How to position yourself for the Budget – a guest post

The Finance Minister will present Modi government’s first full budget on Saturday, Feb 28. Will it be a ‘dream’ budget, or a ‘realistic’ budget or a ‘populist’ Budget? Speculation is rife, and all kinds of rumours are floating around – as is often the case during budget week.

The Railway budget will be presented on Thursday, Feb 26 – followed by the Economic Survey on Feb 27. Those may provide an indication of what may be in store on Saturday.

In this month’s guest post, Nishit argues against a ‘populist’ budget. A ‘realistic’ budget will incorporate some tough measures that may disappoint the market. A ‘dream’ budget will send the stock market soaring to new heights. Either way, there will be opportunities to make money.

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The Union Budget will be presented on Saturday (Feb 28) and the stock market will be kept open on budget day. All eyes are on the Union Budget and let us find out why the Budget is such an important part of the annual economic calendar.

The Budget has two main implications: 1) the Government presents its report card of the past year in Financial terms. It gives the Actual Achievements vs. those projected in the previous Budget. The key figure which everyone looks at is the fiscal deficit number.

2) The more important implication is that the Government outlines its policies and plans for the next year. It outlines what reforms the Government intends to undertake, what would be the subsidies announced, etc.

Usually, the Union Budget becomes more significant when a new Government takes over or after a significant election when a Government comes with a fresh mandate from the people. Often, reforms if any will be attempted in the first three annual budgets. After that the Government goes into election mode and tends to announce populist schemes.

After all, sound economics alone do not win elections. The much touted MNREGA scheme was one of the key reasons why the UPA won in 2009. Now, the present budget in 2015 and the next in 2106 will be two opportunities for the Government to demonstrate their commitment to reform measures. After 2017, with the elections just 2 years away, they may not tinker with policies.

The Modi Government came riding on a lot of hope for reforms. Now, 9 months have passed and there have been no major reforms per se. The first Interim Budget was said to be too short a time for the Government to announce anything new.

The market has seen a rally since August 2013 when Modi was first declared as a BJP candidate for the post of Prime Minister. After his election, Nifty was at 7200. The last 20% rise has been in hope of reforms.

If the Budget is good and reform-oriented, expect Nifty to test 9200-9500. If the Budget is below expectations then a 10-15% correction would be logical.

Either way, for an investor there will be opportunities - book profits at higher levels or accumulate quality stocks at lower levels.

The significance of the Budget at times is overplayed and it is only a milestone on a journey which has many milestones. We all know the euphoria of the 1997 Chidambaram dream budget which sent the markets soaring but later on correction set in.

If euphoria does set in, then it is always a good opportunity to book profits.

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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)

WTI and Brent Crude Oil charts: an update

WTI Crude chart

The following comments appeared in the previous post on the daily bar chart pattern of WTI Crude oil: “A convincing move above the 50 day EMA and the 58 level may provide the first sign that a change of trend is in the offing. However, oil’s price is trading well below its falling 200 day EMA in a long-term bear market. So, it may be too early to even hope for a trend change.”

Despite strong volumes on up-days, oil’s price consolidated sideways in a range between 47.50 and 54.50 - facing strong resistance from its 50 day EMA. A drop below 47.50 may lead to a test of the Jan ‘15 low of 43.

Daily technical indicators are turning bearish. MACD is above its signal line, but has stopped moving up and looks ready to drop back into negative territory. RSI has crossed below its 50% level. Slow stochastic is falling rapidly towards its 50% level.

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 corrected oversold conditions, but their upward momentum has stalled. The bear market rally may be over.

Brent Crude chart

The following comments appeared in the previous post on the daily bar chart pattern of Brent Crude oil: “Only a convincing move above the medium-term moving average and the 64 level may weaken the bear grip. However,  oil’s price is trading well below its 200 day EMA – which means a trend change isn’t going to occur anytime soon.”

The 20 day EMA acted like a ramp, and took oil’s price above the 50 day EMA for seven straight trading sessions. But the resistance level of 64 proved too strong a hurdle. Oil’s price closed just below its 50 day EMA, and is trading well below its 200 day EMA in a bear market.

All three technical indicators are in bullish zones, but showing downward momentum. A drop below the 20 day EMA may bring oil’s bear market rally to an end.

On longer term weekly chart (not shown), oil’s price is trading well below its three weekly EMAs in a long-term bear market. Technical indicators corrected oversold conditions, but have failed to enter bullish zones.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Feb 20, 2015

S&P 500 Index Chart



The daily bar chart pattern of S&P 500 closed at a new lifetime high of 2110, after consolidating a bit near the 2100 level. All three EMAs are rising, and the index is trading well above them in a long-term bull market.

However, there are a couple of dark clouds on the horizon. Note that volumes have been sliding (marked by blue arrow) during the rally from the Feb 2 low of 1980. Rallies require volume support to sustain. (Look what happened to the rally with sliding volumes during Aug ‘14.)

Also, the entire trading during the past 6 months has occurred within a large ‘rising wedge’ pattern (redrawn to incorporate the upward bounce from the Feb 2 low), which has bearish implications.

Daily technical indicators continue to look overbought – though they can (and often do) remain overbought for long periods. MACD is rising strongly above its signal line inside overbought territory. RSI is moving up towards its overbought zone. Slow stochastic is well inside its overbought zone.

On longer term weekly chart (not shown), the index closed well above its three weekly EMAs in a long-term bull market. Weekly technical indicators are looking bullish but overbought. Also, all three indicators are showing negative divergences by failing to touch new highs with the index. Bulls should hold off on celebrating for the time being.

FTSE 100 Index Chart



The bullish ‘ascending triangle’ pattern within which the daily bar chart pattern of FTSE 100 was trading in the previous week, has been redrawn as a bearish ‘rising wedge’ pattern – even though the index touched a lifetime high of 6943 today.

The lack of a clear break out above the ‘triangle’ last week, followed by today’s test and retreat from the upper edge of the ‘wedge’ required the redrawing. While this redrawing may appear confusing to the uninitiated, it is sometimes necessary to take into account any change in trading sentiment.

All three daily technical indicators are in bullish zones, but showing downward momentum and negative divergences by failing to touch new highs with the index. The widening gap between the 20 day and 200 day EMAs is a sign of overbought condition.

On longer term weekly chart (not shown), the index is trading well above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but MACD and Slow stochastic are looking overbought. Also, all three indicators are showing negative divergences by failing to touch new highs with the index. Await the break out from the ‘wedge’ pattern.

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 20, 2015

In a holiday-shortened trading week, FIIs were heavy net buyers of equity on Feb 18 & 19 – cancelling out their entire net selling during the month. DIIs continued with their net buying. Yet, both Sensex and Nifty gained only marginally for the week.

The first round of 19 coal block auctions raised nearly Rs 84000 Crores for the government - justifying CAG’s stricture against the previous UPA government’s coal block allocations. The allocations were subsequently cancelled by the Supreme Court.

WPI inflation in Jan ‘15 was –0.39% compared with 5.11% in Jan ‘14. The fall in inflation was primarily due to lower oil prices. Falling inflation and a low IIP number may lead to another rate cut by the RBI after the budget. The stock market will remain open on budget day – following the precedent of three previous budgets on Saturdays.

BSE Sensex index chart

 

The daily bar chart pattern of Sensex crossed the 29500 mark intra-day on Thu. Feb 19 – gaining nearly 1500 points from its Feb 10 low - but closed only 136 points (less than 0.5%) higher for the week, thanks to profit booking on Friday.

All three EMAs are rising, and the index is trading above them in a long-term bull market. The final hurdle towards a new high remains the Jan 30 top of 29844. Will it happen during budget week? FIIs hold the key to that riddle.

Daily technical indicators are looking bullish. MACD has just crossed above its signal line in positive territory. ROC has crossed above its 10 day MA to enter positive territory. RSI has crept above its 50% level. Slow stochastic has risen to the edge of its overbought zone.

A word of caution. Sensex appears to have discounted a ‘good’ budget that will introduce more reforms, cut subsidies and increase infrastructure investments. Disappointment on any of those areas may lead to serious profit booking.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty closed just about 30 points higher for the week, but formed a ‘doji’ pattern (in candlestick parlance) that indicates indecision among bulls and bears.

The index is trading above its two weekly EMAs, Up trend line 2 and the support-resistance zone between 8180 and 8630 in a long-term bull market. There is no need to fear a huge correction if the budget proves disappointing for the market.

Weekly technical indicators are looking bullish and a bit overbought. MACD has crossed above its signal line into overbought zone. ROC has moved sharply above its 10 week MA into overbought zone. RSI is moving sideways above its 50% level. Slow stochastic is also moving sideways just below its overbought zone.

Expect an interesting tussle between bulls and bears during budget week – with the scales tipped towards bulls.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are back in bull territories after decent corrections. Corrections in bull markets should be expected and used as opportunities to add. However, near a lifetime high, and the budget event risk, it may be better to adopt a wait and watch mode.

Gold and Silver charts: an update

Gold Chart Pattern

The daily chart pattern of gold had bounced up after receiving support from its 200 day EMA in Jan ‘15, but could not sustain in bull territory for long. A drop below all three EMAs on a high volume surge was followed by a test of the downward-sloping neckline of the inverse head-and-shoulders pattern.

The 20 day EMA has crossed below the 200 day EMA, and gold’s price is trading below all three EMAs in a bear market. An upward bounce from the neckline has once again raised bullish hopes. However, gold’s price needs to cross above its Jan ‘15 top of 1310 for the bullish pattern of ‘higher tops and higher bottoms’ to continue.

Daily technical indicators are in bearish zones, but showing signs of turning around. MACD is below its falling signal line, and has dropped into negative zone. RSI has fallen below its 50% level, but trying to move up. Slow stochastic has plummeted to its oversold zone, but has stopped falling.

Expect some consolidation at current levels. This may be a good time to enter, but with a strict stop-loss at 1200.

On longer term weekly chart (not shown), gold’s price closed below its three weekly EMAs in a long-term bear market. Technical indicators are turning bearish.

Silver Chart Pattern

The following comments appeared in the previous post on the daily bar chart pattern of silver: “Silver’s price may consolidate near the neckline of the inverse head-and-shoulders pattern before making another attempt to enter bull territory.”

Note that silver’s price has been consolidating sideways in a range between 16.50 and 17.50 – gyrating about the downward-sloping neckline of the inverse head-and-shoulders pattern. It is trading below its falling 200 day EMA in a bear market.

Daily technical indicators are beginning to turn bullish. MACD is below its falling signal line, but has bounced up from its ‘0’ line. RSI has moved above its 50% level after falling below it. Slow stochastic has emerged from its oversold zone.

On longer term weekly chart (not shown), silver’s price closed above its 20 week EMA but is trading below its falling 50 week and 200 week EMAs in a long-term bear market. Technical indicators are looking bearish. A convincing move above 19 will return silver’s price to a bull market.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Feb 13, 2015

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 received good support from its rising 20 day EMA inside the rectangular band between 1988 and 2064 within which it was consolidating since the beginning of the year.

The index bounced up to test the upper edge of the rectangle, and then broke out upwards to reach a new lifetime high of 2097. All three EMAs are rising, and the index is trading above them in a long-term bull market.

Is it ‘game over’ for bears? It would seem so. However, note that the 117 points rally from the low of 1980 (touched at the beginning of this month) was accompanied by gradually sliding volumes. Bull rallies require volume support to sustain.

Also, the eventual upward break out above the ‘rectangle’ was not accompanied by a significant increase in volumes. That opens up the possibility of a pullback towards the top of the ‘rectangle’ – which can be used as an opportunity to add.

Daily technical indicators are looking a bit overbought. MACD is rising above its signal line in positive territory, and has just entered its overbought zone. RSI is steadily climbing towards its overbought zone. Slow stochastic is well inside its overbought zone.

On longer term weekly chart (not shown), the index closed well above its three weekly EMAs in a long-term bull market. All three weekly technical indicators are in bullish zones, and have reversed their downward momentum. (However, the index has been trading within a large bearish ‘rising wedge’ pattern since the end of Jun ‘14. Circumspection, rather than elation, is suggested.)

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 appears to be consolidating within a bullish ‘ascending triangle’ pattern, from which the likely break out is upwards. Remember that technically valid upward break outs require a surge in volumes.

Daily technical indicators are in bullish zones after correcting overbought conditions. MACD has crossed below its signal line inside its overbought zone. RSI is moving sideways above its 50% level. Slow stochastic dropped sharply from its overbought zone, but is about to re-enter it.

On longer term weekly chart (not shown), the index is trading well above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but Slow stochastic is looking overbought. (However, the index has been trading within a bearish ‘rising wedge’ pattern since the end of Nov ‘14. Caution is advised.)

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 13, 2015

FIIs turned net buyers of equity on Fri. Feb 13 after being net sellers since the beginning of the month. Their net selling has totalled Rs 3400 Crores. DIIs continued to buy – their net buying for Feb ‘15 totalling Rs 2300 Crores so far. Both Sensex and Nifty have bounced up from their respective support-resistance zones.

CPI inflation for Jan ‘15 rose to 5.11% YoY compared with 4.28% in Dec ‘14. This was lower than estimates because the base year and the method of calculation have been changed. The IIP number for Dec ‘14 was lower at 1.7% compared with 3.9% in Nov ‘14. The figures show that economic growth remains tepid.

The trade deficit narrowed, as both exports and imports were lower. Forex reserves have touched a record level of $330 Billion. Q3 results have been disappointing on the whole. SBI’s result was one of the few positive surprises last week.

BSE Sensex index chart

The daily bar chart pattern of Sensex received good support from its 50 day EMA and bounced up to close above the support-resistance zone between 27350 and 28800. The index has corrected nearly 61.8% of its 1800 points fall from 29844 on Jan 30 to 28044 on Feb 10.

All three EMAs are rising, and Sensex is trading above them in a long-term bull market. However, bulls will need to ensure that the index crosses above its Jan ‘15 top of 29844 to regain control.

Daily technical indicators are showing bullish signs. MACD is below its signal line in positive zone, but has formed a small bullish ‘rounding bottom’ pattern. ROC bounced up from the edge of its oversold zone to cross above its falling 10 day MA, and is poised to enter positive territory. RSI and Slow stochastic are rising towards their respective 50% levels.

Bears may try to put up a fight near 29800, but may not be able to prevent the index from touching new highs soon.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty barely tested its rising 20 week EMA, formed a ‘reversal week’ (lower low, higher close) pattern, and emerged from its brief dip inside the support-resistance zone between 8180 and 8630.

The two weekly EMAs are rising, and the index is trading above them in a long-term bull market. The previous top of 8997 – touched in the week ending on Jan 30 ‘15 – needs to be crossed convincingly for bulls to regain control.

Weekly technical indicators are looking bullish. MACD remains entangled with its signal line at the edge of its overbought zone. ROC has moved up to touch its 10 week MA in positive territory. RSI is gradually rising towards its overbought zone. Slow stochastic has slipped down from its overbought zone.

The stage has been nicely set for a pre-budget rally.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices appear to have completed their corrections, and should move up to touch new lifetime highs. Such corrections in bull markets provide opportunities to add. However, near a lifetime high, it may be better to choose a diversified equity fund or a balanced fund instead of trying your luck with individual stocks.

6 Rules From 6 Of The World's Top Investors

If you are like most small investors (and yours truly was not an exception), you probably entered the market with a few thousand Rupees to spare and absolutely zero idea about how the stock market works.

If the first stock you bought did not fall immediately after you bought it – you were lucky rather than smart! You probably sold it after a few days for a meagre profit of a few Rupees – only to see it soar away.

If the first stock you bought started falling right after you bought it – you rued your luck and held on in order to get back your ‘buy’ price. In other words, you became a long-term investor in a losing stock.

Every game has its rules. The stock market is not a game – it is serious business. So, it is all the more important that you learn the basic rules – otherwise those who know the rules will take away all your money.

In a recent article in investopedia.com, investment rules suggested by six of the world’s top investors have been discussed. Read the full article here.

Nifty chart: a mid-week update (Feb 11 ‘15)

In a classic reversal of stock investment wisdom, market players sold on rumour and bought on news. Exit polls showed an AAP victory in the Delhi election – Nifty dropped with a downward ‘gap’. Actual results showed an unprecedented margin of victory – Nifty rose two days in a row!

What on earth is going on here? The logic is: the Modi government is likely to hasten infrastructure spending and announce reform measures in an effort to regain the ground lost to AAP. Is it going to happen? Let us wait and see.

Meanwhile, FIIs have continued with their selling spree. Their net selling in equities in Feb ‘15 has touched Rs 3400 Crores as per provisional figures. DIIs have turned net buyers worth about Rs 1500 Crores.

 

The daily bar chart pattern of Nifty dropped below its 20 day EMA into the support-resistance zone (marked by blue dotted lines on chart), but received good support from its 50 day EMA.

The index formed a bullish ‘reversal day’ pattern (lower low, higher close) on Feb 10, and bounced up to close almost exactly on the 8627 level (its previous top in Dec ‘14).

All four technical indicators are looking bearish, but showing signs of turning around. MACD is falling below its signal line in positive zone. ROC has bounced up weakly from the edge of its oversold zone. RSI has dropped below its 50% level, but has stopped falling. Slow stochastic entered its oversold zone, but is trying to come out.

Could this be the start of a pre-budget rally? Volumes and market breadth are hinting at the possibility. But bears aren’t likely to give up as long as the index trades below its Jan ‘15 top of 8997 (which is a good 370 points away).

Nifty is trading well above its rising 200 day EMA in a long-term bull market. The 6% correction has improved the technical ‘health’ of the chart. Many good stocks have corrected much more than 6%. Those are the ones to add.

WTI and Brent Crude Oil charts: bear market rallies stalled?

WTI Crude chart

In the previous post on the daily bar chart pattern of WTI Crude oil, bears appeared to be tightening their grip even as oil’s price was attempting to find a bottom at 45. After closing below the 45 level two days in a row, a small bullish ‘falling wedge’ pattern got formed – from which oil’s price broke out upwards.

A strong volume surge – typical of bear market rallies – propelled oil’s price above its 20 day EMA to the 55 level, where it is facing resistance from its falling 50 day EMA. A convincing move above the 50 day EMA and the 58 level may provide the first sign that a change of trend is in the offing.

However, oil’s price is trading well below its falling 200 day EMA in a long-term bear market. So, it may be too early to even hope for a trend change.

Daily technical indicators are looking bullish. MACD is rising strongly above its signal line, but has not yet entered positive territory. RSI has crossed above its 50% level, but its upward momentum is weakening. Slow stochastic is poised to enter its overbought zone.

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 the process of correcting oversold conditions. The bear market rally may not last much longer.

Brent Crude chart

The daily bar chart pattern of Brent Crude oil, which had been consolidating sideways in a range between 47-52, broke out sharply on a strong volume surge and easily crossed above its 20 day EMA.

Resistance from its falling 50 day EMA has so far stalled the bear market rally. Only a convincing move above the medium-term moving average and the 64 level may weaken the bear grip.

However,  oil’s price is trading well below its 200 day EMA – which means a trend change isn’t going to occur anytime soon.

Daily technical indicators are looking bullish. MACD is rising sharply above its signal line, and is poised to enter its positive zone. RSI bounced up from its 50% level, but is turning down. Slow stochastic has re-entered its overbought zone after dropping below it.

On longer term weekly chart (not shown), oil’s price is trading well below its three weekly EMAs in a long-term bear market. Technical indicators have corrected oversold conditions, but are yet to turn bullish. Bears may strike at any time.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Feb 06, 2015

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 continued its sideways consolidation within a rectangular band between 1988 and 2064. On Mon. Feb 2, the index dropped below 1988 intraday, but bounced up to close above 2020 – forming a bullish ‘reversal day’ pattern (lower low, higher close).

The index rallied for the rest of the week, breaching the 2064 level to touch an intra-day high of 2072 on Fri. Feb 6, but dropped down to close inside the rectangular band – forming a bearish ‘reversal day’ pattern (higher high, lower close).

Volumes tend to dip during consolidations, but have remained fairly high during the past 5 weeks - with strong volumes on down-days. That should be a matter of concern for bulls – as it is a sign of ‘distribution’.

Daily technical indicators are in bullish zones. MACD has entered positive territory. RSI is above its 50% level. Slow stochastic is inside its overbought zone. The index is trading well above its rising 200 day EMA in a bull market. But the possibility of a break down below the rectangle should be kept in mind.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs in a long-term bull market. All three weekly technical indicators are in bullish zones, and in the process of reversing their downward momentum. Some more consolidation is likely.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 touched an intraday low of 6732 on Mon. Feb 2 ‘15, but formed a ‘reversal day’ pattern (lower low, higher close) and rallied to test the 6900 level the following day. However, after failing to breach the 6900 level, and the index consolidated sideways between 6800 and 6900 for the rest of the week.

The ‘golden cross’ of the 50 day EMA above the 200 day EMA has technically confirmed a return to a bull market after nearly 4 months. A convincing move above the Sep ‘14 top of 6905 will restore control of the chart to bulls.

Daily technical indicators are looking overbought. Some more consolidation or a correction can’t be ruled out.

On longer term weekly chart (not shown), the index has traded above its three weekly EMAs in a long-term bull market for 3 straight weeks. Weekly technical indicators are looking bullish. The index is looking poised to reach new heights.

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 06, 2015

After strong rallies in Jan ‘15, both Sensex and Nifty were in corrective modes during the first trading week of Feb ‘15. As per provisional figures, FIIs were net sellers of equity on all 5 days, for a total of Rs 1100 Crores. DIIs were net sellers during the first 3 days, but their net buying on the last 2 days covered their selling. Both indices closed about 1.6% lower for the week.

Disappointing Q3 results declared so far – particularly by PSU banks – have affected bullish sentiments. There was some good news. India’s forex reserves rose by nearly $6 Billion. The market will be looking forward to GDP, IIP and CPI numbers - to be announced next week. A strong set of numbers can trigger a pre-budget rally.

The outcome of Delhi elections may have some temporary impact on market sentiment. The budget at the end of the month can be a game-changer for bulls if expected pro-market reforms announcements are made. But be prepared for some serious profit booking if the budget doesn’t quite live up to market expectations.

BSE Sensex index chart

The daily bar chart pattern of Sensex has dropped inside the support-resistance zone between 27350 and 28800, where it is seeking support from its 20 day EMA. The 200 day EMA continues its steady rise, with the index trading well above it in a long-term bull market.

All four daily technical indicators have corrected overbought conditions. MACD and RSI are falling, but are still in bullish zones. ROC has entered negative territory. Slow stochastic is also looking bearish by dropping below its 50% level.

Note that all four indicators formed reversal patterns inside their respective overbought zones. MACD and Slow stochastic formed ‘rounding top’ patterns; ROC formed a ‘double top’; and RSI formed a ‘head-and-shoulders’.

Some more correction is likely. But there are no signs yet of a deep correction.

NSE Nifty 50 index chart

 

The weekly bar chart pattern of Nifty has corrected for two straight weeks, and is seeking support from the 8630 level (which is the top edge of the support-resistance zone marked by the two blue dotted horizontal lines on the chart).

The 20 week EMA and the ‘Up trend line 2’ are both within the support-resistance zone, and should provide stronger support in case the index corrects some more. Volumes were strong on a down week – which means bears are trying to wrest control.

Weekly technical indicators are in bullish zones, but looking a bit bearish. MACD is entangled with its signal line, just below the overbought zone. ROC has crossed below its 10 week MA, and is poised to enter negative territory. RSI has dropped from its overbought zone. Slow stochastic is about to do likewise.

The index is trading above both its weekly EMAs in a long-term bull market. Periodic corrections have kept the chart technically ‘healthy’ – enabling the index to touch new highs on a regular basis.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices continue to correct after touching new lifetime highs. Corrections should be expected in a bull market – and used as opportunities to add. If you are planning to enter near a lifetime high, choose a diversified equity fund or a balanced fund instead of trying to pick individual stocks.

Nifty chart: a mid-week update (Feb 04 ‘15)

Some analysts were hoping for another interest rate cut this week. However, the consensus estimate was that after the surprising rate cut announcement  in Jan ‘15, RBI will hold off on further cuts till the budget at the end of this month. So, the status quo announcement by RBI – except for a minor cut in the SLR – came as no surprise.

Q3 results are coming in thick and fast – but there hasn’t been much cheer for the market. Top line and bottom line pressures are clearly visible in large and small companies. There have been a handful of exceptions, but not enough to maintain bullish sentiment.

FIIs and DIIs have been in profit-taking mode during the first three trading days in Feb ‘15. However, their combined net sales in equity totalled less than Rs 1500 Crores. As a result, Nifty has corrected just about 3.2% from the lifetime high of 8997 touched on Jan 30.

The daily bar chart pattern of Nifty has dropped to seek support from its 20 day EMA and the support-resistance zone between 8180 and 8627 - which are its previous tops touched in Sep ‘14 and Dec ‘14. Previous tops tend to act as support levels.

Will the index bounce up from the current level? Or, will it continue to correct, and find support from its 50 day EMA (which is inside the support-resistance zone)? Knowing the answers to those two questions can make short-term traders rich – but should not matter much to long-term investors.

A 3% correction in a bull market should have very little consequence for the long-term – other than removing overbought conditions that prevent an index (or stock) from moving higher.

All four daily technical indicators have corrected overbought conditions. MACD has dropped down from its overbought zone to seek support from its rising signal line. ROC has crossed below its 10 day MA, and is poised to enter negative territory.  RSI has dropped to the edge of its overbought zone. Slow stochastic has slipped down from its overbought zone.

Some more correction or consolidation is possible. But there are no signs of a big correction – despite strong volumes during the past three down days.

Nifty continues to trade above its three EMAs in a long-term bull market. The next triggers for bulls may come from the Delhi election results – where AAP is surprisingly ahead in the initial polls – and the budget.

Hold on to your portfolios. Some times inaction can be a virtue. But do continue with your regular monthly investments/SIPs.

Gold and Silver charts: pullback after upward break outs

Gold Chart Pattern

In the previous post on the daily chart pattern of gold, a break out above the neckline of an inverse head-and-shoulders reversal pattern was followed by a high-volume break out above the 200 day EMA. That had led to the conclusion that the 40 months long bear market was over.

As often happens following a break out above a resistance level, a pullback occurs towards the resistance level. The possibility was mentioned in the previous post. In this case, after touching a high of 1310, gold’s price pulled back to the 200 day EMA – where it received support and bounced up a bit.

Such pullbacks provide buying opportunities to those who missed buying during the earlier upward break out from the inverse head-and-shoulders pattern.

Note that the 20 day EMA has crossed above the 200 day EMA – like it did back in Mar ‘14. But the 50 day EMA is still below the 200 day EMA. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will technically confirm a return to a bull market.

Daily technical indicators have corrected overbought conditions, but remain in bullish zones. MACD has dropped from its overbought zone, and crossed below its signal line. RSI has bounced up a little near its 50% level. Slow stochastic is falling towards its 50% level.

Some more correction or consolidation is possible before gold’s price starts to move up again. Expect resistance from the zone between 1320 and 1340.

On longer term weekly chart (not shown), gold’s price pulled back to the 50 week EMA after crossing above its 20 week and 50 week EMAs. It is trading below its falling 200 week EMA in a long-term bear market. Technical indicators are in bullish zones, but their upward momentum is stalling.

Silver Chart Pattern

The daily bar chart pattern of silver had broken out above the neckline of an inverse head-and-shoulders reversal pattern on good volume support that provided technical validity to the break out. However, there wasn’t much volume support when silver’s price attempted to cross its falling 200 day EMA.

A high-volume pullback towards the neckline put paid to bullish hopes. Note that silver’s price touched a high of 18.50 – which was in the middle of the long-term support-resistance zone between 18 and 19 (mentioned in the previous post).

A convincing move (i.e. with strong volume support) above the 200 day EMA and the 19 level is required for bulls to regain control.

Daily technical indicators have corrected overbought conditions, and are beginning to turn bearish. MACD has crossed below its signal line in positive territory. RSI is trying to hold on to its 50% level. Slow stochastic has dropped sharply below its 50% level.

Silver’s price may consolidate near the neckline of the inverse head-and-shoulders pattern before making another attempt to enter bull territory.

On longer term weekly chart (not shown), silver’s price crossed above its 20 week EMA only to face strong resistance from its 50 week EMA. It has dropped down to seek support from its 20 week EMA, and is trading in a long-term bear market.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jan 30, 2015

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 has been consolidating sideways in a rectangular band between 1988 and 2064 during the month of Jan ‘15. In the process, the index has dropped below the large ‘rising wedge’ pattern, and also below its 20 day and 50 day EMAs.

Note that the 20 day EMA is about to cross below the 50 day EMA for the first time since the beginning of Oct ‘14. Volumes have been rising during the past week, with higher volumes on down days.

A ‘rectangle’ pattern is usually a continuation pattern. Since the index entered the pattern after falling from a lifetime high of 2094 on Dec 29 ‘14, the expected break out is below the 1988 level. However, ‘rectangle’ patterns tend to be unreliable. So, it is advisable to wait for the break out before initiating any buy/sell decision.

Daily technical indicators are looking bearish, and showing increasing downward momentum. MACD has crossed below its signal line in negative territory. RSI has dropped below its 50% level. Slow stochastic is falling sharply towards its oversold zone.

The index is trading above its rising 200 day EMA in a long-term bull market. A possible break down below the rectangular band may lead to a test and likely breach of the long-term moving average.

On longer term weekly chart (not shown), the index dropped and closed below its 20 week EMA, but stayed above its rising 50 week and 200 week EMAs in a long-term bull market. All three weekly technical indicators are showing increased downward momentum. MACD and Slow stochastic are still in bullish zones, but RSI has slipped below its 50% level. Some more correction is likely.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 touched an intraday high of 6865 on Jan 27 ‘15, but formed a ‘reversal day’ pattern and started to pullback towards the large ‘symmetrical triangle’ pattern. The possibility of such a pullback after an upward break out was mentioned in last week’s analysis.

Note that the index is receiving some support from the 6750 level, which happens to be the top touched in Dec ‘14. The pullback is providing a buying opportunity.

The 20 day EMA has crossed above the 200 day EMA. The awaited ‘golden cross’ of the 50 day EMA above the 200 day EMA will technically confirm a return to a bull market.

Daily technical indicators are correcting overbought conditions, but remain in bullish zones. MACD has turned down inside its overbought zone. RSI is falling towards its 50% level. Slow stochastic is sliding down inside its overbought zone.

On longer term weekly chart (not shown), the index is trading above its three weekly EMAs in a long-term bull market. Weekly technical indicators are looking bullish. The index is getting ready to scale new heights.

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 30, 2015

There was good news and bad news in a holiday-shortened trading week that saw increased volatility due to F&O settlement. First the good news. India’s GDP growth rate for 2013-14 was revised upwards from 4.7% to 6.9% by including some unrepresented sectors and products in the method of calculating GDP. So, the economic situation was not as bleak as it was made out to be.

Now, the bad news. Q3 results from NBFCs and banks clearly show bottom line pressure and increase in NPAs. Since the financial institutions are expected to spur the next stage of the country’s growth, stress on their balance sheets do not bode well for the future. Large share divestments till Mar ‘15 – from Coal India and other PSU units in the pipeline – may put a lid on a pre-budget rally.

For the month of Jan ‘15, FIIs were net buyers of equity worth Rs 8500 Crores. DIIs were net sellers of equity worth Rs 6500 Crores. Despite the sharp corrections on Friday (Jan 30), Sensex and Nifty closed slightly lower for the week after touching new lifetime highs. For the month, Sensex gained 6.1% and Nifty gained 6.3%.

BSE Sensex index chart

The daily bar chart pattern of Sensex had closed at a lifetime high of 29682 on Thu. Jan 29. The next day, it touched a new lifetime intraday high of 29844 but closed nearly 500 points lower at 29183 – forming a ‘reversal day’ pattern that appears to have ended the intermediate rally of more than 3000 points from the low of 26776 touched on Jan 7 ‘15.

Sensex can correct some more. Daily technical indicators are still within their respective overbought zones, but their upward momentum have stalled. The zone between 27350 and 28800 (the previous tops touched in Sep ‘14 and Nov ‘14 respectively) should act as a support on the downside. The 20 day and 50 day EMAs are within the support/resistance zone, and can be expected to provide support as well.

Is there a possibility of the index falling below 27350 (the lower edge of the support/resistance zone)? Nothing can be ruled out in the stock market – but the chances of that happening are low. Corrections are part and parcel of bull markets, and should be used as opportunities to add to existing holdings. Searching for new ideas near a market top can be a time-consuming and futile effort.

NSE Nifty 50 index chart

 

The weekly bar chart pattern of Nifty had a splendid 930 points rally – from the intraweek low of 8065 touched on the week ending on Jan 9 to an intraweek high that was a hairs’ breadth short of the 9000 level – but formed a ‘reversal week’ pattern (higher high, lower close). Expect the index to correct or consolidate a bit before the up trend is resumed.

The support/resistance zone between 8180 (top in week ending on Sep 12 ‘14) and 8630 (top in week ending on Dec 5 ‘14) should provide support on the downside. The 20 week EMA is within the support/resistance zone, and the blue ‘Up trend line 2’ is almost at the lower edge of the zone. That means a fall below 8180 is unlikely.

Weekly technical indicators are correcting overbought conditions. MACD is entangled with its signal line at the edge of its overbought zone. ROC has dropped to touch its 10 week MA just below its overbought zone. RSI has dropped to the edge of its overbought zone. Slow stochastic is inside its overbought zone, but its upward momentum is slowing down.

Nifty is trading well above its two weekly EMAs in a long-term bull market. The correction will improve the technical ‘health’ of the chart, and enable the index to rise even higher.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices have corrected after touching new lifetime highs. No need to panic and sell. Periodic corrections are to be expected in a bull market – and taken in stride. If you are planning to enter now, choose a diversified equity fund or a balanced fund instead of trying your luck with individual stocks. Stock picking skills will get tested near market tops.