Sunday musings: what small investors should learn from the fate of the barber who killed the monks

[“Probably no other work of Hindu literature has played so important a part in the literature of the world as the Sanskrit story collection called the Panchatantra.” – Franklin Edgerton, former Professor of Sanskrit and Comparative philology, Yale University.]

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The original Panchatantra was written some time during BC 100 and AD 500. A Pahlavi (Iranian) translation was made in the 6th century AD. An Arabic translation from the Pahlavi version in AD 750 became very popular in Arabic literature.

In the 11th century AD, the Arabic version was translated into Greek, Spanish and Hebrew versions. The Greek version was later translated into Italian, Latin and German versions. An English version was published in 1570.

Some claim that several of Aesop’s Fables were borrowed from the Panchatantra. Others claim the opposite – i.e. some of the Panchatantra stories have been borrowed from Aesop’s Fables. Whatever the actual origins, many of these old morality stories have relevance even today – like the story of the barber who killed the monks.

A wealthy merchant’s son had fallen upon hard times. He lived in his broken-down ancestral home with an old maid – who had nursed him during his childhood – as company. Every evening he would pray to God that his poverty be alleviated.

One night, he had a dream. Three monks woke him up to tell him that they would be visiting him the next day. They were actually the manifestations of three heaps of treasure stored away by forefathers of the merchant’s son.

The merchant’s son was to show no mercy and kill all three immediately – whereupon they would turn back into three heaps of money.

On waking up the next morning, he asked the old maid to clean the house properly and prepare the best meal possible from the meagre rations available. Some time later, a barber came to his home for the monthly trimming of his beard and nails.

Just when the barber had finished his trimming, the three monks of his dream walked in through the door. He killed all three at once and they immediately turned into three heaps of money.

From the piles of money, the merchant’s son gave a hefty amount to the barber as a bribe to keep him quiet. But the barber drew a hasty conclusion from what he had seen, and decided to kill three monks himself.

When three monks came begging to the barber’s house a few days later, the barber promptly killed them – but he got no treasure. The king’s guards came and arrested him and hanged him in public for his crime.

Moral of the story (for small investors in particular): Don’t get unduly influenced by stories of friends/relatives who have made a killing in the stock market in a short span of time. By trying to follow in their footsteps without adequate preparation, you may get killed instead.

You should not enter the stock market to make quick money. Stock market is a place where you can build wealth for the long-term. That will require patience, discipline, a plan and never forgetting what happened to the barber.

BSE Sensex and NSE Nifty 50 index chart patterns – May 29, 2015

There was good news for bears and bulls at the close of trading on May 29 ‘15. Incidentally, it was a combined daily (higher), weekly (lower) and monthly (higher) close.

Good news for bears: down trends from lifetime highs touched in Mar ‘15 (marked by blue down trend lines on Sensex and Nifty charts below) have not been reversed yet.

Good news for bulls: on monthly charts of Sensex and Nifty (not shown), ‘reversal bar’ patterns (lower low, higher close) have formed. That is an indication that the 3 months long corrections may be over.

As per provisional figures, FIIs were net sellers of equity worth Rs 4400 Crores during May ‘15 – though they were net buyers of Rs 2200 Crores on May 29. DIIs were net buyers of equity worth Rs 7500 Crores – though they were net sellers of Rs 2200 Crores on May 29.

Q4 (Mar ‘15) results continue to pour in. As expected, there have been more misses than hits. Big boys like TISCO, TELCO, M&M have been in the former category.

An interest rate cut of at least 25 bps is likely from RBI next week. A 50 bps cut will be a positive surprise. If RBI decides to wait and watch instead, bears will have a field day.

BSE Sensex index chart

The daily bar chart pattern of Sensex managed to close above its three daily EMAs in bull territory, after receiving support from the lower edge of the ‘support-resistance zone’.

The index has formed a bullish pattern of ‘higher tops and higher bottoms’ since touching a low of 26424 on May 7 ‘15, but closed lower on a weekly basis.

Failure to cross above the blue down trend line means that bears still have the upper hand.

Daily technical indicators are looking bullish, but their upward momentum is not strong. MACD is above its signal line, and poised to enter positive zone. ROC is in positive zone, but facing resistance from its 10 day MA. RSI is sliding down towards its 50% level. Slow stochastic has dropped from its overbought zone.

The index went through a decent 12% correction, and looks ready to resume its rally. Bears may not give up easily.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty faced strong resistance from its 20 week EMA, and closed about 25 points lower on a weekly basis. The blue down trend line is likely to provide strong resistance as well.

Weekly technical indicators have corrected oversold conditions, but haven’t turned bullish yet. MACD is below its falling signal line, and moving sideways above the ‘0’ line. ROC has crossed above its 10 week MA, but remains in negative zone. RSI is moving sideways below its 50% level. Slow stochastic is rising towards its 50% level.

The index may attempt to cross above the down trend line. Strong volumes on a down week is a sign that bears are in no mood to give up control just yet.

Bottomline? BSE Sensex and NSE Nifty charts are in the process of recovering from strong bear attacks but have so far failed to cross above their respective down trend lines. Add to existing portfolios if both indices cross convincingly above their down trend lines. Stay invested till then.

Pluses and minuses of Modi government’s first year - a guest post

The ground-swell of support for the likely installation of a Modi-led government was clearly visible in the stock market last year. The situation has changed quite a lot since then – and the current state of the stock market is a clear reflection of what might have been.

The expectations of ‘achhe din’ from citizens were too high. Change – particularly of the structural kind – doesn’t happen in a hurry. Several initiatives have set the tone of this government’s priorities. Much more needs to be done to get the economy back on the growth track.

The first year was a year of consolidation. Modi needed to comprehend the nuances of parliamentary democracy. In this month’s guest post, Nishit provides an assessment of the achievements and failures during the first year of Modi’s government.

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The Modi Government has completed a year in office and amidst all the hoopla let us try and examine whether it has achieved enough during the first year.

The biggest problem this government has faced is the burden of high expectations which they themselves created. India is a complex country and no Prime Minister can expect to solve all the problems in 1 year or maybe even 5 years. To put things into perspective, this 1 year should serve as a base on which Modi can build for the next 4 years.

The first year is the foundation, years 2 and 3 main building blocks and years 4 and 5 are when results should be visible on ground if Mr Modi expects to be re-elected.

The plus points of Year 1:

1. Foreign Diplomacy. Ironically what was expected to be the weakest link has turned out to be the strongest part of Modi’s initiatives. Modi has managed to network with who’s who of the International community and this may serve in good stead over the next 4 years. We are now linked to a global economy and it helps if our leaders have a personal rapport with the top leaders of other countries.
2. Social schemes like the Jan Dhana Yojana. The inclusive concept of everyone having a bank account can lead to much bigger things. The twin insurance schemes are the best thing that could happen to the poorer sections of the Indian population. Many people leave nothing for their families to survive on if they die suddenly. The 2 lakhs insurance will at least give such families some breathing space.
3. Swachh Bharat and similar slogans are needed for a basic reason; most places in India are pretty unhygienic. Such Initiatives do not need much investment but at the same time can be effective in creating awareness among people.
4. The Coal auction put in place a mechanism where coal is available for power plants. India does not need more power plants. It needs all the existing power plants to be optimally used. Reforming the State Distribution companies is the next step.
5. The Land Acquisition and GST bills are the next steps. These are the key steps for Year 2 for Mr Modi.

The negatives:

1. Intemperate statements made by whole lot of fringe elements - amongst them a few Ministers. When the time is to build bridges and walk the extra mile to assure the minorities, such statements help nobody.
2. Grandiose claims by some Ministers over road building and other initiatives by trying to claim credit for something which has not yet been achieved.
3. Needless tax issues created to hassle FIIs. Either the Government goes ahead by taxing these guys or it doesn’t. There is no point by creating a scare and then pulling back from the brink.

All in all a good beginning has been made. More effects should be seen in Year 2. People always have the option of voting out the present government in 4 years time.

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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 has been consolidating sideways with a downward bias since touching a high of 62.50 on May 6 ‘15. It appears to be forming a ‘falling wedge’ pattern that has bullish implications.

Strong volumes on down days mean that bears are in no mood to give up without a fight. There is a possibility that the ‘falling wedge’ may turn out to be a ‘descending triangle’ – which is a bearish pattern. It may be prudent to wait for the pattern to play out over the next couple of weeks.

Daily technical indicators are giving mixed signals – which is often the case during periods of consolidation. MACD is moving sideways in positive zone, but is below its signal line. Note that the signal line has formed a bearish ‘rounding top’ pattern.

RSI bounced up from its 50% level, but is moving down. Slow stochastic has dropped below its 50% level, but moving up. Oil’s price is trading below its 200 day EMA in a bear market.

On longer term weekly chart (not shown), oil’s price has spent 6 weeks above its rising 20 week EMA, but is trading well below its falling 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are looking bullish, but giving mixed signals. MACD is showing good upward momentum in negative zone. RSI has just managed to move above its 50% level. Slow stochastic is inside its overbought zone, but is falling.

Brent Crude chart

The daily bar chart pattern of Brent Crude oil has been consolidating sideways within a ‘falling wedge’ pattern since touching a high of 69.50 on May 6 ‘15. The likely breakout from a ‘falling wedge’ is upwards.

Note that an upward breakout should be accompanied by a significant increase in volumes – otherwise the breakout may turn out to be a ‘false’ one. Strong volumes on down days show that bears remain active despite a strong rally from the Jan ‘15 low. Oil’s price may consolidate some more within the ‘wedge’.

Daily technical indicators are giving mixed signals – which sometimes happen during periods of consolidation. MACD is moving sideways in positive zone, but is below its signal line. Note that the signal line has formed a bearish ‘rounding top’ pattern.

RSI bounced up from its 50% level, but is moving down towards it. Slow stochastic has bounced up weakly from the edge of its oversold zone. Oil’s price is trading below its sliding 200 day EMA in a bear market.

On longer term weekly chart (not shown), oil’s price has spent 6 weeks above its rising 20 week EMA, but is trading well below its falling 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are giving mixed signals. MACD is showing good upward momentum in negative zone. RSI has slipped below its 50% level. Slow stochastic has dropped down from its overbought zone.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – May 22, 2015

S&P 500 Index Chart

The daily bar chart pattern of S&P 500  traded sideways within a narrow 15 points range during the week gone by. The index touched a new intra-day high of 2135 on Wed. May 20, but formed a small ‘reversal day’ bar pattern (higher high, lower close).

The next day it touched a slightly lower top, forming a small ‘double top’ reversal pattern and closed the week with a paltry 3 points gain. All three EMAs are rising and the index is trading above them in a long-term bull market.

But bearish indications abound. Volumes on Tue. and Wed. – both down days – were the highest during the week. The rally from the May 6 low of 2068 has been accompanied by sliding volumes. All three technical indicators are in bullish zones but showing negative divergences by failing to touch new highs with the index.

The bull market is climbing a wall of technical worries. Stay invested, but be prepared for a sharp correction at any time.

On longer term weekly chart (not shown), the index closed at a lifetime high above its three 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.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 closed higher on all five days of the trading week – ending up well above the 7000 level and its three daily EMAs in bull territory, gaining 1% on a weekly basis.

The index has been trading within a ‘symmetrical triangle’ pattern since touching a lifetime high of 7123 on Apr 27 ‘15. An attempt at an upward breakout from the triangle on Fri. May 22 ended in failure due to lack of volume support.

Daily technical indicators are looking bullish. MACD has crossed above its falling signal line to enter positive zone. RSI has moved above its 50% level. Slow stochastic is rising towards its overbought zone.

Another attempt at an upward breakout from the triangle is likely.

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

Sunday musings: Why Eklavya’s sacrifice should be a warning about trading in stock or index futures

The epic, Mahabharata, has many stories and incidents that reveal man’s inhumanity towards fellow humans. The well-known story of Eklavya’s sacrifice is a classic example.

For those not in the know, or have forgotten what they had heard from their grandmothers when they were small children, here is a quick recapitulation.

Eklavya was a low-caste hunter who had ambitions of becoming a warrior. So he sought to learn archery at Dronacharya’s martial arts ‘school’. Dronacharya was appointed by the king of Hastinapur to teach the Kaurava and Pandava princes.

The brahmin Dronacharya refused to teach the low-caste boy. The third Pandava, Arjuna, who was Dronacharya’s favourite pupil, shooed Eklavya away by saying that a low-caste person was not fit to learn along with high-caste princes.

Eklavya was disappointed but not disheartened. He built a clay model of Dronacharya and installed it in a forest clearing. He regularly practised archery in front of his model ‘guru’, and became an expert archer within a few months.

One day, a barking dog disturbed his practice. In a fit of pique, he shot a few arrows into the dog’s mouth. The dog wasn’t hurt too badly, but stopped barking. By chance, the Kaurava and Pandava princes were on a field trip in the same forest. Dronacharya and Arjuna came upon the dog with a mouthful of arrows.

Astonished by the sheer skill of the archer, they sought and found Eklavya practising. When asked who his teacher was, Eklavya pointed to Dronacharya’s clay model. Arjuna was very upset at finding an archer with better skills than him. Dronacharya was secretly happy but to pacify Arjuna, wanted Eklavya’s right thumb as ‘guru dakshina’ (teacher’s fees).

The young boy cut off his own thumb without hesitation. Dronacharya blessed him and said that Eklavya will still be a great archer – which he became by learning to shoot arrows with his forefinger and middle finger (much like modern archers do now).

Moral of the story? Entering into any venture may seem easy at the beginning. Skills can be learnt by perseverance and hard work. But future consequences often depend on the skills and mental acumen of competitors.

Does that mean avoiding any venture due to the fear of competition? Obviously not. But weighing possible future consequences and having an appropriate strategy before starting out can save you from financial disaster.

Most small investors lose their shirt in the F&O market because of their failure to weigh future consequences. Particularly in the futures market, the risk of making a huge loss far outweighs the easy margin entry and possibility of making some quick profits.

Remember that competitors in the F&O market are typically large institutional investors and HNIs with huge resources in terms of money, research and experience. They will beat you regardless of your skill levels.

Want to make money in the stock market the easy way? Read this post.

BSE Sensex and NSE Nifty 50 index chart patterns – May 22, 2015

Both FIIs and DIIs were net buyers of equity during the week – of about Rs 1800 Crores each. While DIIs were net buyers on all five trading days, FIIs did the bulk of their net buying on Mon. May 18, and were net sellers of small amounts on Tue. May 19 and Fri. May 22.

Sensex and Nifty continued with their recoveries, and closed higher for the 3rd week in a row. But both indices are technically still in down trends after touching lifetime highs on Mar 4 ‘15. Bulls have some work left before the indices can reverse their down trends.

One year of the Modi government has brought mixed reactions from India Inc. Some have appreciated the disappearance of power brokers and corruption. Others have lamented the lack of big-bang reforms. The MAT fiasco should never have occurred. Floor management in the Rajya Sabha could have been coordinated better for passing important bills.

BSE Sensex index chart

The daily bar chart pattern of Sensex managed to close above its three daily EMAs in bull territory after 5 weeks. The 20 day EMA has formed a bullish ‘rounding bottom’ pattern. The 50 day EMA has stopped falling. The 200 day EMA is about to start rising. These are all near term bullish signs.

However, the blue down trend line – connecting the Mar ‘15 and Apr ‘15 tops has not been breached yet. That means the down trend from the Mar 4 ‘15 top is still in force. Though all four technical indicators are looking bullish, two of them – ROC and RSI – are showing downward momentum.

Expect bears to put up a fight to defend the down trend line. If Sensex manages to convincingly cross above the down trend line, the upper edge of the ‘support-resistance zone’ (at 28800) may provide strong resistance.

What can cause the index to start another leg of the down trend? Two things. RBI governor may decide not to cut interest rates – against consensus estimate of analysts. The onset of monsoon may get delayed.

As of now, both those events appear unlikely. The scales are slightly tipped towards bulls.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty crossed above its 20 week EMA intra-week and closed just above it after 5 weeks. Despite three straight higher weekly closes, the falling volume bars indicate that bulls have not regained control yet.

The blue down trend line connecting the Mar ‘15 and Apr ‘15 tops is at the same level as the upper edge of the ‘support-resistance zone’ (at 8630). Expect bears to put up a good fight to preserve the down trend.

Weekly technical indicators are showing signs of bullishness. MACD is moving sideways below its falling signal line in positive territory. ROC has just crossed above its 10 week MA in negative territory. RSI is rising slowly, but is below its 50% level. Slow stochastic has emerged from its oversold zone.

The index is recovering from a strong bear attack, but the recovery is far from complete.

Bottomline? BSE Sensex and NSE Nifty charts are gradually recovering from strong bear attacks but are facing resistances from their respective down trend lines. Expect the indices to consolidate within the ‘support-resistance zones’. An expected interest rate cut, and an early onset of monsoon can boost bullish sentiments. Stay invested.

Nifty chart: a mid-week update (May 20 ‘15)

The big boys have started announcing their Q4 results, but there is not much to feel excited about. Tata Steel announced a huge loss. A few PSU banks bucked the trend by declaring decent set of numbers.

Unseasonal rains had damaged standing crops but filled up water reservoirs. A possible early onset of monsoon may further reduce the effects of below-normal rains.

NHAI has targetted about 5600 KM of new road projects in this fiscal year. A likely interest rate cut by RBI should also be a tonic for bulls. The government is lining up a list of 25 PSUs for divestment. That can keep the secondary market depressed.

The daily closing chart pattern of Nifty broke out above its 20 day EMA and the neckline of an ‘inverted head and shoulders’ bottom reversal pattern – thanks to combined net buying by FIIs and DIIs on Mon. May 18.

A look at the volume bars does not inspire much confidence about the sustenance of the rally. An upward breakout requires a significant increase in volumes to technically validate the breakout.

The index is facing resistance from its falling 50 day EMA, and is trading well below the blue down trend line connecting its Mar ‘15 and Apr ‘15 tops. So, bulls have their work cut out.

Daily technical indicators have turned bullish. MACD is rising above its signal line in negative zone. Note the bullish ‘rounding bottom’ pattern formed by the signal line. ROC has climbed to the edge of its overbought zone. RSI has moved above its 50% level. Slow stochastic has entered its overbought zone.

As long as the index remains below the blue down trend line, bears can be expected to attack at any time. A pullback to the neckline is a distinct possibility.

The index is trading above its 200 day EMA in a bull market. A correction in a bull market is an opportunity to add.

Aggressive buying is not recommended. A gradual accumulation of fundamentally strong stocks with a long-term investment horizon may be a better idea.

Gold and Silver charts: an update

Gold Chart Pattern

The following comments appeared in the previous post on the daily bar chart pattern of gold: “… gold’s price appears to have formed a bullish ‘flag’ pattern. An earlier upward breakout from an ‘inverse head and shoulders’ pattern ended in failure due to lack of follow-up buying. Any breakout from the ‘flag’ may meet the same fate – unless the breakout is accompanied by strong volumes.”

The upward breakout from the ‘flag’ on May 13 was accompanied by a sharp volume spike that technically validated the breakout. The subsequent rally managed to cross above the falling 200 day EMA into bull territory. But falling volumes during the past three trading sessions mean that the rally may flatter to deceive.

Daily technical indicators are in bullish zones, but their upward momentum is slowing down. MACD has crossed above its signal line to enter positive zone. RSI is moving sideways above its 50% level. Slow stochastic is well inside its overbought zone, but its upward move has stalled.

Some more upside is possible, but expect bears to step in at any time to push down gold’s price below its 200 day EMA. A strong move above 1260 will technically validate the breakout above the 200 day EMA.

On longer term weekly chart (not shown), gold’s price has crossed above its 20 week EMA but is facing resistance from its 50 week EMA. The 200 week EMA is falling, and gold’s price is trading below it in a long-term bear market. Technical indicators are turning bullish.

Silver Chart Pattern

The daily bar chart pattern of silver followed the yellow metal by breaking out upwards from a ‘triangle’ pattern within which it was consolidating for 6 weeks. A strong volume surge accompanied the breakout and was followed by a sharp up move above the falling 200 day EMA.

Is the bear market in silver finally over? Not quite. The breakout above the ‘triangle’ is technically valid. Not so for the breakout above the 200 day EMA. Why? Because silver’s price is still within the 3% ‘whipsaw’ limit above its 200 day EMA.

Daily technical indicators are looking bullish, and overbought. MACD has risen sharply above its signal line, and entered its overbought zone. RSI has reached the edge of its overbought zone. Slow stochastic is well inside its overbought zone.

A correction can occur at any time.

On longer term weekly chart (not shown), silver’s price has just managed to close above its falling 50 week EMA, but is trading well below its 200 week EMA in a long-term bear market. Technical indicators are turning bullish.

Comparing S&P 500 and FTSE 100 index charts with Nifty – May 15, 2015

S&P 500 Index Chart vs Nifty (in green)

The daily closing chart pattern of S&P 500 reached a lifetime high of 2123 on Fri. May 15 – climbing a wall of fundamental and technical worries, as bull markets often do. However, the past 6 months has been a volatile period that has tested the patience of investors.

The 50 day EMA is rising, and the index is trading above it in a bull market. But the index has barely gained anything since closing at 2117 on Mar 2 ‘15. Volumes have been average, but higher during recent down days – which is a matter of concern for bulls.

Daily technical indicators are in bullish zones. MACD has crossed above its signal line in positive territory. RSI has moved above its 50% level. Slow stochastic has climbed up towards its overbought zone.

However, all three indicators are showing negative divergences by failing to touch new highs with the index. A correction can occur at any time.

Note that Nifty underperformed S&P 500 during mid-Dec ‘14 to mid-Jan ‘15, and again during the past month – but is in the process of forming an inverse head-and-shoulders bottom reversal pattern.

FTSE 100 Index Chart vs Nifty (in green)

The daily closing chart pattern of FTSE 100 has been in a corrective mode since touching a lifetime high of 7104 on Apr 27 ‘15, and is seeking support from its 50 day EMA. It has outperformed Nifty during the past 2 months – thanks to the ongoing correction in the Indian market.

Daily technical indicators are looking a little bearish. MACD has just slipped into negative zone below its falling signal line. RSI and Slow stochastic are a bit below their respective 50% levels.

The margin of victory in the re-election of the Conservative Party was somewhat of a surprise, but the market euphoria seems to have died down quickly.

Expect some consolidation before the index can resume its rally.

BSE Sensex and NSE Nifty 50 index chart patterns – May 15, 2015

FIIs and DIIs were both net buyers of equity on Mon. May 11. For the rest of the week, FIIs turned sellers again while DIIs kept buying. The net result of all the buying and selling – as per provisional figures – was FIIs: (–) Rs 1343 Crores; DIIs: + Rs 2781 Crores.

Sensex and Nifty closed higher for the 2nd week in a row, but neither index managed to resume their up moves. Both touched higher bottoms, but lower tops during the week.

WPI inflation in Apr ‘15 was – 2.65%, contracting for the 6th month in a row. With CPI inflation below 5% and industrial growth remaining tepid, RBI is quite likely to lower interest rates soon. Government’s failure to pass the GST and land bills in the Rajya Sabha may dampen bullish sentiments.

BSE Sensex index chart

The daily bar chart pattern of Sensex managed to close above its 200 day EMA on 4 of the 5 days of the trading week gone by, but faced strong resistance from its falling 20 day EMA.

Note that the downward breach of the 200 day EMA has not been validated technically yet, as the index didn’t close below the 26350 level – which is the 3% ‘whipsaw’ limit below the 200 day EMA. That doesn’t mean that bears have given up the fight.

An aggressive bullish stance should be avoided till the index convincingly crosses above its falling 50 day EMA (currently at 27850) and the blue down trend line connecting the Mar ‘15 and Apr ‘15 tops (currently at 28400).

Daily technical indicators have corrected oversold conditions, and are turning bullish. MACD has crossed above its signal line in negative territory. ROC is above its 10 day MA, and has entered positive zone. RSI has climbed up to its 50% level. Slow stochastic has just crossed above its 50% level.

Slowly accumulate fundamentally strong stocks with appropriate stop-losses.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty received good support from its 50 week EMA, and closed within the ‘support-resistance zone’ between 8180 and 8630.

The index touched a higher bottom but a lower top. Volumes were lower than the previous week’s. Bears are in no mood to give up. Only a convincing move above the falling 20 week EMA and the 8630 level can put bulls back on top.

Weekly technical indicators are still bearish, but showing some signs of turning around. MACD is falling below its signal line in positive zone. ROC is below its falling 10 week MA inside its oversold zone. RSI bounced up weakly from the edge of its oversold zone. Slow stochastic is trying to emerge from its oversold zone.

Technically, Nifty is recovering from a bull market correction. Use the opportunity to accumulate fundamentally strong stocks, but maintain strict stop-losses in case bears attack with renewed vigour.

Bottomline? BSE Sensex and NSE Nifty charts are recovering from strong bear attacks after touching lifetime highs. Do not expect the indices to move up in a hurry. That can happen after some consolidation within the ‘support-resistance zones’. Utilise the corrections to accumulate, but maintain appropriate stop-losses for individual stocks.

How is Nifty faring against Asian Market indices?

Lately, there has been a lot of talk about how some FIIs have been spooked by the retrospective MAT notices and poor Q4 results from India Inc.

Short-term funds in particular have been on a selling spree that has led to a 10% correction in Nifty – after it touched a lifetime high in early Mar ‘15.

So, what are FIIs doing with the funds pulled out from India? A look at the comparative charts of six Asian indices clearly show that Nifty is not the sole sufferer.

Only Hang Seng has outperformed Nifty – and that too only during the past month.

Hang Seng vs. NIFTY (in green)

The 1 year closing chart of Hang Seng underperformed Nifty till mid-April ‘15. But after touching a 52 week high, it has also faced a correction, and may be forming a head-and-shoulders reversal pattern.

Jakarta vs. NIFTY (in green)

The Jakarta Composite index has consistently underperformed Nifty dirong the past year.

Korea KOSPI vs. NIFTY (in green)

Korea’s KOSPI index spent several months in negative territory, but managed to eke out a small gain during the past year – but has clearly underperformed against Nifty.

Malaysia KLCI vs. NIFTY (in green)

Malaysia’s KLCI index has spent the past year in negative territory, and has been the worst performer among the Asian indices.

Singapore STI vs. NIFTY (in green)

Singapore’s Straits Times index has mimicked Jakarta’s moves – making a small gain but underperforming Nifty throughout the past year.

Taiwan TSEC vs. NIFTY (in green)

Taiwan’s TSEC index tried to keep pace with Nifty, but dropped off from Aug ‘14 onwards. It managed an 8% gain during the past year, underperforming Nifty by 50%.

Small investors should take heart. The present corrective move in Nifty is an opportunity to enter good large-cap stocks. You will reap the benefits when Nifty touches 12,000 (yes, it will – in the not-too-distant future).

What should small investors do when stock markets turn volatile?

A lay person’s understanding about volatility in the stock market is unusual and large fluctuations in a stock’s price or an index level. But there are more precise definitions of volatility. Here is what investopedia.com has to say: “Volatility is a measure of dispersion around the mean or average return of a security.”

‘Dispersion’ is the size of a range of expected values of a stock price or index level. It measures the uncertainty (i.e. risk) associated with a stock price or index level. The greater the dispersion, the greater is the volatility. ‘Beta’ measures the dispersion of a stock’s or fund’s return relative to a benchmark index. A higher ‘Beta’ means greater risk.

‘Standard deviation’ is a measure of the dispersion of a stock price or index level from its mean. It is, therefore, a measure of historical volatility. Small-cap stocks tend to have higher standard deviations (i.e. they are more volatile and more risky). Large-cap stocks have lower standard deviations – hence they are less volatile and less risky.

Volatility tends to decline during bull phases, and increases during bear phases. What causes volatility? Often, changes in taxes, interest rates and/or inflation can trigger it off. In the current scenario, the retrospective MAT on capital gains by FIIs was the trigger.

Nifty’s Volatility Index (VIX) measures the implied volatility (IV) of a basket of put options and call options on the Nifty. A higher reading on VIX means higher volatility, and is often associated with stock market bottoms. A lower reading on VIX means less volatility – but do not necessarily correspond with a market top.

If you have managed to read this far (without getting thoroughly confused), here are some do’s and dont’s in volatile markets:

• Don’t sell off in a panic
• Do stay invested in fundamentally strong stocks
• Don’t buy 10,000 shares of 3i Infotech just because it has halved in price from 8 to 4
• Do accumulate large-cap stocks that have corrected more than Nifty

And finally, do invest for the long-term – that means 5 years or 10 years, not 1 year. The longer your investment horizon, the less you will be affected by near-term volatility.

Nifty chart: a mid-week update (May 13 ‘15)

Poor performance of the Indian stock market during the past month, and the lack of clarity on retrospective MAT demands have sent short-term FII funds scurrying to other emerging markets. In a bid to control the damage, all MAT demands on FIIs have been put on hold.

As per provisional figures, FIIs were net sellers of equity worth Rs 1200 Crores during the first three days of this week. DIIs were net equity buyers worth Rs 1900 Crores. Nifty gained about 0.5% over its previous week’s close, but is struggling to remain above its 200 day EMA.

There was mixed news on the economic front. CPI inflation in Apr ‘15 was lower at 4.87% compared to 5.25% in Mar ‘15. However, the IIP number for Mar ‘15 dropped to 2.1%, compared with 4.8% in Feb ‘15 – indicating that industrial growth is yet to pick up. RBI may have no option but to reduce interest rates further.

The 200 day EMA has stayed merged with the lower edge of the ‘support-resistance zone’ between 8180 and 8630 for almost 4 weeks. The daily bar chart pattern of Nifty shows a ding-dong battle between bulls and bears for control – with wide daily points swings.

The good news for bulls is today’s strong trading volumes, and a close near the day’s top after falling to a lower low. The bad news is the overhead resistance being provided by the falling 20 day EMA.

A cross above the May 5 intra-day high of 8356 will form a bullish pattern of ‘higher tops and higher bottoms’. But a more convincing upward move will be a close above the 50 day EMA (at about 8450).

A drop below the May 7 low of 7997 would mean a continuation of the bearish pattern of ‘lower tops and lower bottoms’. How much lower can the Nifty fall? A 5% correction from current levels will take the index down to the next support level of 7840.

Daily technical indicators have corrected oversold conditions but remain in bearish zones, and their upward momentum is weak. MACD has bounced up from the edge of its oversold zone, and trying to cross above its falling signal line. ROC has crossed above its 10 day MA, and looks ready to enter positive territory. RSI and Slow stochastic have moved up from their oversold zones, but are below their respective 50% levels.

Bears still have the advantage, but this doesn’t look like anything other than a technical correction in a bull market due to FIIs rotating their short-term emerging market investments. So, keep your SIPs going, and slowly accumulate fundamentally strong stocks – but don’t forget to maintain stop-losses.

WTI and Brent Crude Oil charts: strong bear market rallies petering off?

WTI Crude chart

The daily bar chart pattern of WTI Crude oil bounced up after touching a low of 42.50 in Mar ‘15. After facing brief resistance at the 54 level, oil’s price rallied to touch a high of 62.50 on May 6 ‘15 – gaining 47% in less than 2 months.

However, oil’s price formed a ‘shooting star’ candlestick pattern (long upper body, open and close near day’s low) – which is often a sign of trend reversal - and corrected down below 60.

The 20 day and 50 day EMAs are rising together, and oil’s price is trading above them. That indicates medium-term bullishness. But the 200 day EMA is falling, and oil’s price is trading below it in a bear market.

In the previous post, a ‘support-resistance zone’ between 47.50 and 54 was marked on the chart. That zone should provide support in case oil’s price corrects some more.

Daily technical indicators are correcting overbought conditions. MACD has crossed below its signal line, and looks ready to drop from its overbought zone. RSI faced strong resistance from the edge of its overbought zone, and has dropped down. Slow stochastic formed a ‘double top’ reversal pattern inside its overbought zone, and dropped sharply to its 50% level.

Some more correction is possible.

On longer term weekly chart (not shown), oil’s price crossed above its 20 week EMA, but is trading below its 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators have corrected oversold conditions, but giving mixed signals. MACD is showing good upward momentum in negative zone. RSI is moving sideways just below its 50% level. Slow stochastic is inside its overbought zone, but has started falling.

Brent Crude chart

The daily bar chart pattern of Brent Crude oil had touched a low of 46 back in Jan ‘15. It has been rallying since then – forming a ‘double top’ at 63 in Feb ‘15, correcting down to 52.50 in Mar ‘15, and then touching a high of 69.50 on May 6 ‘15 – gaining 50% in 4 months.

However, it formed a ‘reversal day’ pattern (higher high, lower close) – which may be the sign of an intermediate top – and corrected down below 65, where it is receiving support from its 20 day EMA.

The 200 day EMA is falling and oil’s price is trading below it in a bear market - despite the strong rally during the past 4 months.

Daily technical indicators are correcting overbought conditions. MACD has crossed below its signal line, and dropped from its overbought zone. RSI faced resistance from the edge of its overbought zone, and is falling towards its 50% level. Slow stochastic has dropped sharply from its overbought zone to its 50% level.

Some more correction seems likely.

On longer term weekly chart (not shown), oil’s price crossed above its 20 week EMA, but is trading below its 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators have corrected oversold conditions, but giving mixed signals. MACD is showing good upward momentum in negative zone. RSI has slipped down after facing resistance from its 50% level. Slow stochastic is about to drop down from its overbought zone.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – May 08, 2015

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 was in volatile mood last week. It rose to touch an intra-day high of 2121 on Mon. May 4 – falling short of its lifetime high of 2126 touched on Apr 27 – only to drop more than 50 points below its 20 day and 50 day EMAs on Wed. May 6.

By Fri. May 8, the index recovered all its losses during the week to close at 2116, with a marginal weekly gain of 8 points. Note that volumes during the two down-days (Tue. & Wed.) were higher than volumes on the three up-days.

The same story had played out a week ago. Volumes during the three down-days (Mon., Wed., Thu.) were higher than volumes on the two up-days. This is a sign of ‘distribution’ – from stronger to weaker hands.

Daily technical indicators are in bullish zones. MACD has moved up to touch its sliding signal line. RSI is oscillating about its 50% level without showing any clear direction. Slow stochastic has moved up sharply above its 50% level after dropping below it.

All three EMAs are rising, and the index is trading above them. But lower volumes on up-days raises serious concerns about the sustainability of the long-term bull market.

On longer term weekly chart (not shown), the index received good support from its rising 20 week EMA, and closed above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but not showing much upward momentum.

FTSE 100 Index Chart

During a holiday-shortened trading week, the daily bar chart pattern of FTSE 100 touched an intra-day high of 7053 on Tue. May 5 but closed 126 points lower. By Thu. May 7, the index dropped another 117 points to an intra-day low of 6810, but recovered all its losses to close at 7047 by Fri. May 8 with a sharp spike in volumes – gaining about 60 points for the week.

Daily technical indicators are in bullish zones. MACD bounced up from its ‘0’ line, but is below its falling signal line. RSI has crossed above its 50% level. Slow stochastic has climbed sharply from its oversold zone.

All three EMAs are rising, and the index is trading above them in a long-term bull market. But bears appear to be quite active – using every rise to sell. Stay invested, but remain cautious.

On longer term weekly chart (not shown), the index dropped below its rising 20 week EMA, but is trading above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but not showing any upward momentum.

BSE Sensex and NSE Nifty 50 index chart patterns – May 08, 2015

Lack of clarity on retrospective MAT on capital gains continued to spook FIIs, who were net sellers of equity worth Rs 4200 Crores during the past week (as per provisional figures). Thanks to DIIs, who were net buyers of equity worth Rs 4850 Crores, both Sensex and Nifty closed marginally higher for the week.

A falling Rupee, rising oil prices, a spate of IPOs in China, tepid Q4 results declared so far were other reasons put forth by analysts to explain the FII pull out. The good news for bulls is that long-term funds are keeping their faith in India’s growth story. If the GST bill gets passed by the Rajya Sabha, it may provide a boost to bullish sentiment.

Q4 results declared by Hindustan Lever and Dabur came as positive surprises for the market. Slow growth in rural markets remain a concern – as does the disappointing results declared by several PSU banks. Credit growth is yet to pick up, and will remain slow unless interest rates come down further.

BSE Sensex index chart

The daily bar chart pattern of Sensex went on a roller-coaster ride during the week – gaining almost 500 points on Mon. May 4, losing 700 points on Wed. May 6, and again gaining 500 points on Fri. May 8.

On Thu. May 7, the index touched an intra-day low of 26424 – its lowest level since Oct ‘14. Note that the 26350 level was tested but not breached. (The significance of the 26350 level was explained in last week’s post.)

The index pulled back to its 200 day EMA after falling below it. Such pullbacks are often used to sell. But there are three technical reasons for not initiating shorts aggressively. First, by not closing below 26350, the breach below the 200 day EMA has not been validated technically – as the index bounced up within the 3% ‘whipsaw’ limit.

Second, all four daily technical indicators are recovering from oversold conditions, and three of them – ROC, RSI, Slow stochastic – are showing positive divergences by failing to touch new lows with the index. Third, the index may have formed a ‘double bottom’ pattern by touching a low of 26469 in Dec ‘14 and 26424 in May ‘15.

The Sensex is poised at a crucial crossroad. A close below 26350 can lead to much lower levels. Any rally is likely to face resistance from the falling 20 day and 50 day EMAs. The scales are still tilted towards the bears – so any buying should be done gradually, with strict stop-losses.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty dropped below its 50 week EMA intra-week to its lowest level since the week ending on Dec 19 ‘14, but bounced up to close marginally higher inside the ‘support-resistance zone’ between 8180 and 8630.

Weekly technical indicators are bearish and looking oversold. MACD is falling below its signal line in positive zone. ROC and Slow stochastic are inside their respective oversold zones. RSI is moving sideways just above its oversold zone.

Some more correction can’t be ruled out. But the formation of a ‘reversal week’ bar (lower low, slightly higher close) has raised bullish hopes that an intermediate bottom is in place.

A convincing close below the 50 week EMA may drop Nifty to much lower levels. Any rally is likely to face resistance from the 20 week EMA and the 8630 level. Refrain from aggressive buying or selling. Technically, Nifty is still in a bull market – so gradual accumulation with strict stop-losses is suggested.

Bottomline? BSE Sensex and NSE Nifty charts are trying to recover from strong bear attacks after touching lifetime highs. Any further correction may lead to trend reversals. Add/hold, but maintain appropriate stop-losses for individual stocks in your portfolios.

Technical updates – L&T and JK Lakshmi Cement

Stocks from the infrastructure sector were in doldrums due to the economic slowdown, and had fallen to two year lows during the second quarter of 2013-14. The ground-swell from Modi’s campaign brought them out of bear markets.

Once the Modi government came to power, many infrastructure stocks rose spectacularly, and provided multibagger gains. However, during the past one year, there has not been much progress in disentangling of stuck projects or initiation of new ones. High interest rate also played spoilsport.

Earnings of infrastructure companies haven’t kept pace with their stock prices. While stock prices haven’t crashed, large-cap and mid-cap stocks are down from their two year highs, and have entered sideways consolidations. The stocks of L&T and JK Lakshmi Cement are good examples.

L&T

After a 1:2 bonus issue in Jul ‘13 (marked by bell on chart), the stock of L&T dropped to a low of 695 on Sep 3 ‘13. From there, it rose to touch a high of 1752 on Jun 9 ‘14 – a huge 150% gain in 9 months.

The stock has since been in a sideways consolidation within a ‘rectangle’ pattern. The stock broke out above the ‘rectangle’ on good volume support and touched a two year high of 1843 on Mar 2 ‘15. But it failed to sustain above the ‘rectangle’. It subsequently formed a ‘head-and-shoulders’ reversal pattern with an upward-sloping neckline within the ‘rectangle’, and corrected below its 200 day EMA.

Daily technical indicators are looking bearish and oversold. A pullback towards the upward-sloping neckline is a possibility. A ‘rectangle’ pattern is usually a continuation pattern – which means the eventual break out should be upwards. But there has already been a failed break out and a reversal pattern formation. It may be better to wait for upcoming annual results to decide whether to buy, sell or hold.

JK Lakshmi Cement

The stock of JK Lakshmi Cement rose from a two years low of 55, touched on Aug 5 ‘13, to a two years high of 407, touched on Jan 19 ‘15 – a whopping 640% gain in less than 18 months. The stock has been consolidating sideways within a ‘rectangle’ pattern with a downward bias since touching its Jan ‘15 high.

The stock is currently receiving twin support from the lower edge of the ‘rectangle’ (at 340) and its 200 day EMA. Despite the correction, valuation looks quite stretched.

Daily technical indicators are in bearish zones, but showing some upward momentum. A technical bounce is a possibility. Sequential QoQ results have shown decline in top and bottom lines for the past three quarters. Check annual results before initiating any action.

Gold and Silver charts: consolidating in bear markets

Gold Chart Pattern

Except for a brief period during Jan ‘15 and early-Feb ‘15, the daily bar chart pattern of gold has spent the better part of 6 months below its falling 200 day EMA in a bear market. All attempts to rally have met with bear selling pressure.

For the past 6 weeks, gold’s price appears to have formed a bullish ‘flag’ pattern. An earlier upward break out from an ‘inverse head and shoulders’ pattern ended in failure due to lack of follow-up buying. Any break out from the ‘flag’ may meet the same fate – unless the break out is accompanied by strong volumes.

Technical indicators are in bearish zones. MACD is below its signal line in negative territory. RSI is below its 50% level, but trying to move up. Slow stochastic has dropped sharply below its 50% level. Any drop below the ‘flag’ can test the Mar ‘15 low of 1140.

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

Silver Chart Pattern

The following comment appeared in the previous post on the daily bar chart pattern of silver: “Silver’s price may again test support from the zone between 15 and 15.50.”

Note that silver’s price bounced up smartly after testing the upper edge of the ‘support zone’, and is trying to remain above its 20 day and 50 day EMAs. However, it closed below its falling 200 day EMA in a bear market.

Technical indicators are looking mildly bullish. MACD is moving above its signal line in negative zone. RSI has crossed above its 50% level, after dropping below it. Slow stochastic faced resistance from the edge of its overbought zone, and is falling towards its 50% level.

On longer term weekly chart (not shown), silver’s price faced resistance from its 20 week EMA, and closed below its three weekly EMAs in a long-term bear market. Technical indicators are in bearish zones, but showing a bit of upward momentum.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – May 01, 2015

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 touched a new intra-day high of 2126 on Mon. Apr 27, but formed a ‘reversal day’ pattern (higher high, lower close) and started correcting. The possibility was mentioned in last week’s post.

After dropping below its 20 day and 50 day EMAs and touching a low of 2078 on Thu. Apr 30, the index recovered and closed above the 2100 level by the end of week on expectations of a postponement of any interest rate hike due to a slowing US economy.

The consolidation within ‘symmetrical triangle’ or ‘ascending triangle’ patterns – mentioned in earlier posts – is being discarded as the index appears to be forming another ‘rising wedge’ pattern.

All three technical indicators are in bullish zones, but failed to touch new highs with the index. Higher volumes on down days is an indication of ‘distribution’. Despite the bearish signals, the index is trading above all three EMAs in a bull market, and continues to touch new highs.

Stay invested – but booking part profits may be a good idea.

On longer term weekly chart (not shown), the index formed a ‘reversal week’ bar (higher high, lower close), but closed above its three 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.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 touched a new high of 7123 on Mon. Apr 27, but failed to sustain above the 7100 level. The index dropped below its 20 day and 50 day EMAs, and briefly breached the lower edge of the large ‘rising wedge’ pattern.

The index bounced up inside the ‘wedge’ by the end of the week, but failed to cross above its 20 day EMA and the 7000 level – keeping bears interested.

Daily technical indicators are looking bearish. MACD is falling below its signal line in positive territory. RSI is trying to climb above its 50% level. Slow stochastic has dropped to the edge of its oversold zone. Note that all three indicators failed to touch new highs with the index.

FTSE is trading well above its rising 200 day EMA in a bull market. But the formation of a large reversal pattern (‘rising wedge’) should be respected. Stay invested, but take some profits off the table.

On longer term weekly chart (not shown), the index touched a new high but formed a large ‘reversal week’ bar and closed below 7000. The index is trading above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but showed negative divergences by failing to touch new highs with the index.

Sunday musings: investment lessons from the Katha Upanishad

The Katha Upanishad uses a dialogue between the Lord of Death, Yama, and a teenaged spiritual seeker, Nachiketa, to provide answers to existential questions about life, death, existence beyond death, and emancipation from the cycle of life and death.

How did this dialogue take place? The sage, Vajasravasa, was performing a special ceremony (yajna) to attain spiritual enlightenment. As part of the ritual, he was giving away his worldly possessions. His young son, Nachiketa, noticed that only sick, weak and barren cows were being donated.

Worried that giving away useless cows would hamper his father’s spiritual progress, Nachiketa urged his father to give him away as well. Vajasravasa ignored his son’s plea. Nachiketa continued to pester his father about being given away. In a fit of pique, Vajasravasa said: “I give you away to Yama.”

In the olden days, the words of a brahmin – even if unintended - was gospel. So, Nachiketa found himself at death’s door. Unfortunately, Yama was away on business. Poor Nachiketa had to wait three whole days without food or shelter.

When Yama finally arrived, he was extremely apologetic for keeping a brahmin spiritual seeker waiting. To atone for his lack of hospitality, Yama offered the young boy three boons – one for each of the days he had to wait.

The first boon asked by Nachiketa was that his father should no longer be angry with his son, and attain peace of mind. The second boon claimed by Nachiketa was to learn the methodology of a fire sacrifice for attaining heaven.

Yama was glad to grant the first two boons, but was stumped by the third claim. The young boy wanted to know about life after death. The Lord of Death tried to dissuade the youngster – telling him that his whole life was ahead of him, and he would gladly provide worldly riches and long life for his yet-to-be-born grandchildren.

But Nachiketa would have none of it. He had no desire for material pleasures and riches, which are of no use because every one will die. The mystery behind death is what interested him. When Yama realised the young boy was serious about receiving his third boon, this is what he explained:

“One has to choose between perennial joy and fleeting pleasures in life. The wise understand that control of the senses and mental discipline – though difficult – can lead to emancipation and perennial joy. The ignorant take the easy way out by running after temporary sensory pleasures, and end up in the eternal cycle of death and rebirth.”

Most small investors have not yet reached the disciplined mindset of Nachiketa. They tend to run after unknown small-caps and hot tips via SMS – hoping to get rich quickly. Some of these stocks may provide fleeting excitement and adrenaline rush by hitting three upper circuits in a row. But when the selling inevitably starts, they get stuck with low-quality stocks – and become long-term investors by default.

Whether one wants to progress spiritually or not, mental discipline and control of the senses will stand in good stead throughout one’s life. It works quite well for investments too. Making a financial plan, an asset allocation plan, steadily building a portfolio of fundamentally strong stocks and debt, and sticking to one’s plans through rain or shine is often a painful and unexciting process.

But once you go through the process, your portfolio gets set almost on auto-pilot. Your plans will tell you when to land (sell) and when to take off (buy). That is as close to investment nirvana that one can get.

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

Finally, a couple of positive triggers for the market – the first good, the second better. Apr ‘15 passenger car sales grew 19% over Apr ‘14 sales, which is hinting at an economic recovery. EPFO will be investing 5-15% of its incremental corpus in equity instruments (probably ETFs). That means anywhere from Rs 4000 to 12000 Crores will be entering the market.

Provisional figures for Apr ‘15 indicate that FIIs were net buyers of equity worth Rs 7800 Crores, and DIIs were net buyers of equity worth Rs 11500 Crores. How come Sensex and Nifty dropped to their lowest levels since the first week of Jan ‘15?

The FII figure was skewed by a huge bulk deal in Ranbaxy shares on Apr 21. During the last 6 trading days of Apr ‘15, FIIs were net sellers of Rs 6000 Crores. Apparently, the MAT uncertainty, poor Q4 results expectations and a depreciating Rupee contributed to the selling spree.

Both Sensex and Nifty look oversold. A technical bounce is likely. Whether it will lead to a resumption of the up move will depend on Q4 results from some of the larger companies. An expected weak monsoon is a sentiment dampener. But unseasonal rains, which have filled up water reservoirs, can help mitigate effects of a weak monsoon.

BSE Sensex index chart

The daily bar chart pattern of Sensex dropped - and closed - below the ‘support-resistance zone’ between 27350 and 28800 and the 200 day EMA (currently at 27150). Any breach of a support zone – and particularly of the 200 day EMA – should be considered seriously.

Technical analysis is based on empirical observations. One of the important observations of any breach of a support (or resistance) level is the ‘3% whipsaw limit’. What does it mean? Quite often, an index (or stock) is seen to reverse directions within this 3% limit.

So, an index (or stock) needs to close more than 3% below a support level (or 3% above a resistance level) for the breach to be technically valid. In this case, 3% below the 200 day EMA is 26335 – which is close to the support level of 26350 (corresponds to the Jul ‘14 top and the Dec ‘14 bottom). Hence, a close below 26350 will trigger a stop-loss set at the 200 day EMA.

There is no hard and fast ‘rule’ that a stop-loss has to be set only at the 200 day EMA. If some one had set the stop-loss at 27350 (lower edge of the ‘support-resistance zone’), the trigger will be a close below 26530. In other words, if you have long positions on the index, the time to sell has not arrived yet.

Technical indicators are looking oversold. Note that RSI and Slow stochastic are showing positive divergences by failing to touch new lows with the index. Some more correction can’t be ruled out, but buying interest can emerge soon.

NSE Nifty 50 index chart

The following remarks appeared in last week’s analysis of the weekly bar chart pattern of Nifty: “A test of support from the lower edge of the ‘support-resistance zone’ and the rising 50 week EMA appears likely.”

Note that Nifty briefly breached the lower edge of the ‘support-resistance zone’ between 8180 and 8630, and tested support from its 50 week EMA before closing exactly at the lower edge of the ‘support-resistance zone’.

Weekly technical indicators are looking bearish, and oversold. MACD is rapidly falling below its signal line in positive zone. ROC has dropped to the edge of its oversold zone. So has RSI. Slow stochastic has entered its oversold zone.

The NSE TRIN (a breadth indicator – not shown) is well inside its oversold zone – where it rarely stays for any length of time.

Is the correction over? May be not yet. However, a technical bounce can happen at any time.

Bottomline? BSE Sensex and NSE Nifty charts are feeling the effects of FII selling, and have breached important support levels. Any further correction may lead to trend reversals. Stay invested till then. Maintain appropriate stop-losses for individual stocks in your portfolios.

Technical updates – Havell’s India and Marico Ltd

One of the ‘rules’ of the stock market – keeping in mind that stock market ‘rules’ are really empirical observations – is that the holdings of small investors in a company’s stock is inversely proportional to the fundamental strength of the stock.

For those who are mathematically challenged, it means that the better the company the lower is the holding of small investors, and vice versa. Two notable examples of this ‘rule’ are the stocks of Havell’s India and Marico Ltd.

A quick look at fundamentals: Havell’s has a net margin of 10%, RoE of 22.5%, debt/equity ratio of 0.07 and P/E of 36.2; Marico has a net margin of 14.7%, RoE of 29.2%, debt/equity ratio of 0.21 and P/E of 44.7. Both have positive cash flows from operations. Share holding of general public? 6.6% in Havell’s, and 3.6% in Marico.

Some may argue that high P/E ratios deter small investors from investing in such stocks. Really? Then how can you explain the 37.5% holding of the general public (which is more than the combined holdings of Indian and foreign promoters) in Punj Lloyd, which has a net margin of 0.1%, RoE of 0.2%, debt/equity ratio of 1.26 and a whopping P/E of 122?

Havell’s India

The 2 years closing chart pattern of Havell’s spent a couple of months (Aug-Sep ‘13) in bear territory before entering a strong bull rally that culminated with a small double-top reversal pattern at 333 (adjusted for 5:1 split) in Dec ‘14.

The stock has been in a sideways consolidation since then – receiving good support from the ‘support-resistance zone’ between 235 and 255. The stock has dropped below its 20 day and 50 day EMAs, but bounced up from its 200 day EMA.

Daily technical indicators are in bearish zones, but showing signs of recovery. This may be a good opportunity to enter/add to existing holdings.

Marico Ltd

The 2 years closing chart pattern of Marico spent a year consolidating sideways within a ‘rectangle’ pattern – finally breaking out upwards with a strong volume surge. It spent the next 2 months in another consolidation within a smaller ‘rectangle’ before rallying strongly to touch a high of 419 on Apr 16 ‘15.

A brief correction down to its rising 20 day EMA has removed overbought conditions, setting the stock up for resuming its up move.

Daily technical indicators are looking bearish, but trying to reverse direction. The stock is in a clear ‘buy on dips’ rally.

(If you are one of the unfortunate souls still mired in Punj Lloyd, get out now and get into Havell’s or Marico. You will thank me after 5 years.)