowing it to move even higher.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty touched a new intra-week high of 6777 – meeting the upward target of 6750 – but formed a ‘reversal week’ pattern (higher high, lower close) on strong volumes. Some correction or consolidation is likely.

Weekly technical indicators are looking overbought. MACD has just entered its overbought zone. ROC is at the edge of its overbought zone. RSI has slipped down after failing to enter its overbought zone. Slow stochastic has been inside its overbought zone for 4 weeks, but showing signs of turning down.

The likely dip can be used to add selectively. It is also a good time to get rid of under-performing small-caps that have started to move up sharply.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are correcting overbought conditions after touching new highs. Both indices are in long-term bull markets – so avoid any impulse to short the indices.

Technical updates – Thermax and Voltas

India’s GDP growth has been shrinking for the past several quarters due to a combination of poor governance, rampant corruption, faulty populist policies and burgeoning fiscal and current account deficits.

High inflation kept interest rates high, which in turn led to lower capital expenditure that stunted growth. Not surprisingly, infrastructure stocks had borne the brunt of the negative sentiment about the economy.

Some belated measures introduced by the Finance Minister have aided in curtailing deficit. FII inflows have helped the Rupee to appreciate in value. The stock market appears to have discounted the good news in advance – the charts of Thermax and Voltas are good examples.

Thermax

The stock price of Thermax formed a small ‘double bottom’ reversal pattern back in Dec ‘11 and started an up trend that is still in force. Note the 14 months long consolidation within a ‘rectangle’ pattern. Rectangles tend to be continuation patterns. The eventual break out was upwards, but was followed by a strong pullback that found support from the rising 200 day EMA.

A sharp rally followed. All four technical indicators indicated overbought conditions. The stock nearly doubled in price from its Dec ‘11 low of 390, but formed a small ‘double top’ reversal pattern. After correcting down to its rising 50 day EMA, the stock bounced up in trade today.

Voltas

The stock price of Voltas formed a small inverse head-and-shoulders reversal pattern back in Dec ‘11 and started to rally. It formed a large ‘double-top’ reversal pattern by touching the 130 level in Mar ‘12 and Sep ‘12. A year-long down trend followed and the stock touched a new low of 64 on Sep 3 ‘13.

A strong rally helped the stock touch a 2 yr high of 163 on Apr 2 ‘14 – a huge gain of 157% in 7 months. The stock is looking overbought. Three of the indicators – ROC, RSI, Slow stochastic – are showing negative divergences by touching lower tops. A correction is likely.

Nifty chart: a mid-week update (Apr 02 ‘14)

After a long consolidation within a ‘rectangle’ pattern, Nifty broke out upwards on a volume surge that validated the break out. Rectangles have measuring implications – as mentioned in a previous post: the height of the rectangle (about 400) is added to the break out point (about 6350) for a minimum upward target of 6750. This target has been met today.

Can the index move higher? Yes, it can. How much further can it rise? Note that after breaking out above the ‘rectangle’, Nifty immediately went into another consolidation within a ‘flag’ pattern. Volumes dropped during formation of the ‘flag’ – as it should. The upward break out from the ‘flag’ was also validated by an uptick in volumes.

Now, ‘flag’s also have measuring implications: the height of the ‘pole’ – measured from the start of the rally from the bottom of the ‘rectangle’ (about 5970) to the top of the ‘flag’ (about 6570) i.e. 600 points – is added to the break out point, for a minimum target of 7170.

Why ‘minimum target’? Because upward targets are often exceeded during bull rallies. Now you know why some experts have started mentioning upside targets of 7100-7200. When will the target be met? The way FIIs are piling into India, it can happen before the results season starts.

Daily technical indicators are bullish, but overbought. MACD, RSI and Slow stochastic are inside their overbought zones. ROC is showing negative divergence by failing to touch a new high with the index. Note that an index can remain overbought for long periods. But be prepared for some consolidation or correction.

Two things to avoid when the bulls are charging: (1) jumping in because you have missed the rally; (2) shorting the index in the hope of making a quick buck. Both can be very injurious to your wealth.

Stick to existing holdings and investment plans. Use the rally to get rid of underperforming stocks from your portfolio.