Causes and consequences of lower commodity prices – a guest post

Globally, prices of various commodities have been on a downward spiral. Prices of oil, gold, steel, copper, aluminium have reduced considerably. That should be good for the Indian economy – as India imports significant quantities of oil and gold.

Reality is a little different. Lower oil prices have shrunk our current account deficit and benefitted oil marketing companies, but not oil explorers like ONGC and Cairn. Lower metal prices have hurt banks that have large exposures to the metals sector, and producers like Tata Steel and Hindalco.

In this month’s guest post, Nishit assesses causes of lower commodity prices and their consequences. Small investors should benefit from this analysis, as it lends perspective to the commodity cycle and would enable them to fine tune their investments.

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Commodity prices are collapsing all over the world. Gold is at a 5 years low, crude oil is very near its lows. Metal prices are tanking. Why is this happening and how can we benefit from this?

First of all, commodity cycles are long drawn out affairs of over 10-12 years between peaks and troughs; which means, prices are not going to rise in a hurry. There may be some corrective spikes but prices would continue to correct over a period of time.

All these years, China was consuming and stockpiling huge hoard of resources building steel and concrete cities which fuelled a real estate boom. China also set up huge capacity of Steel production. All these led the commodity prices many times higher. Now the Chinese economy is floundering; the real estate sector has no buyers and the stock market in China is collapsing.

China has created so much capacity - what does it do with it? Obviously, it cannot be left idle. So, it is now exporting steel priced very close to the cost of production of steel in India. The Government is doing its bit by adding some anti-dumping duties. Overall, the prices remain depressed.

China was accumulating gold reserves and that was the reason price of gold was going up. Now they have started selling some gold leading to lower prices.

Now the bad news. Commodity cycle related companies like steel industry in India will be in doldrums for some time to come. Banks have huge exposure to these companies. These companies make profit equal to just about the interest payment on their loans. Forget about repaying principal amounts.

In India, people rush to buy gold at every price drop. If they buy now they will have to hold it for at least 5-6 years or maybe even longer.

Lower crude oil prices will help the Indian economy. These will also continue for some time to come - at least for this year 2015.

Having an understanding of why commodity prices are correcting will help us capitalise on them.

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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 downward ‘gap’ that formed on the daily bar chart pattern of WTI Crude oil on Jul 6 was a strong signal for bulls to turn tail. The few that decided to stay back managed to fight for 7 days but got badly mauled.

Oil’s price has dropped to test its Apr 1 low of 47 but there is no sign of a bottom formation as yet. The Mar 17 low of 42 may get tested.

Daily technical indicators are inside their respective oversold zones. Oil’s price is trading well below its three falling EMAs in a bear market. There is a possibility of an upward bounce – which bears are likely to use to sell again.

On longer term weekly chart (not shown), oil’s price has been falling like a stone after forming a rare weekly downward ‘gap’, and is trading well below its three weekly EMAs in a long-term bear market. Weekly technical indicators are bearish and looking a little oversold.

Brent Crude chart

The bottom seems to have fallen out of oil’s price after a downward ‘gap’ was formed on Jul 6 ‘15. The following comment appeared in the previous post on the daily bar chart pattern of Brent Crude oil: “Such ‘gap’s tend to act as resistance zones to future up moves.”

Note that oil’s price rose to test resistance from the ‘gap’ on Jul 10, but dropped off like a waterfall and breached the Apr ‘15 low of 54. A drop below 50 can’t be ruled out.

Daily technical indicators are bearish and oversold. Oil’s price is trading well below its three EMAs in a bear market. An upward bounce is a possibility, but it won’t be a buying opportunity.

On longer term weekly chart (not shown), oil’s price has been rapidly falling after forming a rare weekly downward ‘gap’ and is trading well below its three weekly EMAs in a long-term bear market. Weekly technical indicators are in bearish zones and looking a bit oversold.

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

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 rallied past its Jun 22 top of 2130 to touch an intra-day high of 2133 on Jul 20, but fell just short of its lifetime high of 2135 (touched on May 20 ‘15).

Bears mounted a strong attack. The index crashed below its 20 day and 50 day EMAs and closed just below the 2080 level. Though the index is trading above its rising 200 day EMA in a bull market, last week’s strong down-day volumes is a sign of distribution.

The level to watch is the Jul 7 low of 2044. A convincing drop below may lead to a test of the Feb 2 low of 1981.

Daily technical indicators are turning bearish. MACD has dropped from its overbought zone. So has Slow stochastic. RSI has crossed below its 50% level. All three indicators are showing strong downward momentum, hinting at a continuation of the corrective move.

On longer term weekly chart (not shown), the index dropped below its 20 week EMA but is trading above its rising 50 week and 200 week EMAs in a long- term bull market. However, the 20 week EMA may be forming a bearish ‘rounding top’ pattern.

Weekly technical indicators are giving mixed signals. MACD is falling below its signal line in positive zone. RSI has slipped below its 50% level. Slow stochastic has crossed above its 50% level. Strong volumes on down weeks is a sign of distribution. Caution is advised.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 had a brief sojourn in bull territory by closing above all three EMAs on Jul 16 and Jul 20. But the index failed to close above the support-resistance level of 6800.

Bears got encouraged to mount a vicious attack that sent the index plunging below all three EMAs and the 6600 level into bear territory. Good volumes (not shown on chart) during last week’s fall mean bears are in no mood to relent. A test of the Jul ‘15 low of 6430 is on the cards.

Daily technical indicators are looking bearish. MACD is falling towards its rising signal line inside negative zone. RSI has dropped below its 50% level. Slow stochastic is about to cross below its 50% level.

The bearish pattern of ‘lower tops and lower bottoms’ from the lifetime high of 7123 (touched on Apr 27 ‘15) continues.

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

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

Bulls and bears were evenly matched during last week’s trading, with bears wresting a slight advantage. FIIs were net buyers of equity worth Rs 1130 Crores as per provisional figures. DIIs were net sellers of equity worth Rs 1135 Crores.

Commerce and Industry Minister Nirmala Sitharaman, in a written reply to the Lok Sabha, mentioned: "After the launch of 'Make in India' initiative in September 2014, there has been a 48% increase in FDI equity inflows during Oct 2014 to Apr 2015 over the corresponding period last year."

A quick resolution of the contentious retrospective MAT on foreign investors, and reform of draconian labour laws will pave the way for much more FDI inflows.

BSE Sensex index chart

A steep up trend line and negative divergences visible on all four daily technical indicators in last week’s post on the daily bar chart pattern of Sensex had led to the following comments: “Expect a correction towards the blue up trend line. Note that the up trend itself may be under a cloud.”

The index bounced up after successfully testing support from the blue up trend line mid-week, but slid down and closed just below the up trend line by the end of the week.

Note that the breach of the up trend line hasn’t been a convincing one yet, and the index received good support from its rising 20 day EMA. The bulls may have lost last week’s battle, but haven’t lost the war.

Daily technical indicators are in bullish zones, but looking bearish. MACD has slipped down to touch its signal line in positive zone. ROC has dropped to touch its 10 day MA in positive zone. RSI is seeking support from its 50% level. Slow stochastic has fallen down from its overbought zone.

Some more correction/consolidation is likely. Stay invested, or gradually accumulate fundamentally strong stocks.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty crossed above the ‘support-resistance zone’, touching an intra-week high of 8655 but falling just short of the 61.8% Fibonacci retracement level of 8670. Lack of volume support caused a drop towards the blue up trend line.

Weekly technical indicators are giving mixed signals. MACD has merged with its falling signal line just inside positive zone. ROC has corrected down from its overbought zone. RSI is trying to move above its 50% level. Slow stochastic is rising towards its overbought zone.

Nifty continues to trade above its two weekly EMAs in a bull market, but bears are strongly defending the resistance level of 8630. Expect the battle to continue next week, with bears having a slight advantage.

Bottomline? The bar chart patterns of Sensex and Nifty have been in 6 weeks long up trends, but are facing strong bear resistance. Long-term trends remain bullish, so dips are providing adding opportunities. Choose ‘good’ stocks and maintain suitable stop-losses.

Technical updates – Exide and Hero Moto

The automobile industry has been going through a period of transition and upheaval due to the overall economic slowdown. Lower oil prices have helped the industry. But withdrawal of excise duty concessions haven’t.

Commercial vehicle sales have just started to improve after a prolonged slump. Passenger vehicle sales are struggling. Even 2-wheelers (Royal Enfield aside) are troubled by poor rural sales.

It is no surprise that the 2 years closing charts of Exide and Hero Moto are reflecting the challenges being faced by the auto industry.

Exide

Exide’s stock touched a 2 years closing low of 100 in Jan 2014, before embarking on a strong bull phase that took the stock to a 2 years closing high of 198.70 in Jan 2015 – almost doubling in a year.

The stock has been in a correction since then, dropping to a closing low of 141.90 on Jun 12 ‘15 – retracing almost 58% of its bull rally and falling into bear territory.

The stock price has bounced up from the 142 level, but is trading below all its three EMAs. The ‘death cross’ (marked by light blue oval) of the 50 day EMA below the 200 day EMA has technically confirmed a bear market, but the bear phase may not last long.

Technical indicators are turning bearish, which can lead to a test of support from the 142 level. Exide is a market leader. The dip can be used to add, with a stop-loss at 138.

Hero Moto

The stock price of Hero Moto formed a bearish ‘inverted saucer’ pattern from July 2013 to Feb 2014 and closed briefly below all three EMAs in bear territory.

Bulls used the dip to rally strongly. The stock price soared to a 2 years closing high of 3258 on Dec 1 ‘14 – gaining almost 70% from its Feb ‘14 low.

The subsequent correction dropped the stock price below all three EMAs into bear territory. The stock formed a ‘double bottom’ reversal pattern at 2300 and has closed above its three EMAs in bull territory.

All four technical indicators are in bullish zones, but showing negative divergences by touching lower tops (marked by blue arrows). The stock price may correct a bit before resuming its up move.

Nifty chart: a mid-week update (Jul 22 ‘15)

Greece’s debt problem has been temporarily resolved. Iran’s nuclear deal has brought forth mixed global reactions. Gold and oil prices are down again. These are all positive news for the Indian market.

All eyes are now on Q1 (Jun ‘15) results. Infosys positively surprised the market. Asian Paints and HUL declared in-line results. Sun Pharma projected weak numbers and its stock price collapsed.

FIIs are in buying mood again. As per provisional figures, their net buying in equity has touched Rs 3600 Crores in July. DIIs have been net sellers of equity worth Rs 2250 Crores.

The daily bar chart pattern of Nifty has been in an up trend since touching a low of 7940 on Jun 12 ‘15. By touching an intra-day high of 8647 on Jul 21 ‘15, the index has retraced 60% of its fall from the Mar 4 ‘15 top of 9119.

The retracement is close to the 61.8% Fibonacci retracement level (of 8670) – which is the ‘Lakshman rekha’ for a trend reversal. In other words, if Nifty crosses above 8670 with good volume support, bears may pack their bags and go for a vacation.

Note how bears are trying their best to defend the 8630 level, which is the upper boundary of the ‘support-resistance zone’. They know that once 8630 level gets breached, bulls will get encouraged to take the index past 8670.

Are Fibonacci level’s sacrosanct? The answer is: No. Why? Because price charts don’t understand arithmetic. Only technical analysts know the significance of Fibonacci levels, and they tend to buy/sell near those levels.

So, don’t be surprised if the index reaches 8670 and then drops down again. Specially, if volume support is lacking. Note that volumes have remained more or less flat during the up trend from the Jun 12 low of 7940.

Also, recent down days have taller volume bars than those on up days. That is an indication of strong bear presence.

Good news for bulls is that the index tested support from the up trend line for the second time and bounced up. Successful tests of support tends to strengthen a trend line.

Technical indicators are in bullish zones, and showing some upward momentum. All three EMAs are rising, and Nifty is trading above them in a bull market.

Battle lines are clearly drawn. It will be interesting to see who gets the upper hand – retreating bears or charging bulls.

Gold and Silver charts: an update

Gold chart pattern

The daily bar chart pattern of gold collapsed on heavy volumes after breaching the previous support level of 1140, and formed a ‘panic bottom’ at 1080. A ‘dead cat bounce’ took gold’s price to the 1100 level, but the worst may not be over.

A ‘panic bottom’ seldom holds. That means the Jul 20 ‘15 low of 1080 is likely to be breached. Gold’s price has the next support at 1000. What if 1000 level gets breached also? The next support is at 700 – but the probability of going down there is low.

Why the sudden price crash? Some blamed it on the strong US Dollar index. Others pointed to rallies in global stock markets. Dumping by Chinese investors was another reason put forward. Technically, 1180-1200 was a strong support zone. Once that zone got breached, a drop to 1000 has been on the cards.

All three technical indicators are inside their oversold zones, but two of them – MACD, Slow stochastic – are showing positive divergences by touching higher bottoms than those touched in Mar ‘15.

Any attempt at a rally is going to invite bear selling. So, continue to avoid bottom fishing.

On longer term weekly chart (not shown), all three weekly EMAs are moving down, and gold’s price is trading well below them in a long-term bear market. Weekly technical indicators are in bearish zones, but MACD and RSI are showing positive divergences by touching slightly higher bottoms.

Silver chart pattern

The daily bar chart pattern of silver touched a low of 14.50 - breaching the high volume ‘panic bottom’ of 14.60 touched on Jul 7 ‘15, and proving the market adage that ‘panic bottoms seldom hold’.

Note that silver’s price had bounced up sharply after touching the ‘panic bottom’, and crossed above its falling 20 day EMA on Jul 13 – only to lose steam near its falling 50 day EMA. It has been all downhill since then.

Daily technical indicators have entered their respective oversold zones. RSI is showing positive divergence by touching a slightly higher bottom, but don’t expect a big price recovery.

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

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 17, 2015

FIIs have turned positive about the Indian market again. Their net buying in equities crossed Rs 2500 Crores during the past week, as per provisional figures. DIIs were net sellers of equity worth Rs 625 Crores.

Merchandise exports during Jun ‘15 slumped for the 7th month in a row, touching $22.29 Billion against $22.34 Billion in May ‘15 and almost 16% lower than in Jun ‘14. Imports also contracted – which is a sign of slower economic activity.

After widespread rains in Jun ‘15, the monsoon has been deficient during Jul ‘15. A few positive surprises aside, Q1 (Jun ‘15) results are continuing to disappoint. That may put a lid on bullish exuberance.

BSE Sensex index chart

The daily bar chart pattern of Sensex has been in an up trend for the past 5 weeks, which has reversed the down trend from the lifetime high of 30025 touched on Mar 4 ‘15.

All three EMAs have resumed their up moves, and the index has closed well above them at its highest level in 3 months. However, bears are refusing to throw in the towel.

The four technical indicators are in bullish zones, but are showing negative divergences by touching lower tops (marked by blue arrows) while Sensex touched a 3 months high.

Expect a correction towards the blue up trend line. Note that the up trend itself may be under a cloud. Why?

Firstly, the trend line appears a bit too steep. Steep trend lines often get breached easily. Secondly, the up trend may have formed a ‘rising wedge’ pattern, which has bearish implications.

Sensex is rising towards the upper boundary of the ‘support-resistance zone’ between 27350 and 28800. Bears are likely to put up a fight to defend the 28800 level.

The long-term trend remains bullish. Stay invested. Wait for a likely dip to add/buy.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty has extricated itself from a strong 4 months long bear hug, but bulls haven’t quite regained full control.

The index is facing resistance from the upper edge of the ‘support-resistance zone’ between 8180 and 8630. Also, higher volumes during recent down weeks is a sign of active bear presence.

Weekly technical indicators are turning bullish. MACD has entered positive zone and is touching its falling signal line. ROC has moved up to the edge of its overbought zone. Slow stochastic has climbed above its 50% level. RSI is looking a bit bearish by moving sideways below its 50% level.

Nifty is trading above its two weekly EMAs in a bull market. Bears are likely to remain active as long as the index trades below its lifetime Mar ‘15 high of 9119.

Bottomline? The bar chart patterns of Sensex and Nifty have been in 5 weeks long up trends, and look poised to touch new highs in the not-too-distant future. The upward path may not be smooth because of technical potholes and ditches. Long-term trends are bullish, so dips can be used to add.

(Note: Are you looking to add good quality mid-cap and small-cap stocks to your portfolio? Subscribe to my Monthly Investment Newsletter. A limited number of paid subscriptions are being offered till July 21, 2015.)

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

CPI inflation touched a 9 months high of 5.4% in Jun ‘15 - thanks to higher food prices. In May ‘15, CPI number was at 5.01%. In Jun ‘14, it was much higher at 6.77%.

WPI inflation remained flat at –2.4%, but the rising CPI number justified RBI Governor’s hawkish stance on not reducing interest rates further.

Narendra Modi’s ‘Make in India’ clarion call is beginning to show some traction. Mahindra group has signed a deal with AirBus for jointly manufacturing military helicopters. Tata group has signed an agreement with Boeing for jointly manufacturing drones and other products.

As per provisional figures till Jul 14 ‘15, FIIs have been net buyers of equity worth Rs 900 Crores, while DIIs have been net sellers of equity worth Rs 870 Crores. Nifty has broken out of its 4 months long down trend, and is consolidating before moving higher.

The following comment appeared in last week’s post on the daily bar chart pattern of Nifty: “Some more correction, and a drop below the trend line, may be on the cards but bulls can be expected to fight back soon.”

Nifty pulled back to the down trend line, but bounced up after receiving good support – providing an entry opportunity to those who did not (or could not) buy during the earlier break out above the down trend line.

All three EMAs are rising again, and Nifty is trading above them. Bulls are regaining control, but still have some work to do. The index is consolidating within the ‘support-resistance zone’ between 8180 and 8630. A convincing move above 8630 will restore full control to bulls.

Three of the four daily technical indicators are turning bullish again. MACD has started moving up after touching its signal line in positive zone. RSI has bounced up from its 50% level. Slow stochastic is climbing towards its overbought zone. Only ROC is looking bearish by sliding below its falling 10 day MA in positive zone.

Higher volumes on recent down days indicate that bears are still active – and may continue to remain so during Q1 (Jun ‘15) results season.

International concerns have been taken in its stride by Nifty. Some reports suggest a slowdown in monsoon progress across certain parts of the country.

Price fluctuations are part and parcel of the stock market environment. Be cautious, but not afraid.

Increasing the lot size of derivative contracts from Rs 2 Lakh to Rs 5 Lakh is a good move by SEBI. It should deter small investors from burning their hands in F&O trading.

Nifty may be in the midst of forming a bullish cup-and-handle pattern, which can take another 2-3 months to complete. If the pattern does play out (and there is no certainty that it will), the index will have a minimum upward target of 10300 by the end of this year.

(Note: Are you looking to add good quality mid-cap and small-cap stocks to your portfolio? Subscribe to my Monthly Investment Newsletter. A limited number of paid subscriptions are being offered till July 21, 2015.)

WTI and Brent Crude Oil charts: downward ‘gaps’ extinguish bullish hopes

WTI Crude chart

The daily bar chart pattern of WTI Crude had been consolidating sideways during May and Jun ‘15, raising bullish hopes of an upward break out.

A resolution of Greece’s debt problems – though delayed – led to a drop from the consolidation zone between 57 and 62 with a downward ‘gap’.

The ‘gap’ is likely to act as a resistance zone to future up moves. Even if the ‘gap’ gets filled – fully or partly – the down move is expected to resume thereafter.

Daily technical indicators are looking bearish and a bit oversold. MACD is falling below its signal line in negative zone. RSI is at the edge of its oversold zone. Slow stochastic is trying to emerge from its oversold zone.

A nuclear deal with Iran concluded today after protracted negotiations. With economic sanctions likely to be removed soon, Iranian oil supply is going to put downward pressure on prices in an already oversupplied market.

On longer term weekly chart (not shown), oil’s price dropped below its 20 week EMA with a downward ‘gap’, and is trading well below its three weekly EMAs in a long-term bear market. Weekly technical indicators are in bearish zones and showing downward momentum.

Brent Crude chart

The daily bar chart pattern of Brent Crude oil had been consolidating sideways with a downward bias during May and Jun ‘15 within a ‘falling wedge’ pattern which usually has bullish implications.

A resolution of Greece’s debt problem caused a drop from the pattern with a downward ‘gap’ on Jul 6 ‘15 that extinguished all bullish hopes.

Note that an earlier downward ‘gap’ on the chart – formed back in Nov ‘14 – remains unfilled till date. Such ‘gap’s tend to act as resistance zones to future up moves.

The Iranian nuclear deal announced today will be followed by removal of economic sanctions. Iranian oil supply will add to the existing glut in the oil market.

Daily technical indicators are in bearish zones but not showing any signs of upward momentum.

On longer term weekly chart (not shown), oil’s price formed a downward ‘gap’ below its 20 week EMA and is trading well below its three weekly EMAs in a long-term bear market. Weekly technical indicators are in bearish zones and showing downward momentum.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jul 10, 2015

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 tested support from its 200 day EMA, and even closed for a day below it (for the first time since Oct ‘14) before bouncing up. At the time of writing this post, the index is trading above its three EMAs in bull territory.

Is the correction from the small ‘double top’ at 2134 (touched on May 20 & 21 ‘15) over? Not just yet.

The Greece debt problem has been swept under the carpet for the time being. China’s state intervention has averted a stock market crash. Less than impressive growth in USA means interest rates are unlikely to be raised in the near term.

That is enough impetus for bulls to fight back. Daily technical indicators are showing signs of upward momentum. RSI has managed to cross above its 50% level into bullish zone. MACD and Slow stochastic remain in bearish zones.

Sliding volumes during the recent bounce up doesn’t augur well for bulls. Without volume support, the rally may fizzle out. A convincing move above 2130 is required for the index to negate the bearish pattern of ‘lower tops and lower bottoms’.

On longer term weekly chart (not shown), the index dropped below its 20 week EMA but bounced up after receiving good support from its 50 week EMA, and is trading well above its rising 200 week EMA in a long- term bull market.

Weekly technical are looking a little bearish. MACD is falling below its signal line in positive zone. RSI is seeking support from its 50% level. Slow stochastic has dropped below its 50% level. Strong volumes on down weeks is an indication that bears remain active.

FTSE 100 Index Chart

The following comment appeared in the previous post on the daily bar chart pattern of FTSE 100: “A last-minute resolution of Greek’s sovereign debt problems may act as a positive trigger for bulls.”

The Greek debt resolution took longer than expected – long enough for the index to plunge below 6450 deep inside bear territory.

Expectations of a solution led to a smart upward bounce, and a pullback towards the 200 day EMA. Note that the 50 day EMA has crossed below the 200 day EMA. However, the ‘death cross’ that technically confirms a bear market hasn’t been a convincing cross yet.

That may encourage bulls to continue the rally. Sliding volumes (not shown on chart) during last week’s bounce is an indication that the index may not be able to overcome overhead resistances from the 50 day and 200 day EMAs.

Daily technical indicators are showing upward momentum. MACD has crossed above its signal line in negative zone. RSI and Slow stochastic have moved up to their respective 50% levels.

On longer term weekly chart (not shown), the index dropped sharply below its 50 week EMA and tested support from its rising 200 week EMA before bouncing up, and technically remains in a long-term bull market. Weekly technical indicators are in bearish zones.

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 10, 2015

News on the manufacturing front remains indifferent. The IIP number for May ‘15 was 2.7%, compared with 5.6% in May ‘14. The Apr ‘15 number was revised downwards to 3.4% (from 4.1%).

As per provisional figures, FIIs and DIIs were both net sellers of equity during the past week. FII net selling was worth Rs 900 Crores; DII net selling totalled Rs 180 Crores. Sensex and Nifty closed lower for the week.

A Greek bailout is being negotiated. China’s stock market intervention has stopped the fall. Monsoon rains have been fairly widespread. Three concerns for the market are out of the way.

Q1 (Jun ‘15) results will provide the next trigger. Expectations of good results are muted. Any positive surprises from companies will boost their stock prices.

BSE Sensex index chart

The daily bar chart pattern of Sensex crossed and closed above the 28100 level (which is at the middle of the ‘support-resistance zone’ between 27350 and 28800) during the first two days of the week, but formed a small ‘reversal day’ pattern on Jul 7 ‘15.

The subsequent correction found good support from the 50 day EMA. The index has formed a bullish pattern of ‘higher tops and higher bottoms’ from the low of 26307 (touched on Jun 12 ‘15).

Daily technical indicators have corrected overbought conditions, and are looking a bit bearish. MACD has just crossed below its signal line in positive territory. ROC is below its falling 10 day MA, and is trying to emerge from its negative zone. RSI and Slow stochastic have slipped below their respective 50% levels.

Expect some consolidation as the market digests Q1 results.

NSE Nifty 50 index chart

The following comment was made in last week’s post on the weekly bar chart pattern of Nifty: “The possibility of a pullback towards the down trend line (or even a drop below it) can’t be ignored.”

The index did pullback to the down trend line, and formed a ‘reversal week’ pattern (higher high, lower close) – breaking the sequence of three straight higher weekly closes.

Strong volumes on down weeks show that bears are active. However, the index is trading above its rising 50 week EMA in a bull market. That means, the pullback is providing an adding opportunity.

Weekly technical indicators are giving mixed signals, hinting at some consolidation before the up move can resume. MACD and RSI are in bearish zones, while ROC and Slow stochastic are in bullish zones.

Bottomline? The down trends on BSE Sensex and NSE Nifty charts have ended, but bears are still active. Both indices are back in bull territories. Stay invested, or add to existing portfolios. If you are planning to enter the market for the first time, choose a good balanced fund and gradually build up your capital. Leave stock-picking to expert fund managers.

(Note: Are you looking to add good quality mid-cap and small-cap stocks to your portfolio? Subscribe to my Monthly Investment Newsletter. A limited number of paid subscriptions are being offered till July 21, 2015.)

Technical updates – Cairn India and Castrol

After crossing the $105 per barrel mark back in Jun ‘14, WTI Crude oil price fell off a cliff. It touched a low near $40 in Mar ‘15, but bounced up above $60 in May ‘15 – where it consolidated for the next 2 months. Oil’s price has started sliding again.

Lower oil price is good for India’s current account deficit. It is also good for oil marketing companies, and value-added producers like Castrol India. But it is not so good for oil drillers like ONGC and Cairn India.

A look at the 2 years closing charts of Cairn India and Castrol (below) clearly shows which company is benefitting and which one is getting affected by lower oil prices. Cairn India is further hampered by an impending amalgamation with Vedanta.

Cairn India

Cairn India’s stock price touched a 2 years closing high of 382.75 on Jun 10 ‘14 – coinciding with the high touched by WTI Crude oil. It has been in a down trend ever since – failing to match the brief recovery in oil’s price during Mar-Apr ‘15.

In Aug ‘14, the 50 day EMA crossed below the 200 day EMA – the ‘death cross’ (marked by light blue oval) technically confirming a bear market. Since then, all three EMAs have been moving down and Cairn’s stock price is trading below them.

The stock price touched a 2 years low of 165 on Jul 9 ‘15, but three of the four technical indicators – MACD, RSI, Slow stochastic – touched higher lows (marked by blue arrows). The positive divergences can lead to an upward bounce. Use it to exit - in case you are holding the stock.

Castrol

The stock price of Castrol India consolidated sideways with a downward bias from Jul ‘13 to May ‘14 before spiking up with good volumes in Jun ‘14 – about the time WTI Crude oil price started correcting.

The stock closed at a 2 years high price of 532.90 on Dec 5 ‘14, but has been in a down trend (marked by blue down trend line) since then. After slipping below all three EMAs into bear territory, the stock appears to have found a bottom at 427.

The three EMAs are in close proximity of each other – a condition often followed by a sharp price move. Since the stock is trading above its three EMAs in a bull market, the price move is likely to be upwards.

If the stock price breaks out above the down trend line with good volumes, it will be a buying opportunity. If volume is insufficient during the upward break out, expect the stock price to pullback towards the down trend line – which will be another buying opportunity. Keep a stop-loss at 414.

(Note: Castrol’s chart is an example of the benefits of a ‘buy and hold’ strategy for quality stocks. The positive price action happened during 6 months – from Jun to Nov ‘14. The balance 18 months during the 2 years period, the stock price consolidated with a downward bias.)

Nifty chart: a mid-week update (Jul 08 ‘15)

Just when the Greek debt tragedy appeared to be fading out from TV headlines, a Chinese typhoon blew over global stock markets and smashed down share prices.

A Chinese stock market bubble was building for some time due to excessive leveraged speculation. The Shanghai Composite was in a downward trajectory any way, so why the sudden panic?

Expected slowdown in the Chinese economy led to a crash in global commodity prices that had a cascading effect on all markets. FIIs turned net sellers of equity today after 5 straight sessions of net buying.

The daily bar chart pattern of Nifty crossed above the blue down trend line and headed towards the upper edge of the ‘support-resistance zone’ between 8180 and 8630 - after taking the Greek referendum’s ‘No’ vote in stride.

But the index formed a small ‘reversal day’ pattern (higher high, lower close) on Tues. Jul 7, followed by a ‘gap down’ day today that dropped the index to seek support from its 20 day and 50 day EMAs and the blue down trend line.

The break out above the down trend line last week was not accompanied by a significant increase in volumes. That had opened up the possibility of a pullback towards the down trend line.

The Greek and Chinese turmoil provided bears with just the right opportunity to assert themselves.

Overbought conditions visible on technical indicators was another warning of a consolidation or correction. Some more correction, and a drop below the trend line, may be on the cards but bulls can be expected to fight back soon.

The index is trading above its rising 200 day EMA in a bull market. That means pullbacks and dips are adding opportunities.

(Note: If you already have a stock portfolio, and are looking to add good quality mid-cap and small-cap stocks, subscribe to my Monthly Investment Newsletter. Paid subscriptions are being offered till July 21, 2015.)

Gold and Silver charts: slip slidin’ away

Believe we're gliding down the highway
When in fact we're slip slidin' away – Paul Simon

Gold Chart Pattern

After briefly crossing above its three EMAs into bull territory and touching a high of 1232 on May 18 ‘15, the daily bar chart pattern of gold resumed its down trend.

A bearish pattern of ‘lower tops and lower bottoms’ has formed. Gold’s price is trading below all three EMAs in a bear market that is entering its 34th month.

Daily technical indicators are looking bearish. MACD is below its signal line in negative zone. RSI is below its 50% level. Slow stochastic is inside its oversold zone.

Avoid bottom fishing. Volume bars clearly show that brief spells of buying are being immediately followed by selling.

On longer term weekly chart (not shown), all three weekly EMAs are moving down, and gold’s price is trading below them in a long-term bear market. Weekly technical indicators are in bearish zones.

Silver Chart Pattern

The following comments appeared in the previous post on the daily bar chart pattern of silver: “The bullish pattern of ‘higher tops and higher bottoms’ from the Mar ‘15 low of 15.25 remains in force – but may not be for long. Bears are still ruling the chart.”

Silver’s price has dropped below the Apr 24 ‘15 low of 15.55 and touched a low of 15.40 on Jun 30 ‘15 – negating the bullish pattern and establishing a bearish pattern of ‘lower tops and lower bottoms’.

All three EMAs are falling and silver’s price is trading below them in a bear market.

Daily technical indicators are in bearish zones, but showing some signs of upward momentum. MACD is trying to move up towards its signal line in negative zone. RSI has bounced up strongly from the edge of its oversold zone. Slow stochastic is trying to emerge from its oversold zone.

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

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 03, 2015

A dark cloud hanging over global stock markets is the Greek referendum on whether to accept austerity measures proposed by ECB and IMF, or not. As per opinion polls, there is a 50-50 split between ‘Yes’ and ‘No’ votes.

The Greek government has been campaigning for a ‘No’ vote – which can have repercussions on the stability of the Euro zone. Some of the backlash may temporarily affect the Indian market, though the possibility of a ‘No’ vote has been largely discounted.

Reports of increase in government spending, unlocking of stalled projects, a decent monsoon so far, announcements of big-ticket schemes like Smart Cities, Digital India, solar power and irrigation helped to boost bullish sentiments.

FIIs turned net buyers of equity worth Rs 1000 Crores during the first three trading days of Jul ‘15, as per provisional figures. DIIs turned net sellers – with their selling totalling just under Rs 400 Crores. Both Sensex and Nifty closed higher for the third week in a row.

BSE Sensex index chart

In last week’s post on the daily bar chart pattern of Sensex, “…a pullback to the down trend line or, even below it to the 200 day EMA” was mentioned as a possibility. The index did just that on Mon. Jun 29 ‘15, but bounced up to close above its three EMAs and the down trend line in bull territory.

The 28100 level – which is right in the middle of the ‘support-resistance zone – is providing a bit of resistance. This is one of those ‘coincidences’ that frequently appear on price charts, and make technical analysis an interesting pursuit.

The 20 day EMA is about to cross above the 50 day EMA. All three EMAs have started rising, and the index is trading above them in a bull market. There may be technical headwinds ahead, but the correction from the Mar ‘15 lifetime high seems to be over.

Daily technical indicators continue to look bullish and overbought. MACD is rising above its signal line towards overbought territory. ROC is looking a little weak by correcting from its overbought zone and crossing below its 10 day MA. RSI and Slow stochastic are well inside their respective overbought zones, but not showing much upward momentum.

The index appears to be waiting for the outcome of the Greek referendum and Q1 (Jun ‘15) results to resume its up move. Overbought conditions may lead to some consolidation or correction.

NSE Nifty 50 index chart

The following remarks appeared in last week’s post on the weekly bar chart pattern of Nifty: “Expect another interesting fight for dominance between bulls and bears next week – with bulls having a slight advantage.”

Note that the index dropped lower during the week to test support from the lower edge of the ‘support-resistance zone’, but bounced up strongly to close well above its two weekly EMAs and the blue down trend line.

Is it time to celebrate for bulls? The week’s smaller volume bar suggests otherwise. Any upward break out (in this case, above the down trend line) should be accompanied by an increase (and not a decrease) in volumes.

The possibility of a pullback towards the down trend line (or even a drop below it) can’t be ignored. Since the index is trading above its two weekly EMAs in a bull market, any pullback can be used as an adding opportunity.

Weekly technical indicators are turning bullish. MACD is started rising towards its falling signal line, and looks poised to enter positive zone. ROC is showing strong upward momentum by crossing above its 10 week MA and entering positive territory. RSI has just managed to move above its 50% level. Slow stochastic is expected to follow suit.

Bottomline? The 4 months long down trends on BSE Sensex and NSE Nifty charts appear to have ended. Bears are still not out of the game, but are fighting a losing battle. Both indices are back in bull territories. Stay invested. If you have some savings and are itching to enter the market for the first time, start a SIP in a good balanced fund and build up your capital. The stock market can be an expensive teacher.

(Note: If you already have a stock portfolio, and are looking to add good quality mid-cap and small-cap stocks, subscribe to my Monthly Investment Newsletter. Paid subscriptions are being offered till July 21, 2015.)

How price ‘anchoring’ can hurt stock market returns

Price ‘anchoring’ is a cognitive bias. That means, your mind tends to play tricks with you at certain price points. You tend to take decisions based on perceptions or gut feelings that are often illogical.

Next time you visit a shoe shop, take a close look at the price tags on different shoe models. You will come across price tags of Rs 399 or Rs 999 or Rs 1499 or Rs 2999. Is the shop owner trying to fool you?

The answer is: Yes. Apparently, the number 99 has a strange effect on the mind. You know it is less than a 100, and that is some how very effective in closing a sale!

How does this bias work in the stock market? Here are three examples.

1) You have received a ‘tip’ about a bargain stock from a friend and decide to enter it at a price of Rs 32. It had touched a high of Rs 50 a couple of weeks back, but had corrected since then. Your friend says it can’t go any lower.

As often happens, the stock continues its correction after you buy. You wait for a month or two, but the stock fails to cross above Rs 25. You decide to hold on to get back your ‘buy price’. The stock moves up to Rs 28 – but you refuse to sell.

You get ‘anchored’ to your ‘buy price’. Only you know about this price. The market doesn’t, nor does it care. The stock falls below Rs 10 and stays there for the next 3 years. You finally sell it at Rs 6.

2) You do a decent amount of research and prepare a short list of stocks you wish to buy. You start tracking the stocks regularly. You are particularly keen on a stock that moved from Rs 50 to Rs 100, but is hovering around the Rs 85 level.

Finally, the stock dips to Rs 75 and you jump in to buy a decent quantity. You decide to be smart, and sell half your holdings when the stock hits Rs 150. The balance of your holding would then become ‘free of cost’.

Clever strategy – except that the stock refuses to move past Rs 135. You keep holding, but the stock drops to Rs 120. So, you hold some more – and it rises to Rs 135 again. But your mind is ‘anchored’ to Rs 150, and you don’t sell.

After a while (and by this time 2 years may have gone by), the stock drops to Rs 100. You sell off – happy to make a 33% profit on your ‘buy price’. But you lost out on a chance to make 80% profit by not selling at Rs 135.

3) You decide to enter the NBFC segment and short-list a stock trading at Rs 70. The company is a subsidiary of a well-known engineering giant. You decide to get a confirmation from an analyst friend before entering.

The friend suggests a different stock belonging to a less known business house that is trading at Rs 900. But your mind gets ‘anchored’ to the ‘cheaper’ price because Rs 70 is much less than Rs 900.

You think, with limited resources, you can only buy 30 shares at Rs 900. But you can buy 400 shares for Rs 70. So, you ignore your friend’s advice and buy the Rs 70 stock.

What you fail to realise is that the Rs 70 stock is actually not ‘cheap’ at all, because it is trading at a high P/E of 44; whereas, the more ‘expensive’ Rs 900 stock is trading at a much lower P/E of 16.

Sound familiar? It should. Most small investors end up making such errors in decision making due to their cognitive bias. (Yours truly is no exception. Been there, done that.)

The trick to making money in the stock market is to learn from your mistakes by documenting them and not repeating them.

Nifty chart: a mid-week update (Jul 01 ‘15)

FIIs were net sellers of equity for the second month in a row. Their net selling in Jun ‘15 touched Rs 8200 Crores – the highest net selling during a month since Jun ‘13.

DIIs more than compensated by net buying of equity worth Rs 12000 Crores. That may explain the 500 points rally from the Jun 12 ‘15 low of 7940, which has taken the index above the blue down trend line.

After failing to meet IMF’s debt repayment deadline of Jun 30 ‘15 and threatening to leave the Euro zone, Greece’s leaders toned down their rhetoric and agreed to a bailout offer that turned global stock markets bullish.

The monsoon delivered surplus rains during June, but has weakened during the last couple of days – raising the spectre of deficient rains during Jul ‘15.

Auto companies like Maruti, Hyundai and Tata Motors showed marginal growth in sales during Jun ‘15, but sales of M&M and Toyota slipped. Two-wheeler sales were higher except for HeroMoto, which had flat sales.

The daily bar chart pattern of Nifty briefly crossed above the blue down trend line on Thu. Jun 25 ‘15, with decent volume support, but failed to attract follow-up buying from bulls.

The sovereign debt concerns of Greece led to a sharp drop of the index below its three EMAs - to the lower edge of the ‘support-resistance zone’ during Monday’s trading.

Bulls used the opportunity to buy. The index has crossed above its three EMAs and the down trend line to close today at its highest level since May 22 ‘15.

The index has formed a bullish pattern of ‘higher tops and higher bottoms’ after touching its Jun ‘15 low of 7940.

However, daily technical indicators are again looking overbought. Some consolidation can be expected before the index can gather the necessary momentum to cross above the ‘support-resistance zone’.

Note that Nifty has formed an ‘inverse head and shoulders’ pattern with a downward sloping neck line. Since the pattern has formed at the end of a down trend, it is most probably a ‘bottom reversal’ pattern.

The downward sloping neck line has been breached in today’s trading. Since there was no significant rise in volumes - which would have technically validated the breach - bears may engineer a pullback to the down trend line.

Stay invested, or use any dips to add to existing portfolios.