Tuesday, January 31, 2017

Long term Gold chart movements linked to Historical events

Warren Buffett does not invest in gold because the yellow metal provides no returns. But he is in a league of his own. Mere mortals like us can only aspire to be like him.

It makes eminent sense for small investors to include gold as a part of their asset allocation plans. Gold does provide a hedge against inflation and a falling currency.

Indians buy gold in physical form - mainly as jewellery, but sometimes to turn their dark-coloured money into a brighter shade. A better way to invest in gold is to buy gold ETFs or gold funds.

So, is this a good time to invest in gold? Have a look at the interesting long-term chart of gold compiled from Rosland Capital's gold-based IRA page and decide for yourself:




Given below are the events and the corresponding gold prices:



Monday, January 30, 2017

S&P 500 and FTSE 100 charts (Jan 27 '17): bulls well on top but bears refusing to give up

S&P 500 index chart pattern


The daily bar chart pattern of S&P 500 has formed a few interesting patterns that will enthuse both bulls and bears.

The index broke out above the small 'symmetrical triangle' pattern with good volume support on Tue. Jan 24. The next day, it formed an upward 'gap' with strong volumes.

On Thu. Jan 26, the index touched a new lifetime high of 2301 but formed a small 'reversal day' bar by closing lower. It slipped down a little more on Fri. Jan 27, but closed with a weekly gain of 1%.

All three EMAs are rising and the index is trading well above them in a bull market. But don't count the bears out just yet.

Note that the three daily technical indicators touched lower tops when the index touched a new lifetime high. The combined negative divergences can trigger a correction or consolidation.

The upward 'gap' formed on Wed. Jan 25 may be the proverbial dark cloud on the horizon. It can be an 'exhaustion gap' that forms after a strong rally. 

There is also a possibility of the entire trading above the 'gap' forming an 'island reversal' pattern should the index fall with a downward 'gap' during the next few days.

An 'island reversal' pattern may not form at all, and the index will probably keep soaring higher. 

The reason for raising a 'red flag' is due to the widening distance between the 50 day EMA and the 200 day EMA and the fact that the index is trading more than 130 points above its 200 day EMA. 

A similar pattern had occurred back in Aug '16 - triggering a two month long correction.

On longer term weekly chart (not shown), the index closed at a lifetime high of 2295 in a long-term bull market for the 47th straight week. All three weekly technical indicators are looking overbought and showing negative divergences by failing to touch new highs with the index.

FTSE 100 index chart pattern


The daily bar chart pattern of FTSE 100 dropped below its 20 day EMA and touched an intra-day low of 7131 on Mon. Jan 23. It was the lowest level touched during Jan.

However, the index managed to close above the 7150 level by the end of the day. For the rest of the week, the index consolidated sideways in a 50 points range between 7150 and 7200, and closed just 14 points lower for the week.

Is the worst over for bulls? Daily technical indicators are looking a little bearish. MACD is falling below its signal line in positive zone. RSI received good support from its 50% level and is trying to move up. Slow stochastic is trying to emerge from its oversold zone.

Some more correction or consolidation is likely. 

Note that by touching a low of 7131, the index has retraced about 33% of its 675 point rally from the Dec 2 '16 low to the Jan 16 '17 top of 7354. A Fibonacci retracement of 38.2% can drop the index to 7100. Some support can be expected there.

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 31st week in a row. Weekly technical indicators are in bullish zones but showing downward momentum. 

Saturday, January 28, 2017

Sensex, Nifty charts (Jan 27, 2017): Bulls show bears the exit door

In a trading week shortened by Republic Day holiday, FIIs decided to turn net buyers of equity - worth Rs 14 Billion. DIIs were also net buyers of equity worth Rs 19.2 Billion, as per provisional figures.

The combined buying trapped bears who had to run to cover their short positions. Both Sensex and Nifty gained more than 3% on a weekly closing basis.

Govt. data shows demonetisation had very little effect on sowing of rabi crops. India's foreign exchange reserves surged for the second straight week. Govt's focus on infrastructure like ports, roads and waterways will reduce logistics costs significantly.

BSE Sensex index chart pattern


The following comments had appeared in last week's post on the daily bar chart pattern of Sensex: "...all three EMAs have converged together. A sharp move may follow...The 63 points upward 'gap' formed on Wed. Jan 11 is likely to get filled. The up move should resume thereafter."

(Am I a clairvoyant? Not really. These were educated guesses - based on observing price patterns on thousands of charts over the years.)

On Mon. Jan 23, the 'gap' formed on Jan 11 got partly filled as the index briefly slipped inside it. The 20 day EMA also provided support to the index, which bounced up to close higher. 

A 'reversal day' bar (lower low, higher close) was formed. That triggered a sharp up move during the next three days.

The index easily crossed above the resistance level of 27600 as FIIs joined the bull bandwagon. The 'golden cross' (marked by green arrow) of the 50 day EMA above the 200 day EMA has technically confirmed a return to a bull market.

Daily technical indicators are bullish and showing upward momentum but looking overbought. MACD is rising higher in positive zone but ROC, RSI and Slow stochastic are showing negative divergences by touching lower tops.

A pullback towards 27600 is a possibility. The dip can be used to add to existing holdings.

NSE Nifty index chart pattern


The following comments had appeared in last week's post on the weekly bar chart pattern of Nifty: "Any upward bounce, if accompanied by good volumes, will be a buying opportunity. However, index upside may be limited - unless FIIs decide to buy." 

An upward bounce with good volume support - aided by FII buying - propelled the index past its 'double bottom' target of 8650. The long-term 'support-resistance' level of 8675 halted the rally for the week.

Weekly technical indicators are turning bullish. MACD formed a bullish 'rounding bottom' pattern and crossed above its signal line to enter positive territory. ROC has risen sharply above its 10 week MA to enter overbought zone. RSI is about to cross above its 50% level. Slow stochastic has climbed above its 50% level.

Nifty's TTM P/E has touched the 23 mark - much higher than its long-term average. The market breadth indicator NSE TRIN is sliding deeper into its overbought zone.

The Finance Minister will announce the budget on Feb 1. Print and TV analysts are expressing their opinions on whether the budget provisions will be favourable or unfavourable for the stock market.

The uncertainty may temporarily halt Nifty's upward march. This is not the time to jump in feet-first into the market. Await budget proposals, and track Q3 (Dec '16) results closely.

Stick to your Asset Allocation plan and SIPs. Keep a 'buy list' ready to take advantage of any unforeseen opportunities.

Bottomline? Sensex and Nifty charts have successfully reversed 4 months long down trends. With FIIs resuming buying, both indices should touch new highs in the near future. Your planning and discipline will determine whether you will add to your wealth or deplete it.

Wednesday, January 25, 2017

Nifty chart: a midweek technical update (Jan 25 ‘17)

FIIs were net sellers of equity on Mon. Jan 23 and token net buyers on Tue. Today they went on a buying spree. Their total net buying for the three days of trading crossed Rs. 11.8 Billion.

DIIs were net buyers of equity on all three days. As per provisional figures, their total buying was worth nearly Rs 14.4 Billion. Nifty gained a whopping 250 points in 3 days as shorts got badly trapped.

Q3 (Dec '16) results declared so far have not given many negative surprises, though adverse effects of demonetisation - particularly in the rural sector - is becoming clear.


The daily bar chart pattern of Nifty has provided almost a text book sequence of technical reversal signals that indicated the shifting of the trend from a bear phase to a bull phase. 

The index first formed a 'double bottom' reversal pattern after a 4 months long down trend (with positive divergences visible on MACD and RSI, which touched higher bottoms). This pattern was followed by a 'rounding bottom' reversal pattern visible on the 50 day EMA. 

Next came a breach of the down trend line with an upward 'gap'. Then the 'golden cross' of the 50 day EMA above the 200 day EMA (marked by grey ellipse) technically confirmed a bull market. 

An intra-day test of support from the upward 'gap' on Mon. Jan 23 ended with the formation of a 'reversal day' bar (lower low, higher close) that triggered a 200 points move during the next two days.

Note that the three EMAs had converged together. A sharp up move followed. The possibility was mentioned in last week's post.

The minimum upward target for the 'double bottom' reversal pattern is 8650. That is where the index should be heading next. 

Daily technical indicators are inside their overbought zones and showing upward momentum. But Slow stochastic is showing negative divergence by touching a lower top while the index moved higher.

Nifty's TTM P/E is almost at 23 - well above its long-term average. The breadth indicator NSE TRIN (not shown) is falling deeper inside its overbought zone. The index upside seems limited.

Don't worry if you missed buying on the breakout. The index may consolidate and pullback a bit. That will provide a buying opportunity.

Tuesday, January 24, 2017

WTI and Brent Crude Oil charts: consolidating within symmetrical triangles after touching 52 week highs

WTI Crude Oil chart


The daily bar chart pattern of WTI Crude Oil touched a 52 week high on Jan 3, but formed a 'reversal day' bar (higher high, lower close) and corrected down to its rising 50 day EMA.

Oil's price bounced up with good volume support, but touched a sequence of lower tops and higher bottoms - forming a 'symmetrical triangle' pattern.

Triangles tend to be unreliable patterns because the eventual breakout can occur in either direction. Since oil's price is trading above its 50 day and 200 day EMAs in bull territory, an upward breakout is more logical.

Daily technical indicators are not looking bullish. MACD is moving sideways below its falling signal line in bullish zone. RSI is in neutral zone. Slow stochastic is in bearish zone after failing to cross above its 50% level.

Waiting for the breakout before taking any buy/sell decision would be a prudent move.

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

Brent Crude Oil chart


After touching a 52 week high on Jan 3 and forming a 'reversal day' bar, the daily bar chart pattern of Brent Crude Oil has been consolidating sideways within a 'symmetrical triangle' pattern.

Oil's price is trading above its rising 50 day and 200 day EMAs in bull territory. So, the likely breakout from the 'symmetrical triangle' pattern is upward.

However, triangles are notorious for being unpredictable. A downward breakout can occur as well. It may be prudent to wait for the breakout before deciding to buy/sell.

Daily technical indicators are not giving any bullish signals. MACD is moving sideways below its falling signal line in bullish zone. RSI is moving sideways in neutral zone. Slow stochastic is in negative zone.

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

Monday, January 23, 2017

S&P 500 and FTSE 100 charts (Jan 20 '17): bears halt bull rallies

S&P 500 index chart pattern


After touching a lifetime high of 2282 on Jan 6, the bull rally on the daily bar chart pattern of S&P 500 has stalled. 

The index has received support from its rising 20 day EMA as it consolidated sideways - touching a sequence of lower tops and higher bottoms, forming a 'symmetrical triangle' pattern.

On the daily closing chart (not shown), the index has touched a sequence of lower tops and lower bottoms - somewhat like the pattern visible on the RSI.

The index is still trying to make up its mind whether Trump's presidency will be favourable or unfavourable for the stock market.

All three daily technical indicators are in bullish zones, but not showing upward momentum. Note that MACD has formed a large head-and-shoulders like reversal pattern that is hinting at some more consolidation or a correction.

The index is trading above its three EMAs in a bull market. Any correction - if it occurs - will improve the technical 'health' of the chart, and enable it to resume its upward journey.

On longer term weekly chart (not shown), the index closed lower for the second week in a row, but is well above its three weekly EMAs in a long-term bull market for the 46th straight week. All three weekly technical indicators are looking overbought. Only Slow stochastic is showing a bit of upward momentum.

FTSE 100 index chart pattern


On Mon. Jan 16, the daily bar chart pattern of FTSE 100 touched a new intra-day high of 7354, but closed about 11 points lower than its Fri. Jan 13 closing level of 7338.

The 'reversal day' pattern (higher high, lower close) brought an end to the record-breaking rally of 14 straight higher closes. The subsequent fall has been steeper than the climb. (Readers were warned about the story of Icarus in last week's post.)

The index received good support from its 20 day EMA on Thu. & Fri. (Jan 16 & 17), but at the time of writing this post the index has dropped well below its 20 day EMA and has corrected more than 200 points (~3%).

All three daily technical indicators have corrected overbought conditions. MACD is falling below its signal line in positive zone. RSI is seeking support from its 50% level. Slow stochastic has dropped close to its oversold zone.

Some more correction is likely. Support can be expected from the zone between 7000 and 7100.

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 30th week in a row. Weekly technical indicators are correcting overbought conditions. 

Sunday, January 22, 2017

Sensex, Nifty charts (Jan 20, 2017): bears fighting a last-ditch battle

FIIs were net sellers of equity on three days and net buyers on the other two days of the week. DIIs were net buyers of equity on three days and net sellers on the other two days. As per provisional figures, FII net selling was exactly matched by DII net buying.

So, why did Sensex and Nifty close lower for the week? Because both FIIs and DIIs were net sellers on the last day of trading. Some profit was booked by NRIs and proprietary traders before a holiday-shortened F&O settlement week.

The Govt. has recently cleared six FDI proposals worth Rs 11.9 Billion. Total FDI inflows during the Apr-Sep '16 half-year was 30% higher at US $21.6 Billion compared with the Apr-Sep '15 half-year period.

BSE Sensex index chart pattern



On Fri. Jan 13, the daily bar chart pattern of Sensex had ended the trading week by forming a 'reversal day' pattern that often signifies an intermediate top.

The following remarks were made in last week's post: "A pullback to the 200 day EMA seems on the cards. A subsequent strong upward bounce can carry the index above the resistance level of 27600."

After consolidating sideways in a narrow range of 250 points for four days, Sensex pulled back towards its 200 day EMA on Fri. Jan 20.

Note that all three EMAs have converged together (marked by blue ellipse). A sharp move may follow. 

All four daily technical indicators are correcting overbought conditions, and showing downward momentum in bullish zones. Some more correction or consolidation is a possibility.

The 63 points upward 'gap' formed on Wed. Jan 11 is likely to get filled. The up move should resume thereafter.

The 'golden cross' of the 50 day EMA above the 200 day EMA, which will technically confirm a return to a bull market, is awaited. Bears may fight to prevent that from happening.

F&O settlement will be on Wed. Jan 25 as Thu. Jan 26 is a holiday. Trading activity may remain at a low key.

NSE Nifty index chart pattern



The following comments appeared in last week's post on the weekly bar chart pattern of Nifty: "A pullback to the down trend line and the 8300 level can't be ruled out. But technically, the index is poised to move higher."

The index did pullback to the down trend line and the 8300 level - where it is also receiving support from its 20 week EMA. 

Any upward bounce, if accompanied by good volumes, will be a buying opportunity. However, index upside may be limited - unless FIIs decide to buy. 

Nifty's TTM P/E is above its long-term average at 22.37. The breadth indicator NSE TRIN (not shown) is well inside its overbought zone.

Weekly technical indicators are showing bullish signs after correcting oversold conditions. But MACD and RSI are still in their bearish zones. ROC and Slow stochastic have moved up to their respective neutral zones.

Bottomline? Sensex and Nifty charts have pulled back towards support areas after reversing 4 months long down trends. Bears were expected to put up a last-ditch battle - and they appear to be doing so. Such pullbacks provide buying opportunities, but without FII buying support a rally may not sustain. Be stock specific and check Q3 (Dec '16) results before taking any buy/sell decisions.

Friday, January 20, 2017

Why you should Invest in Stocks of Companies that pay regular Dividends

Most people who prefer investing in debt instruments or real estate do so because such investments are 'safer' compared to stocks. Stock prices tend to fluctuate wildly and are considered to be more 'risky'.

That logic reminds me of a departed uncle who refused to stir out of his home. He thought his home was 'safer' because it had less pollution and germs. Plus city roads were too 'risky' because of unruly traffic.

Debt instruments like bonds and bank fixed deposits may appear 'safer' but they carry risks too - from fluctuating inflation and interest rates. Real estate prices fluctuate also, putting your investment at risk.

One of the best reasons given by financial experts for investing in stocks is that they provide capital appreciation that can beat inflation. Younger people often flock towards growth stocks in the hope of quick 'multibagger' returns.

More experienced investors - who are in the game for the long haul - include stocks of dividend paying companies in their portfolios. But aren't such companies stodgy, slow-growth ones?

They often are. But not only do they pay regular dividends, such dividends tend to grow over time. Why? Because with lower growth opportunities, there is less need for capital expenditure.

So, the cash these companies keep generating through well-known branded products or services are distributed to shareholders. 

Those investors who are working regularly or earning from their business or profession may not really need the dividend income. But they can very well reinvest the dividend amounts in buying more stocks.

Over the years, 'dividend compounding' can lead to a substantial addition to your stock portfolio - leading to even more dividends that will become useful when you retire and are no longer earning a regular income.

Wednesday, January 18, 2017

Nifty chart: a midweek technical update (Jan 18 ‘17)

FIIs were net sellers of equity on Mon. Jan 16, but turned net buyers on the next two days. Their total net buying for the three days of trading this week was worth Rs 1.1 Billion. 

As per provisional figures, DIIs were net buyers of equity on Mon. and Wed. but their net selling on Tue. Jan 17 exceeded their net buying by Rs 1.6 Billion. Nifty has been stuck in neutral gear in spite of all the buying and selling.

WPI inflation rose to 3.39% in Dec '16 against 3.15% in Nov '16 and -1.06% in Dec '15. Higher diesel and petrol prices were the main culprits.


The daily bar chart pattern of Nifty had formed a 'double bottom' reversal pattern during Nov-Dec '16 and has been rallying since then. 

After a brief pause near its 200 day EMA, the index negated the 4 months long down trend by crossing above the down trend line with an upward 'gap' last Wed. (Jan 11) on the back of strong buying by DIIs. 

Nifty has been consolidating sideways during the past 5 trading sessions, hovering near the 8400 level.

The 50 day EMA has formed a small 'rounding bottom' reversal pattern and is about to cross above the 200 day EMA. The 'golden cross' will technically confirm a return to a bull market.

Note that all three EMAs have converged together (marked by grey ellipse). A sharp move is likely. Logically, the move should be upwards, because the index is trading above its three EMAs in bull territory.

However, market moves are not always logical. So, a sharp down move towards the 200 day EMA can't be ruled out. Such an event will provide a buying opportunity.  

Daily technical indicators are bullish and looking overbought. MACD has entered its overbought zone. Slow stochastic has been inside its overbought zone since the beginning of the year. RSI is moving sideways just below its overbought zone.

Nifty's TTM P/E is at 22.39 - well above its long-term average. The breadth indicator NSE TRIN (not shown) is inside its overbought zone. The index upside appears limited.

How limited? The 'double bottom' pattern has measuring implications - with an upward target of 8650. To get there, Nifty needs to cross above a resistance zone between 8500 and 8600.

Will it be able to do so? Yes, if FIIs continue buying - like they did during the past two days.

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Tuesday, January 17, 2017

Gold and Silver charts: bulls fight back but face strong resistance zones

Gold chart pattern


What had looked like a technical bounce from the Dec '16 low on the daily bar chart pattern of Gold turned into a sharp rally of about 80 points. 

Gold's price surged past its 20 day and 50 day EMAs on short covering and some value buying before running into the long-term 'support-resistance' zone between 1200 and 1220.

The 200 day EMA is still falling, and gold's price is trading well below it in a bear market.

Daily technical indicators are in bullish zones but not showing much upward momentum. Slow stochastic is inside its overbought zone, and may trigger a correction.

On longer term weekly chart (not shown), gold’s price has closed below all three weekly EMAs in a long-term bear market, despite rallying for two weeks with good volume support. Weekly technical indicators are correcting oversold conditions but remain in bearish zones. 

Silver chart pattern


The daily bar chart pattern of Silver tried to play catch-up with gold's chart, but after crossing above its 20 day EMA the rally stalled at the 50 day EMA - just below the 'support-resistance' zone between 17 and 17.50.

Daily MACD and RSI are in neutral zones and not showing much upward momentum. Slow stochastic is inside its overbought zone and turning down.

The short-covering rally, triggered by positive divergences visible on all three daily technical indicators (which touched higher bottoms when silver's price dropped lower in Dec '16), may have already come to an end. 

On longer term weekly chart (not shown), silver’s price rallied for two weeks but closed below its three weekly EMAs in a long-term bear market. Weekly technical indicators are correcting oversold conditions but remain in bearish zones.

Monday, January 16, 2017

S&P 500 and FTSE 100 charts (Jan 13 '17): bulls are clearly on top

S&P 500 index chart pattern


The daily bar chart pattern of S&P 500 was in pause mode - trading within a 25 points range and closing just 2 points lower for the week. 

On Thu. Jan 12, the index dropped below its rising 20 day EMA to a low of 2254 intra-day, but bounced up to close near its much higher opening level of 2271 - forming a 'hammer' candlestick pattern.

Any bullish implications of the 'hammer' pattern were negated by the formation of a 'shooting star' candlestick on Fri. Jan 13 - showing honours were even between bulls and bears.

Daily technical indicators are in bullish zones but hinting at some more index consolidation before resumption of the up move. MACD is sliding down gently below its falling signal line. RSI and Slow stochastic are moving sideways.  

On longer term weekly chart (not shown), the index closed well above its three weekly EMAs in a long-term bull market for the 45th week in a row. All three weekly technical indicators are looking overbought, but not showing much upward momentum.

FTSE 100 index chart pattern



The daily bar chart pattern of FTSE 100 is in the midst of a record-breaking and unprecedented bull run with 14 consecutive higher closes starting from Dec 22 '16.

At the time of writing this post, the index is trading 5 points higher - and well above its three EMAs in a bull market. A weakening UK Pound against the US Dollar, Japanese Yen and Euro has been propelling the index higher.

All three daily technical indicators are inside their respective overbought zones. Note that an index can remain overbought for long periods. But such a one-way rally without a correction is not technically 'healthy'. It reminds me of the story of Icarus.

On longer term weekly chart (not shown), the index closed well above its three weekly EMAs in a long-term bull market for the 29th week in a row. Weekly technical indicators are looking overbought and showing negative divergences by failing to touch new highs with the index. 

Sunday, January 15, 2017

Sensex, Nifty charts (Jan 13, 2017): game over for bears?

FIIs were net sellers of equity worth Rs 11 Billion, as per provisional figures. DIIs were net buyers of equity worth Rs 8.8 Billion. However, both Sensex and Nifty gained nearly 2% during the week.

There was some cheer on the economic front. The IIP number for Nov '16 was a surprising 5.7% against -1.8% in Oct '16 and -3.4% in Nov '15. Any adverse effect of demonetisation may become apparent from the Dec '16 number.

CPI inflation in Dec '16 slipped to 3.41% against 3.63% in Nov '16 and 5.61% in Dec '15 due to weak consumer demand. 

Exports rose for the 4th straight month to 5.72% in Dec '16. Imports rose only 0.46%, thanks to lower gold imports, leaving a lower trade deficit of $10.4 Billion.

BSE Sensex index chart pattern



The daily bar chart pattern of Sensex slid down the slope of the down trend line on Mon. Jan 9 before bouncing up and closing above its three EMAs in bull territory for the next four days.

On Fri. Jan 13, the index rose to test resistance from the 27600 level but fell short. It closed slightly lower to form a 'reversal day' bar (higher high, lower close) - giving some encouragement to bears.

Note that the three EMAs are converging, which is often a prelude to a sharp move. But in which direction?

Daily technical indicators are giving some clues. All four are in bullish zones. MACD is rising above its signal line in positive territory. But RSI and Slow stochastic are looking quite overbought. ROC faced strong resistance from the edge of its overbought zone and is about to cross below its rising 10 day MA.

A pullback to the 200 day EMA seems on the cards. A subsequent strong upward bounce can carry the index above the resistance level of 27600. 

Be aware that both FIIs and DIIs were net sellers on Thu. and Fri. If they don't resume buying, the index may consolidate sideways within the 'support-resistance' zone between 25900 and 27600 for a while.

Stock picking skills will get tested. Avoid 'cheap' stocks.

NSE Nifty index chart pattern



The inevitable happened. The weekly bar chart pattern of Nifty followed the example of Sensex and crossed above the resistance level of 8300 and the blue down trend line that had dominated the chart for 18 weeks.

Good volume support technically validated the 'double bottom' reversal pattern and the break out above the down trend line.

All four weekly technical indicators are still in bearish zones, but turning bullish by showing upward momentum.

A pullback to the down trend line and the 8300 level can't be ruled out. But technically, the index is poised to move higher.

Nifty's TTM P/E has moved towards 22.50 - higher than its long-term average. The breadth indicator NSE TRIN (not shown) is inside its overbought zone. Some correction or consolidation is likely. 

Bottomline? Sensex and Nifty charts have finally reversed 4 months long down trends after forming 'double bottom' reversal patterns. Bears are losing the war, but may put up a last-ditch battle. FII buying support is required for a sustained rally. Check Q3 (Dec '16) results before taking any major buy/sell decisions.

(Note: Markets fluctuate, but there are always opportunities if you know where to look. Learn how to choose fundamentally strong mid-cap and small-cap stocks. Become a paid subscriber of my Monthly Investment Newsletter. A limited number of new subscriptions are being offered till Jan. 21, 2017. Enrolments have started. Contact me for details: mobugobu@yahoo.com.)

Friday, January 13, 2017

To diversify, or not to diversify? That is the question.

Diversifying - in the context of business and investments - means hedging your bets, instead of putting all your eggs in one basket.

What is the main benefit of diversifying? Reduction of risk. Say, you are supplying large plastic containers to domestic paint manufacturers and have built up a reasonably good clientele.

Out of the blue, demonetisation of bank notes is announced by the government. The real estate sector goes for a toss and paint manufacturers curtail production. A big supply order of containers that you were negotiating gets cancelled.

What will you do? Shout from the rooftops about what an ill-planned disaster demonetisation has been? Or, realise the need of ridding the financial system of large amounts of untaxed cash and look for alternatives?

One alternative is to look for opportunities at other organisations in the domestic market with a need for large plastic containers - like Edible oil manufacturers. That would be a diversification.

Another alternative is to look for opportunities in the export market. A third alternative may be to make small plastic containers - used by shampoo and hair-oil makers.

Without making too many changes to your expertise and production capabilities, you now have more opportunities of growing your business and reducing risk by operating in different markets and product categories.

Peter Lynch coined the term "di'worse'ification" for companies that diversify into unrelated businesses that destroy rather than create shareholder value. A classic example?  Reliance entering the telecom services business. 

As if one brother's disastrous foray into telecom services was not enough. Now, big brother is throwing more money into the same business. The result is likely to be equally disastrous.

What about diversifying in the investment arena? Should you, or shouldn't you? Most financial experts will recommend diversification for reducing risk. That doesn't mean you buy 20 equity funds or 50 stocks.

Real diversification means investing in different asset classes after making a financial plan and an asset allocation plan depending on your goals and risk profile. 

Investing partly in equity, partly in fixed income, partly in gold, partly in a liquid fund will provide a well-rounded portfolio across different market and interest cycles.

When the stock market is booming, stocks will provide huge returns. What if the market crashes - as it often does? Fixed income instruments will continue to provide lower but steady returns, and liquid funds can be transferred to buy equity funds at lower NAVs.

Is there a downside to a planned and well-diversified portfolio? Unfortunately, yes. You will generate steady, average returns, but are unlikely to get filthy rich.

How can you get filthy rich? By becoming the next Bill Gates. Gates stuck to a single line of business, and made sure the whole world will use his company's software through shrewd negotiations with computer makers. (His di'worse'ification efforts into electronic products haven't borne fruit.)

Moral of the story? For mere mortals - like you and me - a planned and well-diversified portfolio that reduces risk and provides steady returns over many years is the route to financial freedom.

Learn more: 
What Does Investment Diversification Really Mean?

Related Post

Wednesday, January 11, 2017

Nifty chart: a midweek technical update (Jan 11 ‘17)

As per provisional figures, net selling in equities by FIIs was worth Rs 9.7 Billion during the first three trading days of the week. DIIs were net buyers of equity worth Rs 14.7 Billion, which allowed Nifty to kill two birds with one stone.

At the ongoing Vibrant Gujarat Global summit, where it is represented by a high-profile 20-member business delegation, Saudi Arabia invited India to play a key role in the kingdom's economic transformation as it seeks to reduce its dependence on oil exports.


The daily bar chart pattern of Nifty vaulted above the twin resistances of the 8300 level and the down trend line, when it opened with an upward 'gap' to begin trading today. 

The index continued its intra-day up move and closed at 8380 with strong volume support (not shown). A breach of a trend line with a 'gap' is considered to be 'stronger' than a breach during regular intra-day trading.

The index killed two birds with one stone - technically confirming the 'double bottom' reversal pattern and reversing the 4 months long down trend.

For the second day in a row, the index closed above its three EMAs in bull territory. The 50 day EMA is forming a small 'rounding bottom' pattern and looks ready to negate its earlier 'death cross' (below the 200 day EMA).

Daily technical indicators are looking bullish and showing upward momentum, hinting at a continuation of the rally. Is it time to throw caution to the winds and start buying by the truckload? 

Not really. Nifty's TTM P/E has moved up to 22.42 - well above its long-term average. The breadth indicator NSE TRIN (not shown) is falling deeper inside its overbought zone. A correction/pullback may be around the corner. 

The index gave two good opportunities to buy when it dropped twice to the 7900 level in Nov '16 and Dec '16. Don't fret if you didn't buy then. There are always good buying opportunities in individual stocks. 

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Tuesday, January 10, 2017

WTI and Brent Crude Oil charts: correcting after touching 52 week highs

WTI Crude Oil chart


The daily bar chart pattern of WTI Crude Oil broke out upwards from its trading range between 52 and 54 on the first day of trading in the New Year.

Oil's price crossed above the 55 level intra-day, but succumbed to selling pressure and dropped to seek support from its rising 20 day EMA. In the process, a 'reversal day' bar (that often marks an intermediate top) got formed.

After a brief upward bounce past the 54 level, oil's price corrected sharply below its 20 day EMA and closed just below 52. Concerns over rising US output and Iraqi exports may have contributed to the bearishness.

All three daily technical indicators showed negative divergences by touching lower tops when oil's price touched a new 52 week high. 

MACD has crossed below its signal line and corrected from its overbought zone. Note that the signal line has formed a 'rounding top' reversal pattern. The last time it formed such a pattern was in Oct '16 - when oil's price dropped from 52 to 42.

RSI and Slow stochastic are showing downward momentum and are about to enter bearish zones. Higher volumes on recent down days is another bearish sign.

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

Brent Crude Oil chart


The daily bar chart pattern of Brent Crude Oil crossed above the 58 level intra-day on the first trading day of the New Year but dropped to close near 55. A large 'reversal day' bar (higher high, lower close) got formed in the process.

After bouncing up to the 57.50 level on Jan 6, oil's price corrected sharply below its 20 day EMA and closed just below 55. Negative divergences visible on all three daily technical indicators, which touched lower tops when oil's price touched a new 52 week high, may have triggered the correction.

MACD has crossed below its signal line and has corrected down from its overbought zone. RSI and Slow stochastic are showing downward momentum and seeking support from their respective 50% levels.

Stronger volumes on recent down days is a clear sign that bears are becoming active. Despite OPEC production cut, another year of low oil prices is likely.

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

Monday, January 9, 2017

S&P 500 and FTSE 100 charts (Jan 06 '17): Touch new highs as bulls go on a rampage

S&P 500 index chart pattern


The daily bar chart pattern of S&P 500 began the New Year in a very bullish mood. On a holiday-shortened trading week, the index rose to touch a new intra-day high of 2282 on Fri. Jan 6, and closed at a lifetime high of 2277.

However, volumes tapered a bit on Friday, which isn't great news for bulls. Daily technical indicators are in bullish zones but giving mixed signals.

MACD is moving sideways below its falling signal line in positive zone. RSI bounced up after receiving support from its 50% level, but isn't showing much upward momentum. Slow stochastic bounced up sharply from the edge of its oversold zone and has entered its overbought zone.

All three indicators are showing negative divergences by failing to touch new highs with the index. The three EMAs are rising, and the index is trading above them in a bull market. 

The index can continue to move higher. But it may not be a bad idea to book part profits. 

On longer term weekly chart (not shown), the index closed well above its three weekly EMAs in a long-term bull market for the 44th week in a row. All three weekly technical indicators are looking overbought, and showing negative divergences by failing to touch new highs.

FTSE 100 index chart pattern


The daily bar chart pattern of FTSE 100 continues to defy gravity and bears. The index negated the 'rising wedge' pattern that had formed on the chart (refer last week's post) and climbed above the 7200 level in a holiday-shortened trading week.

At the time of writing this post, the index has slipped 10 points after touching a lifetime high of 7239. The rally from the Dec 2 low of 6678 has been very steep. Such steep rallies can't be sustained with last week's sliding volumes (not shown on chart).

All three daily technical indicators are inside their overbought zones. Overbought conditions can also be seen from the sharply rising 20 day and 50 day EMAs, with the index trading 150 points above its 20 day EMA.

The index may move higher, but looks ripe for a correction. Part profit booking may be a good idea.

On longer term weekly chart (not shown), the index closed well above its three weekly EMAs in a long-term bull market for the 28th week in a row. Weekly technical indicators are looking overbought and showing negative divergences by failing to touch new highs with the index. 

Sunday, January 8, 2017

Sensex, Nifty charts (Jan 06, 2017): bulls on a roll

The first trading week of the year saw no respite from selling by FIIs. Their net selling in equities touched Rs 19 Billion, as per provisional figures. DIIs were net buyers of equity worth Rs 16.2 Billion. Both Sensex and Nifty managed to eke out small gains (of 0.5% and 0.7% respectively).

India's GDP growth in fiscal 2016-17 is expected to slow down to 7.1% from 7.6% a year ago. But the forecast is based on data available till Oct '16. Experts are predicting a much slower growth of 6.3-6.4% once the full effect of demonetisation of high-value bank notes is taken into account. 

BSE Sensex index chart pattern


The daily bar chart pattern of Sensex almost extricated itself from the four months long bear grip. Why almost? 

Have a close look at the last two trading bars (highlighted by light blue circle). The index broke out above the blue down trend line on Thu. Jan 5, and closed above its three EMAs in bull territory. Bears asserted themselves on Fri. Jan 6. 

The index rose higher and touched the 27000 level intra-day, but pulled back to the top of the down trend line and closed below its 200 day EMA - forming a 'reversal day' bar (higher high, lower close), which often marks an intermediate top.

Daily technical indicators are looking bullish. MACD is rising above its signal line and entered positive territory after more than three months. RSI has crossed above its 50% level. ROC is facing resistance from the edge of its overbought zone. Slow stochastic is turning down after entering its overbought zone.

The index may consolidate or correct a bit before resuming its up move. Q3 (Dec '16) results of TCS and Infosys will be announced next week - which may be a bellwether for the market.

The index crossed above its intermediate top of 26804 - technically confirming a 'double bottom' reversal pattern. Unless FIIs resume buying, do not expect a runaway rally. 

NSE Nifty index chart pattern


The weekly bar chart pattern of Nifty managed to cross above its intermediate top of 8275 intra-week, but faced strong resistance from its 20 week EMA and the 8300 level.

The index closed lower (at its 50 week EMA). Technically, the 'double bottom' reversal pattern has not yet been confirmed. The blue down trend line is still in force. 

All four weekly technical indicators are showing upward momentum, but remain in bearish zones. Bears may put up a fight to defend the down trend line.

Nifty's TTM P/E remains high near 22. The breadth indicator NSE TRIN (not shown) is in neutral zone, but falling rapidly towards its overbought zone. Any further up move may fizzle out quickly.

Bottomline? Sensex and Nifty charts show that bulls have made good progress, but bears are in no mood to relent just yet. FII buying support is essential for any sustained rally. Await Q3 (Dec '16) results before taking any major buy/sell decisions.

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