Stock Index Chart Patterns: S&P 500 and FTSE 100 – Feb 26, 2016

S&P 500 index chart

The daily bar chart pattern of S&P 500 crossed above its 50 day EMA and touched a high of 1963 on Feb 26 '16, but formed a small 'reversal day' pattern that can end the rally from the Feb 11 low of 1810.

By moving above the Feb 1 top of 1947, the index has met the first technical condition of a 'double bottom' reversal pattern. However, falling volumes raises questions about the sustainability of the rally from the low of Feb 11.

Daily technical indicators are looking bullish. MACD is rising above its signal line and entered positive zone. RSI is above its 50% level, but moving sideways and not showing much upward momentum. Slow stochastic is well inside its overbought zone.

The index gained 1.6% on a weekly closing basis, but is trading below its sliding 200 day EMA in bear territory. Expect sellers to come to the fore soon. 

On longer term weekly chart (not shown), the index closed 130 points above its 200 week EMA, but below its falling 20 week and 50 week EMAs for the 8th week in a row. The long-term bull market is still intact. Weekly technical indicators are in bearish zones and showing some upward momentum.

FTSE 100 index chart

The daily bar chart pattern of FTSE 100 shows a spirited fight back by bulls. After dropping below its 20 day and 50 day EMAs on Wed. Feb 24 '16, the index bounced up to test its Feb 1 top of 6115 on Fri. Feb 26.

By closing at 6096, the index gained nearly 2.5% on a weekly closing basis. It was the highest close since Jan 5 '16. The index also broke out above the downward channel within which it was trading for the past 4 months.

Bulls may have exhausted all their ammunition during the rally from the Feb 11 low of 5499.50. At the time of writing this post, the index has been in corrective mode.

Daily technical indicators are looking bullish. MACD is above its signal line and has entered positive zone. RSI is above its 50% level, but its upward momentum has stalled. Slow stochastic is looking overbought.

The index is trading more than 150 points below its falling 200 day EMA in a bear market. Bears are likely to attack at any time. 

On longer term weekly chart (not shown), the index is trying to overcome resistance from its 20 week EMA and is trading well below its 50 week and 200 week EMAs. The 50 week EMA has crossed below the 200 week EMA - the 'death cross' technically confirming a long-term bear market. Weekly technical indicators are showing some upward momentum, but MACD and RSI are still in bearish zones.

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 26, 2016

FIIs were net sellers of equity for the 4th month in a row, and have been sellers in 6 of the last 7 months. Their net selling during Feb '16 has nearly touched Rs 10500 Crores. 

DIIs were net buyers of equity worth Rs 9000 Crores, as per provisional figures. That wasn't enough to prevent both Sensex and Nifty from touching new 52 week lows during the month, and losing 2.5% on a weekly closing basis.

The Railway Minister tried to walk a fine line between a populist and a realistic budget. The result was a bit of a damp squib, and questions were raised about resource generation for funding new projects.

The budget session has started on a combative mode, with the opposition pillorying the government for its ham-handed approach towards subduing various protest movements. There are very little expectations from the budget on Feb 29 - which may turn out to be a contraindicator for a market rally. 

BSE Sensex chart pattern

The following comments were made in last week's post on the daily bar chart pattern of Sensex: "Bears may use the pullback to sell. Sensex is likely to test the Feb 12 low, and even breach it if budget proposals disappoint the market."

As expected, bears (i.e. FIIs) used the pullback towards the 23840 level (marked by 2nd red arrow) to sell. The index stopped short of testing the Feb 12 low of 22600 - thanks to short covering on Fri. Feb 26 '16.

On the Sensex chart above, green arrows point to intermediate bottoms that acted as support levels, which subsequently turned into resistance levels (marked by red arrows).

Three of the daily technical indicators - MACD, RSI, Slow stochastic - are in bearish zones and not showing any upward momentum. ROC is the only one looking bullish by crossing above its 10 day MA and managing to enter positive zone.

The door remains open for bears to push the index down to a new 52 week low, if the budget doesn't contain any market-friendly proposals.

All three EMAs are falling, and the index is trading below them in a bear market. Sensex has closed below its 200 week EMA (not shown) for the second time in three weeks - keeping long-term bulls on tenterhooks.

NSE Nifty 50 chart pattern

The weekly bar chart pattern of Nifty is showing an interesting, but not surprising, phenomenon. Resistance levels that are almost 2 years old (intermediate tops marked by the two red arrows on the left of the chart) got breached on the up side and subsequently turned into support levels (marked by green arrows).

The support levels (intermediate bottoms) were breached on the down side almost 2 years later and then turned into resistance levels (marked by red arrows on the right of the chart).

Reminds me of Miles Davis' famous composition: So what? Just a reminder that calculated levels - like Fibonacci retracement levels - tend to be less reliable than actual support/resistance levels.

What if a Fibonacci retracement level coincides with a previous support level? For e.g. the 61.8% retracement level of the entire 4000 points rise in Nifty (from 5119 in Aug '13 to 9119 in Mar '15) is 6647, which happened to provide support to the index during Apr. '14.

Well, 6647 is likely to be a stronger support level (may be even a turning point) than the support/resistance level of 6869 (corresponding to the Feb 12 low).

In other words, if 6869 gets breached after the budget announcements, Nifty is likely to find strong support in the zone between 6647 and 6869. Remember that technical levels are never exact, but mostly approximate.

What if 6647 also gets convincingly breached on the downside? All bullish bets should be taken off the table.

Weekly technical indicators are in bearish zones, and looking oversold. That doesn't mean Nifty can't correct some more. The index closed below its 200 week EMA (not shown) again after two weeks, but touched a higher bottom - keeping faint bullish hopes of a revival alive.

Bottomline? Chart patterns of Sensex and Nifty have again closed below their respective 200 week EMAs. The threat to long-term bull markets has been renewed. Remain extremely cautious, but keep faith in your investment plans.

Will the Budget be a non-event this year? - a guest post

As Q3 results season comes to an end in February every year, business newspapers, their online counterparts and TV channels try to build up a feverish hype around the annual budget.

It is a mad rush to grab readership and viewership, with experts of all shapes and sizes expounding their views about the kind of proposals the Finance Minister should or should not announce.

In this month's guest post, Nishit mentions some of the important factors that are affecting the economy and the stock market, which may turn the budget into a non-event this year. 

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It is time for the annual ritual of the Union Budget. Every year the Budget is hyped up to be the magic wand that solves all the fiscal problems of the country. This time things are a bit different. Global headwinds are ensuring that there is not much optimism among market players.

Domestically, the passage of the key reform bill of GST will outweigh anything which the Budget has to offer. If the GST bill does not go through, the market will continue its journey downwards. If the GST bill gets passed, the Nifty may well rally by 1000 points.

There are calls for the Finance Minister to avoid further fiscal consolidation and the deficit target of 3.9% of GDP with more spending to stimulate the Indian economy. The danger of doing that is FIIs may increase their selling.

The second factor that is hampering the markets in India is the selling by Sovereign Funds of the oil producing countries. All these years, they had pumped in money as investments from their surplus earnings due to high oil prices. Now they are liquidating their investments.

The third factor is the Banking Sector NPAs. With the Reserve Bank cracking the whip, it is time for the Banking Sector to feel the pain. 'Crony capitalism' of several decades is getting exposed. The Banking and Finance Sector constitutes almost 30% of major Indices.

With all these extraordinary factors, the Budget has been reduced to a non-event this year. Unless the Finance Minister pulls out some rabbit out of his hat, we are going to see the stock market stuck in a range.

The most likely outcome of the Budget is a further increase in Service Tax from 14.5% to 16%, which is close to the expected GST rate, and also some exemptions for the Individual Tax payer. Nothing more and nothing less.

GST is the game changer and if the Government manages to push it through then it would give a major sentiment boost to the market, else status quo will continue till India Inc start reporting better earnings.

These are the some of the reasons why there has not been a pre-budget rally this year.

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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 Oil chart

The daily bar chart pattern of WTI Crude oil dropped to touch an intra-day low of 26 - a level last seen 13 years ago - but bounced up sharply to close at the level of the 50 day EMA.

Positive divergences visible on MACD and RSI, which touched higher bottoms while oil's price dropped lower, preceded the technical bounce. All three technical indicators are looking bullish and showing upward momentum.

Speculation about falling US shale oil output may have added fuel to the short-covering rally.

However, the 200 day EMA continues to fall, and oil's price closed well below it. Expect bears to pounce at any time.

On longer term weekly chart (not shown), oil’s price continues to trade below its three falling weekly EMAs in a long-term bear market. Weekly technical indicators are in bearish zones.

Brent Crude Oil chart

The daily bar chart pattern of Brent Crude oil dropped to an intra-day low of 30, but the subsequent technical bounce floundered after facing stiff resistance from the falling 50 day EMA.

Falling volumes have thrown a wet blanket on any bullish enthusiasm for a continuation of the rally.

Daily technical indicators are showing some signs of bullishness. MACD is rising above its signal line in negative zone. RSI and Slow stochastic are above their respective 50% levels, but not showing much upward momentum.

In an effort to boost prices, Russia and Saudi Arabia have agreed to cut back on oil production  - provided other oil producers do likewise. But a consensus has proved elusive so far.

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

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Feb 19, 2016

S&P 500 index chart

Please note the following remarks from last week's post: "If S&P 500 continues to rally with good volume support and crosses above its Feb 1 top of 1947, a 'double bottom' reversal pattern will get technically confirmed."

The index rallied smartly above its 20 day EMA, but touched a lower top of 1931 on Feb 17 '16. By failing to cross above 1947 - the peak between the two bottoms touched on Jan 20 and Feb 11 - the index could not fulfill the first technical condition for a 'double bottom' reversal pattern. 

Also, volumes during the formation of the Feb 11 bottom (at 1810) were lower than the volumes during formation of the Jan 20 bottom (at 1812). The second technical condition for a 'double bottom' requires volumes to increase after formation of the second bottom.

In other words, what had looked like a bullish 'double bottom' reversal pattern is turning out to be a sideways consolidation with a downward bias. 

If the index manages to rally some more with good volume support, the 'double bottom' can get technically confirmed after all. Resistance from the falling 50 day EMA may prevent that from happening.

Daily technical indicators are looking bullish. MACD is rising above its signal line in negative zone. RSI crossed above its 50% level, but is moving sideways. Slow stochastic has climbed up to the edge of its overbought zone.

The index bounced up after receiving good support from its 20 day EMA on Fri. Feb 19, and closed 2.8% higher on a weekly closing basis. However it continues to trade well below its sliding 200 day EMA in bear territory.

On longer term weekly chart (not shown), the index closed 100 points above its 200 week EMA, but below its falling 20 week and 50 week EMAs for the 7th week in a row. The long-term bull market is intact for the time being. Weekly technical indicators are in bearish zones but not showing much upward momentum.

FTSE 100 index chart

The following remarks were made in last week's post on the daily bar chart pattern of FTSE 100: "...positive divergences visible on all three daily technical indicators - which failed to touch new lows with the index - can trigger a sharp rally that squeezes out shorts."

A sharp short-covering rally during the first three days of the week took the index past its 20 day and 50 day EMAs. The index touched a lower top of 6036.50 on Feb 18, formed a 'reversal day' pattern (higher high, lower close) and dropped below its 50 day EMA.

Though the index gained more than 4% on a weekly closing basis, it is trading within a downward channel for the past 4 months. Recent talks about Brexit (Britain's exit from the Eurozone) may put further bearish pressure on the index.

Daily technical indicators are looking bullish, but their upward momentum is weakening.

On longer term weekly chart (not shown), the index closed below its three weekly EMAs. The 50 week EMA has crossed below the 200 week EMA - the 'death cross' technically confirming a long-term bear market. Weekly technical indicators are in bearish zones, but not showing much upward momentum.

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 19, 2016

Short covering, some amount of value buying and hopes of market-friendly announcements in the forthcoming budget may have triggered last week's rally in the stock market.

There was also a slight let-up in FII selling in equities. Their net selling, as per provisional figures, was Rs 2600 Crores - thanks to net buying of Rs 400 Crores on Thu. Feb 18. DII were net buyers of equity worth Rs 3700 Crores.

Sensex and Nifty gained more than 3% each on a weekly closing basis - their biggest weekly gains in 4 months - and pulled back to test resistance from their respective Jan '16 lows. 

Can the resistances be overcome, or will both indices resume their downward journeys? A lot will depend on whether budget announcements are able to meet or exceed already low market expectations.

BSE Sensex chart pattern

The daily bar chart pattern of Sensex pulled back to its Jan 20 '16 low of 23840, where it is facing resistance from its falling 20 day EMA. The reasons for a likely technical bounce were explained in last week's post.

In the chart above, green arrows have been used to indicate previous bottoms that acted as supports. Once these supports got breached, they turned into resistance levels (marked by red arrows) for subsequent up moves. 

Observant readers may see similar patterns near the 26300 level - supports turning into resistances. The reverse also occurs - resistances, when breached, turn into supports during bull phases.

Daily technical indicators have recovered from oversold conditions, but remain in negative zones and are not showing much upward momentum. RSI is showing positive divergence by touching a higher bottom while Sensex touched a 52 week low of 22600 on Fri. Feb 12.

Bears may use the pullback to sell. Sensex is likely to test the Feb 12 low, and even breach it if budget proposals disappoint the market. 

There is also a possibility - however slim - of the index forming an 'inverse head and shoulders' reversal pattern. The left 'shoulder' has already formed, and the 'head' is in the process of being formed. One has to wait about 5-6 weeks for the pattern to play out.

After dropping and closing below its 200 week EMA (not shown) last week, Sensex has pulled back to close above it. The threat to the long-term bull market has been averted - for now.

NSE Nifty 50 chart pattern

The following remarks appeared in last week's analysis of the weekly bar chart pattern of Nifty 50: 

"A close below the 200 week EMA is considered very bearish. But a single week's breach should not cause panic. Faint bullish hopes were kept alive as the index closed the week within the 3% 'whipsaw' limit below its 200 week EMA."

Nifty pulled back to its Jan '16 low of 7241, and in the process, closed more than 100 points above its 200 week EMA (not shown).

Weekly technical indicators remain in negative zones, but RSI and ROC are showing signs of upward momentum. MACD is still sliding down. Slow stochastic is muddling along the edge of its oversold zone.

Bears (i.e. FIIs) remain in control of the chart, and they are not showing any signs of relinquishing it.

Bottomline? Chart patterns of Sensex and Nifty have pulled back to their Jan '16 lows, and managed to close above their respective 200 week EMAs. The threat to long-term bull markets has been temporarily averted. Remain watchful and cautious, but don't give up on your investment plans.

Why you Shouldn't Sell after a Stock Market Crash

Many small investors buy unknown 'cheap' stocks near stock market peaks. When the eventual crash comes, they are left holding their dud stocks because there are simply no buyers for these at lower prices.

Eventually, the stocks are sold off near the stock market bottom as investors try to salvage whatever they can. This phenomenon gets repeated in every bull-bear cycle.

Why does this keep happening? Because small investors get lured into the market by all the media hype during a bull phase. They expect to make quick gains without doing any homework about how the stock market functions and how to choose stocks based on fundamental and/or technical analysis.

They end up choosing stocks with weak fundamentals that appear relatively 'cheap' and are flying high due to mindless buying during later stages of a bull phase.

Is there a simple solution to the problem? Yes. Instead of buying first and then getting into trouble, seek guidance from a market veteran before buying.

It also helps to plan beforehand. That means taking stock of your present and likely future financial commitments, having the discipline to save first and spend later, and investing your monthly/quarterly savings according to an asset allocation plan.

What if you have done all that and still get caught unawares by a sudden market crash? It is very difficult not to panic when you see your hard-earned money going down the drain almost daily.

If you have done your planning properly and chosen good stocks from fundamental and technical points of view - don't sell in a panic.

A bear market is almost always followed by a bull market. Sometimes a long period of consolidation may precede the next bull phase. You have to learn to take such situations in your stride.

Your asset allocation plan will guide your decision making at every stage of a bull-bear cycle. Just have the patience and discipline to rely on it.

What if you are one of those unfortunates who bought 10000 shares of Suzlon at 25 on an impulse - only to watch the stock price drop to 13? Well, you have just learned four (rather expensive) important lessons:

1. Never buy a junk stock - even if you do, buy 50 or 100 shares to test the waters but never in bulk
2. Never buy on impulse - always do your due diligence before buying
3. Always maintain a stop-loss when you buy - it will save you from a big loss
4. You could have asked me before buying; a simple email would have saved you a lot of pain.

Here is a link to an article in investorpedia.com that gives 3 reasons for not selling after a market downturn.

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Nifty chart: a midweek update (Feb 17 '16)

There has been no let up in FII selling. In the first three days of the week, their net selling in equities crossed Rs 2800 Crores. DIIs more than matched them with net buying in equities worth Rs 2950 Crores.

WPI inflation for Jan '16 was -0.9% - its 15th straight month of contraction. WPI was -0.73% in Dec '15 and -0.95% in Jan '15. However, rising food prices that led to an increase in CPI inflation remain a concern.

Exports fell by 13.6% to $21.1 Billion in Jan '16 against $24.4 Billion a year ago. It was the 14th straight month of contraction. Imports also fell - by 11% to $28.7 Billion in Jan '16 against $32.2 Billion in Jan '15. Trade deficit was at an 11 month low of $7.6 Billion.

The daily closing chart pattern of Nifty 50 seems to be in the throes of a 'dead cat bounce' after falling to a high-volume 'panic bottom' last Friday (Feb 12 '16). All three EMAs are falling, and the index is trading below them in a bear market.

Two of the three daily technical indicators - RSI and Slow stochastic - have corrected oversold conditions but remain in bearish zones. MACD is sliding deeper inside its oversold zone.

On longer term weekly chart (not shown), the index has pulled back to its 200 week EMA after falling below it on Friday.

The breadth indicator NSE TRIN (not shown) has dropped from its oversold zone. Some more correction and a re-test and possible breach of last Friday's low of 6869 is on the cards. 'Panic bottoms' seldom hold.

This isn't the time to be aggressive - as a bull or a bear. Just stick to your asset allocation plan and let the plan help you to decide what you should be doing.

Gold and Silver charts: an update

Gold chart pattern

The daily bar chart pattern of gold easily crossed above its 200 day EMA, and then shot up vertically like a rocket to a level last seen a year ago. By moving above its two previous tops of Oct '15 and May '15, the bearish pattern of 'lower tops and lower bottoms' has been negated.

The 20 day EMA has crossed above the 200 day EMA. The 50 day EMA is trying to follow suit. The 'golden cross' will technically confirm a return to a bull market after more than 4 years.

What happened in the past 2 weeks to warrant such a sharp rally? It was a mad rush towards safety on fears of a collapse in the global banking system, which was triggered by the shocking news from Deutsche Bank. 

As global stock markets tanked amid concerns about a prolonged recession, investors and central bankers started seeking refuge in gold's 'safe haven' status.

All three daily technical indicators are looking extremely overbought, which can lead to a price pullback towards the 1180 - 1200 zone. Bulls may take the opportunity to buy again.

On longer term weekly chart (not shown), gold’s price jumped above its 20 week and 50 week EMAs with strong volume support, but failed to overcome strong resistance from its 200 week EMA. Weekly technical indicators are looking bullish but a bit overbought.

Silver chart pattern

The daily bar chart pattern of silver tried to emulate gold's rocket-like price rally by easily crossing above its 200 day EMA. But the rally stalled at 16 - stopping short of its Oct '15 top and failing to negate the bearish pattern of 'lower tops and lower bottoms'.

All three daily technical indicators are inside their overbought zones. A pullback towards - and a likely drop below - the 200 day EMA is on the cards.

In the unlikely event that silver's price receives support from the 200 day EMA and bounces up with good volume support, it can be used as a buying opportunity. 

On longer term weekly chart (not shown), silver’s price crossed above its 20 week and 50 week EMAs with good volume support, but closed well below its falling 200 week EMA in a long-term bear market. Weekly technical indicators are looking bullish, and showing upward momentum.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Feb 12, 2016

S&P 500 index chart

The following comments appeared in last week's post on the daily bar chart pattern of S&P 500: "All three EMAs are falling, and the index is trading below them in bear territory. The Jan 20 low of 1812 is likely to be tested."

The Jan 20 low of 1812 was tested on Thur. Feb 11 - as the index touched a new 52 week intra-day low of 1810 - but technically not breached because of the 3% 'whipsaw' rule.

On Fri. Feb 12, the index bounced up to close at 1865 - losing just 15 points on a weekly closing basis. Asian markets are in a bull grip at the time of writing this post. If S&P 500 continues to rally with good volume support and crosses above its Feb 1 top of 1947, a 'double bottom' reversal pattern will get technically confirmed.

All three daily technical indicators have corrected oversold conditions, and are showing positive divergences by touching higher bottoms while the index dropped slightly lower.

Is the correction over? It may be too early to call. But a sharp rally is quite possible.

On longer term weekly chart (not shown), the index bounced up after testing support from its 200 week EMA for the second time in 4 weeks, but closed well below its falling 20 week and 50 week EMAs. The long-term bull market is still intact, but may not remain so for long. Weekly technical indicators are in bearish zones and showing downward momentum.

FTSE 100 index chart

The following comments appeared in last week's post on the daily bar chart pattern of FTSE 100: "...the index has dropped below the 5750 level and looks ready to test and breach its Jan 20 low of 5640."

On Thu. Feb 11, the index dropped well below 5640 and touched a new 52 week intra-day low of 5499.50, before bouncing up to close at 5537. Technically, 5640 was not breached because of the 3% 'whipsaw' rule. 

If you think this is technical hair-splitting - a breach of a previous low should be considered a breach - then you may not be able to take advantage of the 3% 'whipsaw' rule. 

I'm not saying the index can't fall lower. But positive divergences visible on all three daily technical indicators - which failed to touch new lows with the index - can trigger a sharp rally that squeezes out shorts.

On longer term weekly chart (not shown), the index touched and closed at 3 year intra-week and closing lows. The 50 week EMA has just slipped below the 200 week EMA. Weekly technical indicators are in bearish zones, but showing positive divergences by failing to touch new lows with the index.

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 12, 2016

FIIs were heavy net sellers of equity worth more than Rs 3000 Crores last week, as per provisional figures. DIIs were net buyers of equity worth Rs 2050 Crores - not enough to prevent vertical plunges on Sensex and Nifty charts.

Retail (CPI) inflation inched up to 5.69% in Jan '16 from 5.61% in Dec '15, due to higher food prices. The Jan '15 number was 5.19%. Rising inflation may prevent any further interest rate cuts by RBI.

The IIP number for Dec '15 was -1.3%. It was the second month of contraction. In Nov '15 IIP was -3.4%. In Q3, IIP was 1.5% vs. 4.8% in Q2. However, for the 9 months period from Apr to Dec '15, IIP was 3.1% against 2.6% for the same period in 2014. 

Auto sales slipped marginally (-0.72%) in Jan '16 on a YoY basis after 14 straight months of growth. The good news is robust double-digit growth in CV sales.

BSE Sensex chart pattern

The daily bar chart pattern of Sensex dropped vertically like a falling knife, as it sliced through known support levels to touch a 21 months low of 22600 on Friday, Feb 12. The unfilled 'gap' formed back in May '14 in the euphoria of NDA's election victory was filled easily.

Daily technical indicators are inside their oversold zones. However all three are showing positive divergences by not falling lower with the index.

Though an index can stay oversold for long periods during bear phases, a technical bounce may be imminent. The index formed a 'reversal day' pattern (lower low, slightly higher close) with strong volume support (not shown on chart).

Sensex closed the week more than 3000 points below its 200 day EMA. Such a huge drop below the 200 day EMA in a short span of time is unsustainable.

In candlestick parlance, Friday's trading formed a 'hammer' pattern, which usually has bullish implications when formed at the end of a down trend. Next week's trading will indicate whether bulls will be in a mood to fight back.

The index dropped below its 200 week EMA (not shown) for the first time since Aug '13, but managed to close within the 3% 'whipsaw' limit. The long-term bull market is now under threat.

NSE Nifty 50 chart pattern

The weekly bar chart pattern of Nifty 50 collapsed on heavy selling by FIIs, touching its lowest level since May '14 and breaching the 200 week EMA for the first time since Aug '13.

A close below the 200 week EMA is considered very bearish. But a single week's breach should not cause panic. Faint bullish hopes were kept alive as the index closed the week within the 3% 'whipsaw' limit below its 200 week EMA.

Weekly technical indicators are looking oversold and showing downward momentum. If the index fails to bounce up within the next 2-3 trading weeks, much lower levels may be on the cards.

How much lower? Check the previous post on Nifty. Likely lower support levels have been mentioned there.

Bottomline? Chart patterns of Sensex and Nifty have closed below their respective 200 week EMAs. Long-term bull markets are now under real threat. This is not the time to panic and sell off. Stick to your investment plans. Bottom fishing should be attempted in a very gradual manner - if at all.

Have you been caught swimming naked?

"Only when the tide goes out do you discover who has been swimming naked" - Warren Buffett

What did Buffett really mean? During bull markets, almost all stocks - the good, the not-so-good and the downright rubbish - tend to move up. Everyone seems to be elated because the value of their portfolios are moving up with leaps and bounds.

So, you really won't know how resilient your portfolio is to a strong down turn. When selling becomes relentless - like it is happening in the market now - almost all stocks tend to lose ground. But the good lose less. The rubbish collapse in a heap.

Many small investors are in a panic. Panic affects rational decision making. The irrepressible urge is to exit at any price. That only adds to the selling pressure.

And so the cycle repeats. A bull market is followed by a bear market, which is followed by another bull market and then again a bear market. Investors buy stocks without proper analysis at high prices during bull markets, and then dump them at huge losses during bear market sell-offs.

Is there no respite from this cycle? The answer is: No, because it is the inherent nature of markets. What should small investors do?

The short answer is: Learn and practice. In other words, learn all you can about how the stock market works. Then enter gradually.

Not the other way around. Most small investors jump into the market first and then try to learn why they lost money. A typical query in one of the business TV channels today: "I bought 1000 shares of Suzlon at 25; now it is down to 13. Should I hold or sell?"

Smart investors learn to prepare a financial plan and an asset allocation plan before entering the market. But they are in a minority. Many have been in the market for years and fail to comprehend why their portfolios are not generating returns to beat inflation and bank fixed deposit rates.

A good financial plan and an asset allocation plan based on an investor's risk tolerance act as guides to investing in a systematic way for generating long term returns. It is a process that is methodical but boring. If you are having fun with your stock investments/trading, you are probably not making any money.

The two plans put your investment decisions almost on auto-pilot. Your monthly savings are invested regularly according to your plans. During bull periods, your equity component will become overweight. Once it goes beyond your pre-set limit, you automatically book partial profits and reinvest the proceeds in other asset classes like fixed income, gold, cash.

During bear market sell-offs, there will be no need to panic. Your equity component will become underweight, and the other asset classes in your portfolio will become proportionately overweight. Once your equity component falls below your pre-set limit, re-balance your portfolio by liquidating part of your fixed income, gold and cash holdings to buy equity.

It is not rocket science - but requires discipline and patience. If your motivation to enter the stock market is to make some quick profits so you can buy a Royal Enfield or the latest mobile phone from Apple, the result will be a hat-trick of no's: no Royal Enfield, no iPhone and no money.

So, dear investor, you really have two choices. You either learn from those who have long experience in the market, or you will learn by losing money. The ball is in your court.

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Nifty chart: a midweek update (Feb 10 '16)

Net selling in equities by FIIs this week has crossed Rs 1500 Crores. On Tue. Feb 9, DIIs joined the selling bandwagon, but they were net buyers on Mon. Feb 8. and Wed. Feb 10. Total DII net buying was Rs 300 Crores.

Falling oil prices, a poor IIP number from Germany, disappointing Q3 results from India Inc. have combined to scare away bulls.

India's GDP grew at 7.3% during Oct-Dec 2015, compared to 7.7% during Jul-Sep '15, but many economists are unable to correlate the numbers with the situation on the ground. 

The daily closing chart of Nifty 50 dropped to a new 52 weeks low of 7216 today. The 200 day EMA has formed a 'rounding top' reversal pattern. Daily technical indicators are in bearish zones and showing downward momentum.

All three EMAs are falling and Nifty is trading below them. On a closing basis, the index is 19.8% below its Mar '15 closing high of 8996. A 20% fall from a top is technically considered a confirmation of a bear market.

That may just be of academic interest. The way FIIs are selling, it seems no low is low enough!

There is one tiny sliver of silver lining on the looming dark bearish clouds. All three technical indicators touched higher bottoms while the index dropped lower. The positive divergences can lead to a technical bounce.

How low can Nifty fall? Let us look at a longer term weekly chart:

An important point to note is that Nifty is still trading above its 200 week EMA, which is currently at 7096. A convincing breach of the 200 week EMA will negate the long-term bull market.

Just above that is the 7120 level - which is the 50% Fibonacci retracement of the entire rise from the Aug '13 low to the Mar '15 top.

Bear phases often find support near the 50% Fibonacci retracement level - since most technical traders know about such levels.

Between 7020 and 7067 is an unfilled 'gap' that was created on the daily bar chart (on May 13 '14 - on euphoria about Modi-led NDA victory in the general election). Such gaps often provide support.

The 100 point zone between 7020 and 7120 may become a good support zone. Below that, support levels are at 6840, 6360 and 6160. Remember that support (and resistance) levels are approximate and rarely exact.

Weekly technical indicators are looking a bit oversold, which can lead to a technical bounce. Bears (i.e. FIIs) will probably use it to sell again.

The advantage is clearly with the bears.

WTI and Brent Crude Oil charts: bear market rallies flounder

WTI Crude chart

The daily bar chart pattern of WTI Crude oil crossed above the falling 20 day EMA with strong volume support and touched an intra-day high of 35 on Jan 29. 

The falling 50 day EMA proved to be a strong resistance. Oil's price has dropped below its three EMAs, but is trying to find a bottom at the 30 level.

Daily technical indicators are not holding out much hope for bulls. MACD has started to turn down towards its rising signal line in negative zone. RSI faced resistance from its 50% level and is moving down. Slow stochastic reached the edge of its overbought zone, but has since dropped below its 50% level.

According to the latest forecast by IEA, global oil demand growth will ease back considerably in 2016.

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

Brent Crude chart

The daily bar chart pattern of Brent Crude oil is once again trading at a premium to WTI Crude, thanks to a bear market rally with good volume support during the second half of Jan '16.

The rally stalled as the falling 50 day EMA proved to be a tough hurdle. Oil's price is consolidating sideways within a small 'triangle' pattern, and trying to find a bottom at 32.

Daily technical indicators are turning bearish. MACD failed to enter positive zone. RSI has slipped below its 50% level. Slow stochastic formed a small 'double top' reversal pattern inside its overbought zone, and started to move down.

With OPEC countries failing to agree on a production cutback, and Iran's production ready to hit the market after lifting of economic sanctions, oil's price is likely to remain depressed due to an already oversupplied market.

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

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Feb 05, 2016

S&P 500 index chart

The daily bar chart pattern of S&P 500 had touched a 52 week low of 1812 on Jan 20 '16, but bounced up sharply above its 20 day EMA to touch an intra-day high of 1947 on Mon. Feb 1.

The 135 points rally - due to a combination of short covering and value buying - was enough to lure bears out of the shadows. Readers were warned about the possibility in last week's post.

The index dropped, and stayed, below the 20 day EMA for the rest of the week and closed at 1880, losing 3% on a weekly closing basis.

Daily technical indicators are looking bearish. MACD is turning down towards its rising signal line in negative zone. RSI faced strong resistance from its 50% level and is moving down. Slow stochastic has dropped from its overbought zone.

All three EMAs are falling, and the index is trading below them in bear territory. The Jan 20 low of 1812 is likely to be tested.

On longer term weekly chart (not shown), the index closed above its rising 200 week EMA, but well below its falling 20 week and 50 week EMAs. The long-term bull market is still intact, but may not remain so for long. Weekly technical indicators are in bearish zones.

FTSE 100 index chart

The daily bar chart pattern of FTSE 100 briefly crossed above the 6100 level intra-day on Feb 1 '16, and managed to close just above its falling 50 day EMA for the second day in a row.

Bears snuffed out flickering bullish hopes the very next day. The index dropped, and stayed, below its 20 day EMA for the rest of the week - losing almost 3.9% on a weekly closing basis.

At the time of writing this post, the index has dropped below the 5750 level and looks ready to test and breach its Jan 20 low of 5640.

Daily technical indicators are in bearish zones and showing downward momentum. MACD has just crossed below its signal line in negative zone. RSI and Slow stochastic are falling below their respective 50% levels.

On longer term weekly chart (not shown), the index closed well below its three weekly EMAs in a bear market. The 50 week EMA is about to cross below the 200 week EMA and technically confirm a long-term bear market. Weekly technical indicators are in bearish zones.

Stock Chart Pattern - LIC Housing Finance (an update)

The previous post was written more than 5 years ago after the company's stock suffered a big sell-off following reports that top officials were involved in a major bribe-for-loan scam.

Several officials alleged to be involved in the scam, including the CEO and a number of PSU bank executives, were arrested. CBI conducted raids in six cities to uncover incriminating documents.

Time is a great healer and public memory is short. One look at the 2 years daily closing chart of LIC Housing Finance will prove the veracity of the two proverbs.

After forming a small 'double bottom' pattern at 157 (for the Rs 2 face value stock) during Aug-Sep '13, the stock embarked on a strong bull rally that touched a closing high of 523.60 in Aug '15 - gaining more than 230% in less than 2 years.

Along the way, the stock faced a couple of decent corrections that were preceded by all four daily technical indicators showing negative divergences by touching lower tops (marked by blue arrows) while the stock moved higher.

From Aug '15 onward, the stock has been consolidating sideways within a 'pennant' (i.e. narrow triangle) pattern, from which a break out can occur in either direction.

Despite trading below its three EMAs in bear territory, the stock is in a long-term bull market because the 200 day EMA is still rising. However, the chart will turn bearish if the stock breaks down below the 'pennant'.

Daily technical indicators are in bearish zones, but showing some weak signs of turning around. ROC and RSI are showing positive divergences by not falling lower with the stock price.

The stock is about 15% below its Aug '15 top, and can be accumulated slowly. Alternatively, wait for a convincing break out above the 'pennant' to enter.