Stock Chart Pattern - Infosys Ltd. (An update)

Bobby Hebb wrote the song 'Sunny' within 48 hours of a double tragedy on Nov 22, 1963. That was the day popular and charismatic US President John Kennedy was assassinated - and Bobby's elder brother was stabbed to death outside a Nashville nightclub.

What does that have to do with the chart pattern of Infosys? Well, Infosys also suffered a double tragedy - due to their disastrous policy of rotating the company's leadership among the original promoters.

As mentioned in the previous update, the two promoter-CEOs that followed Narayanamurthy and Nilekani neither had the dynamism nor the leadership skills required for a company with global aspirations.

With the induction of a professional manager with leadership experience in a global company (SAP), Infosys is ready to sing the following line from the song: "Now the dark days are gone, and the bright days are here". 

Should they? Let us see what the chart foretells.

The closing chart pattern of Infosys Ltd. touched a low of 553 in Apr '13 (adjusted for two subsequent 1:1 bonus offerings - marked by blue bells - in Dec '14 and Jun '15). 

The stock formed a 'double top' reversal pattern at around 950 (in Jan '14 and Mar '14). Negative divergences in three of the four technical indicators (marked by blue arrows) led to a correction within a 'falling wedge' pattern with bullish implications.

An upward breakout from the wedge started a fresh leg of the bull rally that culminated with another 'double top' reversal pattern at around 1180 (in Aug '15 and Oct '15). 

Once again, negative divergences in three of the four technical indicators (marked by blue arrows) led to a correction below the three daily EMAs, but the stock formed a small 'double bottom' reversal pattern and bounced up.

Daily technical indicators are in bullish zones, but giving mixed signals. The stock price has been consolidating sideways within a large 'rectangle' pattern between 960 and 1180 (i.e. 220 points) for the past 14 months.

Rectangles are usually 'continuation' patterns, with price target implications. An expected upward breakout can take the stock to a target of 1400 (= 1180 + 220).

But a 'rectangle' can also be a 'reversal' pattern - in which case, the downward target will be 740 (= 960 - 220). 

Since the stock is trading in a bull market (above its three EMAs), one can use the 'consolidation' to accumulate with a stop-loss at 1020.

[Wishing all blog visitors, blog followers, blog subscribers, twitter followers and newsletter subscribers a very happy and prosperous 2016.] 

How to Select a Company for Investment - a guest post

The long correction since Mar '15 in the Indian stock market may have finally come to an end. The time for a pre-budget rally has arrived. If you were waiting to enter the market, don't wait any more.

But which stocks should you buy from the hundreds that trade every day? Buying a stock is not buying a piece of paper (or an entry in a demat account). You are buying a 'share' of a business.

In this month's guest post, Nishit explains how you should go about selecting different companies for investment. Promoter integrity is at the top of his selection criteria.

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The Indian economy is showing signs of green shoots and we are in the take off state right now.  People who I meet often ask me how to select a company for investment. There are many things which go into the selection of a company but the most important parameters for me are Corporate Governance, Ethics and Transparency.

I usually look at where the broad economy is going and from that I identify which sectors will do well. Once the sectors are identified, next is identifying companies within the sectors. Investing in a company with a crooked promoter in a good sector will still lose you money. An honest promoter is the most important yardstick while selecting a company.

Promoters can make mistakes which are acceptable; skimming off money from the shareholders is not. Satyam is a prime example of a blue chip company in a very exciting sector of IT going bad. Satyam not only jeopardized the jobs of its employees, eroded shareholder value, it also shook the confidence within the IT industry.

If I was a foreigner waiting to invest in India, I would constantly think which other Satyam was lurking in the wings in the Indian IT industry. Now if we were to compare this with a TCS or Infosys or even a Wipro, the promoter ethics are above board. Wipro might be slow to change but at least we know that the promoter is not skimming off money.

This is the very reason the Tata group of companies is my favorite while investing. With their long history and illustrious background, there is very little chance of fraud happening with the Tata companies. They may be slow to change, there could be some mishaps in decision making but that is acceptable.

If I am assured of promoter honesty then 50% of my worries are taken care of. Stock picking is an art. I normally make up my mind in 30 minutes whether or not to buy or not to buy a stock. If I cannot decide in 30 minutes it means there is something wrong somewhere.

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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)

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The 4 Key Elements of a Well-Managed Portfolio

It is easy to have an investment portfolio. Open a demat account and an online broking account and you can start buying stocks. Buying funds require filling up a form and submitting it with a cheque to the fund management house.

Then you just sit back, and get rich. Right? That is what most first-timers think - but they end up losing money instead. What is the catch?

First, you need to know what to buy. Next, you need to know when to buy. Even after correctly deciding what and when to buy, you won't get rich if you don't know how to manage your own portfolio.

The 'what' requires knowledge of fundamental analysis. It helps to have accounting knowledge in dissecting Annual Reports. But basic math skills and common sense are often good enough (unless you have ambitions of being a research analyst in a fund management house).

The 'when' requires knowledge of technical analysis. Again, it helps to be a science graduate or engineer to understand the benefit of graphs drawn on semi-logarithmic sheets. But it isn't rocket science - and the basic concepts are quite simple to understand and apply.

The 'portfolio management' part is often not clearly understood or appreciated by most small investors - even many experienced ones.

In an article in investopedia.com, Brian Bloch explains the 4 key elements of a well-managed portfolio. Here are a couple of excerpts from the article:

"Any investment process must involve planning, organization, leadership and control to some extent in order to be considered managed."

"Portfolio management is defined as the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. This is a very specific definition of management in the investment context."

You can read the full article at this link.

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Stock Index Chart Patterns: S&P 500 and FTSE 100 – Dec 24, 2015

S&P 500 Index Chart

Bulls decided to spread some Christmas cheer to the daily bar chart pattern of S&P 500. In a holiday-shortened trading week, the index rallied past its three EMAs to close in bull territory with a weekly gain of almost 3%.

Despite touching a lifetime high in May '15, the index has lost a bit of ground during the past year. A 'symmetrical triangle' pattern appears to be forming, from which a breakout can occur in either direction.

Daily technical indicators are turning bullish. MACD is about to cross above its signal line in negative zone. RSI and Slow stochastic have moved above their respective 50% levels.

Some consolidation can be expected during the last trading week of the year, when activity is likely to remain low.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones but not showing much upward momentum.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 rallied past its 20 day and 50 day EMAs but stopped well below its falling 200 day EMA in a trading week truncated by Christmas holiday.

The index continues to trade in a bear market, though daily technical indicators have turned bullish. MACD is rising above its signal line in negative zone. RSI and Slow stochastic have climbed past their respective 50% levels.

The rally was accompanied by low volumes, which raises questions about its sustainability.

On longer term weekly chart (not shown), the index closed below all three weekly EMAs in a long-term bear market despite closing higher for the 2nd week in a row. Weekly technical indicators are in bearish zones, but showing some upward momentum. 

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 24, 2015

In a truncated trading week, FIIs turned net buyers of equity worth Rs 480 Crores, as per provisional figures. DIIs were also net buyers worth Rs 940 Crores. Both Sensex and Nifty gained about 1.2% on a weekly closing basis.

Interest rate hike in USA has led to a slight fall in the US Dollar - sparking a mild rally in oil prices and strengthening of the Rupee. Expected foreign inflows from Jan '16, particularly into state and central government bonds, should further strengthen the Rupee.

PM Modi spread some Christmas cheer by unexpectedly stopping by in Lahore on his way back from Russia and Afghanistan. Opposition parties called the visit pre-planned due to a nudge from USA to improve neighbourly ties.

BSE Sensex index chart

The daily bar chart pattern of Sensex appears to have formed a 'double bottom' reversal pattern (marked by green arrows) at the 24850 level. The index has crossed above its 20 day EMA but is facing resistance from the 50 day EMA.

A 'double bottom' requires technical confirmation, which will be provided if the index crosses above the highest level between the two bottoms. That would be the Oct '15 top of 27618 - which is almost 1800 points above the week's closing.

To get there, the index has to overcome resistances from the 50 day and 200 day EMAs and the blue down trend line. It won't be easy for bulls. Buying support from FIIs can help.

Daily technical indicators are looking bullish. MACD is rising above its signal line in negative zone. ROC is facing resistance from the edge of its overbought zone. RSI has crossed above its 50% level. Slow stochastic has entered its overbought zone.

The rally may continue during the last week of the year on the back of DII buying, as FII activity is going to be limited.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty closed higher for the second week in a row after receiving support from the long-term support/resistance level of 7540, but continues to trade in bear territory below its 20 week and 50 week EMAs.

As explained in last week's post, the formation of a 'double bottom' reversal pattern will get confirmed only if (and when) the index crosses above its Oct '15 top of 8336.

Weekly technical indicators are beginning to show some signs of turning around. MACD is moving sideways below its signal line in negative zone. ROC and Slow stochastic are trying to move up from the edges of their respective oversold zones. RSI is facing resistance from its 50% level.

Volume bar appears lower than the previous week, but that is because there was no trading on Friday due to the Christmas holiday. Volumes need to pick up next week if the rally is to sustain.

Bottomline? Chart patterns of Sensex and Nifty bounced up from long-term support levels - forming 'double bottom' reversal patterns that are awaiting technical confirmation. Long-term bull markets are intact, as both indices are trading well above their rising 200 week EMAs (not shown). This is a good time to add to your portfolios, but maintain suitable stop-loss levels. 

WTI and Brent Crude Oil charts: an update

WTI Crude chart

The daily bar chart pattern of WTI Crude oil dropped to a new low below 35 on Dec 14 '15, but formed a 'reversal day' pattern (lower low, higher close) and almost reached the 38 level the next day.

Despite good volume support, the 2 days recovery ended quickly. Oil's price failed to test resistance from the falling 20 day EMA, and drifted down below 36.

Daily technical indicators are moving sideways deep inside bearish zones. Bears are selling at every rise. They may continue to do so for some more time.

On longer term weekly chart (not shown), oil’s price continues to trade well below its three weekly EMAs in a long-term bear market. Weekly technical indicators are looking oversold, but showing positive divergences by not falling lower.

Brent Crude chart

The daily bar chart pattern of Brent Crude oil dropped to a 10 years low of 36 on Dec 21 '15. The fall during the past 2 months has been quite sharp. A technical bounce is a possibility.

Daily technical indicators are inside their oversold zones, which is also hinting at a technical bounce. Bulls need to be courageous and nimble-footed to try and eke out some gains. 

The bottom seems to be falling out of the oil market. But it may not be a good idea to go short now.

On longer term weekly chart (not shown), oil’s price is trading well below its three weekly EMAs in a long-term bear market. Weekly technical indicators are inside their oversold zones.

John Murphy's "Charting Made Easy"

If you are like most small investors, graphs and charts probably remind you of your middle-school mathematics classes that you hated to attend. 

Teaching maths is an art. Many teachers turn it into memorising of formulae without explaining the relevance. Those who can make it lucid and fun hold the attention of their students. 

Charts are pictorial representations of data. They make it easy to 'see' any underlying patterns in the data. This is particularly useful for stock price charts.

Why? Because the underlying patterns represent the collective greed and fear of market participants. 

Studying price charts is called 'Technical Analysis'. But there is nothing 'technical' about it, because there is very little math involved.

Spend a little time in understanding the various price patterns, and what they reveal about investor sentiment. There is no better place to start than John Murphy's introduction to chart patterns.

You can read the eBook at this link. Bookmark the link and return to it periodically. 

You won't become an expert overnight. But you will get an idea about what is going on in the market. Why prices are moving up, or down or not going anywhere. 

With practice and experience, you will learn when to buy, when to sell and when to sit tight.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Dec 18, 2015

S&P 500 Index Chart

It was a volatile week for the daily bar chart pattern of S&P 500. After dropping below the 2000 level after 2 months, the index formed a ‘reversal day’ pattern (lower low, higher close), and bounced up to close above its three EMAs in bull territory on Wed. Dec 16.

Bears pounced immediately to push the index below all three EMAs by the end of the week. The index lost barely 7 points on a weekly closing basis, but the huge volume surge on Fri. Dec 18 doesn’t augur well for bulls.

Daily technical indicators are in bearish zones, and showing downward momentum. The 20 day and 50 day EMAs are falling towards the 200 day EMA. A deeper fall into bear territory is likely.

On longer term weekly chart (not shown), the index closed below its 20 week and 50 week EMAs for the second straight week, but 200 points above its rising 200 week EMA in a long-term bull market. Weekly technical indicators are looking bearish.

FTSE 100 Index Chart

The following comments in last week’s post on the daily bar chart pattern of FTSE 100 may be worth repeating:

“Daily technical indicators are in their oversold zones, which can lead to a technical bounce at any time. But it should not be used as a bottom-fishing opportunity. Why? Because there is no sign of a bottom formation as yet.”

The index closed below the 5900 level on Mon. Dec 14, but bounced up sharply to cross above 6150 on Thu. Dec 17. Resistance from the falling 20 day EMA proved too strong.

FTSE closed just above 6050 with a 100 points weekly gain, but huge volumes (not shown) on Fri. Dec 18 – a down day – is a clear sign of continued bear domination.

Daily technical indicators have corrected oversold conditions, but remain in bearish zones. All three EMAs are falling and the index is trading below them in a bear market.

On longer term weekly chart (not shown), the index stayed well below all three weekly EMAs during the week. Weekly technical indicators are in bearish zones. 

The 20 week EMA has crossed below the 200 week EMA for the first time in more than 3 years. The ‘death cross’ of the 50 week EMA below the 200 week EMA will technically confirm a long-term bear market.

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 18, 2015

Net selling in equities by FIIs dropped drastically during the past week, barely touching Rs 20 Crores as per provisional figures. DIIs’ net buying crossed Rs 900 Crores. Sensex and Nifty gained about 2% on weekly closing basis, though FIIs and DIIs were both net sellers on Friday.

Slumping price of oil - mainly due to supply glut - and a crash in the price of natural gas also raised concerns about a global economic slowdown, which led to profit booking in global markets. 

The policy stalemate in the Rajya Sabha has ensured that the GST bill will not get passed during the winter session. Politicians seem more interested in tarnishing each other's reputations (or, the lack of it) than conducting legislative business.

BSE Sensex index chart

The following comment was made in last week's post on the daily closing chart pattern of Sensex: "The positive divergences (on the daily technical indicators) may have set the stage for a technical bounce."

The index tested the support level of 24850 and bounced up to close above its falling 20 day EMA on Thu. Dec 17. But Friday's profit booking by FIIs and DIIs ensured that the index closed below its three falling EMAs in bear territory.

Daily technical indicators have corrected oversold conditions, but are looking bearish. MACD just managed to cross above its signal line in negative zone. ROC climbed above its 10 day MA, but failed to enter positive zone. RSI is below its 50% level. Slow stochastic is facing resistance from its 50% level.

Lack of FII selling can be a near-term trigger for the index to move up till the end of the month. Advance tax figures of several large-cap companies may be a harbinger for better Q3 (Dec '15) results.   

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty is showing bullish and bearish signs. Since bearish signs appear stronger, let me recount them first.

• The blue down trend line is still ruling the chart - as it has done for the past 9 months. 
• The index is trading well below the trend line, as well as below its two weekly EMAs. 
• The 20 week EMA has crossed below the 50 week EMA, and both EMAs are moving down.
• All four technical indicators are in bearish zones.

Now, the bullish signs.

• The index bounced up after testing the long-term support level of 7540.
• It formed a weekly 'reversal bar' (lower low, higher close) - like it did in the week ending Sep 11 '15.
• Volumes last week were higher than that in the week ending Sep 11 '15 - opening the door for a 'double bottom' reversal pattern.

A 'double-bottom' reversal pattern will technically be confirmed only if the index manages to move above its Oct '15 top of 8336. To do that, Nifty will need to overcome resistances from its two falling weekly EMAs and the down trend line. Bulls have a lot of work to do.

Bottomline? Chart patterns of Sensex and Nifty bounced up from long-term support levels - hinting at a likely reversal of the 9 months long down trend. Long-term bull markets are very much in force, since both indices are trading well above their rising 200 week EMAs (not shown). This may be a good time to enter large-cap and mid-cap stocks that are facing temporary headwinds. 

Stock Chart Pattern - Indian Hotel (An Update)

Fundamentally, the company is still struggling to come out of the woods. Mistimed acquisitions - overseas and in India - at the height of the previous bull market had left the company with a huge debt burden.

A global economic downturn followed by the terrorist attack in Mumbai severely curtailed visits by foreign tourists, and put paid to any near term chance of a revival. Overcapacity in the Indian market didn't help matters.

The lower-end Ginger brand hasn't been successful. A change at the helm and efforts to restructure and consolidate operations seem to be slowly bearing fruit.

Technically, the daily bar chart pattern of Indian Hotel shows that the worst may be getting over. The stock had touched a low of 37.55 on Aug 6 '13. The subsequent rally took the stock to a high of 127.25 on Dec 5 '14 - a huge gain of 240% in 16 months.

The stock touched slightly lower tops of 126.85 on Jan 2 '15 and 126.95 on Feb 5 '15 - forming a 'triple top' reversal pattern in the process. A 7 months long correction ensued, and the stock slid below its three EMAs into bear territory.

The stock price touched a low of 80.75 on Sep 7 '15 - testing the long-term support-resistance level of 80 - and retracing 51% of its entire rise from the low of Aug '13 to the high of Dec '14. Since a 50% Fibonacci retracement often marks the end of a bear phase, it was no surprise that the stock has been on an up trend for the past three months.

By convincingly crossing above its three EMAs with a volume surge on Dec 2 '15, the stock has re-entered bull territory. The 'golden cross' of the 50 day EMA above the 200 day EMA has technically confirmed a bull market.

Three of the four daily technical indicators - MACD, RSI, Slow stochastic - are looking overbought. ROC has corrected sharply from its overbought zone. The stock is undergoing a sideways consolidation - after which it may move up to touch a new high.

This may be a good time to start accumulating the stock.

Nifty chart: a midweek update (Dec 16 ‘15)

As the calendar year 2015 draws to a close, selling by FIIs is tapering down. Their net selling in equity just about crossed Rs 600 Crores during the first three days of trading this week, as per provisional figures.

DIIs continued their bullish stance, and were net buyers of equity worth nearly Rs 1700 Crores. That helped Nifty to jump up to its falling 20 day EMA.

The macroeconomic outlook remains weak. WPI inflation crept up, but remained negative. CPI moved above 5% - thanks to higher food prices.

Exports fell 24% in Nov '15 - its 12th straight month of degrowth. Imports fell more than 30%, which reduced the trade deficit for the Apr-Nov '15 period to $87.5 Billion from $102.5 Billion in the same period in 2014.

The daily bar chart pattern of Nifty bounced up smartly after testing its Sep '15 low of 7540, but is facing resistance from its falling 20 day EMA.

Has the index formed a 'double bottom' reversal pattern - ending the 9 months long down trend? It's too soon to call. Why? Because a 'double bottom' needs technical confirmation - which will require the index to cross above its Oct '15 top of 8336.

That means the index needs to overcome resistances from its 3 falling EMAs, and climb almost 600 points from its current level. Not impossible, but bears may make it a difficult task.

That's the bad news. The good news is that all three technical indicators have also formed 'double bottom' patterns, which is a bullish sign.

MACD is about to cross above its signal line in negative zone. RSI bounced up after receiving support from the edge of its oversold zone. Slow stochastic has emerged strongly from its oversold zone.

The long-term bull market remains intact. The 200 week EMA (not shown on chart) is still rising, and Nifty is trading almost 700 points above it. However, weekly technical indicators aren't showing any upward momentum.

Identify fundamentally strong stocks, and accumulate them gradually.

Gold and Silver charts: an update

Gold chart pattern

The following remarks were made in the previous post on the daily bar chart pattern of gold: "The fall during Nov ‘15 has been a bit steep. That can lead to a short covering rally."

Gold's price dropped below 1050 intra-day on Dec 3, and bounced up sharply on strong volumes to close above its falling 20 day EMA the next day. Bears quickly smothered the rally.

Despite a couple of intra-day moves above the 20 day EMA, gold's price resumed its downward slide to close just below the 1060 level.

Daily technical indicators are looking bearish, and showing downward momentum. Fears of an interest rate hike by the US Fed had caused huge selling in Oct and Nov '15. It will be interesting to see what happens if the Fed does increase the interest rate.

On longer term weekly chart (not shown), gold’s price is trading well below its three weekly EMAs in a long-term bear market. MACD is falling below its signal line in negative zone. RSI is falling below its 50% level. Slow stochastic is trying to emerge from its oversold zone.

Silver chart pattern

After touching an intra-day low of 13.80 on Dec 3, the daily bar chart pattern of silver bounced up to close above its 20 day EMA on the following day. On Dec 7, silver's price crossed above the 14.60 level intra-day but faced resistance from its falling 50 day EMA.

It formed a 'reversal day' pattern (higher high, lower close) that ended the brief rally. Silver's price touched a new intra-day low of 13.60 on Dec 14.

Daily technical indicators are in bearish zones and looking oversold. However, they are showing positive divergences by not falling to new lows. Another technical bounce is possible.

On longer term weekly chart (not shown), silver’s price is trading well below its three weekly EMA in a long-term bear market. MACD is sliding down below its signal line in negative zone. RSI is moving down below its 50% level. Slow stochastic is inside its oversold zone.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Dec 11, 2015

S&P 500 Index Chart

The following comments appeared in last week's post on the daily bar chart pattern of S&P 500: "The entire trading since the beginning of Nov ‘15 has been a sideways consolidation within a ‘symmetrical triangle’ pattern, from which a break out can occur at any time. Since triangles tend to be continuation patterns, the break out is expected to be upwards. But triangles are unreliable – so one should wait for the break out before initiating a buy/sell action."

The index broke down below the triangle on the last day of the week, and dropped below all three EMAs into bear territory. A bearish pattern of lower tops and lower bottoms has been formed.

Strong volumes on 4 of the 5 down days last week clearly show bear domination. All three daily technical indicators are in bearish zones, and showing downward momentum - hinting at a deeper correction.

Is the index getting ready to enter another bear phase? It may be a bit early to call, as the technical pattern is still evolving. If the index bounces up strongly from its current level - like it did in mid-Nov '15 - there is a possibility of formation of a bullish 'flag' pattern. 

On longer term weekly chart (not shown), the index closed below its 20 week and 50 week EMAs, but well above its 200 week EMA in a long-term bull market. Weekly technical indicators are turning bearish.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 closed lower on all 5 trading days last week, and dropped below the 6000 level - losing 4.5% on a weekly closing basis. All three EMAs are moving down and the index is trading well below them in a bear market.

Daily technical indicators are in their oversold zones, which can lead to a technical bounce at any time. But it should not be used as a bottom-fishing opportunity. Why? Because there is no sign of a bottom formation as yet.

On longer term weekly chart (not shown), the index stayed below all three weekly EMAs during the week. Weekly technical indicators have turned bearish. The ‘death cross’ of the 50 week EMA below the 200 week EMA will technically confirm a long-term bear market. 

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 11, 2015

Net selling in equities by FIIs tapered down during the past week, but exceeded Rs 1400 Crores, as per provisional figures. DIIs’ net buying touched Rs 2100 Crores. Yet, Sensex and Nifty lost about 2.2% on weekly closing basis.

The IIP number for Oct ‘15 shot up to a 5 year high of 9.8% – albeit on a lower base. The Oct ‘14 figure was –2.7%. For the Apr-Oct ‘15 period, IIP was 4.8% compared with 2.2% in the same 7 months during the previous year.

Domestic passenger vehicle sales rose more than 10% during Nov ‘15 – aided by festive season sales. It was the 13th consecutive month of growth in sales.

The stock market won’t be able to ignore such good news much longer. Both Sensex and Nifty are near long-term support levels. Bulls may get encouraged to put up a fight.

BSE Sensex index chart

The daily closing chart pattern of Sensex tested the Sep ‘15 intra-day low of 24834 (marked by dotted horizontal line), but bounced up to close above the 25000 level.

Note that the Sep ‘15 closing low of 24894 was also tested on a closing basis (as mentioned in last week’s post), but not breached.

The blue down trend line continues to dominate the chart. All three EMAs are falling, and Sensex is trading below them in bear territory.

A convincing breach of the 24834 level can cause a sharp drop to the 150 points ‘gap’ formed on the chart in May ‘14 due to the NDA election victory euphoria.

All four daily technical indicators are looking bearish, and oversold. None of the four have fallen lower than their Nov ‘15 lows – unlike the index. The positive divergences may have set the stage for a technical bounce.

Will it be just a short-covering bounce? Or, will the index form a ‘double bottom’ reversal pattern and resume its up trend?

The answer to the first question is: ‘Yes – as per current technical set-up’. Only if FIIs resume buying of index stocks –  unlikely before the beginning of the New Year – can the second question be answered in the affirmative.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty closed lower for the 2nd straight week due to selling in index stocks by FIIs. The Sep ‘15 low of 7540 – which also happens to be a longer-term support/resistance level – was tested.

The index continues to trade below the blue down trend line and its two weekly EMAs in bear territory. If the 7540 level gets breached convincingly, Nifty can fall another 10%.

Weekly technical indicators are in bearish zones. MACD and ROC are showing downward momentum. Slow stochastic is moving sideways with a downward bias.

RSI is showing positive divergence by rising during the past four weeks, while the index has fallen lower. That may provide bulls with enough incentive to fight back.

Bottomline? Chart patterns of Sensex and Nifty have dropped to long-term support levels. Long-term bull markets are intact because both indices are trading above their respective 200 week EMAs (not shown in above charts). Prolonged corrections test the patience and mettle of small investors. Those who have the courage to swim against the tide will make bigger gains. But do wear a life jacket (i.e. keep suitable stop-loss levels).

When To Sell Stocks

Anecdotal evidence - from occasionally watching business TV channels – shows that many small investors get attracted to the market when stock prices are rising.

They end up buying stocks at comparatively high prices. When a bear phase starts and stock prices start plummeting, they compound their problems by ‘averaging down’.

When stock prices fall even more, small investors panic and sell at a big loss. The emotional upheaval and loss of self esteem often turn them away from the stock market forever.

The moral of the story? It is important to choose stocks carefully, and buy them at a fair price. It is more important to know when to sell. Your investing success depends on it.

Remember that buying – even at a significant discount to the intrinsic value of a stock – doesn’t make anyone any money. You only make a profit (or loss) when you sell.

The fear of making a loss, and irrational behaviour (viz. thinking that by not selling a falling stock you are not incurring an actual loss) leads to even bigger losses.

In a recent article at investopedia.com, the reasons for selling a stock have been explained. Small investors – even experienced ones – may find the article interesting.

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Nifty chart: a midweek update (Dec 09 ‘15)

FIIs remain bearish on emerging markets. Their net selling in equities during this week crossed Rs 1100 Crores, as per provisional figures. For the first 7 trading days in Dec ‘15, their net selling has exceeded Rs 3500 Crores.

DIIs have been bullish. Their net buying in equities this week was Rs 1400 Crores, but failed to prevent Nifty from seeking lower levels. Their net buying in Dec ‘15 so far has been Rs 3100 Crores.

Why are FIIs on such a selling spree? Several reasons can be attributed. Appreciation of the US Dollar against the Rupee; likely interest rate hike in the US later this month; withdrawal of sovereign Middle East funds because of falling oil prices.

The daily bar chart pattern of Nifty closed lower for the 6th day in a row, after facing strong resistance from its falling 50 day EMA.

All three EMAs are falling, and the index is trading below them in a bear market. The Sep 8 low of 7540 is in danger of being tested, and even breached.

The blue down trend line continues to dominate Nifty’s chart.

Daily technical indicators are in bearish zones, but only Slow stochastic has entered its oversold zone. Some more correction is possible.

Note that three of the four indicators – MACD, ROC, RSI – are showing positive divergences by touching higher lows (marked by blue arrows).

A technical bounce can occur at any time. Will that lead to a reversal of the 9 months long down trend soon? Doesn’t seem so.

FII selling negated the ‘inverse head and shoulders’ reversal pattern that formed during Aug-Sep ‘15. There is no indication of a bottom formation as yet.

The long-term bull market is intact. The 200 week EMA (not shown on chart) is still rising, and Nifty is trading more than 550 points above it.

Many small investors have shown maturity – as evidenced by the steady inflows into mutual funds.

Many good mid-cap and small-cap stocks are facing selling pressure. This may be a good time to utilise your stock picking skills.

WTI and Brent Crude Oil charts: fall to 7 year lows

WTI Crude chart

The following comments appeared in the previous post on the daily bar chart pattern of WTI Crude oil:

“Another attempt at a rally may be in progress – thanks to the continued turmoil in the Middle East. A glut in global supply is likely to play spoil sport.”

Oil’s price briefly crossed above the 43 level but failed to overcome strong resistance from its falling 20 day EMA.

After drifting down and finding some support at the 40 level, oil’s price crashed on strong volumes to close below 38 – a level not seen since early 2009.

Daily technical indicators are bearish and looking oversold. MACD is falling below its signal line in negative zone. RSI is seeking support from the edge of its oversold zone.

Slow stochastic has slipped inside its oversold zone, but showing positive divergence by touching a higher bottom. That doesn’t mean oil’s price won’t fall even lower.

On longer term weekly chart (not shown), oil’s price is trading well below its three weekly EMAs in a long-term bear market. Weekly technical indicators are bearish and looking oversold.

Brent Crude chart

The following comments appeared in the previous post on the daily bar chart pattern of Brent Crude oil:

“Oil’s price is yet to cross above its falling 20 day EMA, and is trading below its three EMAs in a bear market. Any rally may be short-lived.”

Oil’s price managed to cross above the 46 level two days in a row, but could not overcome resistance from its falling 20 day EMA and dropped to close below the 41 level.

All three daily technical indicators are in bearish zones and looking oversold, but Slow stochastic is showing positive divergence by touching a higher bottom.

On longer term weekly chart (not shown), oil’s price is trading well below its three weekly EMAs in a long-term bear market. Weekly technical indicators are in bearish zones, and looking oversold.