How is the Sensex performing against global indices?

The Sensex bottomed out in Dec ‘11 after more than 13 months of a bear phase. In Jun ‘12, it formed a higher bottom and has been in an uptrend ever since. Technically, it looks like the early stage of a new bull market in the Sensex.

Though the index is trading more than 10% below its Nov ‘10 top, many stocks have touched their all-time highs – thanks to relentless buying by FIIs. There have been some doubts about the real source of such FII inflows. Apparently, a lot of black money is being funneled out through ‘hawala’ routes and round-tripping back into the country in the garb of FII investments.

Where are the ‘real’ FIIs buying? A look at the 1 year closing chart patterns of some global indices may provide some clues.

Brazil IBOVESPA vs. SENSEX (in green)

After outperforming the Sensex till May ‘12, Brazil’s IBOVESPA index has underperformed for the past 6 months. Some FII money may have been diverted from Brazil to India of late.

Russia RTSI vs. SENSEX (in green)

Russia’s RTSI index was an equal performer with the Sensex till Feb ‘12 before outperforming in Apr and May ‘12. Since Jun ‘12, Sensex has outperformed the Russian index. Some FIIs may have booked profits and invested in India.

Hang Seng vs. SENSEX (in green)

The Hang Seng index was an equal performer in Nov ‘11 and again during Jun to Sep ‘12. It has outperformed the Sensex during the other 7 months.

Jakarta Composite vs. SENSEX (in green)

Indonesia’s Jakarta Composite index has comfortably outperformed the Sensex during the past year, clearly indicating which market the ‘real’ FIIs prefer.

Germany DAX vs. SENSEX (in green)

Despite the economic woes in Europe, Germany’s DAX index has clearly outperformed the Sensex during the previous 12 months. Is this an indication that India’s so-called economic growth doesn’t have many takers among ‘real’ FIIs?

S&P 500 vs. SENSEX (in green)

Only during Nov ‘11, and during the recent correction, was the Sensex able to keep up with the S&P 500 index. The slow growth and high unemployment in the US economy hasn’t shaken the faith of FIIs in their home market.

Comparative charts of BRIC indices

The BRIC countries are supposed to be the next global economic growth centres. Does economic growth translate into stock market strength? It ain’t necessarily so (with due apologies to the Gershwin brothers). If you’ve not been exposed to Gershwin’s music, click on the link to hear an amazing rendition by violinist Jascha Heifetz.

How are the BRIC stock indices faring? Given below are the 2 years closing chart patterns of Brazil (IBOVESPA), Russia (RTSI) and China (Shanghai Composite) indices as compared with India (Nifty):

Brazil IBOVESPA vs. NIFTY (in green)

The Nifty has outperformed the IBOVESPA index over the past 2 years, though both indices have provided negative returns. Both indices are facing corrections after re-entering bull markets. The bearish technical indicators are pointing to a deeper correction – probably a test of support from the rising 200 day EMA.

Russia RTSI vs. NIFTY (in green)

Russia’s RTSI index has been more volatile than the Nifty over the past 2 years by touching higher tops and lower bottoms, but has provided marginally positive returns. The technical indicators are looking bearish. A drop below the 200 day EMA is likely.

Shanghai Composite vs. NIFTY (in green)

The Nifty has outperformed the Shanghai Composite index by a wide margin. China’s economic growth continues to be the highest among the BRIC nations, but its stock index has fared the worst. The technical indicators are looking oversold, so a bounce up may be on the cards. But it will probably be used by the bears to sell.

Despite its negative growth in the previous 2 financial years, the Nifty has lost less than the Shanghai Composite and the Brazil IBOVESPA indices, and been less volatile than Russia’s RTSI index. That may explain why the FIIs are buying in India despite all the scams and poor governance.

Comparative performance of Sensex and global indices

One keeps reading and hearing that the Sensex has been one of the worst performers among global stock indices over the past one year. So I decided to take a look at some of the leading global indices (in blue) to check whether the Sensex (in green) has been an underperformer or not.

Here is what I found:-

S&P 500 vs. Sensex

The S&P 500 index has not only outperformed the Sensex by a wide margin, but has eked out a 5% gain over the past year despite the economic slow down in the USA.

FTSE 100 vs. Sensex

The UK economy is in a bad shape with growth almost non-existent. Still, the FTSE 100 has outperformed the Sensex right through the past year – despite losing 5%.

DAX vs. Sensex

The German economy is stronger than the UK’s, but the DAX has lost 10% over the past year. Despite the steep fall in Aug ‘11, it managed to outperform the Sensex.

Bovespa vs. Sensex

India is no match for Brazil on the soccer field, but the Sensex has managed to outperform the Bovespa by more than 5% over the past year.

MERVAL vs. Sensex

The Argentine index has not gained during the past year, but has outperformed the Sensex by a wide margin.

Hang Seng vs. Sensex

Hang Seng is the only other major global index that has underperformed the Sensex, thanks to its steep fall over the last two months.

Jakarta Composite vs. Sensex

The Indonesian index has been one of the best performers in Asia, though it has made zero gains during the past year. It has significantly outperformed the Sensex.

KLCI vs. Sensex

The Malaysian index outperformed the Sensex throughout the past year, though it has lost about 3%.

The Sensex has indeed been an underperformer against major global indices – with the exception of the Bovespa and the Hang Seng. India’s economy is still growing in spite of the recent slow down due to high interest rates. When the turnaround comes, the index is likely to become an outperformer.

Global indices: crack under bear attack

It wasn’t just the Indian market that suffered at the hands of the bears. Global indices cracked as well, even the few that have been showing remarkable resilience so far.

Our trouble-shooting Finance Minister was quick to state that Indian markets were only feeling the effect of a global sell-off, and there was no reason to panic. Those are mere words to shore up our falling market.

The time for soothing words is long over. It is time for action. Tough policy decisions – however unpopular – need to be taken and implemented. Soon. Bears are about to take complete control.

Here are the 6 months closing chart patterns of a few global market indices:

Shanghai Composite China

The Shanghai Composite index has been trading sideways ever since it dropped below the 200 day EMA back in Apr ‘10. It has once again dropped below all three EMAs. Last Friday’s fall has no special significance for a index already struggling to keep the bears away.

Australia All Ordinaries

The Australia All Ordinaries index has been in a down trend since Apr ‘11. The ‘death cross’ of the 50 day EMA below the 200 day EMA in Jun ‘11 confirmed a bear market. Friday’s panic selling has pushed the index deeper into bear territory.

DAX Germany

Except for a few days in Mar ‘11, the DAX index had been in a bull market – trading above a rising 200 day EMA - till Jul ‘11. The index slipped below the 7000 level and the 200 day EMA on Mon. Aug 1 ‘11, and continued to fall through the past week. The ‘death cross’ will confirm a bear market.

Madrid General Spain

The Madrid General index has been in a bear market since May ‘11, making a pattern of lower tops and lower bottoms. Things were bad. They have just turned worse.

IBOVESPA Brazil

The IBOVESPA index has been trending down in a bear market since Apr ‘11. Last week’s selling has pushed the index below a downward sloping channel.

MERVAL Argentina

The Argentine MERVAL index had been trading with a slight downward bias, but stayed above a rising 200 day EMA till Jul ‘11 (except for a few days in Jun ‘11). Friday’s huge drop has changed the equation in favour of the bears.

American Index Chart Patterns – one year charts

Last month, I had taken a look at the 5 year chart patterns of American indices. The S&P 500 and the Canada TSX charts remained well below their all-time highs and were struggling to cross their Apr ‘10 tops. The Brazil BOVESPA chart was a little below its all-time high. The Mexico IPC and the Argentine MERVAL charts were at new all-time highs.

Some interesting changes have occurred since last month’s post, which the one year chart patterns of the American indices will reveal:

S&P 500 Index Chart

Last week, the S&P 500 index chart moved marginally above the intra-day and closing high levels touched in Apr ‘10. The 50 day and 200 day EMAs are rising with the index above them. Note that the 50 day EMA straddled the 200 day EMA for two months before moving up. The S&P 500 has made a bullish pattern of higher tops and higher bottoms. All point to a revival of the bull market.

That was the good news. Now the bad. By dropping below the 1200 level and failing to move significantly above the Apr ‘10 top on reduced volumes, the index may be forming a bearish double-top pattern. The double-top can be confirmed only if the index falls below the Jul ‘10 low. Should that happen, the S&P 500 index chart can drop to 900.

The bearish possibility will be negated if the index bounces up after finding support at the 50 day or 200 day EMA. Such an upward bounce will be an adding opportunity.

Canada TSX Composite Index Chart

The Canada TSX Composite index chart touched a new 52 week closing high of 13052 on strong volumes – well above its Apr ‘10 top of 12281. Like the S&P 500, it is facing a bit of correction.

Note that the 50 day EMA formed a bullish saucer-like pattern and didn’t fall to the 200 day EMA. The TSX Composite index had dipped below the 200 day EMA for only 7 trading sessions during the past 12 months and remains in a bull market. Use the dip to add.

Mexico IPC Index Chart

The Mexico IPC index chart touched a new all-time high of 36814 last week and ended up gaining almost 1600 points (4.5%) since my previous post.

Bulls are in complete command, and the dip following the new high is an adding opportunity. Note that the IPC index hasn’t dropped below the 200 day EMA even once during the past year.

Brazil IBOVESPA Index Chart

The Brazil IBOVESPA index chart comfortably crossed its Apr ‘10 intra-day and closing highs with more than 1000 points to spare, but fell 400 points short of its all-time high of 73517 (touched in May ‘08).

The bears launched a strong attack to take the index down to the 70000 level and the rising 50 day EMA. Note that the RSI has been rising while the IBOVESPA index has been correcting. The index is likely to resume its up move soon.

MERVAL Buenos Aires Index Chart

The Argentine MERVAL index chart pattern touched a new all-time high of 3381 on Nov 5 ‘10. The index has risen too steeply above the 50 day EMA and is looking overbought.

The RSI has been inside the overbought zone for the past three weeks, which is unusual. The correction may last a little longer.

Bottomline? The one year American index chart patterns are in bull markets of varying strengths. Stay invested with trailing stop-losses, or add the dips.

American Index Chart Patterns – 5 year charts

The long-term American index charts are showing contrasting patterns. While the USA and Canada are struggling to get back into a bull market, having barely crossed the 50% Fibonacci retracement levels of their bear market falls, Mexico and Argentina are trading at all-time highs. Brazil is less than 4% below its all-time high.

Here are the 5 year charts of some of the American indices.

S&P 500 Index Chart

The S&P 500 index chart has crossed the hurdle of 1150, and has closed above the flat 200 day EMA. The Apr ‘10 closing high of 1217 has to be crossed convincingly for the bulls to regain some control. The Oct ‘07 closing high of 1565 is way out of sight.

Canada TSX Composite Index Chart

The Canada TSX Composite index chart is in a slightly better shape than the S&P 500 chart. The Apr ‘10 top has been crossed, forming a bullish ‘higher tops and higher bottoms’ pattern. The Apr ‘08 closing high of 14321 is almost 1800 points away.

Mexico IPC Index Chart

The Mexico IPC index chart is at an all-time high, and it looks like it isn’t done yet. One of the best performing markets not only in the Americas, but worldwide.

Brazil IBOVESPA Index Chart

The Brazil IBOVESPA index chart is still 2700 points below its May ‘08 high of 73517. It may be a matter of time before the index reaches a new all-time high. In spite of all the noise about the economic growth of the BRIC countries, the Brazil index chart hasn’t quite made it to the top of the heap – though it is one of the better performers.

MERVAL Buenos Aires Index Chart

The Argentine MERVAL index chart gets the gold medal amongst the American long-term charts. Quite a comeback for a country that was in a state of economic turmoil and high inflation just a decade back.

Bottomline? The 5 years US and Canada index charts are showing the effects of over-leveraged economies and debt mismanagement. Mexico, Brazil and Argentina index charts are faring much better and are among the best performers world-wide. Booking profits in Mexico and Argentina and deploying in Canada may be a good contrarian play.

Stock Index Chart Patterns - Dow Jones (DJIA) and Bovespa (Brazil), May 21, '10

Dow Jones (DJIA) index chart

In last week's analysis of the Dow Jones (DJIA) index chart pattern, I had observed a 'reversal day' followed by a 'distribution day', and concluded that the bulls didn't have much hope (of a recovery) in the near term.

An effort at a pullback on Tuesday, Mar 18 '10 was nipped in the bud by the falling 20 day and 50 day EMA, which had merged briefly. The bears attacked with renewed vigour on increasing volumes on Wednesday and Thursday, and pushed the Dow below the 200 day EMA.

Friday's intra-day low of 9861 was less than 100 points above the May 6 '10 ('fat finger' crash day) low of 9787. A sharp pullback on reduced volumes stopped short of the 200 day EMA but ensured that the Dow remained above the psychological 10000 level. Note that the 20 day EMA has dropped below the 50 day EMA but it is still 400 points above the 200 day EMA.

Bulls may try to stem the rot by grasping at these straws. The technical indicators are signalling that any rallies may be short-lived and used as a selling opportunity. The slow stochastic and RSI are both below their 50% levels and moving down. The MACD is below the signal line and falling quickly in negative territory. The MFI had a small bounce off the oversold zone.

The bulls are getting weaker with each passing day after a heady 13 months long rally. Indicators of economic activity like Copper prices, Baltic Dry Shipping index, Dow Jones Transportation index are all hovering near or below their 200 day Moving Averages. That means the economic recovery may be a chimera.

Bovespa (Brazil) index chart

The Brazil Bovespa index chart pattern was a picture of bullishness back in Jan '10. The index had just made a new high of 71068, even as the MACD, RSI and MFI were all indicating negative divergence.

The index corrected by more than 9700 points (13.5%), fell to a low of 61341 in Feb '10, received support near the 200 day EMA and started a fresh rally that peaked higher at 71989 on Apr 9 '10.

Note that both the RSI and MFI made lower tops as the index rose to a new high. This time the bears attacked with much more determination. The intra-day low of Feb '10 was broken on May 6 '10, when the Bovespa fell in sympathy with the Dow - down to 60774.

Last week's high volume bear onslaught kept the index below the 200 day EMA throughout the week, with Thursday's low of 57634 a good 5% below the May 6 '10 low. Friday's sharp 2000 points pullback took the Bovespa above the psychological 60000 level - but short of the May 6 '10 low of 60774.

The technical indicators are quite bearish, in spite of Friday's big pullback. The 20 day EMA has slipped below the 200 day EMA. The slow stochastic is attempting to emerge out of the oversold zone. The MACD is sinking deeper into negative territory. The RSI is at the edge of its oversold zone. The MFI has bounced off the oversold zone.

The bulls look like a prize fighter who has taken too many punches - all glassy-eyed and wobbly-kneed - awaiting the knock-out blow.

Bottomline? The chart patterns of the Dow and Bovespa indices have entered bear markets - much like indices around the globe. Remember that money is made in bear markets by selling on rises and buying back on dips. Long-term investors can hang on to their good portfolio stocks and accumulate more on sharp falls. This is not the time for bottom-fishing.

Stock Index Chart Patterns - Dow Jones (DJIA) and Bovespa (Brazil), Jan 8, '10

Dow Jones (DJIA) index chart

Last week's analysis of the Dow Jones (DJIA) index chart was concluded with the following comments:-

'...this bull rally on low volumes has surprised on the upside every time the bears have tried to dominate. So look for another thrust towards a new high.'

True to form, the Dow made a new high of 10666 on Jan 7 '10 - this time accompanied by decent volumes. But the daily lows dipped below the 10500 level on each of the first four days of the week and the index sought daily support from the rising 20 day EMA. The 50 day EMA and the 200 day EMA are rising nicely, as the bulls resumed their efforts to dominate the bears in the new year.

The technical indicators are reflecting the bull surge. The RSI bounced off the 50% level, but note that it failed to make a new high. The MFI has moved up sharply above the 50% level. The slow stochastic has entered the overbought zone. The MACD has remained positive and just above the signal line, but is showing negative divergence like the RSI.

This rally can end dismally if the employment figures do not start to improve soon. "Until we focus on creating middle class jobs that are not dependent on the government, we will only be putting band-aids on the open, festering wound that is our unemployment rate", mentions this article.

Bovespa (Brazil) index chart

It has been a while since I looked at the Bovespa (Brazil) index chart. But that hasn't deterred the bulls from their upward march. A renewed effort by the bears to fight back during the last two weeks of Dec '09 was effectively repulsed.

The new year's trading began strongly and the index made a new high of 70937 on Jan 6 '10 with good volume support. All three EMAs are moving up with the index above them.

The technical indicators are not as supportive. The RSI is above the 50% level, but actually drifted lower as the Bovespa made a new high. The MFI has dropped to the 50% level. The slow stochastic has entered the overbought zone. The MACD is above the signal line and rising in the positive zone. But it is showing negative divergence - like the RSI and MFI.

Bottomline? Both the Dow Jones (DJIA) and Bovespa (Brazil) index chart patterns are looking bullish. The sporadic efforts by the bears to stall the bull rally have come to nought every time. Maintain trailing stop-losses and stay invested.

Stock Index Chart Patterns - Dow Jones (DJIA) and Bovespa (Brazil), Oct 9, '09

Dow Jones (DJIA) index chart

The Dow Jones (DJIA) index got good support at the 50 day EMA and jumped up swiftly to gain back the prior week's losses and reach a new closing high of 9865. The index seems poised at an interesting juncture - less than 50 points away from its previous high of 9938, made on Sep 23 '09.

All three EMAs are moving up, but volumes remain muted. The slow stochastic has changed directions and crossed the 50% level. The RSI and MFI are both below their 50% levels and moving sideways. The MACD has moved up to touch the signal line.

The Dow chart pattern is looking very similar to the European indices, which look to be in buoyant moods. An attempt at crossing the psychological level of 10000 is on the cards.

Bovespa (Brazil) index chart

My previous look at the Brazil Bovespa index chart pattern was 4 week's back. At that time, the index had just completed a correction down to the 50 day EMA and jumped back up (just like the Dow did last week). Since then, the bulls have been relentlessly charging and the index gained 9% while the Dow managed just a 2% gain.

A quick glance at the 3 months bar chart pattern of the Bovespa shows that the Brazilian index is on much stronger footing. The slow stochastic is well entrenched in the overbought zone. Both the RSI and MFI are above their 50% levels. The MACD is moving up and is above the signal line.

All the three EMAs are moving up smartly. But the new high on Oct 9 '09 was on much lower volume. Could it be a sign of buying exhaustion? The negative divergences in the RSI and MFI are the other concerns.

The Dow has gained more than 50% from its Mar '09 low. The Bovespa has gained more than 100% since its Oct '08 low. At some point, both indices should face deeper corrections, as it has been a one-way rally so far for both. When? That's a million dollar question.

Bottomline? The Dow Jones (DJIA) and Bovespa (Brazil) index chart patterns are in bullish moods. Keep tight stop losses and enjoy the ride.

Stock Index Chart Patterns - Dow Jones (DJIA) and Bovespa (Brazil), Sep 11, '09

Dow Jones (DJIA) index chart

During the previous week's analysis of the Dow Jones (DJIA) index chart pattern, I had expressed my reservations about the continuation of the bull rally because of two things - the lack of volumes and the 'rising wedge' bearish pattern.

The bulls emerged rejuvenated after the long weekend and the index made higher tops and bottoms every single day of the truncated week of trading. But look what happened on Fri, Sep 11 '09 - a higher high but a lower close. A bearish 'reversal day'.

The 3 months bar chart pattern of the Dow Jones (DJIA) index shows the effort by the bulls to shake off the poor fundamentals and technicals of the market:-

All three EMAs are moving up with the index, which means that the bulls are still in control. The bears appear to be in need of a confidence booster to launch a proper attack. The short squeeze in Jul '09 is still fresh in their minds.

The low volumes remain a concern. The technical indicators are not supporting the gung-ho bullishness in the Dow. The RSI turned flat after rising above the 50% level. The MFI remains above the 50% level but is heading down. The slow stochastic stopped short of entering the overbought zone. The MACD rose a bit but failed to move above its falling signal line.

Note the negative divergences in all the indicators, which failed to make new highs with the index. That doesn't mean you should short this market. Not yet. Wait for it to go below the low of 9223 made on Sep 2, '09.

Bovespa (Brazil) index chart

I had looked at the Bovespa (Brazil) index chart pattern nearly two months ago, when it was trying to shrug off a correction. The subsequent up move was strong, as the bears were trapped badly.

The 3 months bar chart pattern of the Bovespa (Brazil) index is now following the moves of the Dow closely:-

Almost a lock-step move with the Dow last week - moving above the 20 day EMA and making higher tops and bottoms through the week, ending with a bearish 'reversal day'.

There are two significant differences between the Dow and Bovespa. A much wider gap between the 50 day and 200 day EMAs in the Bovespa chart, indicating a much stronger bull rally. Volumes are also much lower but less volatile.

The RSI is just above the 50% level. The MFI has slipped below the 50% level. The slow stochastic has also stopped short of entering the overbought zone. The MACD has moved a bit above its flattening signal line.

Bottomline? Both the Dow Jones (DJIA) and Bovespa (Brazil) index chart patterns are showing a bit of fatigue after the hectic climb last week. A correction this week would help the bull rally to get stronger. (At the time of writing this post, both indices seem to be in correction mode.)

Bovespa (Brazil) index chart pattern - July 16, '09

The last time I took a look at the Bovespa index chart pattern 3 months ago, the Brazilian index was looking a lot stronger than the BSE Sensex index. With this week's strong performance of the Sensex, I thought it may be worthwhile to have another look at the Bovespa index chart.

It wasn't surprising to find that the BSE Sensex chart (in red) is now outperforming the Brazil index (in blue). The Sensex has been superimposed on the Bovespa 6 months closing chart pattern for comparison - so the index levels are replaced by percentage levels:-

The two indices lock-stepped along till the middle of May '09. The election results in India was seen as a big positive by the stock market, and the big gap-up jump on May 18, '09 took the BSE Sensex index way above the Bovespa index. Notice how the Brazil index also moved up on May 18, '09 - when there was no euphoria due to election results.

What is more interesting is the way the two chart patterns behaved subsequently. Minus the gap, both have moved sideways with a downward bias, including the sharp rise during this week. Just goes to show that the two emerging markets are dancing to the same FII tune.

Let us look at the technicals. The ^BVSP spent a bit of time below its 50 day EMA, dragging the 20 day EMA down towards the medium term average. This week's up move (which seems to be continuing on Friday, July 17, '09 at the time of writing this post) has once again taken the index above all three moving averages.

The slow stochastic has bounced up sharply from the oversold zone and moved above the 50% level, indicating a trend change. A similar move last month proved to be a 'false' indication. Another example of why a single technical indicator is not to be relied upon.

The RSI gave a better signal, as it made a higher bottom while the index was making a lower one - a positive divergence. The MFI has started to move up after making two bottoms above the oversold region, but remains below the 50% level.

The MACD is still in the negative region - proving that it is a 'lagging' indicator - but is trying to move above its signal line. Volumes have picked up to support the up move.

Bottomline? The Bovespa (Brazil) index chart pattern shows that the recent up move may be getting stronger, as bears appear to have been trapped. Don't fight the trend - but keep booking partial profits.

Dow Jones (DJIA) Index Chart Pattern - Jun 26, '09

In last week's discussion about the Dow Jones (DJIA) index chart pattern, I had cautioned about the following bearish possibility:-

'All the technical indicators are signalling a deeper correction ... (which) is well on its way and the next support from the 50 day EMA may be under threat.'

A glance at the 3 months closing chart pattern of the Dow Jones (DJIA) index chart pattern (in blue) will reveal that the bears are beginning to regain control. Please note that the Dow Jones index values are in percentage terms because I have included the 3 months closing chart pattern of the Bovespa (Brazil) index (in red) for comparison.

The DJIA index did break down through the support of the 50 day EMA on Monday and proceeded to close below it for three days in a row. Thursday's sharp up move took the index back above the medium-term moving average, but the 20 day EMA provided resistance to a further move upwards. Friday's lower close was on higher volumes.

The RSI bounced off the 20% level just before entering the oversold zone. The slow stochastic did likewise, but the %K line failed to make a bullish cross above the %D line. The MFI is headed down towards the oversold zone. The MACD is not only below its signal line, but has entered negative territory.

Two indicators are bearish, and two are mildly bullish. Bulls need not get elated. Just take a look at the Bovespa chart. At first glance, it may appear that the Dow is behaving similarly to the Brazilian index. May be a little weaker at worst.

Wrong. The Bovespa index remains in a bull market. It is well above its 200 day EMA, took support from the 50 day EMA during last week's correction and closed above the 20 day EMA. Compare that with the Dow, that never got out of a bear market by failing to close convincingly above the 200 day EMA.

Bottomline? The Dow Jones (DJIA) index chart pattern seems to have had its day (rather, 3 months) in the sun. Much like the USA soccer team in the FIFA Confederations Cup final against Brazil, it has flattered only to deceive. Investors should seriously start looking at the emerging markets, if they wish to get any returns on their investments.

About Economic tides and Stock Market trends

In a book written nearly 70 years ago but which is still relevant today, Edwards and Magee compared stock market trends to tides, waves and ripples in the ocean.

Major or Primary trends - 'bull market' for an up trend and 'bear market' for a down trend - last for a year or more. A 'bull market' can be compared to an incoming tide 'which carries the water farther and farther up the beach until finally it reaches high-water mark and begins to turn. Then follows the receding or ebb tide, comparable to a Bear Market'.

Intermediate or Secondary trends - that last for 3 weeks to a few months - are declines or 'corrections' in a 'bull market' and rallies or 'recoveries' in a 'bear market'. 'While the tide is rising, each succeeding wave pushes a little farther up onto the shore and, as it recedes, does not carry the water quite so far back as did its predecessor. During the tidal ebb, each advancing wave falls a little short of the mark set by the one before it, and each receding wave uncovers a little more of the beach. These waves are the Intermediate trends - Primary or Secondary depending on whether their movement is with or against the direction of the tide'.

Minor trends are part of Intermediate or Secondary trends that last for only a few days, and are meaningless for investment purposes and often prone to manipulation. 'The surface of the water is constantly agitated by wavelets, ripples and "catspaws"
moving with or against or across the trend of the waves - these are analogous to the market's Minor trends, its unimportant day-to-day fluctuations'.

The vast majority of the world's population have neither any interest, nor any inclination towards investing, in the stock markets. For them, the state of the economy - the rising cost of daily groceries, interest on mortgage payments, cost of petrol are of greater significance.

To extend the ocean analogy further, I would like to compare the ebb and flow of the ocean's tide to the state of the economy. During economic up turns, production booms, jobs are plentiful, consumption of household goods and luxury goods go up - leading to expansion in production, more jobs, more consumption, till finally, inflation and higher interest costs take its toll and the economic tide turns.

Over the past several years, the economic tide is gradually flowing towards the emerging markets and ebbing from the developed markets. It didn't happen in a day and the economic balance has still not shifted completely. But the signs of this shift are becoming apparent.

A look at the world market indices will suffice. While the Shanghai Composite, Hang Seng, TSEC, KOSPI, Sensex, Bovespa are all trading above their long term averages, the Dow, FTSE, CAC, DAX are still struggling to cross their 200 day EMAs.

This gives a clear indication of where the economic recoveries will happen first. Irrespective of whether we are in an intermediate bear market rally or in the primary stages of a bull market.

KOSPI (Korea) Chart Pattern - Apr 23, 2009

In last week's discussion about the Sensex chart pattern, I had made the following assertion:

A quick look at indices around the globe reveals that Bovespa (Brazil), Venezuela and Chile in South America and Shanghai, TSEC (Taiwan) and Kospi (Korea) in Asia are the only six that have closed above their 200 day EMA, but the upward rally is slowing. All the other world indices are below their 200 day EMAs.

It is logical to have a look at the KOSPI (Korea) 6 months closing chart pattern to ascertain the status of the rally:-

(Please right-click on the image above and open it in a new tab or window for a better view.)

Far from slowing down, the upward rally has resumed with new vigour. Before we look at the technical indicators, let us note the interesting index chart pattern.

The global stock indices, including the Sensex, made a new 52 week closing low on May 9, '09 before the rally started. But look at the KOSPI. It made a low on Mar 2, '09 - but this wasn't a 52 week closing low. That had happened all the way back on Oct 27, '08.

After testing the 52 week closing low in Nov '08, the KOSPI's rally started as the index made gradually higher tops and bottoms while still in a long term bear market. The sharp upward rally from Mar '09 also preceded the global rally by a week.

The index has now spent most of Apr '09 above its 200 day EMA, while global indices (barring the few mentioned) are struggling to reach - let alone cross - their respective 200 day EMAs. Now, have a look at the short and medium term EMAs.

The 20 day EMA moved above the 50 day EMA from below around the middle of Mar '09, and both averages moved steadily up along with the index. But see what happened after the past two days' trade? The 20 day EMA nudged above the flattening 200 day EMA from below - the first confirmation of a bull market.

The stronger confirmation will come if the 50 day EMA also crosses above the 200 day EMA. That seems like a question of 'when?' rather than 'will it'? The volumes in Apr '09 have been considerably higher than in Mar '09.

There is no long term resistance below 1500. So another 10% upside is quite likely before any serious correction can happen. (Coincidentally, the long term resistance for the Sensex is also 10% above its current level of 11300.)

Are there any negatives at all? A few. The MACD has stopped moving up for the past few trading sessions. Both the ROC and RSI have made lower highs while the KOSPI continues to make higher tops. This is a 'divergence' that can stop the rally and bring the index down below its 200 day EMA. May be not right away - but the possibility exists.

Bottomline? It appears that the smart money (read FIIs) have realised that the economies of the USA and Europe are in far worse shape and are betting their stakes on the relatively stronger economies of Brazil, China, India, Taiwan, Korea. The KOSPI chart pattern is reflecting that.

Dow Jones Chart Pattern - Apr 17, 2009

Last week, my comment about the Dow Jones chart pattern was: The upward momentum has definitely slowed and the index seems to be treading water around the 8000 level.

The DJIA closed higher for the 6th week in a row but was reluctant to go much beyond the 8000 level. Let us have a look at the 3 months bar chart pattern of the Dow:-

(Please right-click on the image above and open it in a new tab or window for a better view.)

The only difference from the previous week is that the 20 day EMA has crept up above the 50 day EMA. But the index has flattened out, and so have the slow stochastics (which is in the overbought region) and the MACD.

The ROC rose during the week but made a lower high. The RSI has turned down and is headed towards the midpoint. The Dow seems happy to be above the 50 day EMA and is in no hurry to get anywhere close to the 200 day EMA. As long as the index remains below the long-term average, this isn't a bull market.

Contrast this with the Taiwan (TSEC) and Brazil (Bovespa) indices - both of which have crossed their respective 200 day EMAs, though the upward momentum has slowed.

Despite some experts opining about 'green shoots' and 'light at the end of the tunnel', the economic slowdown is far from getting over. Home foreclosures are back with a bang and joblessness is not showing any signs of abating. The positive results declared by a few companies should be carefully checked with a fine-tooth comb for fictional content.

Bottomline? Investors should use this rally to get rid of their non-performing or dud stocks. Buying should be postponed till the next dip.

Bovespa (Brazil) Chart Pattern - Apr 17, 2009

I had a look at the Bovespa chart pattern on Apr 7, '09 - when it had paused just below its 200 day EMA, much like what the Sensex chart pattern is doing now.

Let us have a look at the 3 months bar chart pattern of the Bovespa index to see what is different:-

(Please right-click on the image above and open it in a new tab or window for a better view.)

Last week, the Sensex crossed the 200 day EMA hurdle three days in a row, but only managed a close above it for a day. The Bovespa showed no such hesitation and after piercing the long-term average, closed 6 straight trading days above it.

Is that a clear indication of a reversal in trend from bear to bull market? Not yet. In spite of the 6 days spent above the 200 day EMA, the upward thrust seems to have lost momentum as the Bovespa pauses for breath.

Why do I say that? The answer lies in the technical indicators. While the slow stochastics has remained in the over bought zone for quite sometime - as it often does during bullish periods, the MACD and RSI has flattened out and the ROC is showing signs of moving down from an over bought region. Volume has also tapered off a bit, and that doesn't support an upward move.

Does it mean that the rally is over? May be not. Both the 20 day EMA and 50 day EMA are moving up sharply and may cross the 200 day EMA. That will confirm the change of trend.

Bottomline? Next week's trading needs to be watched closely. Like the index, investors should also pause a bit before deciding on the next course of action.

Sensex Chart Pattern - Week ending Apr 17, '09

While discussing last week's chart pattern, I had mentioned that the Sensex had come to an interesting fork on the road. Unlike a more decisive Yogi Berra, the Sensex took three steps forward and a long step back on another holiday-curtailed week.

Let us take a look at the 6 months bar chart pattern to find out what happened on the 4 days of trading:-

(Please right-click on the image above and open it in a new tab or window for a better view.)

On Apr 13, '09, the Sensex moved up to pierce through the upper level of 10945 of the rectangular consolidation pattern of the past 6 months and closed 22 points above it - but failed to touch the 200 day EMA. After the holiday on Apr 14, the Sensex charged up with renewed vigour above the long-term average on Apr 15, '09 and managed to close above it.

On Apr 16, '09 the Sensex opened higher than the previous day's high but profit booking on heavy volumes caused a drop below the 200 day EMA, with the close below the previous day's close and almost at the upper level of the rectangular consolidation pattern. This higher-high-lower-close on high volumes is a typical 'reversal day' pattern often seen at the end of a longish upmove.

On Fri. April 17, '09, the index opened below the 200 day EMA, soon crossed it without any problems but then faced heavy headwinds and closed below it, 75 points above the previous day's close.

So three days in a row, the Sensex crossed the 200 day EMA, but closed above it only on one day. That still leaves us at the fork on the road, with the Sensex unable to decide whether to take the high road or the low.

What do the technical indicators say? The slow stochastics continues in the overbought zone, though the %K has just dipped below the %D line. The MACD has stopped rising. But both the ROC and the RSI have turned down from overbought zones. Friday's higher close was on lower volumes. The Sensex seems to be hesitating, much like the Hang Seng, after reaching the 200 day EMA .

What do the experts say? Anthony Bolton, the respected fund manager at Fidelity, recently gave a call that this is not a bear market rally but the start of a new multi-year bull market. Nouriel Roubini, Professor of Economics at NYU who had correctly predicted the economic downturn way back in 2006, has mentioned in an article that this is nothing but a bear market rally and the light at the end of the tunnel that many optimists are able to see is actually very faint.

A quick look at indices around the globe reveals that Bovespa (Brazil), Venezuela and Chile in South America and Shanghai, TSEC (Taiwan) and Kospi (Korea) in Asia are the only six that have closed above their 200 day EMA, but the upward rally is slowing. All the other world indices are below their 200 day EMAs.

Bottomline? Wait and watch till the Sensex makes up its mind. My hunch is that we are still in a bear market rally, which the 'reversal day' on Apr 16, '09 may bring to a halt. But the possibility of a trend change remains. When the 20 day EMA and the 50 day EMA both rise above the 200 day EMA a new bull market will be confirmed.

Bovespa (Brazil) Chart Pattern - Apr 6, 2009

Brazil's Bovespa chart pattern looks quite different from all the index chart patterns discussed so far. The only similarities are the Mar '09 rally, and the stock index being below the 200 day EMA, indicating a long term bear market.

The striking differences in the Bovespa 6 months closing chart pattern can be seen below:-

(Please right-click on the image above and open it in a new tab or window for a better view.)

Most global indices made a 52 week low in Mar '09. Bovespa's Mar '09 low is almost 30% above its 52 week low made in Oct '08.

In Jan '09, the 20 day EMA moved up from below to touch the 50 day EMA. Thereafter, the 20 day EMA and 50 day EMA have been in a tight embrace while the Bovespa consolidated in a rectangular sideways pattern between the 38000 and 42000 levels - well above the Oct '08 52 week low and the higher Nov '08 low.

The global rally that started in Mar '09 culminated with the Bovespa moving above the rectangular sideways pattern on April 2, '09. But the 200 day EMA provided strong resistance. The volume has also fallen off the past couple of days.

The technical indicators - slow stochastics in the over bought zone, MACD, ROC, RSI in positve zones - are confirming the recent bullishness.

Bottomline? The overall chart pattern of the Bovespa is looking a lot stronger than the Dow and the Sensex.  But the resistance by the 200 day EMA and the volume drop off may be the first signs of the global bear market rally coming to an end soon.