The 3 R’s of long term investing – a guest post

There is a theory about running any business: If the barrier to entry is low, making money is a lot tougher. If the barrier to entry is high, making money is much easier. Can the same theory be applied to stock market investing?

The short answer is: Yes. Most small investors enter the market by opening a demat account and a trading account. There are some documentations to be done, and voila! You are ready to buy and sell within a few days. Any one can do it, right? Entry barrier is low. No wonder very few make money.

The entry barrier is actually quite high. You need to learn how the stock market works, how to read an Annual Report, the various economic factors that enhance or affect any business, what is happening globally, human psychology about decision making. Read, read and then read some more (those are not the 3 R’s – though they could be).

Build a knowledge base over time, and you will see that making money in the market is not so difficult. In this month’s guest post, Nishit mentions some key points of long term investing.

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Let me elaborate on the principles of Long Term Investing. I have been in the market for 16 years now and am convinced that there is only one type of individual who becomes rich in the market eventually. It is the Long Term Investor. It is not the number of times you trade but the time you spend in the market which counts.

Some key points to be considered are:

1. Treat stocks which you buy as businesses you own

Every time you buy a stock, you buy a small fraction of a business. Try and understand what the business is all about. People spend more time thinking about buying groceries than stocks. You are investing in a business; spend time to try and understand the business model, and give the business time to grow.

2. Look around you and see what’s hot

Stock prices are a reflection of what is the flavour of the month. Look around you and see what products your friends and colleagues are buying. If the products are good and people are buying, then the stocks of those companies should do very well.

In 2002, I saw a lot of people buying Airtel phone connections in Mumbai. I picked up the stock at around Rs 50.

3. Businesses have an entire lifecycle

The mistake I did with Bharti Airtel was selling it off when it reached Rs 110 - happy with my profit. The stock touched Rs 400+ after that. I was happy with my profit but I did not understand that the business cycle was much longer. Book part profits so that your cost of capital becomes so less that you can forget about the stock and live on the dividends. My strategy is to reduce the value of a stock to a dividend yield of 5%, treat it like a bank FD interest income and forget about it.

4. Look at your own circle of competence

Many amongst us are in some profession or the other. My family doctor recommended the stock of Glenmark to my mother 10 years back saying ‘keep it for your grandchildren’. The stock has already multiplied 20-30 times. I am in IT industry and for me it becomes easier to buy IT stocks.

5. Know when to exit

As per the philosophy of life everything which begins has to end some day. This is as certain as night follows day and day follows night. In 1986, many companies that listed as blue chips on the Bombay Stock exchange do not even exist anymore. One should know when to exit. Hindustan Motors and Premier Auto were Sensex constituents once upon a time. Do those companies even exist now?

Investing is all about buying the right stock at the right time, and holding it for the right amount of time. Those are the 3 R’s of long term investing.

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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. You can reach him at nish.stockid@gmail.com)

Nifty Long Term Elliot Wave Counts

Those investors who are in a panic because Nifty has corrected for 2 straight sessions, and are worried that the index may face a huge fall – here is some good news.

Take a long-term view. The future doesn’t look that murky at all. In fact, it looks extremely bright.

For details, check out Nishit’s long term Elliott Wave counts here.

(Note: I am not a great fan of Elliott Wave theory because it seems too confusing and cumbersome in practice. But I do like long-term views, and Nishit’s post is definitely worth checking out.)

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

Q1 results declared so far have been a mixed bag. Apart from the large IT services companies, positive surprises have been fewer, and stock specific. Even private banks are beginning to show a degradation in performance.

It may take a couple of more quarters before India Inc. gets well and truly on a revival path. The new government is trying to do its best. Reports indicate a change in attitude and activity among the ‘babus’ – who are endeavouring to push files up instead of around, thanks to clear directions from the PM’s office.

FIIs were net buyers throughout the week. However, net selling by DIIs on the last two days of the week was higher than FII buying. Both Sensex and Nifty charts are trading above their daily and weekly EMAs – as well as their up trend lines – in long term bull markets. Both indices touched new highs, but are showing some signs of strain.

BSE Sensex index chart

Sensex touched a new high of 26300 in early trading on Fri. Jul 25, but formed a ‘reversal day’ pattern by closing lower by more than 250 points. Profit booking after 8 days of rallying? Possibly. Next week has F&O settlement and a holiday. That may embolden bears to sell.

All four technical indicators continue to show negative divergences (marked by blue arrows) by failing to touch new highs with the index. The longer these divergences remain, the greater becomes the probability of a correction or consolidation.

Unless there is an external ‘black swan’ event, the chances of a deep correction are less. There are plenty of supports marked on the chart – the three EMAs, the 24900 level, the ‘gap’ and the ‘up trend line 2’ – that should protect the down side.

No need to worry about an impending correction, or sell in a panic. Trying to sell with an intention to buy back at lower levels works better in bear markets. Stay invested with appropriate stop-losses. Buy only if you see compelling value. Don’t get trapped by the ‘greater fool theory’.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty touched new intra-week and closing highs during the week. The index has been trading in an upward-sloping channel for the past 10 weeks. The lower edge of the channel is at 7500, which should provide near-term support in case of a correction.

Why talk of a correction when the index is trading above its weekly EMAs and the up trend line in a long-term bull market? Note the volume bars, which have been sliding as Nifty has moved higher. A bull rally requires volume support to sustain.

Weekly technical indicators are in their respective overbought zones. However, ROC is showing the first signs of cracking by crossing below its 10 week MA. Also, all four indicators failed to touch new highs with the index. The negative divergences will eventually lead to a correction or consolidation.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in long-term bull markets, and touched new highs last week. Negative divergences in technical indicators are pointing to a likely correction or consolidation at any time. Such corrections/consolidations are an integral part of a bull market. Be prepared for it and use it to your advantage. Sharp falls in quality scrips – like Tata Motors and IPCA Labs – provide opportunities to add.

Stock Index Chart Patterns: CAC 40, DAX, RTS – Jul 25, ‘14

CAC 40 Index Chart (France)

In last week’s analysis of the 6 months daily bar chart pattern of CAC 40, the following comments were made: “Bears are unlikely to release their strong grip on the chart unless the index crosses convincingly above 4375 and its falling 20 day EMA. Bearish technical indicators are suggesting that may be easier said than done.”

Note that the index did manage to cross above the 4375 level and its falling 20 day EMA. But was it a convincing cross? The answer is: No. Why? Two technical reasons. First, the 3% ‘whipsaw’ rule applies for any break out (or break down). In this case, that 3% level (above 4375) is about 4500. The index failed to get anywhere near 4500 (which, incidentally, is another resistance level).

Second, there should be at least 10-14 daily closes above any resistance level for a convincing breach. CAC 40 had only a single day’s close above 4375. The first reason (3% rule) is the preferred one for analysis because it has been time-tested on many thousands of charts.

The index faced resistance from its falling 50 day EMA and dropped down to test support from its 200 day EMA. Will the support hold? Seems unlikely from the bearish daily technical indicators.

MACD has crossed above its signal line, but remains in negative territory. RSI faced resistance from its 50% level and is headed down. Slow stochastic just about crossed above its 50% level into bullish zone, but is already back-tracking.

On longer term weekly chart (not shown), the index is continuing to receive support from its 50 week EMA and is trading above its 50 week and 200 week EMAs in a long-term bull market. However, weekly technical indicators are in bearish zones. The support from the 50 week EMA is in danger of getting breached. Hold with a strict stop-loss at 4275.

DAX Index Chart (Germany)

The following comments appeared in last week’s analysis of the 6 months daily bar chart pattern of DAX: “Bulls are likely to defend the 9600 level strongly, because a drop below it can take the index much lower towards 9000-9250.”

On Mon. Jul 21, the index actually dropped marginally below the 9600 level intra-day, but managed to bounce up and closed at 9612. It then tried to rally past its falling 20 day and 50 day EMAs over the next 3 days, with very little success.

By Fri. Jul 25, bears took control as the index transacted the highest volumes for the week – but much lower than the previous Friday’s volumes. The index once again dropped close to the 9600 level. Bulls did manage to defend the 9600 level for the week, but how much longer will they be able to do so?

All three daily technical indicators are in bearish zones, and moving down. However, they haven’t quite reached their respective oversold zones. That means further down side is likely.

On longer term weekly chart (not shown), the index closed below its 20 week EMA for the first time since the beginning of Apr ‘14, but is trading above its rising 50 week and 200 week EMAs in a long-term bull market. However, weekly technical indicators are falling and look ready to drop into their respective bearish zones. Hold with a strict stop-loss at 9600.

RTS Index Chart (Russia)

Technical indicators were looking a bearish and a bit oversold in last week’s analysis of the 6 months daily bar chart pattern of RTSI. That had led to the following remark: “Any upward bounce from here is likely to face more selling.”

Note that the index dropped and closed below the 1250 level on Mon. Jul 21, but bounced up weakly above the 1275 level on Wed. Jul 23. That was an invitation for bears to resume their selling. By the end of the week, the index closed below the 1250 level once again – losing about 30 points for the week.

All three daily technical indicators are in bearish zones, and moving down. All three EMAs have converged together. A sharp move usually follows. No prizes for guessing in which direction the index is likely to move.

On longer term weekly chart (not shown), the index is trading below its three weekly EMAs in a long-term bear market. Weekly technical indicators are looking bearish. A deeper correction is likely.

Technical updates – Bartronics and Bilcare

There are two kinds of stocks that never fail to attract small investors – ‘theme’ stocks and RJ stocks. Just like a flame never fails to attract moths. The end results of such attractions are almost equally disastrous.

There are no better examples of these two kinds of stocks than Bartronics and Bilcare. The former is a ‘theme’ stock with a story (high-tech electronics, bar code readers - the next great invention since sliced bread, etc.) that was successfully promoted by brokers and analysts.

The latter is a typical RJ entrapment. Supposedly bought at much lower prices and well publicised as being in RJ’s portfolio, small investors piled into it to push the stock price sky high (to 1830 in Jan ‘08) before the bottom fell out.

With the stock market touching a lifetime high, several ‘theme’s are playing out on message boards (water treatment, agri-related, defence-related etc.), not to mention current RJ favourites. Do yourself a favour. When you hear ‘theme’ or ‘RJ’ in a conversation at a get-together, excuse yourself and leave. 

Bartronics

The stocks price of Bartronics had touched a high of 294 in Jan ‘08. It then dropped to a low of 55 in Nov ‘08, recovered to a high of 194 in Jul ‘09 and then had a one-way fall that seems to have finally bottomed out at a low of 5 touched in Aug ‘13.

The stock has since tripled by closing at 15 on Jun 6 ‘14, but is consolidating sideways within a symmetrical triangle pattern. The stock has returned to a bull market. The ‘golden cross’ of the 50 day EMA above the 200 day EMA has technically confirmed that.

But triangles are unreliable. The break out can be upwards or downwards. Daily technical indicators are looking bearish. If you are thinking about buying because the stock is cheap, forget it. Fundamentals are awful.

Bilcare

The stock price of Bilcare dropped from 1830 in Jan ‘08 to a low of 36 in Dec ‘13 – losing 98% from its peak (like Bartronics). The stock closed at 106 on Jul 7 ‘14, almost tripling from its Dec ‘13 low and returning to a bull market.

The stock price has formed a ‘rounding bottom’ bullish pattern, suggesting more upside. There is resistance at the 138 level, but it may take a while to get there. Daily technical indicators are looking bearish. Some more correction is likely.

Fundamentals are almost as bad as those of Bartronics. Loss-making with a huge debt that is like a millstone round its neck. Best to avoid.

Nifty chart: a mid-week update (Jul 23 ‘14)

Stock markets have this uncanny habit of knowing exactly what everyone wants and expects to happen, and then doing the complete opposite – leaving experts and small investors frustrated, baffled and searching for explanations.

Everyone was expecting a deeper correction from the Jul 8 ‘14 top of 7808 – at least to the ‘gap’ zone formed on the Nifty chart (below) on May 13 ‘14. That would have improved the technical ‘health’ of the chart and provided a buying opportunity to many who have missed the entire rally since the Aug ‘13 low (marked by Up trend line 2).

Instead, Nifty took support from its rising 50 day EMA and rallied to new intra-day and closing highs today. If you have been waiting for a deeper correction to buy, you may have missed the bus. Don’t lose heart. Markets have a strange way of providing many chances to enter.

For bulls, there is plenty of good news. FIIs are back in ‘buy mode’, and have so far net purchased worth Rs 8500 Crores in July. DII net selling worth Rs 4700 Crores haven’t quite kept pace with FII buying. So, who sold the rest? You tell me.

All three EMAs are rising and the index is trading above them in a long-term bull market. Daily technical indicators are looking bullish but not overbought. That means there can be more up side in the near term.

Bears are not going to throw in the towel just yet. Note that volumes have been sliding since the upward ‘gap’ got formed more than 2 months ago. All four technical indicators touched lower tops today while Nifty touched an all-time high. The combined negative divergences may lead to a correction or consolidation.

By touching a top that was less than half a point higher than the Jul 8 top of 7808, accompanied by lower volumes, Nifty may be forming a ‘double top’ reversal pattern. The pattern will get confirmed only if the index falls below the July 14 low of 7422 (‘valley’ between the two tops). Should it do so – and I am not saying it will – then the downside target will be in the middle of the ‘gap’ zone.

Don’t jump in with both feet. Nor should you keep waiting for a correction. The trick to making money in the stock market is to choose fundamentally strong stocks and keep adding to them on a regular basis as per proper financial and asset allocation plans. As simple as that.

Gold and Silver charts: an update

Gold Chart Pattern

The bear market rally on the 6 months daily bar chart pattern of gold from Jun 17 to Jul 11 ‘14 formed a bearish ‘rising wedge’ pattern from which the price broke sharply downwards on very strong volumes on Jul 14 ‘14.

The following remarks were made in the previous post on gold: “The price band between 1330-1350 is a resistance zone, which needs to be crossed convincingly if bulls are to overcome the Mar ‘14 top of 1395, and regain control.”

Gold’s price took support from its 200 day EMA and the lower edge of the wedge, and spiked up on good volumes to touch the upper edge of the wedge – just short of the 1350 level on Jul 10 ‘14.

After dropping below all three EMAs, gold’s price pulled back towards the break down point on the lower edge of the wedge, providing a selling opportunity. MACD and RSI are in bullish zones, but looking weak. Slow stochastic has bounced up from its oversold zone, but is yet to cross above its 50% level.

On longer term weekly chart (not shown), gold’s price is trading above its 20 week EMA but below its 50 week and 200 week EMAs in a long-term bear market. Bears are likely to use any rallies to sell.

Silver Chart Pattern

 

The bear market rally on the 6 months daily bar chart pattern of silver followed in the footsteps of the yellow metal by forming a bearish ‘rising wedge’ pattern from which an expected downward break occurred on Jul 14 ‘14.

Such break downs (or break outs) are often followed by pull backs towards the break down (or break out) point. That is exactly what silver’s price did by crossing the 21.25 level – giving another opportunity to sell for those who may have missed selling on the break down below the wedge.

In the previous post, the following comments were made: “The 200 day EMA has provided good support on the downside so far. If the support holds, then silver’s price may attempt to cross above the resistance zone between 21.25-21.75. Unless that happens, bears will use every opportunity to sell, as they have been doing for the past two trading sessions.”

MACD and RSI corrected down from their respective overbought zones and remain in bullish zones, but their upward momentum has disappeared. Slow stochastic bounced up from the edge of its oversold zone, but is below its 50% level.

On longer term weekly chart (not shown), silver’s price is trading above its 20 week EMA but below its 50 week and 200 week EMAs in a long-term bear market.

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

S&P 500 Index Chart

The 6 months daily bar chart pattern of S&P 500 has been consolidating sideways within a symmetrical triangle pattern since touching a lifetime high of 1985 on Jul 3 ‘14. Triangles tend to be continuation patterns, so the eventual price break out should be upwards.

However, triangles are also unreliable. Price can break downwards or continue to move sideways and break out through the apex of the triangle. That means, one needs to wait for the eventual break out before initiating any buy/sell decision.

Note that volumes during the week were highest on an up-day (Wed. Jul 16), but were equally strong on a down-day (Thu. Jul 17). Bulls and bears appear to be evenly matched. What about the technical indicators?

All three are in bullish zones, but have formed bearish patterns of lower tops and lower bottoms. Interestingly, MACD and RSI are showing negative divergences by touching lower bottoms on Thu. Jul 17, while the index touched a slightly higher bottom.

On longer term weekly chart (not shown), all three weekly EMAs are rising and the index is trading well above them. That is the sign of a long-term bull market. Falling volumes since the beginning of the year is a concern. Weekly technical indicators are overbought. A sharp correction can occur at any time.

FTSE 100 Index Chart

The 6 months daily bar chart pattern of FTSE 100 has good news and bad news for bulls. First, the good. The index spent the entire week above its 200 day EMA. On Fri. Jul 18 ‘14, the index dropped to test support from its 200 day EMA, but bounced up to close almost on the 6750 level, with a 60 points gain for the week.

Now, the bad. The index managed to cross and close above its falling 20 day and 50 day EMAs on Wed. Jul 16 ‘14, but could not sustain in bull territory and dropped below its 20 day and 50 day EMAs. By touching a lower top just short of the 6800 level, the 2 months long down trend continues.

Technical indicators are in bearish zones. MACD is touching its signal line in negative territory, and moving sideways. RSI is trying to cross above its 50% level. Slow stochastic is rising towards its 50% level. The index needs to move convincingly above its Jul ‘14 top of 6875 to break the bearish pattern of ‘lower tops and lower bottoms’.

On longer term weekly chart (not shown), the index is trading above its rising 50 week and 200 week EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but showing downward momentum. Expect bears to dominate in the near term.

Bottomline? The daily bar chart patterns of S&P 500 and FTSE 100 indices are in long-term bull markets, but facing technical headwinds. S&P 500 is consolidating sideways within a triangle pattern. FTSE 100 is in a 2 months long down trend. Deeper corrections may occur at any time. Stay invested, but maintain stop-losses.

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

Q1 results have started hitting the market – and so far, results show that size matters. After better than expected results from Infosys, it was the turn of TCS and Reliance to positively surprise the market.

This is a very good example of why small investors should build a core portfolio of large-cap stocks that can sustain growth through good times and bad. Mid-cap and small-cap stocks should form a satellite portfolio comprising not more than 20-25% of total portfolio value.

Monsoon is spreading across more regions of the country. The overall rainfall deficit has reduced considerably – though some areas are facing drought-like conditions. By quickly taking steps against hoarders and increasing export duties, the government has kept food prices within control.

BSE Sensex index chart

The 6 months daily bar chart pattern of Sensex received good support from the 24900 level, which has acted as a support/resistance level for the past 2 months. The upward bounce took the index above its 20 day EMA. Both are good news for bulls.

However, the index is yet to cross above its Jul 8 ‘14 top of 26190. Unless it does so in a hurry, the possibility of a head-and-shoulders reversal pattern may come to the fore. Note that the ‘left shoulder’ and the ‘head’ has formed already. If the index drops again towards 24900, the ‘right shoulder’ may get formed with 24900 as the ‘neckline’.

Should that happen – and it is only a possibility, not a certainty – the index may drop all the way down to the ‘gap’ formed on May 13 ‘14. Note that the 50 day EMA is just below the 24900 level, and should provide added support on the downside.

Why are we discussing down side when the index is trading above all three EMAs in a long-term bull market? Note the mixed signals being given out by the daily technical indicators. MACD is moving sideways in positive zone, but is below its falling signal line. ROC is also moving sideways below its falling 10 day MA, but in negative zone.  RSI is falling towards its 50% level. Slow stochastic has just crossed above its 50% level.

MACD and ROC are in down trends for more than a month. All four indicators showed negative divergences by failing to touch new highs with the index on Jul 8. Unless 26190 is surmounted convincingly, bears may play spoilsport in the near term.

On longer term weekly chart (not shown), the index is consolidating sideways but is well above its three rising weekly EMAs. Weekly technical indicators have started correcting overbought conditions. Some more correction or consolidation will help improve the technical ‘health’ of the chart, and enable it to scale new highs.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty formed a ‘reversal week’ pattern (slightly lower low and a much higher close). So, is the intermediate down trend that started in the previous week over? The answer is: Not till the index can cross above the previous week’s all-time high of 7808.

Volumes have been sliding for the past 8 weeks, with down-week volumes being higher. That is a clear sign that bears remain active. However, the bearishness is only in the near term – which is not unusual near an all-time high. The index is trading well above its two weekly EMAs and the blue up trend line. The long-term bull market is intact.

Weekly technical indicators remain in their respective overbought zones, with some signs of slipping down. MACD is moving sideways above its rising signal line inside overbought zone. ROC has merged with its 10 week MA inside its overbought zone. RSI is getting good support from the edge of its overbought zone. Slow stochastic is moving sideways inside overbought zone.

The index is likely to consolidate or correct a bit more before it moves higher.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are undergoing consolidations in long-term bull markets. This is a good opportunity to add fundamentally strong stocks to your portfolio before both indices embark on the next legs of their up moves. Avoid the temptation of buying unknown ‘cheap’ stocks recommended on various message boards.

(Note: If you want to give your portfolio a boost, add fundamentally strong small-cap stocks recommended in my Monthly Investment Newsletter. But hurry. Offer for paid subscriptions will close on July 21, 2014.)

Stock Index Chart Patterns: CAC 40, DAX, RTS – Jul 18, ‘14

CAC 40 Index Chart (France)

The following comments were made in last week’s analysis of the 6 months daily bar chart pattern of CAC 40: “Is the correction over? Negative divergences, still visible on the technical indicators, are suggesting otherwise.”

Though the index closed 19 points higher for the week, it has been consolidating within a 100 points zone between 4275-4375 – possibly forming a bearish ‘flag’ pattern in the process. The likely break out from the ‘flag’ is downwards.

Bears are unlikely to release their strong grip on the chart unless the index crosses convincingly above 4375 and its falling 20 day EMA. Bearish technical indicators are suggesting that may be easier said than done.

MACD is inside its oversold zone, moving sideways below its falling signal line. RSI bounced up from the edge of its oversold zone, but remains below its 50% level. Slow stochastic emerged from its oversold zone, but its upward momentum has stalled well below its 50% level.

All three indicators continue to show negative divergences by falling below their respective Feb ‘14 lows, while the index touched a higher low. A fall below 4275 can drop the index towards 4000.

On longer term weekly chart (not shown), the index is receiving support from its 50 week EMA and is trading above its 50 week and 200 week EMAs in a long-term bull market. However, weekly technical indicators have turned bearish. The support from the 50 week EMA may get breached. Hold with a strict stop-loss at 4275.

DAX Index Chart (Germany)

More downside was expected in last week’s analysis of the 6 months daily bar chart pattern of DAX due to bearish technical indicators. Instead, the index used the support from the 9600 level to rally briefly past the 9800 level and its 20 day and 50 day EMAs.

The lower top of 9871 – touched on Wed. Jul 16 – gave an excuse for bears to resume their selling. The index dropped below its 20 day and 50 day EMAs into the support zone between 9600-9800. Will the support hold again?

Volumes on Fri. Jul 18 were the highest in 4 weeks as the index opened with a downward gap and dropped below the 9700 level – indicating strong bear dominance. Bulls fought back and the index closed near its highest level with a 54 points gain for the week.

All three daily technical indicators are in bearish zones. Bulls are likely to defend the 9600 level strongly, because a drop below it can take the index much lower towards 9000-9250.

On longer term weekly chart (not shown), the index is continuing to receive support from its 20 week EMA, and is trading above its 50 week and 200 week EMAs in a long-term bull market. However, weekly technical indicators are falling within bullish zones. Hold with a strict stop-loss at 9600.

RTS Index Chart (Russia)

The 4 months long bull rally from the Mar ‘14 low on the 6 months daily bar chart pattern of RTSI appears to be over. The following bearish possibility was mentioned in last week’s analysis:

“By touching a slightly lower intra-day top of 1420 on Thu. Jul 10, and forming a ‘reversal day’ pattern (higher high, lower close), the possibility of a ‘double top’ reversal pattern has come to the fore. However, the pattern will get confirmed only if the index falls below the 1350 level.”

The index confirmed the ‘double top’ reversal pattern by falling below 1350 and its 50 day and 200 day EMAs – back into bear country. The stop-loss at 1325 got triggered in the process. The 50 day EMA is about to cross below the 200 day EMA and confirm the return to a bear market.

Technical indicators are looking bearish, and a bit oversold. MACD is falling below its signal line and has dropped inside negative zone. RSI has dropped almost to the edge of its oversold zone. Slow stochastic has entered its oversold zone. Any upward bounce from here is likely to face more selling.

On longer term weekly chart (not shown), the index has dropped below its 20 week and 50 week EMAs after finding resistance from its 200 week EMA. Weekly technical indicators are turning bearish. Stay away for now.

Technical updates – DLF and Unitech

Real estate stocks were all the rage during the later stages of the previous bull market in 2007. The term ‘land bank’ entered the stock market jargon dictionary. Companies were falling over each other in trying to acquire land parcels at any price. Banks and NBFCs joined the race of lending money against ‘land banks’.

Stocks of companies in completely unrelated businesses – particularly older companies in the doldrums – were getting highly valued on the basis of their ‘land banks’. Small investors relished the idea of making quick money and jumped on to the real estate band wagon.

A real estate bubble had been created, and it burst with a loud ‘pop’. Paper wealth of small investors vanished into thin air. Two of the most popular and high fliers among the real estate stocks were DLF and Unitech – despite the reported poor quality of their construction and unfavourable agreement clauses with buyers.

Both stocks have been in long down trends for the past 6 years. The moral of the story? Buy real estate; shun real estate stocks.

DLF

DLF stock had gone past the 1200 mark in Jan ‘08 before the bottom fell out. In just over a year, it fell almost 90% from its peak. The subsequent rally saw the stock cross the 450 mark in Oct ‘09 – giving 3-bagger returns from its Feb ‘09 low, but failing to retrace even 50% of its huge fall. That kept the stock technically in a bear market.

That was a signal for bears to take charge. The stock price has formed a bearish pattern of lower tops and lower bottoms that dropped the price to 122 in Aug ‘13 – which was lower than its Feb ‘09 low. The rally to a high of 241 gave almost 100% gains from its Aug ‘13 low. The stock is undergoing a price consolidation, and may try to breach the resistance level of 241. Only a convincing move above the Mar ‘13 top of 285 will negate the ‘lower tops-lower bottoms pattern’.

Technical indicators have corrected overbought conditions and are in bullish zones. Another test, and possible breach of 241 is likely. The company is saddled with massive debt and valuations are sky high. Best to avoid.

Unitech

Unitech stock had touched headier heights in the 5-figure range in early 2006. A huge bonus and stock split brought the price down to more reasonable levels. The stock price continued to rally and tripled to cross the 600 mark in May ‘07. A 1:1 bonus could not stem the rush to buy and took the stock price up to the 550 level in Jan ‘08.

The crash was extraordinary, as the stock price dropped more than 95% to touch a low of 22 in Nov ‘08. The subsequent rally took the stock price to 118 in Sep ‘09 – more than 400% gain from its Nov ‘08 low – but retracing less than 20% of its massive bear market fall. It has been all down hill since then.

The stock touched a low of 11 on Mar 3 ‘14 – 50% lower than its Nov ‘08 low. The recent rally saw a sharp rise to 38 last month – 3-bagger returns in 3 months! Daily technical indicators had become extremely overbought. The stock price corrected below the support/resistance level of 30, and is struggling to move up again.

Interest expenses were more than twice the reported net profit last year and P/E ratio is 88. Don’t be swayed by budget sops. Avoid with a capital ‘A’.

Nifty chart: a mid-week update (Jul 16 ‘14)

Call it ‘selling on news’ after the budgets failed to announce any big-bang reform measures, or call it routine profit booking after Nifty touched a new high. May be the selling trigger was the negative divergences on the technical indicators that failed to touch new highs with the index.

Whatever the reason(s), the index underwent a 5% correction (less than 400 points) from its peak that lasted all of 5 trading sessions. After turning net sellers for the previous 3 trading sessions, FIIs were net buyers today.

Both WPI and CPI inflation eased, mainly due to lower food prices. That doesn’t mean RBI will reduce interest rates right away. The deficient monsoon is still a concern. So is the increase in the current account deficit.

There are lots of technical supports on the downside for Nifty. Some of them were explained in last week’s update. The index chose the first one, and bounced up. Does that mean the correction is over?

Daily technical indicators are looking mildly bullish. MACD is below its signal line in positive territory, but has stopped falling. ROC is below its 10 day MA in negative territory, but making an effort to turn up. RSI has crossed above its 50% level, after falling below it. Slow stochastic has emerged from its oversold zone.

Volumes are showing that bears haven’t yet given up the fight. Though volumes have started rising with the index during the past 2 trading sessions, they are considerably lower than the down day volumes of last week.

A little more correction or some consolidation is possible before the up move resumes. Valuations are not cheap. Neither are they too expensive. The correction has alleviated overbought conditions. The dip gave an adding opportunity.

(Note: Want to give your portfolio a boost by adding fundamentally strong small-cap stocks? Subscribe to my Monthly Investment Newsletter. A limited number of paid subscriptions are being offered till July 21, 2014.)

WTI and Brent Crude Oil charts: bull markets face strong bear attacks

WTI Crude chart

In the previous post on the 6 months daily bar chart pattern of WTI Crude oil, oil’s price was consolidating in the resistance zone between 105-108. The following cautionary remark was made: “Failure to breach the 108 level may enthuse bears to become active.”

The consolidation was expected to continue a bit, and it did so for the next 6 sessions. Once the 105 level was breached convincingly on the down side on Jul 2, oil’s price dropped like a stone below its 200 day EMA, before pulling back to the long-term average.

What caused the sudden fall in price? Was it because Iraq’s main oilfields were safe from the ISIS rebels? Or, did Libyan supply flood the market to cause a supply/demand mismatch? Or, was it just profit booking after a technical resistance zone proved too tough a hurdle for bulls?

It doesn’t really matter. Daily technical indicators had reached overbought zones, and that is often a precursor to a correction. Now, the technical indicators are looking oversold – which could lead to a bounce up in price.

On longer term weekly chart (not shown), oil’s price is seeking support from its 50 week EMA and is trading well above its rising 200 week EMA in a long-term bull market. However, weekly technical indicators are looking a bit bearish. That could lead to some more correction or consolidation.

Brent Crude chart

In the previous post on the 6 months daily bar chart pattern of Brent Crude oil, overbought technical indicators had pointed to a correction. Oil’s price was expected to drop to 112. But the bear attack was much more severe.

Oil’s price dropped nearly 10 points down to the 106 level – well below its 200 day EMA in bear territory. All three daily technical indicators are inside their oversold zones and showing negative divergences by falling below their respective lows touched at the beginning of April while oil’s price touched a higher low.

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 in a long-term bull market. Weekly technical indicators are looking bearish. Some more correction or consolidation is likely.

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

S&P 500 Index Chart

In last week’s analysis of the 6 months daily bar chart pattern of S&P 500, overbought technical indicators displaying negative divergences had hinted at a possible correction. The correction was a mild one – less than 2% from its lifetime peak of 1985 (touched on Jul 3).

Volumes were strong on down days, but the rising 20 day EMA provided good support. At the time of writing this post, the index has recovered most of its losses of last week. The mild correction should enable the index to rise to a new high soon.

Daily technical indicators are in bullish zones after correcting overbought conditions. MACD is below its signal line inside overbought territory, but has stopped falling. RSI and Slow stochastic dropped from their respective overbought zones, but stopped short of their 50% levels.

On longer term weekly chart (not shown), all three weekly EMAs are rising and the index is soaring above them. However, sliding volumes since the beginning of the year, and negative divergences visible on weekly technical indicators means the index is ripe for a deeper correction.

FTSE 100 Index Chart

In last week’s analysis of the 6 months daily bar chart pattern of FTSE 100, the following warning note was sounded: “The index formed a ‘doji’ pattern (in candlestick parlance), which is a sign of indecision. Bears may use the opportunity to fight back.”

Bears did fight back – and how! The index dropped all the way below its 200 day EMA and the 6650 level, before pulling back to close above the 200 day EMA. The 20 day EMA has crossed below the 50 day EMA, indicating near term bearishness.

Daily technical indicators are in bearish zones, but showing some signs of turning around. MACD is falling below its signal line in negative territory. RSI is below its 50% level, but turning up. Slow stochastic is also below its 50% level, but its downward momentum is slowing.

At the time of writing this post, the index is trading above the 6750 level but facing resistance from its falling 20 day EMA.

On longer term weekly chart (not shown), the index bounced up after receiving support from its rising 50 week EMA and is trading well above its 200 week EMA in a long-term bull market. The dip provided an adding opportunity.

Bottomline? The daily bar chart patterns of S&P 500 and FTSE 100 indices underwent bull market corrections last week. S&P 500 had a mild correction that got support from its 20 day EMA. FTSE 100 dropped briefly below its 200 day EMA before recovering above it. Stay invested.

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

The two budgets – railway and finance - are out of the way. As expected, both showed pragmatism rather than populism. The stock market used them as negative triggers and sold off. Even some good news was ignored.

The increases in individual tax exemption and 80C investments by Rs 50000 each will put extra cash in the hands of all tax payers. The increase in the PPF limit should be utilised by all investors who do not have the benefit of company provident funds.

The IIP number was a positive surprise. So was the Q1 result of Infosys. On Fri. Jul 11, FIIs and DIIs were both net sellers. On Thu. Jul 10, both were net buyers but still the indices fell. Go figure! Excess froth was building up – particularly in unknown small-caps. Better sense should prevail – thanks to the correction.

BSE Sensex index chart

The daily bar chart pattern of Sensex has dropped below its 20 day EMA, which is bearish in the near term. The index is seeking support from the 24900 level, which has acted as a support/resistance level for the past 2 months.

The 50 day EMA is about 200 points lower, and should provide support if 24900 gets breached on the downside. The 150 odd points ‘gap’, formed on May 13 ‘14 will be a stronger support level if the 50 day EMA gets breached. Even if the ‘gap’ gets filled, the index should resume its up move thereafter.

In last week’s analysis, combined negative divergences visible on all four technical indicators had warned about a consolidation or correction. Daily technical indicators are turning bearish, and again showing negative divergences – by dropping below their respective lows touched on May 30 ‘14. The correction isn’t over yet.

Note that the index is trading above its 50 day and 200 day EMAs in a long-term bull market. Such corrections provide adding opportunities. But be very selective when choosing stocks.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty has formed a ‘reversal week’ bar (higher high, lower close) after touching a lifetime high of 7809. In candlestick parlance, a bearish engulfing pattern has formed on increasing volumes.

Observant readers may note that 6 weeks ago (in the week ending on May 30), the index had also formed a ‘reversal week’ bar and a bearish engulfing candlestick on much higher volumes. But the index had continued to move up.

This time it may be different. In the week ending on May 30, the index had not touched a new high. So, Nifty may have begun an intermediate down trend.

Weekly technical indicators are still inside their respective overbought zones, but have started correcting. MACD is beginning to slide down towards its rising signal line. ROC has dropped to touch its 10 week MA. RSI has fallen to the edge of its overbought zone. Slow stochastic is drifting down inside overbought territory.

Downside support can be expected from 20 week EMA, up trend line 2 (in dark blue) and 50 week EMA. On the daily Nifty chart (refer this post), there is a 47 points ‘gap’, which is just below the current level of the 20 week EMA and above up trend line 2. The correction is expected to receive good support from the ‘gap’.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are undergoing bull market corrections after touching new lifetime highs. Use the dip to add. Learn how to choose fundamentally strong small-cap stocks by subscribing to my Monthly Investment Newsletter. A limited number of paid subscriptions are being offered till July 21, 2014.

Stock Index Chart Patterns: CAC 40, DAX, RTS – Jul 11, ‘14

CAC 40 Index Chart (France)

The 6 months daily bar chart pattern of CAC 40 is undergoing its first serious correction since Mar ‘14. In last week’s analysis, negative divergences visible on the technical indicators and strong volumes on a down day had hinted at continued bear domination.

The selling came sharp and swift. The index hesitated briefly at the expected support level of 4350 before plunging below the 200 day EMA and the 4300 level. By the end of the week, a mild pullback took the index back up to its 200 day EMA.

The 20 day EMA has crossed below the 50 day EMA, and both EMAs are falling – indicating near term weakness. Technical indicators are bearish and looking oversold. MACD has dropped deep into its oversold zone. RSI has bounced up weakly from the edge of its oversold zone. Slow stochastic is trying to move up inside its oversold zone.

Is the correction over? Negative divergences, still visible on the technical indicators, are suggesting otherwise. All three indicators dropped to lower levels than their respective lows back in Feb and Mar ‘14, whereas the index has touched a higher bottom.

On longer term weekly chart (not shown), the index received support from its 50 week EMA and is trading above its 50 week and 200 week EMAs. The long-term bull market is intact. The correction is providing an adding opportunity.

DAX Index Chart (Germany)

The following warning note was sounded in last week’s analysis of the 6 months daily bar chart pattern of DAX, though the index had touched a new lifetime closing high of 10029: “Bearish signals visible at or near a market top should not be ignored. The bearish ‘broadening top’ pattern still exists. By failing to move above its recent intra-day top of 10051, the index is keeping the door open for the formation of a ‘double top’ reversal pattern.”

By falling and closing below the Jun ‘14 low of 9750, the ‘double-top’ pattern, and a downward break from the ‘broadening top’ pattern have been confirmed. That means more downside is likely. The good news is that the stop-loss level of 9600 was not triggered, though the index dropped close to the 9600 level two days in a row.

Technical indicators are looking bearish. MACD is falling below its signal line in negative territory. RSI is below its 50% level. Slow stochastic has dropped inside its oversold zone.

On longer term weekly chart (not shown), the index is testing support from its 20 week EMA, and trading above its 50 week and 200 week EMAs in a long-term bull market. However, it has broken down below a bearish ‘broadening top’ pattern. Negative divergences are also visible on weekly technical indicators.

There is a possibility of the index falling to the zone between 9000-9250. Book some partial profits.

RTS Index Chart (Russia)

There is good news and bad news for bulls that are visible on the 6 months daily bar chart pattern of RTSI. First the good news. The rising 20 day EMA has supported the index well. The 50 day EMA has finally crossed above the 200 day EMA – though the ‘golden cross’ is not a convincing one yet.

Now, the bad news. By touching a slightly lower intra-day top of 1420 on Thu. Jul 10, and forming a ‘reversal day’ pattern (higher high, lower close), the possibility of a ‘double top’ reversal pattern has come to the fore. However, the pattern will get confirmed only if the index falls below the 1350 level.

Daily technical indicators are in bullish zones, but showing signs of weakness. MACD is sliding below its signal line inside overbought zone. Note that the signal line has formed a bearish ‘inverted saucer’ pattern. RSI and Slow stochastic are above their respective 50% levels, but slipping down.

On longer term weekly chart (not shown). the index is trading above its 20 week and 50 week EMAs but below its 200 week EMA in a long-term bear market. Weekly technical indicators are in bullish zones.

Continue accumulation with a stop-loss at 1325. Add more if the index crosses 1425 convincingly.

Technical updates – Punj Lloyd and Suzlon

The two budget proposals during the week were met with widespread selling in the stock market. Huge expectations from the Modi-led NDA government had caused a sharp rise in stock prices – particularly of stocks from the infrastructure sector.

It turned out to be a case of ‘buy the rumour and sell the news’. The budget proposals had few populist measures and no big-bang reform proposals. Perhaps it was too much to expect from a government that has spent less than 2 months in power.

Interestingly, many stocks hit their peaks in June ‘14, well before the two budgets. The two stocks discussed below were darlings of small investors during the 2003-2007 bull market. Their tough times continue despite significant gains from recent lows.

Punj Lloyd

The stock of Punj Lloyd had closed at 63 back in Jan ‘13. But that was a bear market rally top. The stock soon dropped below all three EMAs. Another rally carried the stock to a lower top of 56 in May ‘13 – but the long-term support/resistance level of 57 stalled the rally.

The stock plummeted like a stone to drop to a low of 21 in end-Aug ‘13, where it formed a small double-bottom reversal pattern and started to recover. After climbing above its 20 day and 50 day EMAs, the stock entered a sideways consolidation with a slight upward bias that lasted 7 months.

All three EMAs converged in May ‘14 – and as often happens, a sharp price spurt on strong volumes followed. The stock again faced resistance from the 57 level, and has corrected down to its 50 day EMA. Technical indicators are looking bearish and oversold, which may lead to a bounce up.

The stock is technically in a bull market – but invest at your own peril. Fundamentals are atrocious.

Suzlon

The Suzlon stock has a love-hate relationship with me. I love to hate it. If you don’t know why, please read this post.

The stock spent a long period in bear territory and dropped to penny-stock status in Jun ‘13. It dropped to a low below 6 in Aug ‘13 before recovering to test its 200 day EMA in Oct ‘13.  The next 6 months were spent in a sideways consolidation in and out of penny-stock status.

A sharp rally in Apr ‘14 propelled the stock to a 2 years high of 36 in Jun ‘14 – a whopping 6-bagger gain in less than a year! All four technical indicators became overbought. The subsequent correction has dropped the stock to its 50 day EMA.

Technical indicators are looking oversold, and the stock price may bounce up from here. The company has huge losses and massive debt. Stay as far away as possible.

Nifty chart: a mid-week update (Jul 09 ‘14)

Perhaps in a pragmatic precursor to tomorrow’s budget, the railway budget contained no populist measures. The intent to consolidate and modernise seemed clear on a cursory reading. May be the devil is in the detail.

Proceedings at the Lok Sabha hit a new low on the ethics and decency scale after the Railway budget was announced. Semi-educated MPs from the ruling party and the opposition exchanged vulgar language and nearly came to blows amid pandemonium in the well of the house.

As if on cue, Nifty sank by more than 150 points after touching a new lifetime high just above the 7800 level. What caused the selling? Who knows? Some times the force of ‘gravity’ becomes strong when an index rises too high without a proper correction.

FIIs have been net buyers on every trading day this month, while DIIs have been net sellers.

Nifty formed a ‘reversal day’ pattern (higher high, lower close) on Tue. Jul 8, supported by strong volumes. That may be the signal for an intermediate down trend. The index is trying to cling on to support from its 20 day EMA, but it appears that the support may not hold for long.

If the index falls further, the 50 day EMA and below it, the 47 points ‘gap’ formed on May 13 ‘14, are the next support levels. A 10% correction from yesterday’s peak of 7808 will drop Nifty to the ‘gap’ area. If that happens, it will be a good buying opportunity.

Can Nifty fall even further? Any thing is possible in the stock market. But remember that the index is in a long-term bull market. A 10% correction will surely attract buyers.

Daily technical indicators are turning bearish. MACD has crossed below its signal line in positive territory. ROC is resting at the ‘0’ line after crossing below its 10 day MA. RSI has dropped to its 50% level. Slow stochastic has dropped sharply from its overbought zone.

The correction is likely to continue a bit longer – unless there are some market-friendly announcements in Thursday’s budget. Use the dip to add.

(Note: Want to learn how to pick fundamentally strong small-cap stocks? Subscribe to my Monthly Investment Newsletter. A limited number of paid subscriptions are being offered till July 21, 2014.)

Gold and Silver charts: bear market rallies coming to an end?

Gold Chart Pattern

The 6 months daily bar chart pattern of gold spiked up on huge volumes on Jun 19 ‘14 to rise above the 1280 level and its 50 day and 200 day EMAs into bull territory. Since then, gold’s price has traded above all its three EMAs for 11 straight sessions.

The long-term moving average has provided good support on the downside. Both the 20 day and 50 day EMAs formed bullish ‘rounding bottom’ patterns, and are rising towards the 200 day EMA. These are bullish signs.

However, the entire rally from the Jun 3 ‘14 low of 1240 is technically a bear market rally. Why? Gold’s price crossed above the 1330 level intra-day on Jul 1 & 2, but failed to close above it. Note that 1330 is the previous top touched in Apr ‘14.

The price band between 1330-1350 is a resistance zone, which needs to be crossed convincingly if bulls are to overcome the Mar ‘14 top of 1395, and regain control. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will be a technical confirmation of a return to a bull market. Till then, bears will remain on top.

Daily technical indicators are in bullish zones, but correcting overbought conditions. MACD is above its signal line in overbought zone, but forming a bearish ‘rounding top’ pattern. RSI has slipped down from its overbought zone. Slow stochastic formed a small ‘double top’ reversal pattern and looks ready to drop from its overbought zone.

Trouble in Iraq and slow growth in the USA may have encouraged bulls to take long positions. But the rally appears to be coming to an end.

On longer term weekly chart (not shown), gold’s price moved above its 20 week EMA but is facing strong resistance from its 50 week EMA. Gold is trading more than 50 points below its falling 200 week EMA in a long-term bear market.

Silver Chart Pattern

The 6 months daily bar chart pattern of silver followed the yellow metal’s example and rose sharply to enter bull territory on Jun 19 ‘14, and has traded above its 200 day EMA since then. Strong volume support raised hopes of a trend reversal.

All three daily technical indicators are inside their respective overbought zones, but beginning to correct. The 200 day EMA has provided good support on the downside so far. If the support holds, then silver’s price may attempt to cross above the resistance zone between 21.25-21.75.

Unless that happens, bears will use every opportunity to sell, as they have been doing for the past two trading sessions.

On longer term weekly chart (not shown), silver’s price moved above its 20 week EMA but is facing strong resistance from its 50 week EMA. Silver is trading more than 3 points below its falling 200 week EMA in a long-term bear market.

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

S&P 500 Index Chart

The 6 months daily bar chart pattern of S&P 500 continued to defy gravity, as it soared to touch, and close at, a new lifetime high of 1985. The psychological level of 2000 is just a hop, skip and jump away. All three EMAs are rising, and the index is trading above them in a long-term bull market.

A few dark clouds are visible on the horizon. Note the volume bars, which have been sliding as the index rose higher. Thursday’s new high was accompanied by the lowest volumes in 2014. May be the long weekend led to curtailed trading activity, but a bull market requires volume support to sustain.

Daily technical indicators have re-entered their respective overbought zones, but failed to touch new highs with the index. An index can remain overbought for long periods, but combined negative divergences on the indicators can lead to a correction at any time.

Stay invested, with a trailing stop-loss.

FTSE 100 Index Chart

The 6 months daily bar chart pattern of FTSE 100 bounced up sharply from the 6700 level and climbed above its 20 day and 50 day EMAs to touch an intra-day high of 6875 on Fri. Jul 4. The index closed the week above the 6850 level in bull territory – with a weekly gain of more than 100 points.

Daily technical indicators have turned bullish. MACD has crossed above its signal line and entered positive zone. Both RSI and Slow stochastic have risen above their respective 50% levels. But volumes were moderate. The index formed a ‘doji’ pattern (in candlestick parlance), which is a sign of indecision. Bears may use the opportunity to fight back.

The index is trading above all three EMAs in a long-term bull market. But the May ‘14 top of 6895 needs to be crossed convincingly before bulls can regain full control of the chart.

Bottomline? The daily bar chart patterns of S&P 500 and FTSE 100 indices show long-term bull markets in progress. S&P 500 is rising to touch new highs regularly, but the index is looking overbought and ready for a correction. FTSE 100 is recovering from a correction after touching a new high two months back. Stay invested, but maintain trailing stop-losses.

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

Every one with any stake in the financial markets must be eagerly awaiting the budget proposals by the new government. Chances are that it will be a non-event. The Finance Minister has dropped enough hints at what to expect.

There won’t be any populist proposals. The NDA government has been elected with a massive mandate, and may announce pragmatic measures to put the floundering growth engine back on track. That means spending money – so, taxes and duties are likely to go up.

Both Sensex and Nifty broke out of bullish ‘flag’ consolidation patterns to touch and close at new lifetime highs. But neither index has soared away. Regular consolidations have allowed adding opportunities.

BSE Sensex index chart

The following comments were made in last week’s analysis of the daily bar chart pattern of Sensex: “Note that the index has been receiving support from its 20 day EMA (within the ‘flag’) for the past two trading sessions. A bounce up from here can breach the upper boundary of the ‘flag’.”

Some times patterns play out just as expected. Sensex used the support of its 20 day EMA to break out upwards from the ‘flag’ and closed at lifetime daily and weekly highs.

Daily technical indicators had corrected from overbought conditions, and have turned bullish again. MACD is about to cross above its falling signal line in positive territory. ROC has crossed above its 10 day MA into positive zone. RSI is rising towards its overbought zone. Slow stochastic has entered its overbought zone.

Is it time to celebrate and open up the bubbly? May be not just yet. The budget is just 4 days away. Better to be safe than sorry. Technically, all four indicators are showing negative divergences by failing to touch new highs with the index. Another consolidation or correction may follow.

Stay invested. Use dips to add fundamentally strong stocks. Get rid of non-performers. Tighten up your portfolio for the next leg of the up move.

NSE Nifty 50 index chart

As expected in last week’s update, the weekly bar chart pattern of Nifty broke out upwards from the three weeks long consolidation within a bullish ‘flag’ pattern. Weekly volumes were strong. Nifty touched and closed at lifetime highs.

All four technical indicators are inside their respective overbought zones. While an index may remain overbought for long periods, the possibility of a correction or consolidation occurring at any time should be kept in mind.

Note that volumes – though higher than the average volumes till Apr ‘14 – have been sliding for the past six weeks. No need to panic and sell. But part profit booking is always a good idea. Whatever you do, don’t fall into the trap of trying to make some quick money by investing in ‘penny’ stocks.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices broke out upwards from bullish ‘flag’ patterns to touch new lifetime highs. Stay invested. Use dips to add. Learn how to choose fundamentally strong small-cap stocks by subscribing to my Monthly Investment Newsletter. A limited number of paid subscriptions are being offered till July 21, 2014.

Stock Index Chart Patterns: CAC 40, DAX, RTS – Jul 04, ‘14

CAC 40 Index Chart (France)

Last week’s analysis of the 6 months daily bar chart pattern of CAC 40 had the following comments: “The index dropped below its 20 day and 50 day EMAs into the support zone between 4420-4500. Despite an intra-day breach of 4420 on Thu. Jun 26, the support zone should prevent a deeper fall.”

On Mon. Jun 30, the index dropped to an intra-day low 4407 but closed the day just above the 4420 level. A brief rally took the index to an intra-day high of 4491 on Thu. Jul 3, but the resistance from the falling 20 day EMA proved too strong. The index closed the week at 4469 – below its 20 day and 50 day EMAs, but with a gain of 32 points.

Technically, the index spent the entire week within the support zone between 4420-4500 despite another intra-day breach of the 4420 level. But failure to rise above 4500 is not a bullish sign. Bulls may feel happy that the support zone prevented a deeper fall.

Daily technical indicators are suggesting that the happiness may be short-lived. All three indicators have recovered from their lows, but remain in bearish zones. All three are showing negative divergences by touching lower lows (than the ones touched in Apr ‘14) while the index touched a higher bottom.

During the week, volumes (not shown on chart) were the highest on Wed. Jul 2 – which was a down day. Bears are not ready yet to release their grip on the chart. In case 4420 gets breached convincingly on the down side, expect stronger support at 4350.

On longer term weekly chart (not shown), the index continues to receive support from its 20 week EMA. The bull market correction is providing an adding opportunity.

DAX Index Chart (Germany)

The 6 months daily bar chart pattern of DAX bounced up strongly after receiving support from its rising 50 day EMA, and cruised past the psychological 10000 level. On Thu. Jul 3, the index touched a slightly lower intra-day top of 10032, but closed at a lifetime high of 10029. A small correction on the last day of the week still kept the index above the 10000 level.

In last week’s analysis, technical indicators were looking bearish and a continuation of the correction was expected. Instead, the index defied gravity and closed at a new high. Just goes to show the fallibility of technical analysis (which is not a science despite the name).

Bearish signals visible at or near a market top should not be ignored. The bearish ‘broadening top’ pattern still exists. By failing to move above its recent intra-day top of 10051, the index is keeping the door open for the formation of a ‘double top’ reversal pattern.

Daily technical indicators have turned bullish. MACD is about to cross above its falling signal line in positive zone. RSI has moved above its 50% level. Slow stochastic has almost reached the edge of its overbought zone.

On longer term weekly chart (not shown), the index is trading above all three weekly EMAs in a long-term bull market. However, it is consolidating in a range within 9750-10050 and forming a bearish ‘broadening top’ pattern in the process.

No need to sell yet. Stay invested with a stop-loss at 9600. Book part profits if you are a conservative investor.

RTS Index Chart (Russia)

Last week’s analysis of the 6 months daily bar chart pattern of RTSI had the following comments: “Technical indicators are correcting overbought conditions, but remain in bullish zones. However, all three continue to show negative divergences by failing to touch new highs with the index. A correction may be just around the corner.”

A correction has started, though the 20 day EMA has prevented a steep fall so far. The 50 day EMA is ready to cross above the 200 day EMA – the ‘golden cross’ technically confirms a return to a bull market. However, it needs to be a convincing cross – for which the index needs to hold its current level or move higher.

That may be easier said than done. Daily technical indicators are still in bullish zones. But all three are in down trends and may slip into bearish zones soon.

On longer term weekly chart (not shown). the index is trading above its 20 week and 50 week EMAs but below its 200 week EMA in a long-term bear market.

Accumulate with a stop-loss at 1300. Add more if the index crosses 1425 convincingly.

‘Fatal Attraction’, or why small investors prefer small-cap stocks

A few years back, I had written a post: Why small investors should avoid small cap stocks. The effect on small investors was the same as water on a duck’s back – it didn’t last long. With the stock market indices hitting new highs today, more and more small investors are getting ready to enter the market.

What stocks will they be after? L&T? ITC? Reliance? Glaxo? Tata Motors? M&M? TCS? Not a chance! Those stocks are too expensive. Too old-fashioned. They belong to the portfolios of grey-haired grandfathers, and are unlikely to give multibagger returns in 3 to 6 months. The name of the game is quick money.

And so, another generation of young investors are going to suffer from the ‘fatal attraction’ to small cap stocks in the hope of hitting a ‘six’ – just like it happens in every bull cycle. How do I know? Been there and done that. And lived to tell the tale, albeit with a big hole in my pocket.

If you buy a small-cap stock and it immediately spikes up and doubles your investment within a matter of days, you won’t know what you did wrong! Picking that stock at that time was pure luck – unless you happen to be knowledgeable about fundamental and technical analysis.

A bull market is like a high tide that lifts all boats. Stocks with ridiculously poor fundamentals often rise the highest in a short span of time due to their small trading volumes – sucking in investors and separating them from their hard-earned cash. Such stocks plummet just as fast, giving no chance to investors to exit.

Typically, small-cap companies belong to owners who wish to retain majority control and service a small niche product or service segment. The good news is that small niche segments are avoided by large players because of lower profit potential or lack of technology or expertise in the field.

That allows a niche segment leader to dominate the segment and make good profits without any threat from the big guys. That is why some small-cap companies often deservedly get high valuations and provide good returns to shareholders. But such ‘good’ companies are few and far between.

Many small-cap companies are out there to fleece the public. They make money from the IPO. Then they make money from the plant and equipment they install. Then they take bank loans for expansion and siphon off the funds to a chain of unrelated privately-held subsidiaries. Then they indulge in circular trading to jack up their stock price to trap unsuspecting buyers.

Then change their name, and repeat the whole fraudulent process. If they get caught, they bribe their way out and disappear to South America or Dubai. Their low equity capital facilitates price manipulation – which is not possible in a large-cap stock.

There is a market myth: small-cap stocks will become large-cap some day. Aren’t the large-cap stocks of today the small-caps of yesterday? Yes. That does not mean every small-cap you buy will eventually make the transition. Most will not. Some will remain small-cap for 50 years. Others will disappear from the face of the earth (with your money!).

Small investors have three choices about investing in small-cap stocks:

1) avoid small-caps completely and stick to large-caps or mutual funds (less adrenaline rush but good returns);

2) spend time and effort to learn how to pick stocks through detailed analysis (it is not rocket science – neither is it as simple as opening a demat account and listening to experts on business channels about what to buy);

3) subscribe to my Monthly Investment Newsletter that provides detailed fundamental and technical analysis of an under-the-radar small-cap stock every month. A limited number of paid subscriptions will be available till July 21, 2014.