Wednesday, August 31, 2016

Nifty chart: a midweek technical update (Aug 31 '16)

After last week's selling (probably on concerns of an interest rate hike by the US Fed), FIIs have been net buyers of equity this week - worth Rs 1530 Crores. As per provisional figures, DIIs joined the buying spree with net buying worth Rs 1350 Crores.

For the month of Aug '16, FIIs were net buyers of equity of nearly Rs 8800 Crores, whereas DIIs were net sellers of equity worth Rs 4400 Crores. Nifty closed at a 52 weeks high and gained almost 500 points (6%) for the month.

In a new worry for the NDA government, Indian economy grew at the slowest pace in last six quarters at 7.1 per cent in the April-June period of current fiscalGDP had recorded 7.5% growth in Q1 (Jun '15) and 7.9% in Q4 (Mar '16).




Tuesday's upward breakout with a 'gap' above the 20 day EMA on the daily bar chart pattern of Nifty should not have come as a surprise to the followers of this blog because of the following comments in last week's update

"Since the index is trading well above its rising 200 day EMA in a bull market, the expected break out should be upwards...the index may be in the process of forming a bearish 'rounding top' pattern. The pattern will be confirmed if the index drops below 8500."

Note that the index received support from the 8540 level and did not even come close to breaching the 8500 level. By crossing and closing above its previous (Aug 9) top of 8728, the bearish 'rounding top' pattern was negated.

Where is Nifty headed from here? The next known resistance zone is between 8790-8850 (previous bottoms in Feb-Mar '15). The index retreated from this resistance zone during today's trade and closed just below 8790.

If and when this resistance zone is crossed with good volume support, Nifty should go on to touch a new lifetime high.

A few technical reasons may motivate bears to put up a fight to defend the resistance zone. These are:

1. Daily technical indicators are looking bullish and showing upward momentum. However, all three are showing negative divergences by failing to touch new highs with the index. 
2. Volumes (not shown) were very strong today as both FIIs and DIIs were heavy net buyers of equity. But that can be a sign of a 'buying climax'.
3. In candlestick parlance, the index formed a 'shooting star' pattern that often signals a change of trend.
4. Nifty's TTM P/E has touched 24.09 - well above its long-term average, and the first time it has crossed above 24 this month.
5. The breadth indicator NSE TRIN (not shown) is well inside its overbought zone.

Bull markets are supposed to climb a wall of worries, and Nifty has been doing precisely that.

However, the higher it climbs in the near term, the harder it may fall when a correction does happen. The downside risk is increasing by the day, which means one should remain cautious but optimistic.

Monday, August 29, 2016

S&P 500 and FTSE 100 charts (Aug 26 '16): bears trying to get on top

S&P 500 index chart pattern


Negative divergences visible on technical indicators in last week's post on the daily bar chart pattern of S&P 500 had hinted at a correction.

The index touched a slightly lower top of 2193 on Tue. Aug 23 and formed a bearish 'gravestone doji' pattern (in candlestick parlance) as well as a small 'double top' reversal pattern.

The index corrected just below its 20 day EMA on Thu. Aug 25 before the US Fed's hawkish stance on interest rate dropped the index to a low of 2160 before closing about 15 points lower on a weekly basis.

Daily technical indicators are looking bearish and showing downward momentum. MACD is falling below its signal line in positive zone. RSI has slipped below its 50% level. Slow stochastic has dropped to the edge of its oversold zone after forming a small 'double top' pattern inside its overbought zone.

Some more correction is possible. Support can be expected from the rising 50 day EMA. Bulls have been buying on every little dip, so a deep correction appears unlikely.

On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market for the 25th week in a row. Weekly technical indicators have started to correct overbought conditions.

FTSE 100 index chart pattern



The following comments were made in last week's post on the daily bar chart pattern of FTSE 100: "The index may correct some more. Expect some downside support from the zone between 6750-6780."

As if on cue, the index dropped below its rising 20 day EMA on Thu. Aug 25 and touched an intra-day low of 6779 before bouncing up to close at 6838 with a weekly loss of 21 points.

MACD and Slow stochastic are looking bearish and showing downward momentum after correcting overbought conditions, but RSI has managed to remain above its 50% level. 

The index may consolidate around current levels before resuming its up move.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs in a long-term bull market for the 9th week in a row. Weekly technical indicators have started to correct overbought conditions.

Saturday, August 27, 2016

BSE Sensex and NSE Nifty charts (Aug 26, 2016): bears wrest advantage

FIIs turned net sellers of equity worth Rs 370 Crores during the week, possibly on concerns about a possible interest rate hike by the US Fed. However, they were net buyers of equity worth Rs 340 Crores on Fri. Aug 26.

DIIs were also net sellers of equity worth Rs 900 Crores, as per provisional figures, but were net buyers on Mon. Aug 22 and Wed. Aug 24. Both Sensex and Nifty lost 1% on a weekly closing basis.

FIIs can be expected to remain sellers next week as the US Fed hinted at a likely interest rate hike without specifying when.

BSE Sensex index chart pattern


The daily bar chart pattern of Sensex continued its sideways consolidation within the 'support-resistance zone' between 27600 and 28600 for the 7th week.

The index is forming a bearish 'rounding top' pattern that will get technically confirmed on a drop below 27600. The 50 day EMA is just below the 'support-resistance zone' and can provide some support.

Stronger support can be provided by the two 'gaps' (marked Gap1 and Gap2) that formed on the chart on Jul 11 '16 and Jun 30 '16. In between the two 'gaps' is the support level of 27100. 

Even if either or both 'gaps' get filled, the index should resume its up move thereafter. There is a possibility that the index will only fill Gap1 and then bounce up from the 27100 level.

All four daily technical indicators are looking bearish and showing downward momentum. MACD is falling below its signal line in bullish zone. ROC, RSI and Slow stochastic are falling in bearish zones.

The correction can continue - at least in the earlier part of next week - before the index finds some buying support. No need to fear a 2008-style crash.

NSE Nifty index chart pattern


The weekly bar chart pattern of Nifty dropped below the 8650 level and closed lower for the third week in a row - forming a bearish 'rounding top' pattern in the process.

The 'rounding top' will get technically confirmed if the index falls below 8500 - in which case, support can be expected from the 8300-8400 zone.

Weekly technical indicators are in their overbought zones, but showing some signs of correcting down.

Nifty's TTM P/E is still high at 23.50. The breadth indicator NSE TRIN (not shown) is moving sideways inside its overbought zone.

Some more correction is likely - but a deep correction is not expected.

Bottomline? Sensex and Nifty charts show that bears have wrested some advantage. Index valuations on a TTM basis remain expensive. Some more correction will improve the technical 'health' of the charts, and provide adding opportunities.

Wednesday, August 24, 2016

Nifty chart: a midweek technical update (Aug 24 '16)

Quietly, FIIs have turned net sellers of equity this week - though their net selling in three days was only worth Rs 340 Crores. DIIs were net buyers on Monday and today (worth Rs 180 Crores), but were net sellers of equity (worth Rs 450 Crores) on Tue. Aug 23.

So, if both FIIs and DIIs were net sellers, who have been buying? In a clear case of history repeating itself, retail investors are getting sucked into the stock market at exactly the wrong time - again! 

With no fresh bullish triggers for the market - at least till the 7th Pay Commission awards start showing up as credit entries in the bank accounts of government employees - the much awaited correction may be around the corner.


The daily bar chart pattern of Nifty has been consolidating sideways within a 'symmetrical triangle' pattern since the beginning of the month.

Triangles are unreliable patterns because a break out can occur in either direction. Since the index is trading well above its rising 200 day EMA in a bull market, the expected break out should be upwards.

However, as pointed out last week, the index may be in the process of forming a bearish 'rounding top' pattern. The pattern will be confirmed if the index drops below 8500.

FIIs have been buying on every dip - till this week. If they continue to sell, the index can drop down to fill the 54 points 'gap' (between 8353 and 8407) formed on Jul 11 '16.

Whether the 'gap' gets filled partly or fully, the index should resume its up move thereafter. So, do not sell in a panic. No one knows if the correction will occur or not.

But no harm in being prepared for it. If the correction does happen, use it to add to existing holdings - or even make fresh entries. 

Daily technical indicators are in bullish zones but looking bearish. MACD and Slow stochastic are showing downward momentum. RSI is moving sideways.

Nifty's TTM P/E has inched up to 23.78 - well above its long-term average. The breadth indicator NSE TRIN is inside its overbought zone.

An index can remain overbought for long periods, and hoping for a correction doesn't trigger one. But with FIIs selling for the first time this month, downside risk has increased.

No need to stop your monthly SIPs, but refrain from making huge bets for short-term gains. 

Tuesday, August 23, 2016

WTI and Brent Crude Oil charts: end of short-squeeze rallies?

WTI Crude Oil chart


The 'V' shaped rally on the daily chart pattern of WTI Crude Oil surged past the 49 level before correcting and closing below 47.50. 

Shorts got squeezed after OPEC's announcement of a meeting in end-Sept. '16 to discuss a possible output freeze. Going by recent experience, OPEC members are unlikely to agree on any cut in output.

Technically, there are bullish and bearish signals on the chart. Both the 20 day and 50 day EMAs have formed bullish 'rounding bottom' patterns. The 50 day EMA has moved up without crossing below the 200 day EMA, keeping the bull rally intact.

However, oil's price has corrected after touching a lower top, and daily technical indicators are in the process of correcting overbought conditions.

A pullback towards the 200 day EMA is likely. 

A convincing move above 52 is required to vanquish the bears. That may be a tough ask with more US rigs coming back into production and shale oil fracking beginning to pick up.

On longer term weekly chart (not shown), oil's price is trading above its 20 week and 50 week EMAs but well below its sliding 200 week EMA in a long-term bear market. Weekly technical indicators are in bullish zones, but MACD and RSI are not showing much upward momentum.

Brent Crude Oil chart


The daily bar chart pattern of Brent Crude Oil rallied past the 51 level but formed a small 'reversal day' pattern (higher high, lower close) on Fri. Aug 19 and corrected down to the 49 level.

Bulls managed to prevent the 'death cross' of the 50 day EMA below the 200 day EMA. All three EMAs are rising again, and oil's price is trading above them in bull territory. 

Daily technical indicators are in the process of correcting overbought conditions. A pullback towards the 200 day EMA is a possibility. A convincing move above the 53 level is needed before bulls can regain control of the chart.

On longer term weekly chart (not shown), oil's price is trading above its 20 week and 50 week EMAs but well below its falling 200 week EMA in a long-term bear market. Weekly technical indicators are in bullish zones, but only Slow stochastic is showing upward momentum.

Monday, August 22, 2016

S&P 500 and FTSE 100 charts (Aug 19 '16): post-Brexit bull rallies take a pause

S&P 500 index chart pattern


The daily bar chart pattern of S&P 500 continued with its previous week's sideways consolidation - touching a new high of 2194 on Mon. Aug 15 and a low of 2168 on Wed. Aug 17 before closing flat for the week.

The rising 20 day EMA provided good support and the index closed above its three EMAs in a bull market, but formed another 'doji' candlestick pattern that indicates indecision among bulls and bears.

All three daily technical indicators are in bullish zones, but showing negative divergences by failing to touch new highs with the index. Some more consolidation or a correction is likely.

On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market for the 24th week in a row, but has formed a 'doji' candlestick pattern that may trigger a correction. Weekly technical indicators are still looking overbought.

FTSE 100 index chart pattern


The concluding comment in last week's post on the daily bar chart pattern of FTSE 100 was: "Weekly technical indicators are looking quite overbought, which can trigger a correction at any time."

The index touched a new 52 week high of 6955 on Mon. Aug 15 but slipped into a correction and closed almost 100 points lower. On a weekly closing basis, the index lost 57 points (0.85%).

Daily technical indicators have corrected overbought conditions, and are showing downward momentum. The index may correct some more. Expect some downside support from the zone between 6750-6780.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs in a long-term bull market for the 8th week in a row, but has formed a 'reversal' bar (higher high, lower close). Weekly technical indicators are still overbought. Some more correction is possible.

Saturday, August 20, 2016

BSE Sensex and NSE Nifty charts (Aug 19, 2016): bulls and bears locked in a stalemate

Neither bulls nor bears were able to gain much advantage during a holiday-shortened trading week. FIIs were net buyers of equity worth Rs 1250 Crores, as per provisional figures. DIIs were net sellers of equity worth a little more than Rs 100 Crores.

On a weekly closing basis, Sensex lost 75 points - a point more than what it had gained in the previous week. Nifty lost 5 points, closing lower for the second week in a row.

Chances of a US interest rate hike pushed the Dollar higher and the Rupee lower. Oil prices rose on speculation of a production freeze by OPEC. Without any immediate bullish triggers, market players chose to book profits.

BSE Sensex index chart pattern


The following comments were made in last week's post on the daily bar chart pattern of Sensex: "Some more consolidation or correction is likely. With FIIs buying on every dip, the Sensex may not face a deep correction."

The index consolidated in a narrow range within the 'support-resistance zone' between 27600 and 28600. The 20 day EMA provided good downside support. The up trend from the Feb 29 '16 low is intact.

Three of the daily technical indicators - MACD, ROC, Slow stochastic - are in bullish zones, but not showing any upward momentum. RSI is straddling its 50% level.

The longer the index consolidates, the sharper will be the eventual breakout. In a bull market, such consolidations usually precede an upward breakout.

However, the macroeconomic picture has not improved. Inflation is rising again. Manufacturing output is weak. Q1 (Jun '16) earnings were nothing to write home about.

The 7th Pay Commission awards will get implemented from next month. That may provide some fillip to consumer-related stocks.

NSE Nifty index chart pattern


The weekly bar chart pattern of Nifty closed just above the resistance level of 8650 after trading within a 100 point range. The index formed a 'doji' candlestick that indicates indecision among bulls and bears.

The index may be forming a small 'rounding top' reversal pattern that can trigger a correction. A move above the previous week's top of 8728 will negate the pattern.

Three of the weekly technical indicators - MACD, RSI, Slow stochastic - are moving sideways well inside their overbought zones. ROC is also moving sideways below its 10 week MA just inside its overbought zone.

Nifty's TTM P/E remains high at 23.7. The breadth indicator NSE TRIN (not shown) has dropped inside its overbought zone.

An index can remain overbought for long periods. No need to worry about a big crash as FIIs are buying all dips. Stay invested, but with a stop-loss as the downside risk appears higher.

Bottomline? Sensex and Nifty charts show that bulls and bears are locked in a stalemate. Index valuations on a TTM basis are expensive, increasing downside risk. If you wish to enter now, your bottom-up stock picking skills will be tested.

Friday, August 19, 2016

Is stock investing risky?

To be able to answer that question, one has to understand the meaning of risk. The problem is: there is no clear cut definition of risk, or the best way to measure risk.

Volatility is often considered a measure of risk - particularly by inexperienced investors. But seasoned traders thrive on volatility and make most of their money from it.

One often thinks of a bank fixed deposit as 'safe'. Why? Because there is very little chance of losing your principal amount. 

Compared to a bank fixed deposit, stocks seem more 'risky'. Why? Because during a bear phase the price of a stock can fall below the price at which it was bought.

Many small investors fall into the trap of such a simplified view of risk and choose the 'safe' option. What they fail to realise is that safety also comes at a price.

Returns from fixed deposits are taxable and subject to fluctuations in interest rates. A 3 years deposit earning 8% interest may seem like a good safe return, but the real rate of return is only 2% if inflation is 6%.

There are a couple of ways that risk can be reduced when investing in stocks. The first is by diversification: (i) across market capitalisation, i.e. investing in a mix of large-cap, mid-cap and small-cap stocks; and (ii) across sectors, i.e. buying stocks from auto, pharma, FMCG, financials, etc.

The second is by portfolio diversification through investment in different asset classes, like stocks, funds, fixed income, gold.

Another way to reduce the riskiness of stock investing is by learning the basics of technical analysis. 

While fundamental analysis is a must in understanding the financial robustness and competitive advantage of a company, technical analysis provides signals of when to buy, when to sell and when to sit tight.

Plus, the concept of a 'stop-loss' allows an investor to exit with a smaller loss when a stock's price is tumbling down.

If you are not adept at picking stocks, you can still invest in stocks and diversify your portfolio by buying units of different mutual funds.

By choosing the 'dividend option' in a fund, risk is reduced because the periodic dividend payments act as partial profit booking and freeing up some cash that can be utilised elsewhere.

So, the answer to the question is: No - provided you know what you are doing.

To learn more about risk, here is an interesting article from investopedia.com.

Wednesday, August 17, 2016

Nifty chart: a midweek technical update (Aug 17 '16)

WPI inflation rose for the 4th straight month to a 23 month high of 3.55% in Jul '16 against 1.62% in Jun '16. In Jul '15, the index was -4%. WPI had hit a peak of 3.74% in Aug '14. Prices of potatoes, pulses, vegetables, sugar and fruits showed strong double-digit growth.

RBI Governor's decision to keep interest rates unchanged due to inflation concerns turned out to be correct. Rise in food inflation is due partly to a lower base effect, and is expected to come down due to ample rainfall. So far, about 93% of the country has received normal to excess rainfall.

After Independence Day holiday on Mon. Aug 15, activity has been slightly muted. Net buying in equities by FIIs was less than Rs 700 Crores. DIIs were net sellers of equity worth about Rs 200 Crores. Nifty drifted sideways with a slight downward bias.


The daily bar chart pattern of Nifty has been consolidating sideways within a small 'symmetrical triangle' pattern after touching a 52 week high of 8728 on Aug 9, and continues to trade above its three EMAs in a bull market.

FIIs have been buying on every dip to prevent a deeper correction. The 20 day EMA has provided very good downside support during the first half of the month. Will it continue to do so? 

Nifty may be in the process of forming a 'rounding top' reversal pattern, which will be technically confirmed only if the index falls below 8500. A deeper fall may not happen due to reasons mentioned in last week's post.

Daily technical indicators are in bullish zones, but giving contradictory signals. MACD and RSI are showing downward momentum and negative divergences by touching lower bottoms, while Slow stochastic is showing upward momentum.

Nifty's TTM P/E ratio is at 23.58 - well above its long-term average. The breadth indicator NSE TRIN (not shown) has slipped inside its overbought zone despite two days of index correction. 

Downside risk remains high, but excess global liquidity and FII appetite for Indian stocks is keeping the stock market in the firm grip of bulls. 

The index has rallied for more than 5 months without a significant correction. However, expecting a correction doesn't cause one. It may happen two days later, or only after Nifty touches a new high.

But happen it will. No need to panic and sell off. Be prepared with a 'buy list' to take advantage of any sharp correction. Also keep a 'profit booking list' ready should the index rise to a new high.

Either way, you will make money.

Tuesday, August 16, 2016

Gold and Silver charts: consolidating after sharp post-BrExit rallies

Gold chart pattern


The following comments were made in the previous post on the daily bar chart pattern of Gold: "Volumes are a bit of a concern. They need to pick up for the rally to sustain. Otherwise, gold's price can see some consolidation." 

Volumes failed to pick up - except on two down days (Aug 5 & 12) - leading to a sideways consolidation that received good support from the 20 day EMA.

Note that gold's price fell short of touching a new 52 week high and appears to be forming a 'triangle' pattern, from which a break out can occur in either direction.

Daily technical indicators are in bullish zones but giving conflicting signals, which often happens during periods of consolidation. MACD is falling below its signal line. RSI has bounced up from its 50% level. Slow stochastic is falling towards its 50% level.

A drop towards the 50 day EMA is a possibility before gold's price can move higher.

On longer term weekly chart (not shown), gold’s price closed above its three weekly EMAs in long-term bull territory for the 10th week in a row. The 'golden cross' of the 50 week EMA above the 200 week EMA, which will signal a return to a long-term bull market, is awaited. Weekly technical indicators have started correcting overbought conditions.

Silver chart pattern


The following comments were made in the previous post on the daily bar chart pattern of Silver"Can silver's price face a correction? Sliding volumes during the past 4 days seem to suggest as much." 

Note that silver's price touched a lower top and dropped below its 20 day EMA, but bounced up after receiving good support from the 19.50 level only to fall below its 20 day EMA once more.

The price pattern appears to be forming a large 'symmetrical triangle' from which a break out can occur in either direction.

Daily technical indicators are looking a bit bearish. MACD is rapidly falling below its signal line in positive zone. RSI is hanging on to its 50% level. Slow stochastic is falling towards its oversold zone.

A test of support from the 50 day EMA is a possibility before silver's price can move higher.

On longer term weekly chart (not shown), silver’s price closed above its 200 week EMA in long-term bull territory for the 7th week in a row. Weekly technical indicators have started correcting overbought conditions.

Monday, August 15, 2016

S&P 500 and FTSE 100 charts (Aug 12 '16): bulls take total control

S&P 500 index chart pattern


The daily bar chart pattern of S&P 500 consolidated within a narrow range during the week - touching a low of 2172 on Aug 10 and a new lifetime high of 2188 the following day.

Though the index barely gained a point on a weekly closing basis, it continues to trade above its three rising EMAs in a bull market.

Strong retail sales and payroll data have enabled bulls to remain in total control. However, there are some dark clouds on the horizon.

The index valuation is looking stretched. Daily technical indicators are looking overbought and showing negative divergences by failing to touch new highs with the index.

The current consolidation phase may continue for a bit before the index tries to move up again.

On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market for the 23rd week in a row, but has formed a 'doji' candlestick pattern that may trigger a correction. Weekly technical indicators are looking overbought.

FTSE 100 index chart pattern


The daily bar chart pattern of FTSE 100 shows that bulls have shrugged aside bearish technical signals and have taken total control of the chart.

The index gained almost 2% for the week, closing above the 6900 level after more than 14 months.

All three daily technical indicators are looking overbought, and MACD is showing negative divergence by failing to touch a new high with the index.

FTSE is trading well above its three rising EMAs in a bull market. The rally from the BrExit low in Jun '16 has been a little too steep.

Bulls are in no mood to give bears any opportunities. However, some consolidation or correction - should either happen - will improve the technical 'health' of the chart. 

On longer term weekly chart (not shown), the index closed above its three weekly EMAs for the 7th week in a row. The 'golden cross' of the 50 week EMA above the 200 week EMA has technically confirmed a return to a long-term bull market. Weekly technical indicators are looking quite overbought, which can trigger a correction at any time.

Saturday, August 13, 2016

BSE Sensex and NSE Nifty charts (Aug 12, 2016): bulls and bears fight each other to a standstill

Bulls (i.e. FIIs) and bears (i.e. DIIs) fought each other to a standstill during the week. FIIs were net buyers of equity worth Rs 3525 Crores; DIIs were net sellers of equity worth almost Rs 3250 Crores, as per provisional figures.

On a weekly closing basis, Sensex gained 74 points (0.26%) while Nifty lost 11 points (0.13%). With no immediate bullish triggers for the market, both indices are undergoing some consolidation.

The IIP figure for Jun '16 was 2.1%, but manufacturing growth was only 0.9%. The cumulative growth for Q1 (Jun '16) was a paltry 0.6% against 3.3% in Q1 (Jun '15).

In another worrying sign for the economyCPI inflation rose to 6.07% in Jul '16 against 5.77% in Jun '16 - mainly due to rising prices of pulses, sugar and vegetables.  

BSE Sensex index chart pattern


The daily bar chart pattern of Sensex repeated the previous week's price pattern. It touched a slightly higher top of 28290 on Aug 9, formed a 'reversal day' bar (higher high, lower close), and corrected down to the support level of 27600.

A surge in buying by FIIs on Fri. Aug 12 led to an upward bounce. The index closed above its three EMAs in a bull market, but within the 'support-resistance zone' between 27600-28600 for the 5th week in a row.

Note that the support level of 27600 has already been tested a few times during the past couple of weeks. Such frequent tests tend to weaken the support level - increasing downside risk.

Three of the daily technical indicators - ROC, RSI, Slow stochastic - are in neutral zones. MACD is falling below its signal line in bullish zone. However, all four are showing negative divergences by touching lower tops (marked by blue arrows) while Sensex has been touching higher tops.

Some more consolidation or correction is likely. With FIIs buying on every dip, the Sensex may not face a deep correction.

Stay invested, with a stop-loss. Do not try to short a bull market. Avoid big lump-sum bets on 'cheap' stocks.

NSE Nifty index chart pattern


The weekly bar chart pattern of Nifty breached the 'rising wedge' pattern within which it was trading for the previous 11 weeks. But it was more of a sideways breach rather than a breakdown.

The index touched a new 52 week high of 8728, dropped below the wedge to a low of 8540, and then pulled back towards the wedge to close above the resistance level of 8650.

In the process, the index formed a 'reversal' bar (higher high, lower close). In candlestick parlance, a bearish 'hanging man' pattern has formed.

Weekly technical indicators MACD, RSI and Slow stochastic are well inside their respective overbought zones. But ROC has crossed below its 10 week MA and moving down. Is it a precursor to a correction?

Nifty's TTM P/E is still quite high at 23.71. The breadth indicator NSE TRIN (not shown) has fallen sharply towards its overbought zone.

The index is trading well above its two rising weekly EMAs in a bull market, and may continue to move higher on the back of FII buying. But technical signals are flashing red, so caution is advised.

Bottomline? Sensex and Nifty charts show that bulls and bears are fighting hard for dominance. Index valuations on a TTM basis are quite expensive, increasing downside risk. The 7th pay commission awards next month may trigger the next up move.

Friday, August 12, 2016

How to do 'due diligence' before buying a stock

The Indian economy is back on the growth path. Liquidity is sloshing around. FIIs are buying. The stock market has shaken off the bears and is rising towards its lifetime high. 

You are either a smart investor who entered at lower levels and are enjoying the bull ride. Or, you are a new investor feeling anxious whether to enter the market now or wait for a correction.

Either way, you may be interested in catching hold of the 'next Eicher Motors' or the 'next Page Industries' or the 'next Yes Bank' and becoming a 'Crorepati'.

Successful investing requires more than luck and pluck. It requires serious hard work, discipline and patience.

Most of the hard work - or 'due diligence' - should be done before buying a stock. What is 'due diligence'? It is the process of investigating all available information about a company whose stock you are thinking of purchasing.

What does 'all available information' include? Financial information available from Annual Reports. Stock price history available from stock exchanges. Brokerage reports. Industry reports. Reputation of company management.

That seems like a lot of 'available information' to investigate. What if one doesn't have the time or know-how to do all this investigating? Isn't there a shortcut?

Fortunately, there is. You can leave the 'due diligence' to experienced fund managers by starting a SIP in a diversified equity fund or a balanced fund with a track record of 5 years or more.

You will still get the benefit of good long-term returns - provided you hold on to the fund units for the long-term - without the hassle of going through Annual Reports, Brokerage Reports and Price charts.

In fact, a SIP in a good equity fund or balanced fund is the best way for new investors to start investing in the stock market.

However, if researching companies excite you and making outsize returns from the stocks of less known and 'undiscovered' companies gets your adrenaline pumping, then performing 'due diligence' won't seem like a chore.

So, prepare a 'watch list' of companies based on their past, current and likely future performances and start your 'due diligence' to prepare a shorter 'buy list'.

Haven't done proper 'due diligence' before? 
Read the article by Ryan Barnes: Due Diligence In 10 Easy Steps

Wednesday, August 10, 2016

Nifty chart: a midweek technical update (Aug 10 '16)

RBI Governor kept interest rates unchanged, as was widely expected by economists and analysts. Dr Rajan's policies have kept inflation under control, helped to clean up balance sheets of PSU banks and put the economy back on the growth track.

Government's robust tax collections during the Apr-Jul '16 period is a clear sign of improved economic activity. Direct tax collections grew 24%. Indirect tax collections grew an even more impressive 29%.

During the first three trading days this week, FIIs were net buyers of equity worth Rs 1700 Crores, as per provisional figures. DIIs were net sellers of equity worth Rs 2200 Crores.

Nifty touched a new 52 week high of 8728 on Aug 9, but has once again corrected down to seek support from its rising 20 day EMA. Will the index bounce up again, or will it correct some more?

Note the following comments from last week's technical update on Nifty

"If the index falls below its 20 day EMA, it can drop quickly to the support zone between 8300-8400. Can Nifty fall even lower? Sure it can, but a couple of technical reasons may prevent a fall below 8300. The first is of course continued buying by FIIs on every dip. The second is a 54 points upward 'gap' between 8353-8407 formed on Jul 11. The 'gap' area can act as a support zone." 

The index had bounced up after receiving support from its 20 day EMA last week, but is once again on the verge of falling lower. Will it be different this time? 

Increase in DII selling, plus lack of any immediate bullish triggers can lead to some more profit booking. All the positives - like good monsoon, decent Q1 (Jun '16) results, passing of the GST bill in parliament - have already been 'discounted' by the index.

Note the 'gap' zone between 8353-8407 marked on the chart. The 50 day EMA has risen almost to the upper edge of the 'gap'. That suggests bulls may start buying aggressively on any dip towards 8400.

Daily technical indicators are still in bullish zones after correcting overbought conditions. But their downward momentum and combined negative divergences (marked by blue arrows) may lead to some more correction. 

Nifty's TTM P/E ratio is still high at 23.44. The breadth indicator NSE TRIN (not shown) is rising towards its oversold zone - hinting at more correction.

The current chart set-up does not suggest a deep correction towards 8000 - as suggested by a couple of fundamental analysts. However, the stock market has a knack of doing the exact opposite of expectations.

Nifty is trading above its three EMAs in a bull market. Any further correction will provide an adding opportunity.

So, stay invested, but keep a stop-loss at 8350.

Tuesday, August 9, 2016

WTI and Brent Crude Oil charts: short covering rallies on OPEC output freeze speculation

WTI Crude Oil chart


The daily bar chart pattern of WTI Crude Oil formed a 'rounding top' reversal pattern (clearly visible on the 20 day and 50 day EMAs) during the past three months, and corrected below all three EMAs into bear territory.

The following remarks appeared in the previous post: "All three daily technical indicators are in bearish zones and showing downward momentum - hinting at some more correction. Slow stochastic is inside its oversold zone, and showing positive divergence by not falling lower with oil's price. A pullback towards the 200 day EMA is likely." 

After falling below the 40 level for the first time since Apr 18, oil's price pulled back sharply towards its 200 day EMA due to short covering - but is facing resistance from its falling 20 day EMA.

Daily technical indicators are in bearish zones after correcting oversold conditions, and are showing good upward momentum. Some more upside is likely. If volumes continue to slide, the rally may stall in the 44-46 zone.

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

Brent Crude Oil chart



The daily bar chart pattern of Brent Crude Oil formed a 'rounding top' reversal pattern (clearly visible on the 50 day EMA) during the past three months, and corrected below all three EMAs into bear territory.

The following remarks appeared in the previous post: "More correction is on the cards. Slow stochastic is showing positive divergence by not falling lower with oil's price. That can lead to a pullback to the 200 day EMA." 

Oil's price dropped below the 42 level for the first time since Apr 18, but pulled back sharply towards its 200 day EMA - aided by short covering on speculation of an output freeze that may or may not be announced at OPEC's informal meeting in end-Sept. '16.

The 'death cross' of the 50 day EMA below the 200 day EMA that would have technically confirmed a return to a bear market has been prevented for the time being. The rally is likely to face resistance from the zone between 46-48.

After correcting oversold conditions, daily technical indicators are in bearish zones and showing good upward momentum. Some more upside is likely.

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

Monday, August 8, 2016

S&P 500 and FTSE 100 charts (Aug 05 '16): rise to lifetime highs

S&P 500 index chart pattern


The daily bar chart pattern of S&P 500 broke downwards from the previous two weeks' consolidation zone to touch a low of 2148 on Aug 2, but bounced up after receiving good support from its rising 20 day EMA.

Strong non-farm payroll data propelled the index to a new high of 2183 on Fri. Aug 5. All three EMAs are rising, and the index continues to trade above them in a bull market.

Daily technical indicators have corrected overbought conditions, and are showing upward momentum in bullish zones. However, all three are showing negative divergences by failing to touch new highs with the index.

Expect some correction or consolidation around current level. 

On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market for the 22nd week in a row. Weekly technical indicators are looking overbought.

FTSE 100 index chart pattern

The daily bar chart pattern of FTSE 100 corrected down below its 20 day EMA, but bounced up after receiving good support from the 6620 level to touch a 52 week high of 6800.

A 25 bps cut in interest rate and announcement of another round of Quantitative Easing to boost a sagging economy helped the index recovery.

Note how the 6620 level had earlier provided resistance to the index in Jul '16, but subsequently turned into a support level.

Daily technical indicators are in bullish zones after correcting overbought conditions. But all three are showing negative divergences by failing to touch new highs with the index.

Some correction or consolidation is likely. The index is trading above its three EMAs in a bull market. So, dips are providing adding opportunities.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs in a long-term bull market for the 6th week in a row. The 'golden cross' of the 50 week EMA above the 200 week EMA is imminent. Weekly technical indicators are looking overbought.

Sunday, August 7, 2016

Stock Chart Pattern - Great Eastern Shipping (an update)

These were introductory comments in the previous post on Great Eastern Shipping 7 years ago: "Fundamentally strong, with very good profit margins, strong cash flows from operations, low P/E ratio, regular dividends - all the hallmarks of a stock that should adorn any long-term portfolio."

The shipping sector has been facing a pressure on freight rates for quite some time due to an excess supply of vessels - compounded by a slowdown in the Chinese economy and low oil prices that have affected offshore drilling business.

In spite of such headwinds, India's largest private sector shipping company has produced stellar results. Consolidated net profit of Rs 1039 Crores with NPM of 25.5%; diluted EPS of 68.8 giving a P/E ratio of 5.3; net cash flow from operations of a massive Rs 2047 Crores; debt/equity ratio at a manageable 0.55; dividend yield of 3.7% on CMP.

Yet, the chart below shows the stock price has been in a 2 years long down trend (marked by blue down trend line). Is this a value investing opportunity, or what? 


The stock price had touched a 2 years high of 460 on Sep 15 '14 only to drop into a long correction-cum-consolidation phase. After forming a 'rounding bottom' reversal pattern, the stock rose to touch a high of 399 on Aug 13 '15 but retreated after facing strong resistance from the blue down trend line.

Continuing with the consolidation within a 'rounding bottom' pattern, the stock price breached the down trend line and touched a high of 420 on Nov 10 '15, but formed a 'reversal day' pattern (higher high, lower close) that triggered a sharp correction below its three EMAs into bear territory.

The stock price formed a small 'double bottom' reversal pattern at 275 on Mar 2 '16 and rallied past its 20 day and 50 day EMAs, but failed to overcome strong resistance from its 200 day EMA. Another correction-cum-consolidation ensued.

After forming another 'rounding bottom' reversal pattern (clearly visible on the 20 day and 50 day EMAs), the stock price rallied past its 200 day EMA into bull territory and has breached the blue down trend line once again.

Daily technical indicators are looking overbought. That means the upside may be limited in the near term. Those who understand the nitty-gritty of the shipping business may consider gradual accumulation.