Comparing Nifty with Global Indices over the past year

The Indian stock market performed splendidly during the past year. Nifty gained nearly 35% when it hit its peak earlier this month. The subsequent correction pared off some of the gains. Yet Nifty clocked more than 25% gains for the year – which is quite substantial for an index dominated by large-cap stocks.

To put the gains into perspective, Nifty’s one year closing chart (in blue) has been compared with 10 global index charts (in green). With the notable exception of Argentina’s MERVAL index, which handsomely outperformed Nifty during the year, the other 9 indices trailed Nifty’s performance by large margins.

Small investors are flocking back to the Indian market – as can be seen from large inflows into domestic mutual funds – getting attracted by Nifty’s gains during the past year. It is unlikely that there will be a repeat performance from Nifty during 2015-16 fiscal year. However, a 15% gain looks possible – and will still beat bank fixed deposit and debt fund returns.

Australia All Ordinaries (in green) vs. NIFTY

Australia’s stock index dipped into negative zone during Oct ‘14 and Dec ‘14, but managed to eke out about 10% gains during the year.

Austria ATX (in green) vs. NIFTY

Austria’s ATX index gave negative returns through most of the year – managing to close flat for the year.

DAX Germany (in green) vs. NIFTY

Germany’s DAX index oscillated between positive and negative zones till the beginning of 2015. The index rallied spectacularly during the past 3 months, managing to catch up with Nifty’s gains by the end of the year.

France CAC40 (in green) vs. NIFTY

France’s CAC40 index rallied strongly from Jan ‘15 and managed to close the year with 15% gains after spending several months in negative zone.

MERVAL Argentina (in green) vs. NIFTY

Argentina’s MERVAL index took investors on a roller coaster ride – gaining a huge 100% by end Sep ‘14, then giving up most of the gains by Dec ‘14, only to rally strongly to end the year with 75% gains – handsomely outperforming Nifty.

Canada TSX (in green) vs. NIFTY

After briefly outperforming Nifty in early May ‘14, Canada’s TSX index ended the year with a meagre 5% gain.

S&P 500 (in green) vs. NIFTY

USA’s SPX index had a very good year gaining 12% in a country where interest rate is 0. But it underperformed Nifty almost throughout the year.

Taiwan TSEC (in green) vs. NIFTY

Taiwan is an Asian manufacturing tiger – specially in electronics and computers. But its TSEC index barely gave 10% returns to investors.

Korea KOSPI (in green) vs. NIFTY

Korea’s KOSPI index hugely underperformed the Nifty, just managing to close in positive zone.

Malaysia KLCI (in green) vs. NIFTY

Malaysia’s KLCI index remained in negative zone despite a late rally – underperforming Nifty by a large margin from May ‘14 onwards.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 27, 2015

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 rose to touch a lower top of 2115 on Mon. Mar 23 ‘15, formed a ‘reversal day’ pattern (higher high, lower close), corrected below its 20 day and 50 day EMAs, and broke down below the large ‘rising wedge’ pattern on Thu. Mar 26 ‘15. On the last day of the week, the index pulled back to the lower edge of the wedge.

The possibility of ‘buying exhaustion’ was mentioned in last week’s post. Note that the index may have formed a ‘double top’ reversal pattern – but the pattern will get confirmed only when the index falls convincingly below its previous low of 2040.

The downward target of the ‘double top’ pattern – if it gets confirmed technically – is 1965. That means a breach of the rising 200 day EMA and a dip into bear territory will come into play.

Technical indicators are looking bearish. MACD has crossed below its signal line and entered negative zone. RSI and Slow stochastic have dropped below their respective 50% levels. It will be interesting to see how well bulls can defend the 2040 level.

On longer term weekly chart (not shown), the index may have formed a bearish ‘double top’ pattern and dropped to its 20 week EMA, but closed above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones but showing downward momentum. The index is probably in a process of topping out. Part profit booking may be a good idea.

FTSE 100 Index Chart

The following remarks appeared in last week’s analysis of the daily bar chart pattern of FTSE 100: “Note that all three indicators failed to touch new highs with the index. The combined negative divergences can bring the current rally to a halt.”

The index rose to touch a new lifetime high of 7065 on Tue. Mar 24 ‘15, faced resistance from the upper edge of the large ‘rising wedge’ pattern, formed a ‘reversal day’ pattern (higher high, lower close) and dropped down to its 50 day EMA by the end of the week. The prospect of a drop below the ‘wedge’ is looming large.

Daily technical indicators are turning bearish. MACD is about to cross below its signal line in positive zone. RSI has slipped below its 50% level. Slow stochastic has fallen sharply from its overbought zone, and its downward momentum is strong.

On longer term weekly chart (not shown), the index formed a large ‘reversal week’ pattern, but closed well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but showing downward momentum.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 27, 2015

Militant groups have been under fire on several fronts. Pakistani Air Force is pounding Taliban fighters on the Af-Pak border. USA has resumed air strikes on IS in Iraq. Saudi Arabian jets bombed Houthi militants in Yemen.

Global markets were spooked by the possibility that movement of oil tankers through Aden may get affected. Prices of oil (and gold) spiked up. Stock markets took steep dives.

Sensex and Nifty negated bullish ‘falling wedge’ patterns (drawn on charts last week) by their sharp falls, and are trading near the lower edges of their respective support zones. Both indices have corrected around 9% from their all-time highs touched earlier this month.

As per provisional figures, FIIs were net buyers of equity worth Rs 1100 Crores. DIIs were also net buyers of equity worth Rs 1200 Crores during the week. So, who killed the market? “..after all, it was you and me” (with due credit to the Rolling Stones, Sympathy for the Devil).

BSE Sensex index chart

The daily bar chart pattern of Sensex has corrected almost 2800 points (9.25%) from its lifetime high of 30025 touched on Mar 4 ‘15.

Is the bull market coming to an end? Not till Sensex and the 50 day EMA crosses below the 200 day EMA. Where is the index headed? To look for answers, let us check the facts:-

Bearish points:

• The 20 day EMA has crossed below the 50 day EMA, and the index is trading below both EMAs
• The lower edge of the ‘support zone’ was breached during Friday’s trading
• The upward ‘gap’ formed on Jan 15 failed to provide support and has been filled
• All four daily technical indicators are in bearish zones

Bullish counterpoints:

• The 200 day EMA is still rising, and the index is trading above it
• Though the ‘support zone’ was breached intra-day, the index moved up to close within the ‘support zone’
• The filling of an upward ‘gap’ is usually followed by a resumption of the up move
• All four technical indicators are looking oversold, and showing some signs of reversing direction

As per anecdotal evidence, HNI and retail investors have been selling. Expectations of a poor Q4 results season have already been ‘discounted’. Technically, a turnaround seems just around the corner. This may be a good time to slowly accumulate fundamentally strong stocks.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty has corrected 850 points (9.3%) from its lifetime high of 9119 touched in the week ending on Mar 6 ‘15. Can the index correct some more?

Most of the technical signals are pointing to such a possibility. The index has dropped below its 20 week EMA, and the Up trend line 2. However, Nifty closed within the 3% ‘whipsaw’ limit of the trend line.

On the downside, expect support from the lower edge of the ‘support zone’ at 8180, and the rising 50 week EMA (at 8000). Can Nifty drop below its 50 week EMA? Nothing can be ruled out. But the TRIN (a breadth indicator – not shown) is suggesting a turnaround.

Weekly technical indicators are looking bearish. MACD is falling below its signal line in positive territory. ROC is below its 10 week MA and has dropped inside negative zone. RSI is seeking support from its 50% level. Slow stochastic has slipped below its 50% level.

Bottomline? The corrections on BSE Sensex and NSE Nifty charts have reached important support levels. A pullback – if not a reversal of the intermediate down trend – may be on the cards. Both indices are still in long-term bull markets. The corrections are providing long-term entry opportunities.

The likely effects of a US interest rate hike on global markets – a guest post

The US economy has been on a revival path for quite some time. The Quantitative Easing programme to stimulate a sluggish economy was gradually tapered off last year. With inflation showing signs of inching up, the stage is getting set for a possible interest rate hike by the US Fed.

Why should that be of any interest to Indian investors? Because the global economy has become a lot more interconnected. A rate hike in the US, coupled with a strong Dollar, may be a signal for FIIs to withdraw money from emerging markets (including India).

In this month’s guest post, Nishit discusses the current economic scenario in the US, and the possible effects of an interest rate hike on world markets.

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World markets were on tenterhooks – awaiting the US Fed announcement of a possible interest rate hike. Why are markets so obsessed with the US Fed decision to hike rates and how does it affect world markets?

The US Fed’s answer to the 2008 economic crisis was throwing cash to plug the gaps. They printed money and called it ‘Quantitative Easing’. Large amounts of money were made available at very low interest rates. This money found its way into many emerging markets, like India, and boosted their stock markets.

The idea was simple: borrow in the US at almost zero interest rates, invest in stock markets worldwide and mint profits. Since the rate of interest was almost zero, the currency risks were taken care of.

Quantitative Easing seemed to have worked and the US economy in the past 2 years has shown signs of recovery and growth. It is no more in recession, jobs are being added and the crutches of stimulus are no longer needed.

The US Fed had to account for this surplus printing of money and as a first step they tapered off the Quantitative Easing programme.

The next step is to hike up the interest rates as easy money can lead to inflation and creation of bubbles. Low interest rates helped to provide stimulus to the economy. Now, when the economy is up and running, the rates have to go up gradually for two simple reasons.

First is to prevent the formation of economic bubbles, and second is to provide room and buffer for providing another stimulus if the economy goes into recession again. After all, one can cut rates only up to zero.

In an isolated scenario this is fine. But in the case of the US - since it is the global leader - this extra money has been invested into various asset classes across the world. If the Fed starts hiking rates, then this money may be withdrawn from the various asset classes and will flow back to the US. The US Dollar has already started strengthening in anticipation of this.

Such a situation can lead to recession in other parts of the globe. Since the global economy is interconnected and the US companies also get a major part of their income from places other than the US, the Fed needs to tread cautiously.

To counteract the likely US withdrawal of stimulus, we have the Japanese stimulus and now the European Central Bank stimulus.

This is one of the anticipated reasons our markets are falling. One needs to keep an eye on how this plays out.

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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 daily bar chart pattern of WTI Crude oil dropped below the support level of 47.50 and breached its Jan ‘15 low. After touching a 6 yr low of 42.50, oil’s price pulled back to the 47.50 level – where it is also facing resistance from its 20 day EMA.

Bears are likely to use the pullback as a selling opportunity. In case oil’s price manages to re-enter the support-resistance zone (marked by blue horizontal lines) – though the probability seems low – the 50 day EMA should provide strong resistance.

Daily technical indicators are showing some upward momentum, but remain in bearish zones. MACD is below its signal line in negative territory. RSI and Slow stochastic are moving up towards their respective 50% levels.

Saudi Arabia has decided not to cut down its oil production – so, the supply glut in the oil market will continue to put downward pressure on price.

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 correcting oversold conditions, and showing some signs of upward momentum.

Brent Crude chart

The daily bar chart pattern of Brent Crude oil dropped below the 55 level, but bounced up after receiving support from the 52.50 level. The 20 day EMA is providing resistance. If oil’s price drops below 52.50, it can breach its Jan ‘15 low.

Daily technical indicators are in bearish zones. MACD is sliding below its signal line in negative territory. (Note the bearish ‘rounding top’ pattern formed by the signal line.) RSI is trying to move up towards its 50% level. Slow stochastic has emerged from its oversold zone, but its upward momentum is weak.

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, and showing some upward momentum.

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

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 bounced up smartly from the twin support of the 2040 level and the lower edge of the large ‘rising wedge’ pattern. All three EMAs have resumed their upward moves, and the index is trading above them in a long-term bull market.

Bears may have lost the battle, but not the war. As long as the index trades within the bearish ‘wedge’ pattern, expect the bears to fight back at any time. Note the huge volume surge on Fri. Mar 20, and compare it with a similar volume surge on Dec 19 ‘14. It may be a sign of ‘buying exhaustion’.

Technical indicators are back in bullish zones. MACD has crossed above its signal line in positive territory. RSI has moved above its 50% level. Slow stochastic is rising towards its overbought zone.

Bulls still have some work left. First is a cross above its previous (Feb 25 ‘15) top of 2119.60. More importantly, the index needs to move above the upper edge of the ‘rising wedge’. The first task will be easier than the second.

On longer term weekly chart (not shown), the index received support from its 20 week EMA, and bounced up to close well above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones and showing upward momentum.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 bounced up strongly to touch a lifetime high of 7024 on Fri. Mar 20 ‘15 after receiving good support from its 200 day EMA. However, the index appears to be trading within a large bearish ‘rising wedge’ pattern since the beginning of the year.

Daily technical indicators are looking bullish. MACD has crossed above its signal line in positive zone. RSI is moving up towards its overbought zone. Slow stochastic is well inside its overbought zone.

Note that all three indicators failed to touch new highs with the index. The combined negative divergences can bring the current rally to a halt.

On longer term weekly chart (not shown), the index received support from its 20 week EMA and closed well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but showing negative divergences by failing to touch new highs with the index.

Sunday musings: dichotomy in an investor’s psyche?

According to Hindu mythology, Lord Krishna was an ‘avataar’ of Lord Vishnu – born in human form to rid the world of evil forces. (“Paritranaya sadhunam vinasaya ca duskrtam, dharma samsthapanarthaya sambhavami yuge yuge” – Bhagavad Gita, Ch. 4:8)

How Krishna was born to Devaki and Vasudeva inside a prison, how he was smuggled out to live his early life in the cowherd family of Yasoda and Nanda, how he grew up to slay his evil maternal uncle, King Kansa (who had imprisoned his parents) are known to  many.

In his young days, Krishna was a playful and mischievous cowherd. He liked to play his flute and dance and play pranks on the ‘gopis’ (milk-maids), who loved him and revered him. In between, he did kill a demon or two – but those may be stories to establish Krishna’s divinity.

In later life, Krishna indirectly led the Pandavas to victory over their cousins, the Kauravas in the battle at Kurukshetra. But is it the same adorable prankster Krishna who later became the calculating and shrewd politician depicted in the epic Mahabharata?

Several experts and commentators on the Upanishads and Puranas have raised doubts. There is no mention of Krishna’s early life in the Mahabharata. So, it is possible that the stories of the cowherd Krishna was amalgamated with those of the shrewd politician Krishna (or vice versa) at a later date.

Considering the ‘colourful’ past of several of our politicians, it is quite likely that the cowherd Nandalal (son of Nanda) and the politician Parthasarathi (charioteer of Arjuna) are one and the same. (‘Colourful’ may be an over-statement, since the dominant colour is usually black.)

Most small investors start their investing life as mischievous cowherds – flirting with ‘gopis’ (i.e. small-cap stocks) and trying to steal ‘makhan’ (i.e. catch multibaggers) without a care in the world. Sooner than later, they get caught (i.e. lose their money).

The few who manage to become long-term wealth builders, learn to be shrewd and calculating. They ‘develop a system of investing that suits their psyche’ and ‘follow that system in a disciplined manner’.

There is no real dichotomy in being carefree and fun-loving (in real life) and being shrewd and systematic (in investments). But it requires patience and discipline – and the understanding that investing is not a game.

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

The mining bill got passed in the Rajya Sabha – this time with support from Trinamool Congress. The turnaround from a very vocal opposition party shows good ‘floor management’ by NDA. Perhaps a ‘quid pro quo’ (‘You help us to pass bills, we won’t oppose you strongly in the forthcoming municipal elections’)?

Advance tax figures available so far indicate that many companies are not performing well. That means Q4 results are not going to be any better than Q3 results. With most good news already ‘discounted’, Sensex and Nifty had no place to go but down.

As per provisional data for the week, FIIs were net buyers of equity worth Rs 830 Crores while DIIs were net sellers of equity worth Rs 1130 Crores. So, it isn’t a surprise that both indices closed lower for the week. What was a bit of a surprise was that on Thu. Mar 19, FIIs were net buyers of Rs 1430 Crores, and DIIs were also net buyers of Rs 50 Crores – yet both indices fell.

BSE Sensex index chart

The ongoing correction in the daily bar chart pattern of Sensex from its all-time high of 30025 (touched on Mar 4 ‘15) has formed a ‘falling wedge’ pattern that has bullish implications.

Daily technical indicators are starting to look oversold. MACD is falling below its signal line in negative territory. ROC and RSI have dropped to the edge of their respective oversold zones. Slow stochastic is already inside its oversold zone.

Note that Sensex formed an upward ‘gap’ of 190 points on Jan 15 ‘15. This ‘gap’ is near the lower edge of the support zone between 27350 and 28800 (marked by dotted horizontal lines). The ‘gap’ has remained unfilled so far, and should provide support on the downside.

If the ‘gap’ gets filled during the ongoing correction, the up move should resume thereafter. In other words, even if the correction continues a bit longer, the technicals are suggesting a turnaround in the near future.

Due to F&O expiry next week, activity may remain low. No need to jump in feet first. If you were waiting for a correction to enter/add, this may be a good time to do so gradually.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty dropped inside the support zone between 8180 and 8630, but received good support from its 20 week EMA and the lower edge of a ‘falling wedge’ pattern within which it has been trading for the past three weeks.

The likely break out from a ‘falling wedge’ is upwards. In case Nifty corrects some more, the blue Up trend line 2 should provide good support. Technical experts have already started talking about the 8000 level – which is the current level of the 50 week EMA. But it seems unlikely that the index will fall that far.

Weekly technical indicators have corrected overbought conditions, but are in bullish zones. MACD and Slow stochastic have dropped from their respective overbought zones and showing downward momentum. But ROC and RSI are showing upward momentum.

The index has corrected just over 6% from its lifetime high of 9119 (touched in the week ending on Mar 6 ‘15). Some more correction is possible. But the correction appears to be on its last legs.

Bottomline? BSE Sensex and NSE Nifty indices are correcting within bullish ‘falling wedge’ patterns formed on both charts. Upward break outs from the ‘wedges’ can occur at any time. Both indices are in long-term bull markets. The corrections are providing adding opportunities.

Nifty chart: a mid-week update (Mar 18 ‘15)

WPI Inflation for Feb ‘15 was a lower-than-expected –2.06% compared with –0.39% in Jan ‘15 and 5% in Feb ‘14. Lower oil price was the main contributor to lower inflation. But food inflation, which has greater weightage in CPI inflation, remains a concern. Heavy unseasonal rain damaged standing crops in Punjab, UP and Maharashtra.

The telecom spectrum auction has raised more than Rs 1 Lakh Crore so far – which is good news for India’s fiscal deficit but bad news for telecom operators. The government is taking a re-look at a few coal blocks that fetched low prices in the recent auction to ensure that no cartelisation has taken place.

Both FIIs and DIIs have been net sellers of equity this week. Their combined net selling crossing the Rs 1900 Crores mark as per provisional figures. Though Nifty managed to hold its ground, it is in an intermediate down trend since touching its all-time high of 9119 on Mar 4.

The daily bar chart pattern of Nifty dropped briefly inside the support zone between 8180 and 8630 (marked by blue dotted lines on chart) and bounced up. But the index is facing resistance from its falling 20 day EMA.

Does that mean the index can correct some more? Strong volumes on recent down days is an indication that some amount of ‘distribution’ is taking place. That is to be expected near an all-time high.

Daily technical indicators are looking bearish. MACD is falling below its signal line, and entered negative zone. ROC is below its 10 day MA, and falling in negative territory. RSI is facing resistance from its 50% level. Slow stochastic is inside its oversold zone.

The index has corrected only about 5.5% from its Mar 4 ‘15 top. Some more correction is quite possible. It seems like the index is consolidating and just waiting for some external trigger to move up again.

As long as the 200 day EMA keeps rising, and Nifty keeps trading above it, the long-term bull market will be under no threat. Use the opportunity to make a list of fundamentally strong stocks that have corrected disproportionately. Add them when the up move resumes.

Gold and Silver charts: an update

Gold Chart Pattern

The daily bar chart pattern of gold tried to cling on to the 1200 level for a few days, but the force of gravity (i.e. bear selling) pulled it all the way down to 1150 – where it is trying to find a temporary bottom.

All three technical indicators are inside their respective oversold zones – which may lead to an upward bounce. But this is not the time for bottom fishing. Bears appear to have a stranglehold on the chart.

The next positive trigger for gold bulls may be an expected interest rate increase by the US Fed. No one really knows when that will happen.

On longer term weekly chart (not shown), gold’s price closed well below its three weekly EMAs in a long-term bear market. Technical indicators are in bearish zones. The Nov ‘14 low is likely to be tested and breached.

Silver Chart Pattern

The daily bar chart pattern of silver breached the support level at 16 and dropped below 15.50. It is trying to find an intermediate bottom at 15.50.

Daily technical indicators are in the process of correcting oversold conditions, but their upward momentum looks weak. MACD is inside its oversold zone, but has stopped falling. RSI has bounced up from the edge of its oversold zone. Slow stochastic has just emerged from its oversold zone.

On longer term weekly chart (not shown), silver’s price is trading below all three weekly EMAs in a long-term bear market. Technical indicators are in bearish zones. A fall below 15 may test the Dec ‘14 low.

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

S&P 500 Index Chart

Bearish technical indicators in last week’s analysis of the daily bar chart pattern of S&P 500 had hinted at a continuation of the corrective move. The index dropped sharply below its 50 day EMA, but bounced up after receiving good support from the lower edge of the large ‘rising wedge’ pattern.

Note that the 50 day EMA is providing resistance, and daily technical indicators are in bearish zones. So, a fall below the ‘wedge’ is a likely outcome. Support from the rising 200 day EMA may get tested.

Can the index fall below the 200 day EMA? The possibility can’t be ruled out – considering what had happened back in Oct ‘14.

On longer term weekly chart (not shown), the index received support from its 20 week EMA, and closed above its three weekly EMAs in a long-term bull market, but has closed lower for the third straight week. Strong volumes may be an indication that ‘smart money’ is moving out. Weekly technical indicators are in bullish zones but showing downward momentum.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 broke down below the bearish ‘rising wedge’ pattern and plummeted to test support from its 200 day EMA. The index bounced up but faced resistance from its 50 day EMA.

Daily technical indicators are in bearish zones. MACD is falling below its signal line, and entered negative territory. ROC is below its 50% level. Slow stochastic is trying to emerge from its oversold zone.

The index may fall below its 200 day EMA. The up trend line connecting the Dec ‘14 and Jan ‘15 lows may provide some support on the downside.

On longer term weekly chart (not shown), the index received support from its 50 week EMA and closed exactly on its 20 week EMA. It is trading well above its rising 200 week EMA in a long-term bull market. Weekly technical indicators are in bullish zones, but showing downward momentum.

5 mistakes small investors should avoid near a stock market top

The Indian stock market has been in a bull phase since Dec 2011. Nifty had touched a low of 4531 on Dec 20 ‘11, and rose to touch a lifetime high of 9119 on Mar 4 ‘15 – doubling in a little over 3 years.

Can the market rise even higher? Sure it can. Can it double again in the next 3 years? Anything is possible in the stock market – but the probability will be low because of the higher base.

So, expectations of making windfall gains should be moderated. Does that mean that there are no multibaggers left in the market? The market always provides opportunities – but investors need to be patient rather than chase after the ‘next Infosys’ or the ‘next L&T’.

Making huge gains is what motivates small investors to enter the stock market. But more important than making huge gains is preserving capital. The best way to do that is to avoid some common mistakes small investors make near a market top.

Here are five of them:

1. Looking at the Sensex and Nifty levels on a daily basis

Sensex and Nifty should be looked at for determining the long-term trend in the market. An easy way to do that is to look at an index chart with the 200 day EMA superimposed on it. A rising 200 day EMA with the index trading above it indicates a bull market. A falling 200 day EMA with the index trading below it represents a bear market.

Unless you own the 30 Sensex stocks or the 50 Nifty stocks, knowing the precise levels of Sensex and Nifty are not of much consequence and induces needless greed or fear. It is the performance of your portfolio that you need to monitor. Your asset allocation plan should tell you which assets you should buy or sell or hold.

Don’t have an asset allocation plan? Better make one – otherwise your investment decisions will be based on hearsay and gut-feel, which are sure tickets for disaster!

2. Selling in a panic if the market corrects 5-10%

There is a tendency for stock markets to correct when indices hit levels with several zeros in them, e.g. Sensex at 30000 or Nifty at 9000. Many traders (and investors) prefer to sell (or buy) at such levels. Note how call and put options are written at 7600 or 8800 – never at 7562 or 8793!

Corrections are part and parcel of a bull market. Corrections of 5-10% are quite common. These should be taken in stride, and in fact, welcomed as opportunities to add more. If you sell off in a panic, you may either miss the next leg of the up move, or re-enter at higher levels.

3. Getting swayed by economic and/or political news

Various economic and political news – which may or may not affect the stock market – flow into the market on a daily basis. Some companies win a few coal blocks in the auction – their stock prices go up. The IIP number is lower than expectations, the market falls.

The trick to avoid getting influenced by news is to realise that the effect of most news lasts 2 to 3 days at most. Things return to normal soon. It is the actual performance of the companies you own (yes, you own a small ‘share’ of the company whose stock you purchase) that matter over the longer term.

4. Buying ‘cheap’ stocks because the good stocks are ‘too expensive’

Regardless of when you enter the market, good stocks will typically trade at a premium. This is more so near a market top. If a stock is trading at a ‘cheap’ valuation, there is usually a very good reason for it to do so. Remember that ‘cheap’ stocks have a tendency to get even ‘cheaper’ – often just after you buy a large chunk of it!

If you are not an expert stock picker, and are confused about which stocks to buy during the ongoing correction in the market, choose a good diversified equity fund or a balanced fund. And keep investing your surplus savings in the fund regularly. After a few years, you will be amazed at the fortune you have generated with very little effort.

5. Holding on to your losers in the hope of getting back your ‘buy price’

If your portfolio has losers – don’t feel ashamed or blame your luck. Despite careful selection processes, stocks fail to perform as per expectations or lose money.

The big mistake – and this is perhaps the biggest cause of loss for most small investors – is to keep holding on to the losers in the hope of getting back your ‘buy price’. If a stock is losing money near a market top, it is unlikely it will ever make any money. Remember that the market doesn’t care about your ‘buy price’.

The best time to get rid of your losers is near a market top – when you may still find a buyer for them!

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

The stock market was clearly disappointed by the economic data announced last week. The IIP number was positive, but lower than the previous two months. CPI inflation has started inching up again – mainly due to higher food prices. That may force the RBI’s hand into postponing any further interest rate cuts.

The insurance bill was passed in the Rajya Sabha – thanks to the support from Congress. The land acquisition bill is facing stiff opposition, and the government was forced to climb down and consider certain amendments. If the land bill also gets passed by the upper house, it will be a feather in the cap of the NDA government.

As per provisional figures, FIIs have been net buyers of equity worth Rs 4500 Crores in Mar ‘15, while DIIs were net sellers of equity worth Rs 800 Crores. Yet, both Sensex and Nifty touched their lowest levels in a month.

BSE Sensex index chart

The formation of a bearish ‘rising wedge’ pattern and the possibility of a break down below it was mentioned in last week’s analysis of the daily bar chart pattern of Sensex.

The index dropped below the ‘wedge’ on Mon. Mar 9; received good support from its 50 day EMA and pulled back to the lower edge of the ‘wedge’ on Fri. Mar 13; but dropped below its 20 day and 50 day EMAs to close inside the ‘support zone’ (marked by dotted horizontal lines).

Technical indicators are looking bearish and showing downward momentum. Some more correction can’t be ruled out. The index had touched a lifetime high of 30025 on Mar 4, but all four technical indicators showed negative divergences by touching lower tops (marked by blue arrows). That was a warning of a likely correction.

The 200 day EMA is rising, and Sensex is trading well above it in a long-term bull market. The index has corrected about 5.25% from its Mar 4 top – so there is no need to press the ‘panic button’. The index had corrected 8% in Dec ‘14 – but had very little effect on the bulls.

NSE Nifty 50 index chart

 

The weekly bar chart pattern of Nifty broke down below the ‘rising wedge’ pattern and closed at the upper edge of the ‘support zone’ between 8180 and 8630. Can the index correct some more?

Weekly technical indicators are suggesting so. MACD has crossed below its signal line, and slipped down from its overbought zone. ROC has dropped sharply from its overbought zone, and crossed below its 10 week MA. ROC is seeking support from its 50% level. Slow stochastic is about to drop from its overbought zone.

In case the index falls inside the ‘support zone’, its rising 20 week EMA and the Up trend line 2 should provide strong support. The correction is providing another opportunity to enter fundamentally strong stocks.

India’s economic growth has slowed down considerably, but it is still strong compared with most emerging market economies. That should keep FIIs interested.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices have corrected below bearish ‘rising wedge’ patterns on both charts. Both indices are in long-term bull markets. Such corrections provide adding opportunities.

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

Expectations of a mid-year interest rate hike in the US propelled the US Dollar to new highs against global currencies. ECB began its bond buying (QE) programme with freshly printed money – further weakening the Euro against the Dollar.

FIIs switched to ‘sell’ mode – their net selling during the past two days was worth nearly Rs 1200 Crores. DIIs seem confused – buying and selling on alternate days. Nifty broke down below the bearish ‘rising wedge’ pattern (mentioned in an earlier post) within which it has been trading since the end of Jan ‘15.

The coal block and telecom spectrum auctions appear to be going well for the government. The large amounts raised should put a significant dent on India’s fiscal deficit, and allow investments in much-needed infrastructure projects.

The daily bar chart pattern of Nifty dropped below the ‘wedge’ and the 20 day EMA, but has received good support from the 50 day EMA so far. The support zone (marked by blue dotted lines on chart) between 8180 and 8630 should provide stronger support in case the index corrects some more.

An unscheduled 25 bps interest rate cut and a less-than-exciting budget has been already ‘discounted’ by the stock market. Q4 results - to be announced next month - may continue the disappointing trend set by Q3 results. Any positive triggers to boost bullish sentiments need to come from external sources.

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

The index has corrected less than 5% from its lifetime high of 9119 (touched on Mar 4 ‘15). Some more correction is possible. Before you sell in a panic, remember that the index is trading well above its rising 200 day EMA in a long-term bull market. Periodic corrections have kept the chart ‘technically healthy’.

If you have already booked partial profits, redeploy the proceeds in a gilt fund or income fund instead of looking for new ideas near a market top. In a falling interest rate regime, long-term debt funds ought to do well – and also protect the downside.

WTI and Brent Crude Oil charts: sideways consolidations continue

WTI Crude chart

The daily bar chart pattern of WTI Crude oil continued its sideways consolidation in a range between 47.50 and 54.50. The support level of 47.50 was not breached – which is good news for bulls.

The bad news is that the falling 50 day EMA is providing strong resistance on the upside. The brief rally is trying to stabilise oil’s price at the 50 level (which is also the level of the 20 day EMA) – but for how long?

Daily technical indicators are in bearish zones. MACD is entangled with its signal line, and moving sideways just below the ‘0’ line. RSI is also moving sideways slightly below its 50% level. Slow stochastic has turned down after failing to cross above 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 are looking oversold, but showing signs of upward momentum. A downward break out below the consolidation range is the likely outcome.

Brent Crude chart

The daily bar chart pattern of Brent Crude oil could not move above the resistance level of 64, and has slipped down below its 50 day and 20 day EMAs. Note that the 20 day EMA failed to cross above the 50 day EMA. The short-term bullish sentiment is fading.

Daily technical indicators are turning bearish. MACD formed a ‘rounding top’ pattern and crossed below its signal line in positive zone. RSI is about to drop below its 50% level. Slow stochastic has already fallen below its 50% level, and is showing increasing downward momentum.

On longer term weekly chart (not shown), oil’s price is trading below its three weekly EMAs in a long-term bear market. Technical indicators corrected oversold conditions, but their upward momentum is diminishing. If the 55 level gets breached, oil’s price may test its Jan ‘15 low.

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

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 touched a lower top of 2117.50 on Mon. Mar 2 ‘15 – forming a small ‘double top’ reversal pattern – and dropped down to test support from its 50 day EMA by the end of the week. The possibility of a correction was mentioned in last week’s post.

The index lost about 1.6% on a weekly closing basis, but is still trading well above its rising 200 day EMA in a long-term bull market. Some more correction is possible. The level to watch will be 2030 – which corresponds to the lower edge of the large ‘rising wedge’ pattern within which S&P 500 has been trading for more than 6 months.

Daily technical indicators are looking bearish. MACD formed a bearish ‘rounding top’ pattern and crossed below its signal line in positive territory. RSI and Slow stochastic have dropped below their respective 50% levels, and their downward momentum is increasing.

On longer term weekly chart (not shown), the index managed to close above its three weekly EMAs in a long-term bull market, but formed a ‘distribution bar’ pattern (open near week’s high, close near week’s low). Weekly technical indicators are in bullish zones but showing downward momentum. The index can correct some more.

FTSE 100 Index Chart

The following comment appeared in last week’s post on the daily bar chart pattern of FTSE 100: “The more likely move (of the index) should be a drop below the ‘wedge’.”

The index moved up to touch a new high of 6974 on Mon. Mar 2 ‘15, only to drop below the wedge on the very next day. The index pulled back inside the ‘wedge’ by Thu. Mar 5 – raising bullish hopes – but again dropped below the ‘wedge’ by the end of the week.

The index lost a meagre 35 points (0.5%) on a weekly closing basis, but is trading below the ‘wedge’ and the 20 day EMA at the time of writing this post.

Daily technical indicators are in bullish zones, but showing strong downward momentum. MACD is sliding below its signal line in positive zone. RSI and Slow stochastic are poised to cross below their respective 50% levels.

All three indicators showed negative divergences by failing to touch new highs with the index on Mon. Mar 2. Some more correction is likely.

On longer term weekly chart (not shown), the index is trading well above its three weekly EMAs in a long-term bull market, but formed a ‘reversal week’ pattern (higher high, lower close). Weekly technical indicators are in bullish zones, but showing clear signs of turning downwards.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 05, 2015

A holiday-shortened trading week witnessed sharp volatility. An out-of-turn 25 bps interest rate cut by RBI initially enthused the stock market. Both Sensex and Nifty rose to touch new highs on Wed. Mar 4 ‘15.

However, neither index could sustain at the higher levels, as profit booking ensued – firstly due to the possibility of a credit rating downgrade by S&P, and secondly because of the realisation that the country’s economy is far from being in the pink of health.

FIIs did not seem to be too bothered. They net bought Rs 4000 Crores worth equity during the first 4 days of the month. DIIs were net sellers of equity worth Rs 300 Crores. Both indices closed slightly higher on a weekly basis.

BSE Sensex index chart

The daily bar chart pattern of Sensex closed above the ‘symmetrical triangle’ pattern on all four days of the week, and touched a new intra-day high of 30025 on Mar 4. But it formed a ‘reversal day’ pattern and pulled back to the top of the triangle.

On Mar 5, the index dropped inside the triangle intra-day, but bounced up to close higher after receiving good support from its rising 20 day EMA. Technically, the break out above the triangle hasn’t been convincing. Also, Sensex is yet to close above 29682 – the highest ever closing level on Jan 29 ‘15.

All three EMAs are rising, and Sensex is trading above them in a long-term bull market. The last of the bear shackles should get removed once the index closes above 29682.

Daily technical indicators are in bullish zones, but not showing much upward momentum. MACD is entangled with its signal line and moving sideways. ROC bounced up from the ‘0’ line but is yet to cross above its 10 day MA. RSI and Slow stochastic are moving down towards their 50% level.

Note that all four indicators are showing negative divergences by failing to touch new highs with the index. That may not necessarily trigger a strong correction. Expect the index to consolidate around current levels before resuming its up move in earnest.

(A bear case for a strong correction can be made by re-drawing the triangle as a ‘rising wedge’. Why should such a possibility be considered? Because of the unconvincing break out above the triangle, and the subsequent intra-day drop inside the triangle on Fri. Mar 5. Any breach below the lower edge of the triangle may push the index down inside the support zone between 27350 and 28800.)

NSE Nifty 50 index chart

The following comment appeared in last week’s post on the weekly bar chart pattern of Nifty: “Nifty looks poised to touch new highs in the near future.”

The index touched new intra-week (9119 on Mar 4) and closing (8938 on Mar 5) highs – and closed higher for the fourth week in a row. Both weekly EMAs are rising, and the index is trading above them and the blue ‘Up trend line 2’ in a long-term bull market.

Weekly technical indicators are bullish. Three of them – MACD, ROC, Slow stochastic – are inside their respective overbought zones. RSI is moving sideways above its 50% level.

Bears are not completely out of the picture despite all the bullish signals. Nifty may be forming a bearish ‘rising wedge’ pattern – from which it may break downwards and drop inside the support zone between 8180 and 8630 (marked by dotted horizontal lines). A convincing move above the ‘wedge’ should send the bears packing.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in long-term bull markets, and seem poised to move higher. However, the possibility of formation of bearish ‘rising wedge’ patterns on both charts may be a warning sign. Taking partial profits and reinvesting in a gilt or income fund – which should do well in a falling interest rate scenario – may be a good idea.

5 reasons why the stock market sold off after the surprise 25 bps interest rate cut by RBI today

The budget lacked any populist measures, and laid emphasis on fiscal consolidation. Inflation is on a downward slide. Many experts had expected a second interest cut after the budget. So, why did the stock market fail to celebrate? Here are five reasons:

1) It was a case of ‘sell on news’. Though the timing was a bit of a surprise – as was the earlier rate cut in Jan ‘15 - a second rate cut was expected around March-April. After the initial surge today, profit booking set in.

2) Nifty had touched the psychological 9000 mark on Tue. Mar 3. Today (Mar 4), Sensex touched the 30000 level. When an index is at lifetime high with no known resistances, there is a tendency for traders and investors to book profits when the index reaches a nice, round level (i.e. with several zeroes).

It happens for stocks, too. How often have you waited for a stock to touch 200, or 500, or 1000 in order to book profits?

3) Some more PSU divestments are lined up this month. Cash will be required – particularly by DIIs – to invest, and/or bail-out the issues in case of under-subscriptions.

4) The 25 bps rate cut in Jan ‘15 was immediately followed by a reduction in fixed deposit rates by banks, but the interest rate benefit was not passed on to borrowers. PSU banks in particular have a lot of NPAs/restructured assets on their books. They chose to utilise the rate cut to shore up their books. They may do so this time as well.

5) Last – but not the least – is the realisation by RBI that economic growth is still sluggish on the ground, despite the government’s ‘new formula’ of calculating GDP that indicated a higher growth. And investors didn’t like the confirmation about slow growth.

This is what L&T Chairman Anil M Naik said in an interview to Business Standard: “It’s too little, too late. For the economy to bounce back as against crawl back, you need a cut of another 50 basis points. Not just that, banks have to pass it on. If banks don’t pass on, consumer demand will not come back. Our infrastructure is high-cost because interest rates are as much as 12 per cent for some groups, which make projects unviable.”

Q. E. D.

Gold and Silver charts: bears regaining control

Gold Chart Pattern

The following comments appeared in the previous post on the daily chart pattern of gold: “Expect some consolidation at current levels. This may be a good time to enter, but with a strict stop-loss at 1200.”

The 1200 level was breached intra-day on a couple of occasions, but gold’s price did not close below it. So technically, the stop-loss did not get triggered – but only just. The 20 day EMA has crossed below the 50 day EMA, and gold’s price is trading below all three EMAs in a bear market.

The rally that crossed above the downward-sloping neckline of the bullish inverse head-and-shoulders pattern (see chart of previous post) and crossed the 1300 level has been all but negated. If you are holding, maintain the strict stop-loss at 1200.

Daily technical indicators are in bearish zones, but showing some signs of upward momentum. MACD is trying to emerge from its oversold zone, but remains below its signal line. RSI has formed a small cup-and-handle like pattern below its 50% level. Slow stochastic has climbed out of its oversold zone.

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 in bearish zones. Bears are regaining control after a sharp rally.

Silver Chart Pattern

The daily bar chart pattern of silver bounced up after receiving good support from the 16 level, but faced resistance from its falling 50 day EMA. All three EMAs have resumed their down moves, and silver’s price is trading below them in a bear market.

The inverse head-and-shoulders pattern drawn on silver’s chart in the previous post has been negated. Pattern failure from time to time makes technical analysis a challenge. The sharp bear market rally that took silver’s price to 18.50 and into bull territory appears over.

Daily technical indicators are looking bearish. MACD is moving up towards its falling signal line in negative zone. RSI is below its 50% level. Slow stochastic has emerged from its oversold zone. More correction is likely.

On longer term weekly chart (not shown), silver’s price is trading below all three weekly EMAs in a long-term bear market. Technical indicators are looking bearish.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Feb 27, 2015

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 touched a new lifetime high of 2120 on Wed. Feb. 25 ‘15, but formed a small ‘reversal day’ pattern and closed marginally lower for the week. All three EMAs are rising, and the index is trading above them in a long-term bull market.

However, as pointed out in last week’s analysis, there are a couple of bearish dark clouds on the horizon – 1) falling volumes (marked by blue arrow) during the bull rally in Feb.; 2) a large ‘falling wedge’ pattern within which the index has been trading for the past 6 months.

Daily technical indicators are in the process of correcting overbought conditions, but are in bullish zones. MACD has formed a small ‘rounding top’ pattern inside its overbought zone, and is falling towards its signal line. RSI has also formed a small ‘rounding top’ pattern below its overbought zone. Slow stochastic is falling inside its overbought zone. Some more correction is likely.

A convincing break out above the ‘falling wedge’ pattern is necessary to chase the bears away. Till then, caution is advised. A large bearish pattern at a market top needs to be respected.

On longer term weekly chart (not shown), the index closed well above its three weekly EMAs and touched a lifetime weekly high but formed a small ‘reversal week’ pattern. 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. It may be a good idea to book some part profits.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 touched a lifetime high of 6967 on Fri. Feb 27 backed by strong volumes (not shown on chart), but continued to trade within a bearish ‘rising wedge’ pattern.

All three daily technical indicators are in bullish zones, but showing 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.

At the time of writing this post, the index is trading lower after touching a new intra-day high of 6974. A convincing break out above the wedge is required for bulls to establish complete control. The more likely move should be a drop below the ‘wedge’.

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 inside their respective overbought zones. Part profit booking may be a good idea.

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 28, 2015

Some experts called it a ‘well- balanced’ budget. Detractors called it a missed opportunity to announce ‘big bang’ reforms. The stock market gave the budget a thumbs-up – as both Sensex and Nifty closed higher on budget day for the first time in 4 years.

Did the thrashing by AAP in the Delhi elections tip the Finance Minister’s hand? The pro-poor measures are hinting at the possibility. Economic inclusiveness for the poor can be achieved by providing better education and vocational training. Building toilets is commendable and will improve hygiene – but the poor will remain poor.

Increased allocations for road transport and railways, and a ‘plug and play’ system of providing all statutory clearances prior to awarding of infrastructure projects should kick-start investments. Increase in service tax will affect the middle-class.

For the first time since Aug ‘14, FIIs and DIIs were both net buyers of equity during Feb ‘15. FIIs were net buyers of Rs 6700 Crores. DIIs were net buyers of Rs 1700 Crores.

BSE Sensex index chart

The daily bar chart pattern of Sensex has been consolidating sideways within a ‘symmetrical triangle’ pattern ever since it touched a lifetime high of 29844 on Jan 30 ‘15. The ‘support zone’ (marked by blue dotted lines) between 27350 and 28800 limited the Sensex correction to 1800 points (6%) from the top.

Budget day’s trading can be termed a failed attempt at an upward break out from the triangle – despite strong volumes. The index closed at the upper edge of the triangle, and will require follow-up buying next week to break out convincingly.

Daily technical indicators are in bullish zones, but giving mixed signals. MACD is yet to cross above its falling signal line in positive zone. ROC has formed a small head-and-shoulders pattern and crossed below its rising 10 day MA in positive zone. RSI has moved up to the edge of its overbought zone. Slow stochastic is rising towards its overbought zone.

The index is trading above all its three EMAs in a long-term bull market. Time for bears to throw in the towel? A convincing move above the Jan ‘15 top of 29844 should provide the trigger.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty closed higher for the third straight week, accompanied by an increase in volumes. It was the first ever weekly (and monthly) close above the 8900 level.

The index received good support from the zone between 8180 and 8630 (marked by blue dotted lines), and is trading above its two weekly EMAs and the Up trend line 2 in a long-term bull market.

Weekly technical indicators are looking overbought. MACD has crossed above its signal line to enter overbought zone. ROC has risen sharply above its 10 week MA to enter its overbought zone. RSI is moving sideways above its 50% level. Slow stochastic has re-entered its overbought zone.

Remember that an index can remain overbought for long periods. Nifty looks poised to touch new highs in the near future.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are back in bull territories and ready to touch new highs. The uncertainty regarding the budget is over. Now is a good time to study the budget proposals (they are still proposals, and amendments can take place before the budget is formally ‘passed’ by parliament). Take a re-look at your portfolio and your ‘watch list’ to decide on the next course of action.