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Wednesday, October 29, 2014

Why you should include gold in your investment portfolio – a guest post

For most Indians, buying gold is a no-brainer. Gold is bought for the family deity. It is bought for a daughter’s wedding and for the wife on a wedding anniversary. It is bought on Dhanteras, and on Diwali. Having significant amounts of gold in one’s possession is a sign of great wealth and status.

But is gold a good investment? Sure, the price of gold has appreciated over the years. But it doesn’t provide any regular returns. Equity shares provide dividends, rights and bonus shares. Plus, they can be redeemed quickly for cash. Redeeming gold for cash is cumbersome – though many NBFCs now offer easy gold loans.

The debate should not be about equity vs. gold. Logically, equity is far better as an inflation-beating investment. However, that does not mean one should not include gold as part of an asset allocation plan. In this month’s guest post, Nishit builds the case for including a small percentage allocation for gold as a hedge against inflation.

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Gold’s price is back where it was in July 2010 in US Dollar terms (at about 1200-1250). In July 2010, the Indian Rupee was about Rs 47 to the US Dollar and now it is around Rs 61.

While investment focus should be on equities, it is always better to have 5-10% in Gold as a hedge against inflation. People talk about Rupee going back to 47 levels but that will make exports uncompetitive and it remains to be seen if Rupee actually appreciates that much.

Historically, Rupee has always depreciated against the Dollar. With global markets showing signs of weakness, Gold can also be a hedge against equity weakness if any. While I do not believe that the Indian markets will have a drastic fall, it is always good to have a hedge.

Interest rates also show signs of weakening and Gilts are another good option at the current juncture. Gilt funds make money when interest rates drop. With weak diesel prices, inflationary pressure will lessen.

Investment in Gold can be in the form of Exchange Traded funds, physical gold or even jewellery (if one wishes to enjoy the gold while using it as a hedge). There are talks of import duty being cut on Gold in the forthcoming budget.

Asset allocation at the current juncture can be 90% Equity, 5% Gold and 5% Gilt funds. When gold was at its peak at almost US $1900, the risk-reward ratio was unfavourable for buying any gold. Now, it has corrected almost 33% from the top and almost 55% of the rise which started in 2008.

In US Dollar terms gold can correct another 10% or so. One cannot catch exact levels but it is safe to start accumulating gold.

The promise of “Acche Din” is here and I see no reason why India will not see glory days ahead, but it is always good to buy insurance for a rainy day.

If interest rates go up for some reason, or if the global economy weakens further for some reason, equity and Gilt funds will go for a toss. At least gold will cover up some of the losses.

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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)

Monday, October 27, 2014

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Oct 24, ‘14

S&P 500 Index Chart

S&P 500_Oct2414

The following comments appeared in last week’s analysis of the daily bar chart pattern of S&P 500: “The sharp volume spurt during Wednesday’s low may be the sign of a ‘selling climax’ that has bearish implications if the index fails to regain at least 50% of its fall from the Sep ‘14 top of 2020 to 1820. That means, the index needs to rise above 1920 quickly to prevent bears from getting complete control.”

It was also mentioned that the long-term bull market was intact, as the index was trading well above its 200 week EMA. Note that the index quickly crossed above its 200 day and 20 day EMAs – and rose above the 1920 level in the process.

After facing a day’s resistance from the 50 day EMA, the index bounced up from the support received from its 20 day EMA, and closed the week above all three EMAs in bull territory. So, have bears been vanquished?

Not just yet. Look at the volume bars, which have been sliding during the sharp bounce from the recent low of 1820. That may be a signal of short covering instead of renewed buying. Bears are probably lurking round the corner. (At the time of writing this post, the index is slipping down towards its 50 day EMA.)

Technical indicators have turned bullish. MACD is still negative, but has crossed sharply above its signal line (which has formed a small bullish ‘rounding bottom’ pattern). RSI has moved above its 50% level after brief hesitation. Slow stochastic has entered its overbought zone.

On longer term weekly chart (not shown), the index closed above all three weekly EMAs. Weekly technical indicators are back in bullish zones. However, the index may be forming a bearish ‘broadening top’ pattern that will be negated only if the previous top of 2020 can be crossed quickly. (This month’s sharp correction was triggered by a ‘broadening top’ pattern that formed on the daily chart.) Caution is advised till 2020 is convincingly crossed.

FTSE 100 Index Chart

FTSE_Oct2414

Last week, daily technical indicators were trying to correct oversold conditions. That led to a rally on the daily bar chart pattern of FTSE 100 that briefly crossed above the 6400 level, but faced strong resistance from the falling 20 day EMA. The index gained 78 points for the week, but failed to close above the 6400 level.

Daily technical indicators corrected oversold conditions, but their upward momentum is slowing. MACD has crossed above its signal line in negative territory. RSI faced resistance from its 50% level, and slipped down. Slow stochastic has just moved above its 50% level.

At the time of writing this post, the index is trading below the 6350 level in bear territory.

On longer term weekly chart (not shown), the index managed to stay above its 200 week EMA during the week. But the 20 week EMA is about to cross below the 50 week EMA for the first time in more than 2 years, and both EMAs are moving down. Weekly technical indicators are trying to correct oversold conditions. The long-term bull market is under serious threat of being reversed.

Sunday, October 26, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Oct 23, 2014

Profit booking by FIIs after the stock market touched a lifetime high on Sep 8 ‘14 caused a correction that threatened the up trend (marked by UL3 on Sensex and Nifty charts) that followed BJP’s victory in the general elections.

Recent results of state elections in Haryana (BJP majority) and Maharashtra (BJP largest party) will allow BJP to form the government in both states. Bearish sentiment disappeared, and a short pre-Diwali rally ensued. FIIs started buying equity again. DII net buying has almost caught up with FII net selling during Oct ‘14.

Bulls are about to regain control and take both indices to new highs. The Sep 8 ‘14 lifetime high remains a psychological hurdle. There is usually some profit booking near a previous top, but that shouldn’t prevent bulls from charging ahead.

BSE Sensex index chart

Sensex_Oct2314

A couple of closes below Up trend line 3 (UL3) threatened the Sensex up trend that followed the general election results in May ‘14. But it wasn’t a convincing breach according to the 3% ‘whipsaw’ rule. Note that Sensex bounced up above UL3, and its 20 day and 50 day EMAs, into bull territory – proving that the rule works.

Daily technical indicators are looking bullish. MACD has crossed above its falling signal line, and is about to enter positive territory. ROC has crossed above its 10 day MA to enter positive zone. Both RSI and Slow stochastic have moved above their respective 50% levels.

Expect the index to touch new highs soon – though there may be some consolidation near its previous top of 27355.

NSE Nifty 50 index chart

Nifty_Oct2314

The weekly bar chart pattern of Nifty bounced up from support provided by its 20 week EMA – breaking a 4 weeks long down trend, but failing to close above the up trend line UL3.

The drop below UL3 was within the 3% ‘whipsaw’ range – keeping the up trend intact technically. Nifty should cross above UL3 soon, and move up to touch new highs.

Technical indicators are moving sideways in bullish zones. MACD is below its signal line, and just below its overbought zone. ROC is below its 10 week MA in positive territory. RSI and Slow stochastic are above their respective 50% levels.

Nifty is trading above its two weekly EMAs and the longer term Up trend line 2 in a long-term bull market that started from the low touched in Dec ‘11.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices have recovered from 4 weeks long corrections. The long-term bull market is intact. Q2 results declared so far have shown decent top line growth but pressure on bottom lines. The previous post identified sectors that can lead the next leg of the bull market.

Friday, October 24, 2014

BSE Sectoral Indices – which ones will lead the next leg of the bull market?

Sensex has undergone a bull market correction after touching a lifetime high in Sep ‘14. FII selling was the main trigger. With BJP likely to form a government in Maharashtra and Haryana, sentiments have turned positive again.

Except BSE Metals and BSE Realty indices, all the other 9 indices are trading above their rising 200 day EMAs in bull markets. Does that make Metals and Realty contrarian plays? The answer is: Yes, for metals; but No, for realty.

What about sectoral leaders for the next leg of the bull market? From the charts, Capital Goods, Oil & Gas and Metals seem to have the best potential. Needless to say, one needs to be stock-specific within each sector.

BSE Auto Index

BSE Auto Index_Oct14

Passenger vehicle sales slipped in Sep ‘14 but commercial vehicles are showing an up tick – which is a sign of an improving economy. After touching a high in Sep ‘14 with the Sensex, BSE Auto index underwent a bull market correction. The up move has resumed. With inflation moderating, interest rates are likely to come down in the not-too-distant future. This is a ‘buy on dips’ sector.

BSE Bankex

BSE BANKEX_Oct14

BSE Bankex underwent a sideways consolidation before firmly entering a bull market in Mar ‘14. The index is undergoing another sideways consolidation with an upward bias since May ‘14, and touched a new high during the week. PSU banks may appear to be contrarian plays, but they are still struggling with NPAs. Credit growth is still tepid, but should start picking up in 2015.

BSE Capital Goods Index

BSE Capital Goods Index_Oct14

After forming a ‘double top’ reversal pattern during Jun-Jul ‘14, BSE Capital Goods index twice corrected down below its 20 day and 50 day EMAs, but did not test its rising 200 day EMA. Economic growth is expected to rise during 2015-16, and interest rates are likely to come down. That should boost the prospects of the sector.

BSE Consumer Durables Index

BSE Consumer Durables Index_Oct14

BSE Consumer Durables index entered a bull market at the end of Mar ‘14 after spending more than 9 months in bear territory. The index formed a small ‘double top’ reversal pattern during Sep-Oct ‘14 and corrected briefly below its 20 day and 50 day EMAs before bouncing back into bull territory. Consumer sentiments are definitely improving – if Dhanteras/Diwali sales are any indication. The index should touch new highs soon.

BSE FMCG Index

BSE FMCG Index_Oct14

BSE FMCG index was one of the leaders till Jul ‘13. A year-long sideways consolidation ended with the index touching a new high in Sep ‘14. A sharp bull market correction ensued, and dropped the index below its 20 day and 50 day EMAs. Don’t expect any fireworks from the sector as rural demand is on a down-swing.

BSE Healthcare Index

BSE Healthcare Index_Oct14

With a rising population and increasing per capita income, BSE Healthcare index continues in a strong bull market. More stringent inspection by US FDA authorities may curb export prospects of domestic generic manufacturers. MNC pharma stocks should continue to do well.

BSE IT Index

BSE IT Index_Oct14

It has been a bit of a roller-coaster ride for BSE IT index. Export growth is sensitive to forex fluctuations and economic growth (or lack of it) in the western world. Despite recent correction, the index is in a bull market. Stick to the large-cap counters.

BSE Metal Index

BSE Metal Index_Oct14

A sharp rally after election result euphoria took the BSE Metal index to a new high in Jun ‘14. It has been a steady descent into bear territory since then, as reality hasn’t lived up to expectations of infrastructure growth. It may take another couple of quarters for infrastructure projects to resume in earnest. That means the time to buy is now.

BSE Oil & Gas Index

BSE Oil & Gas Index_Oct14

BSE Oil & Gas index went nowhere till it bounced up into bull territory in Mar ‘14. The index has managed to remain in bull territory despite a long sideways consolidation with a downward bias after touching a high in Jun ‘14. Deregulation of petrol and diesel prices should benefit OMCs. Low oil price in international market should benefit refineries.

BSE Power Index

BSE Power Index_Oct14

A ‘triple top’ reversal pattern ended a sharp rally during May ‘14. BSE Power index has drifted down to test support from its 200 day EMA. So far, the support has held. The sector is overly dependent on government policies. There is uncertainty about coal availability. When in doubt, stay out.

BSE Realty Index

BSE Realty Index_Oct14

A sharp rally into bull territory after a long bear market ended with the high touched in Jun ‘14. Note the negative divergences on ROC and RSI charts (which failed to touch new highs) and a ‘double top’ reversal pattern on Slow stochastic chart. BSE Realty index started a correction that has returned it back where it belongs – in bear country. Avoid.

Wednesday, October 22, 2014

WTI and Brent Crude Oil charts: an update

WTI Crude chart

WTI Crude_Oct2114

In the previous post, bears seemed to have total control of the daily bar chart pattern of WTI Crude oil. Positive divergences visible on technical indicators had raised some bullish hopes of a recovery. But such hopes were soon snuffed out.

Oil’s price continued to plummet and touched an intra-day low of 84 - easily achieving the lower target of 85. A day’s bounce stopped at the 86 level, followed by a plunge on huge volumes to an intra-day low of 80.

A ‘dead cat bounce’ took oil’s price to the 85 level. But that only provided another selling opportunity to bears. Can oil’s price fall even lower?

Daily technical indicators are suggesting further downside. MACD is below its signal line and inside its oversold zone. It has stopped falling, but not showing any signs of moving up. RSI emerged from its oversold zone, but is sliding down again. Slow stochastic managed to come out of its oversold zone, but its upward momentum is weak.

On longer term weekly chart (not shown), oil’s price has closed below its 200 week EMA for seven straight weeks. Weekly technical indicators are in their respective oversold zones. The 20 week EMA has crossed below the 200 week EMA. A test of the Jun ‘12 low of 77.50 appears likely. The long-term bull market is coming to an end.

Brent Crude chart

BrentCrude_Oct2114

The daily bar chart pattern of Brent Crude oil is resembling a waterfall due to its increasing downward momentum. The Jun ‘12 low of 88 was easily breached.

Oil’s price touched an intra-day low of 83, followed by a ‘dead cat bounce’ to 88. Bears used the opportunity to sell again.

Daily technical indicators are trying to correct oversold conditions. MACD is well inside its oversold zone, but trying to move up. RSI has formed a bullish ‘inverse head-and-shoulders’ pattern inside its oversold zone. Slow stochastic has just emerged from its oversold zone.

On longer term weekly chart (not shown), oil’s price has closed below its 200 week EMA for ten weeks in a row. Weekly technical indicators remain oversold. The 50 week EMA is about to cross below the 200 week EMA, and technically confirm a bear market.

Monday, October 20, 2014

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Oct 17, ‘14

S&P 500 Index Chart

S&P 500_Oct1714

Bears had tightened their grips and daily technical indicators were looking bearish in last week’s analysis of the daily bar chart pattern of S&P 500. A breach of the 200 day EMA appeared imminent.

The index easily breached its 200 day EMA on the first day of the week, and dropped all the way to 1820 on Wed Oct 15 ‘14 – wiping out all gains made in the last 6 months. By the end of the week, the index pulled back to its 200 day EMA but closed 12 points below in bear territory.

The sharp volume spurt during Wednesday’s low may be the sign of a ‘selling climax’ that has bearish implications if the index fails to regain at least 50% of its fall from the Sep ‘14 top of 2020 to 1820. That means, the index needs to rise above 1920 quickly to prevent bears from getting complete control.

Daily technical indicators are correcting oversold conditions, but remain in bearish zones. MACD is deep inside its oversold zone. RSI has bounced up after a brief visit inside its oversold zone. Slow stochastic has emerged from its oversold zone.

On longer term weekly chart (not shown), the index dropped below its 50 week EMA for the first time in 2 years, but managed to close above it. Weekly technical indicators are looking bearish and showing downward momentum. Some more correction is likely. The index is trading well above its rising 200 week EMA, so the long-term bull market is intact.

FTSE 100 Index Chart

FTSE_Oct1714

The following comments appeared in last week’s analysis of the daily bar chart pattern of FTSE 100: “The ‘death cross’ has technically confirmed a bear market. That means every rise may be used by bears to sell.”

A weak attempt at a rally by bulls barely took the index above the 6400 level. Bears started selling immediately. The index dropped below the 6100 level intra-day on a strong volume surge but recovered to close above the 6300 level by the end of the week with a small weekly loss of 30 points.

Daily technical indicators are bearish, but trying to correct oversold conditions. MACD is deep inside its oversold zone, but has stopped falling. RSI has bounced up from the edge of its oversold zone. Slow stochastic is trying to emerge from its oversold zone.

On longer term weekly chart (not shown), the index dropped below its 200 week EMA intra-week for the first time in more than 2 years, but managed to close well above it. Weekly technical indicators have dropped deeper inside bearish zones. The long-term bull market is under serious threat.

Saturday, October 18, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Oct 17, 2014

For the third straight holiday-shortened trading week, FIIs remained net sellers of equity. Their cumulative net selling this month has crossed Rs 6500 Crores. DIIs have been net buyers on all 9 trading days in Oct ‘14. Their cumulative net buying is a bit less than Rs 4800 Crores.

The euphoria in the stock market after BJP’s thumping victory in the Lok Sabha election has dissipated. Both Sensex and Nifty have breached their respective post-election up-trend lines. Is the bull market coming to an end?

The short answer is: Not yet. Why? Two technical reasons. First, both indices are trading well above their long-term moving averages. Second, both indices have corrected a little over 40% of their entire gains from the lows made on May 16 ‘14 (the day Lok Sabha election results were declared) – which is less than the Fibonacci retracement level of 50%.

BSE Sensex index chart

Sensex_Oct1714

The daily bar chart pattern of Sensex dropped and closed below the post-election Up trend line 3 on Thu Oct 16 ‘14, but formed a ‘reversal day’ pattern (lower low, higher close) on Fri Oct 17 ‘14.

Before bulls get too excited and think that the correction from the Sep 8 ‘14 intra-day top of 27355 is over, it must be pointed out that Friday’s trading action may be just a pullback to the up-trend line. Such pullbacks are usually selling opportunities.

Daily technical indicators are in bearish zones, but showing faint signs of recovery. MACD is below its signal line, and both lines are sliding deeper in negative territory. ROC has moved up towards its falling 10 day MA in negative zone. RSI dropped briefly inside its oversold zone for the first time since Feb ‘14, before bouncing up. Slow stochastic has re-entered its oversold zone.

Note that ROC and Slow stochastic are showing positive divergences by failing to drop lower with the index. The index may consolidate a bit before it can resume its up move.

If BJP wins majority in the state elections of Maharashtra and Haryana (results to be announced on Sun Oct 19 ‘14) – as one exit poll has predicted – the prevailing bearish sentiment may change quickly.

NSE Nifty 50 index chart

Nifty_Oct1714

The weekly bar chart pattern of Nifty closed lower for the 4th straight week, and below UL3 (its post-election up-trend line) for the 2nd straight week.

In case bulls are getting disheartened and thinking about selling out, note that the index has received good support from its 20 week EMA. If the index corrects some more, expect stronger support from Up trend line 2 (currently at 7500).

Weekly technical indicators are in bullish zones, but giving mixed signals. MACD is below its signal line, and about to drop from its overbought zone. ROC is below its 10 week MA in positive territory, but showing positive divergence by not falling lower with the index. RSI is also showing positive divergence by bouncing up from its 50% level. Slow stochastic is falling towards its 50% level.

Nifty is trading above its two weekly EMAs and the longer-term up-trend line 2. That means the long-term bull market is intact despite 4 weeks of correction.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices have breached their post-election up-trend lines. However, the long-term bull market is intact. Q2 results declared so far have thrown up a handful of positive surprises. Election victory for the BJP in Maharashtra and Haryana can turn market sentiments in favour of bulls. Expect more selling if BJP fails to win a majority in either state.

Thursday, October 16, 2014

Fundamentals are improving – why is the stock market still correcting?

Are the fundamentals really improving? The short answer is: Yes. Let us look at some facts:

1. WPI inflation dropped to its lowest level in 5 years. CPI inflation also dropped - below 6.5%. The primary reason for this drop is lower food prices – which is not due to any monetary action by RBI or fiscal action by the government.

However, there is no denying that inflation is moderating, which raises the prospect of an interest cut by RBI sooner than later.

2. Commercial vehicle sales have picked up in Sep. ‘14 after 16 months of decline. That is a clear sign of a turnaround in the economy.

Passenger vehicle sales dipped slightly in Sep ‘14 – but that is probably due to seasonal reason. Dussehra, Eid, Dhanteras, Diwali are being celebrated in Oct ‘14 – an ‘auspicious time’ for vehicle buyers. Purchases may have been postponed in Sep ‘14.

3. Oil prices have fallen significantly – due to oversupply in the international market. India’s oil import bill has come down. Petrol price has been reduced. Expect a cut in diesel price soon. This will help in curbing inflation.

4. The trade deficit has narrowed by 8.2% during the first half of the year (Apr to Sep ‘14) compared to the same period last year – despite a sharp jump during the month of Sep ‘14 due to a big increase in gold imports.

In US Dollar terms, exports grew by 6.5%, while imports grew by 1.6% during Apr to Sep ‘14.

5. Despite a surge in the Dollar index, the Rupee has been relatively stable in the 60-62 range against the US Dollar. Infosys has already declared good Q2 results. Expect other large IT players to also show improvement in top and bottom lines.

The macro fundamentals are definitely better than a year ago. To answer the larger question, one needs to remember the famous quote from Benjamin Graham, who is considered the ‘father’ of value investing:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

What it means is that sentiments rule the market in the near-term. Why are sentiments bearish now? The main reason is selling by FIIs. Despite record inflows into Indian mutual funds, DII buying hasn’t kept pace with FII selling.

Why are FIIs selling? There has been some disappointment with the lack of speed of the Modi government in implementing much-needed reforms in financial and labour sectors. Declining growth in China and Germany, and a likely hike in interest rate in the USA have also caused a more cautious approach by FIIs.

Eventually, the market will ‘weigh’ the improving fundamentals, and the stock market will resume its up move and touch new highs. The question is: When?

How about from Mon. Oct 20 ‘14? Exit polls indicate a possible sweep by the BJP in the just-concluded state elections in Maharashtra and Haryana. Results will be declared on Sun. Oct 19 ‘14.

Government formation by BJP in both states may be just the positive fillip the stock market is awaiting.

Tuesday, October 14, 2014

Gold and Silver charts: bear market rallies

Gold Chart Pattern

Gold_Oct1314

After breaching the support level of 1240, the daily bar chart pattern of gold was expected to fall to its previous low of 1180. The good news for gold bulls is that the 1180 level was tested but not breached.

The subsequent upward bounce was sharp – typical of bear market rallies. Gold’s price crossed above its falling 20 day EMA without much ado, but is likely to face strong resistance from the zone between 1240 and 1260. The falling 50 day EMA is within the resistance zone.

Daily technical indicators have corrected oversold conditions and looking bullish. MACD is emerging from its oversold zone, and its signal line has formed a bullish ‘rounding bottom’ pattern. RSI has crossed above its 50% level for the first time in two months. Slow stochastic has risen sharply to enter its overbought zone.

On longer term weekly chart (not shown), gold’s price is trading well below its three weekly EMAs in a long-term bear market. Technical indicators are showing some upward momentum, but remain in bearish zones. Expect bears to attack soon.

Silver Chart Pattern

Silver_Oct1314 

In the previous post on the daily bar chart pattern of silver, bears appeared to have a stranglehold on the chart. A lower target of 16 was mentioned.

Silver’s price dropped to a new 52 week low of 16.50. All three technical indicators were inside their respective oversold zones, but two of them – RSI, Slow stochastic – showed positive divergences by failing to touch new lows.

A rally ensued and took silver’s price above the 17.50 level - where it faced strong resistance from the falling 20 day EMA. Technical indicators are beginning to look bullish. Silver’s price may rally some more, but the zone between 18 and 19 will provide strong resistance. The falling 50 day EMA is within the resistance zone.

On longer term weekly chart (not shown), silver’s price is trading well below its three weekly EMAs in a long-term bear market. Technical indicators are bearish, but two of them – MACD, RSI – are showing positive divergences by touching higher bottoms.

Monday, October 13, 2014

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Oct 10, ‘14

S&P 500 Index Chart

S&P 500_Oct1014

Bears tightened their hold on the daily bar chart pattern of S&P 500. Any hope of a recovery by bulls was belied on the first day of the week. The index rose to touch an intra-day high of 1978, but faced resistance from its falling 20 day EMA, and formed a ‘reversal day’ pattern.

Attempts to rally on Wed. and Thu. by bulls were also thwarted by the falling 20 day EMA, which crossed below the 50 day EMA for the first time in 8 months. The index dropped on rising volumes to close the week at 1906 – losing 3% for the week and testing the Aug ‘14 low of 1905.

Daily technical indicators are bearish and a bit oversold. MACD has dropped inside its oversold zone. RSI is falling towards its oversold zone. Slow stochastic has re-entered its oversold zone after a brief bounce up. A breach of the 200 day EMA appears imminent.

On longer term weekly chart (not shown), the index closed below its 20 week EMA for the first time in 6 months, but is trading above its rising 50 week and 200 week EMAs in a long-term bull market. Weekly technical indicators are looking bearish and showing downward momentum. The correction may continue a bit longer, and test support from the 50 week EMA (at 1878).

FTSE 100 Index Chart

FTSE_Oct1014

The following bearish signals were observed in last weeks’ analysis of the daily bar chart pattern of FTSE 100: “The 20 day EMA has crossed below the 200 day EMA for the first time in more than 2 years. If the 50 day EMA also crosses below the 200 day EMA, the ‘death cross’ will technically confirm a bear market.”

A brief attempt at a rally by bulls stopped short of the 6600 level. The index continued to fall through the week, and closed at a 52 week low of 6340. The ‘death cross’ has technically confirmed a bear market. That means every rise may be used by bears to sell.

Daily technical indicators are inside their respective oversold zones – so an upward bounce can occur at any time. At the time of writing this post, FTSE is trading about 25 points higher.

On longer term weekly chart (not shown), the index closed well below its 20 week and 50 week EMAs, but is trading above its 200 week EMA. Weekly technical indicators have dropped deeper inside bearish zones. The long-term bull market is under threat.

Saturday, October 11, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Oct 10, 2014

FIIs were net sellers during another holiday-shortened week. Net buying by DIIs could not quite match up to FII selling. Both Sensex and Nifty closed 1% lower for the week. Poor growth numbers from Europe spooked FII sentiments.

The IIP number was a disappointing 0.4% for August ‘14 – much below consensus estimate of 2.4%. Manufacturing growth remains worrisome. Negative growth of capital goods and consumer durables sectors show that demand is yet to catch up with improved business sentiments.

Infosys declared good results for Q2, and threw in a surprising 1:1 bonus for shareholders. TCS, HCL Tech, Tech Mahindra are also expected to announce better results. Will Q2 results of India Inc. and state election results in Maharashtra and Haryana provide a much-needed pre-Diwali rally? Let us see what the charts foretell.

BSE Sensex index chart

SENSEX_Oct1014

The daily bar chart pattern of Sensex dropped to test support from the post-election up-trend line (marked UL3). The support held – just as it had done in Jul ‘14 and Aug ‘14. But this time looks a bit different as the up trend hasn’t resumed after the test.

Daily technical indicators are in bearish zones. MACD is negative, and falling below its signal line. ROC is also negative and facing resistance from its falling 10 day MA. RSI briefly moved above its 50% level, only to fall below it. Slow stochastic is struggling to emerge from its oversold zone. Expect some more correction or consolidation before the up move resumes.

Sensex is trading above UL3 and well above its rising 200 day EMA. The long-term bull market is under no immediate threat.

NSE Nifty 50 index chart

Nifty_Oct1014

The weekly bar chart pattern of Nifty closed 86 points lower for the week. In the process, it breached the post-election up-trend line (marked UL3) on intra-week as well as closing basis.

Is the up-trend over? Application of the 3% ‘whipsaw’ rule suggests that the breach of UL3 is not technically significant yet. But a breach is a breach, and should be respected.

Why the divergence with Sensex chart – where the UL3 has not been breached yet? The reason is the difference in the index constituents (shares of 30 companies comprise Sensex but shares of 50 companies comprise Nifty).

Weekly technical indicators are still in bullish zones, but showing bearish signs. MACD is falling below its signal line inside its overbought zone. ROC is below its 10 week MA in positive zone, and trying to move up. RSI has dropped to its 50% level. Slow stochastic is falling towards its 50% level.

Some more correction or consolidation is likely. The long-term bull market remains intact, as Nifty is trading above its two weekly EMAs and longer-term up-trend line 2.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in corrective modes. The long-term bull market is intact, so don’t panic and sell if the indices correct some more. Watch Q2 results closely for adding outperformers to your portfolio.

Thursday, October 9, 2014

Stock Market Outlook: Keep Your Expectations in Check

Sensex gained almost 57% (~9900 points) from its Aug 28, 2013 intra-day low of 17449 to its Sep 8, 2014 intra-day high of 27355. That is an exceptional performance considering it occurred during a period of high inflation, low GDP growth and high interest rates.

Inflation has started moderating. GDP growth is showing signs of picking up. But interest rates still remain high. From its all-time high of 27355 touched on Sep 8 ‘14, Sensex underwent a moderate correction of 4.4% by losing 1200 points to touch an intra-day low of 26150 on Oct 8 ‘14 – thanks mainly to FII selling.

Today’s bounce up from trend line (UL3) support is an indication that the correction may have run its course. Can the index gain another 9900 points to touch 36000 over the next one year? The possibility can’t be ruled out. But note that in percentage terms (~38%), the gain will be lower because of the higher base-effect.

In a recent article at morningstar.com, investors were advised to keep their expectations in check because the US market looks fully valued. The same can be said about the Indian market. With both markets near lifetime highs, there are no easy pickings left for new entrants.

Stock-picking skills will be tested, and return expectations should be moderate. That doesn’t mean stocks will not give better returns than bonds, NCDs or bank FDs over a 3-5 years period.

You can read the full article here.

Tuesday, October 7, 2014

WTI and Brent Crude Oil charts: bears have total control

WTI Crude chart

WTI Crude_Oct0614

The following comments appeared in a post two weeks back on the daily bar chart pattern of WTI Crude oil: “Another attempt at a rally is possible from the current level, but downward momentum appears to be building up again. That means a likely breach of the 90 level should follow shortly.”

Note that oil’s price rallied above its falling 20 day EMA, but faced strong resistance from the 95 level (its previous top) and its falling 50 day EMA. Bears used the rally to sell again. Oil’s price quickly breached the 90 level to touch a new 52 week low of 88 before bouncing up to close above the 90 level.

All three technical indicators are in their respective bearish zones, but are showing positive divergences by touching higher bottoms while oil’s price dropped lower. Expect another rally at any time – but bears are not going to miss the opportunity to sell again.

On longer term weekly chart (not shown), oil’s price has closed below its 200 week EMA for five straight weeks. Weekly technical indicators are looking oversold. Oil’s price has formed a bearish pattern of lower tops and lower bottoms since touching a high of 112.50 more than a year back. A fall to 85 is a possibility.

Brent Crude chart

BrentCrude_Oct0614

The following comments appeared in a post two weeks back on the daily bar chart pattern of Brent Crude oil: “All three technical indicators are in bearish zones and looking a bit oversold, and also showing positive divergences by touching higher bottoms while oil’s price touched a lower bottom. Some sideways consolidation or a weak attempt at a rally will probably face more selling from bears.”

Note that a brief sideways consolidation was followed by an attempt to reach the 98 level. Resistance from the falling 20 day EMA provided the trigger for bears to resume selling. After touching a two-year low of 91, oil’s price bounced up to the 93 level.

All three technical indicators are inside their respective oversold zones, with Slow stochastic showing positive divergence by touching a slightly higher bottom. Some consolidation can be expected before the down move resumes.

On longer term weekly chart (not shown), oil’s price has closed below its 200 week EMA for eight weeks in a row. The 20 week EMA has crossed below the 200 week EMA. Weekly technical indicators are looking oversold. The long-term bull market is under serious threat. A test of the Jun ‘12 low of 88 seems likely.

Monday, October 6, 2014

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Oct 03, ‘14

S&P 500 Index Chart

S&P 500_Oct0314

Daily technical indicators were looking bearish in last week’s analysis of the daily bar chart pattern of S&P 500 index. Some more correction - and a possible test of the Aug ‘14 low of 1905 - was expected.

The index dropped sharply to touch an intra-day low of 1926 on Thu. Oct 2 ‘14, but bounced up to close near the day’s top – forming a ‘doji’ pattern (in candlestick parlance) that indicates indecision among bulls and bears.

A positive jobs report led to buying on the last day of the week that is a signal that the correction may be over. The index lost about 15 points for the week; but by touching a higher bottom of 1926, the index continued the bullish pattern of higher tops and higher bottoms.

Daily technical indicators are in bearish zones, but showing some signs of recovery. MACD is falling below its signal line in negative territory. RSI is trying to reverse its downtrend, but remains below its 50% level. Slow stochastic has emerged from its oversold zone.

On longer term weekly chart (not shown), the index dropped below its 20 week EMA intra-week, but is trading above all three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones but showing downward momentum. The index may consolidate a bit before resuming its up move.

FTSE 100 Index Chart

FTSE_Oct0314

The following remarks appeared in last week’s analysis of the 6 months daily bar chart pattern of FTSE 100: “…all three technical indicators are bearish, and two of them – RSI, Slow stochastic – are showing negative divergences by touching lower bottoms. That means, the correction may not be over yet.”

The index dropped below its Aug ‘14 low and the 6500 level to an intra-day low of 6446 – its lowest level in 8 months – before closing above the 6500 level by the end of the week with a loss of 120 points.

The 20 day EMA has crossed below the 200 day EMA for the first time in more than 2 years. If the 50 day EMA also crosses below the 200 day EMA, the ‘death cross’ will technically confirm a bear market.

Daily technical indicators are looking bearish and oversold. MACD is falling below its signal inside its oversold zone. RSI has bounced up from its oversold zone. Slow stochastic is inside its oversold zone, but trying to turn up. At the time of writing this post, the index is trading about 47 points higher at 6575.

On longer term weekly chart (not shown), the index is well 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 have entered bearish zones. Bears may be getting the upper hand.

Saturday, October 4, 2014

BSE Sensex and NSE Nifty 50 index chart patterns – Oct 03, 2014

Trading activity remained at a low key during a holiday-shortened week. During the second half of Sep ‘14, FIIs turned net sellers and DIIs became net buyers of equity shares. However, for the entire month, FIIs were net buyers of Rs 1500 Crores while DIIs were net sellers of Rs 1100 Crores.

RBI Governor’s announcement about unchanged interest rates was widely expected by market experts. What came as a surprise was a hint that interest rates may not be reduced any time soon, as CPI inflation is more likely to rise towards 8% instead of sliding down to 6%. That means rate sensitive sectors will continue to struggle.

Both Sensex and Nifty closed marginally lower for the week. Trading remained within narrow ranges, but was quite volatile with wide intra-day fluctuations. The market appears to be in wait and watch mode till the next triggers - expected from Q2 results announcements and elections in a few states.

BSE Sensex index chart

SENSEX_Oct0114

In a 3-day trading week, the daily bar chart pattern of Sensex consolidated sideways in between its 20 day and 50 day EMAs, closing about 60 odd points lower. The post-election up trend line (UL3) was not tested – though the possibility of a test of support from the trend line is still on the cards.

Daily technical indicators continue to look bearish – which means some more correction or consolidation is likely. MACD is falling below its signal line and is about to enter negative territory. ROC crossed above its 10 day MA only to drop back into its negative zone. RSI is moving sideways below its 50% level. Slow stochastic is also below its 50% level.

The index is trading above UL3 trend line and well above its rising 200 day EMA. The long-term bull market is under no threat. The correction is providing an adding opportunity – particularly in good stocks that have fallen more than the index.

On longer term weekly chart (not shown), all three weekly EMAs are rising and Sensex is trading above them in a long-term bull market. Weekly technical indicators have corrected overbought conditions, but remain in bullish zones.

NSE Nifty 50 index chart

Nifty_Oct0114

The weekly bar chart pattern of Nifty traded within a narrow range and closed about 25 points lower for the week. Support from the up trend line - marked UL3 – has held so far. The index is trading above its two up trend lines and its two weekly EMAs in a long-term bull market.

Weekly technical indicators are in bullish zones, but showing a bit of downward momentum. MACD has crossed below its signal line inside its overbought zone. ROC is falling below its 10  week MA in positive territory. RSI is moving sideways above its 50% level. Slow stochastic has slipped down from its overbought zone.

Some more correction or consolidation can be expected, but buying support can emerge at any time.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in the midst of mild bull market corrections. Don’t panic and sell if the indices correct some more. Avail the opportunity to add good stocks that have fallen more than the indices.