Sensex, Nifty charts (Aug 28, 2020): moving higher on FII buying

FIIs were net buyers of equity on all five trading days during the week. Their total net buying was worth Rs 54.5 Billion. DIIs were net sellers of equity on all five trading days, but could not keep pace with FII buying. Their total net selling was worth Rs 30.56 Billion. 

SEBI had introduced certain restrictions on F&O trading to curb volatility on Mar 20. These restrictions, including limits on holding short positions, have been extended till Sep 24. Bulls are expected to drive home their advantage.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex moved up relentlessly on the back of strong FII buying and closed at its highest level in 6 months. Bears have been pushed back to the last ditch - a 335 points downward 'gap' that had formed on Feb 28th, a few days before the index crashed.

The index has already closed just above the 'gap' zone. It appears unlikely that bears will be able to put up much of a fight. An index up move to a new lifetime high may occur sooner than later.

All three EMAs are rising, and the index is trading above them - and above the (blue) up trend line - in a bull market. The 'golden cross' (of the 50 day EMA above the 200 day EMA - marked by light blue circle) had technically confirmed a return to a bull market. Bears are on the verge of throwing in the towel.

Daily technical indicators are looking bullish and a bit overbought. MACD is moving sideways after merging with its signal line in bullish zone. ROC is rising above its 10 day MA in bullish zone. RSI has just entered its overbought zone. Slow stochastic is moving sideways well inside its overbought zone.

Despite poor Q1 (Apr-Jun '20) corporate earnings and a likely contraction in GDP, analysts are projecting higher earnings two years forward to justify current stretched index valuations. 

Small investors should remain wary, because no one really knows how long the pandemic will continue to devastate the already slowing economy and what corporate earnings will look like two years down the road.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty closed above its three weekly EMAs in long-term bull territory for the 8th straight week. The index moved above the psychological 11500 to its highest level in 6 months.

The 20 week and 50 week EMAs are moving up after forming bullish 'rounding bottom' patterns. The 200 week EMA is also moving up after forming a shallower saucer-like pattern. Bulls are gaining significant ground against bears.

Weekly technical indicators are looking bullish and overbought. MACD is rising above its signal line and has entered its overbought zone. RSI continues its gradual rise above its 50% level. Slow stochastic is moving sideways well inside its overbought zone. 

Nifty's TTM P/E touched a new lifetime high of 32.92, which is well above its long-term average and deep inside its overbought zone. The breadth indicator NSE TRIN (not shown) is falling sharply in neutral zone, hinting at some more near-term index upside.
 
Bottomline? Bulls are regaining control on Sensex and Nifty charts. Bears are clearly on the back foot - thanks to SEBI restrictions on short selling. Some more upside is likely. Stay on the sidelines and wait for better entry opportunities on dips.

Sensex, Nifty charts (Mar 20, 2020): in strong bear grips

FIIs were net sellers of equity on all five trading days. Their total net selling was worth a whopping Rs 209.09 Billion. DIIs were net buyers of equity on all five days. Their total net buying was worth Rs 164.72 Billion, as per provisional figures.

India's WPI-based inflation softened to 2.26% in Feb '20 from 3.1% in Jan '20 and 2.93% in Feb '19 - thanks to cheaper food and vegetables prices. 

On Friday, Mar 20, SEBI announced a few steps to ease market volatility by limiting short positions in F&O segment, increasing margins on non-F&O stocks and revising marketwide positions limits for stock derivative contracts. (These measures will come into effect from Mon. Mar 23.)

BSE Sensex index chart pattern

Note the following comment from last week's post on the daily bar chart pattern of Sensex:

"Since 'panic bottoms' seldom hold, expect Friday's intra-day low of 29389 will be tested and breached."

It came as no surprise that the index closed well below 29389 on Wed. Mar 18, and dropped further to touch a new low of 26714 on Thu. Mar 19. 

Friday's sharp rally on short-covering and some value buying was typical of bear market rallies, and should be treated as a 'dead-cat bounce'. That means, if the index tries to rally higher, expect bears to 'sell on rise'.

Sensex appears to be correcting the 11 year gain of some 34000 odd points from the Mar '09 low to the Jan '20 top. A 50% Fibonacci retracement will drop the index to about 25100. Thursday's low came within 1600 points of this critical level.

Daily technical indicators are looking bearish and oversold. MACD is falling deeper inside its oversold zone. RSI is trying to emerge from its oversold zone. Slow stochastic is oscillating about the edge of its oversold zone. Remember that a stock market can remain oversold for long periods during a bear phase. 

The Corona virus may have been contained in China, but is spreading rapidly in Europe, USA, Australia. India will not escape its tentacles easily - whether you clap your hands on Sunday or not. 

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched a new 3 year low of 7833, and closed well below its 200 week EMA for the second straight week. The 20 week EMA has crossed below its 50 week EMA for the first time in 3 years, and both weekly EMAs are falling towards the 200 week EMA.

The long-term bullish structure of the chart has been dismantled by bears. FIIs have pulled out more than Rs 510 Billion from their equity holdings during the past three weeks, and may continue with their exit strategy.

Note that the past two weeks' steep correction, which has been blamed on the Corona virus by experts, was preceded by three weeks of correction that had dropped Nifty close to its 200 week EMA. The virus only exacerbated the already bearish mood. 

Weekly technical indicators are looking bearish and oversold. MACD is falling inside its oversold zone. RSI is also falling inside its oversold zone. Slow stochastic has bounced up a bit from the edge of its oversold zone. Friday's short-covering bounce may not last long before bears resume their selling. 

Nifty's TTM P/E has moved down further to 19.72, but remains above its long-term average. The breadth indicator NSE TRIN (not shown) has slipped down from its oversold zone, hinting at some near-term index pullback or consolidation.

Bottomline? Sensex and Nifty charts have closed well below their respective 200 week EMAs for the second straight week - signalling the end of long-term bull markets. A rapidly spreading corona virus has compounded bearish sentiment about weak economic growth and fiasco in the financial sector. Small investors should stay on the sidelines and curb any urge for bottom-fishing.

Nifty chart: a midweek technical update (Aug 09 ‘17)

FIIs were net sellers of equity on Mon. & Wed., but their net buying on Tue. exceeded their net selling by Rs 5 Billion. DIIs were net buyers of equity on all three days - worth Rs 16.6 Billion.

Despite all the buying, Nifty corrected 245 points (2.4%) from its Aug 2 top of 10138 before managing to close just above the 9900 level.

After a strong bull rally in Jul '17, the index became technically overbought and was poised for a correction. SEBI's strictures on 331 'shell' companies provided just the trigger bears wanted.

The following remark was made in last week's update on the daily bar chart pattern of Nifty: "Aug '17 may well turn out to be a month of correction or consolidation." 

The index has dropped and closed below its 20 day EMA after 5 weeks, but is trading well above its rising 200 day EMA in a bull market.

Daily technical indicators are showing downward momentum after correcting overbought conditions. MACD is falling below its signal line in bullish zone. RSI and Slow stochastic have slipped into their respective bearish zones.

Nifty's TTM P/E has reduced a bit to 25.31, but remains much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is about to emerge from its overbought zone.

Some more correction is possible. Expect support from the 50 day EMA (at 9780), and stronger support from the 9700 level. A fall below 9700 seems unlikely as both FIIs and DIIs are buying.

Remain cautious. No need to jump into the market yet. Keep a watch on good mid-cap and small-cap stocks, which tend to correct more than the index during corrections. Some value-buys may become available. 

Nifty chart: a midweek technical update (Jun 21 ‘17)

FIIs continued to sell equity shares. Their net selling during the first three days of the week was worth Rs 7.2 Billion.

DIIs were net buyers of equity worth Rs 9.6 Billion, as per provisional figures. Nifty consolidated sideways within a trading range.

SEBI has announced tightened regulations on P-notes and offshore derivatives while easing registration rules for foreign investors. Hedge funds will now be able to participate in commodity derivatives. 

The daily bar chart pattern of Nifty has been consolidating sideways within a 'rectangle' (shaded in grey) for nearly 4 weeks.

A 'rectangle' is usually a continuation pattern. Since the index entered the 'rectangle' from below during an up trend, the eventual breakout should be upwards.

However, sometimes a 'rectangle' can act as a 'reversal' pattern. So, a downward breakout is also a possibility.

In either case, the upward or downward target following the eventual breakout should equal the height of the 'rectangle' (about 160 points). That gives an upward target of 9870 and a downward target of 9390.

Technical targets are rarely exact. Let us work with an upward target of 9900 and a downward target of 9400 - provided the 'rectangle' pattern plays out as expected.

Nifty has received good support from its rising 20 day EMA while consolidating within the 'rectangle' and is trading above its three EMAs in a bull market.

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

Nifty's TTM P/E is at 24.31 - much above its long-term average. Chances of earnings catching up with index valuation appears slim in the near term. Rollout of GST from July 1 will bring its own set of challenges and teething problems.

The breadth indicator NSE TRIN (not shown) is falling inside its overbought zone, limiting index upside. FII selling will also keep Nifty's rally in check.

It is better to look at individual stocks than worrying about index movements. Several stocks have touched new highs in June while the index has gone nowhere.

8 Signs of a Doomed Stock

Let me assume that you have been following my posts regularly, and are no longer swayed by stock market cacophony and 'expert tips' sent by SMS to your smart phone.

You have been doing due diligence and picking stocks based on solid research. Already some of them have moved higher since you bought them.

But there are these one or two exceptions that are refusing to move up. In fact, they may be gradually sliding down despite apparently good track records.

As a long-term investor, what are you supposed to do with the laggards? Hold on, and hope for prices to improve? Buy more as the stock is now available at a price lower than your 'buy price'? Get rid of it?

In a recent video posted at investopedia.com, you can check out more information about the '8 Signs of a Doomed Stock':

1. Negative cash flows from operations
2. High debt/equity ratio
3. Low interest coverage ratio
4. Sustained decline in price
5. Profit warnings issued before or during quarterly results
6. Large selling by owners/directors
7. Resignations by key executives/managers
8. Investigations by SEBI/Enforcement Directorate/Income Tax department

Any one of the above signs may not be enough to warrant selling. But several of these signs taken together is almost a guarantee that the stock's price will crash.

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What does the Debt/Equity ratio indicate?

What does the Interest Coverage Ratio signify?

What caused the NSEL fiasco? – a guest post

The NSEL fiasco was primarily the result of greed getting the better of good sense. Rules and regulations are made to ensure that common investors are not duped. But without proper monitoring or enforcement, there will always be a few market players who will bend the rules to their own advantage.

Duping investors has been a regular ploy of greedy operators in stock and commodity exchanges the world over. Indian stock exchanges have witnessed a large number of scams despite progressively tightened rules and regulations, and greater authority to SEBI.

Commodity exchanges are a more recent phenomenon in India. FMC - the authority monitoring the NSEL exchange – has perhaps not done as good a job as they should have in stopping some of the blatant rule-bending that was going on. In this month’s guest post, Nishit provides his views on the NSEL crisis.

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The NSEL fiasco has led to a lot of questions in the minds of investors. What actually happened with NSEL?

NSEL is an electronic spot exchange meant for delivery-based trading of commodities at actual (spot) prices. It is a subsidiary of Financial Technologies, a listed company owned by Jignesh Shah. Two other commodities exchanges - NCDEX and MCX (the latter is also a subsidiary of Financial Technologies) – allow trading in futures contracts. Earlier, we only had two stock exchanges - the Bombay Stock Exchange (BSE) led by a consortium of brokers, and the National Stock Exchange (NSE), which is promoted by a group of Public Sector Banks and Institutions.

Now, the primary function of any exchange is to facilitate trading of stocks, currencies or commodities in a smooth manner without the risk of default. Risk of default occurs when one of the parties involved in a trade has made a loss and cannot or does not want to pay up either money or the instrument. The Exchanges have to do strict risk management and collection of margins so that such an event does not occur. All the Exchanges operate on the element of trust and once trust is lost, it is the end of the road.

What was NSEL doing that led to a financial crisis? It was offering contracts that had a settlement of T+2 and T+25, that is cycles of 2 days and 25 days. It was also allowing short-selling, which is against the rules of a spot exchange.

In T+2 contracts, farmers, producers and traders sell commodities for delivery on T+2 days and they get payment on T+2 days. The actual users, processors and exporters, buy commodities in T+25 contracts, make payment on T+25th day and get delivery. An investor buys the commodity in T+2 contract and sells the same in T+25 contract. As a result, trading volume for T+2 and T+25 is identical.

All back-end clearing is handled by the exchange. The problem arises when the actual commodities are not supplied on the 25^th day. By doing this arbitrage, investors were getting a risk-free return of 15% and the processors did not have to take a loan at the rate of 30%. Everything was fine, till one day the government asked NSEL not to introduce fresh contracts till regulation was in place.

The exchange suddenly on August 1^st stopped trading and the payout process following the government’s order, which led to the crisis. Now, there is an amount of about Rs 5500 Crores to be paid out, which would be done over the next 6 months in installments.

What are the implications:

• NSEL as an exchange led by Financial Technologies may be shut down or taken over by the Government
• The Promoters would have to make good the losses, which is why Financial Technologies stock was badly hammered
• This business happens on trust and this could impact the listed MCX exchange, as people may not be keen to trade with this promoter group anymore

So what should one do?

Wait and watch. Financial Technologies should not be touched at all for buying. Only those who can live with the loss of entire invested amount can take a bet on MCX. Risk is very high but so can be the reward. It may happen that Financial Technologies sells off MCX to new promoters.

Bottomline: better regulation should be in place before new exchanges are allowed to start operations. The culpability ultimately lies at the doorstep of the Government.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Was Friday’s ‘flash crash’ in the Nifty an error or a scam?

All seemed well when the stock market opened in the morning on Fri. Oct 5 ‘12. The previous evening’s cabinet meeting had passed the Companies Bill (2011 amendments) and FDI in insurance and pension. The Nifty was expected to open higher, and it did. Out of the blue at 9:50 am, the Nifty crashed by 900 points before you could say ‘Jack Robinson’.

10% circuit filter kicked in and trading was halted at the NSE for 15 minutes, while trading continued at the BSE. When normalcy was restored and trading resumed at NSE, Nifty quickly climbed back almost to the level from which it had fallen. But the bullish sentiment had been badly dented.

What happened? NSE authorities were quick to mention that there were no technical problems with NSE’s software. Instead, fingers were pointed at a particular brokerage house that had entered 59 ‘erroneous’ trades on a basket of Nifty stocks worth Rs 650 Crores. The brokerage house had been ‘disabled for trading’ and the matter was being investigated.

There was no clarification from the brokerage house. All its senior managers apparently left the office in the morning. There were rumours floating around that some of them were at the NSE’s office, trying to sort out payment issues. What about the likely loss that the brokerage house may have suffered due to the ‘error’? Unconfirmed figures in the range of Rs 80 Crores to Rs 200 Crores were being bandied about.

So, was it really an ‘error’ or was it another one of those periodic scams perpetrated to bail out some one who was caught short in a rising market? The truth may never be known – going by the lack of transparency of NSE officials and the poor track record of SEBI in bringing scamsters to justice.

But if I had to make a bet on one or the other, I’d go with a scam. Here are the reasons why:

1. An ‘error’ can occur with one or two trades. But 59 trades – one after the other? It seems too much of a coincidence.
2. The timing of the ‘erroneous trades’ within the first hour of trading, when volumes are typically low in Nifty cash, raises questions. A series of trades worth Rs 650 Crores could bring the Nifty to its knees, though daily volumes top Rs 10000 Crores.
3. The 10% circuit breaker should have been applied as soon as the Nifty dropped by 570 points. Why was it applied only after a 900 points (15%) fall?
4. As per SEBI guidelines, if a circuit breaker is applied before 1 pm, trading ought to be suspended for 1 hour. Why was trading resumed after 15 minutes?
5. When trading is suspended due to circuit breaker in one exchange, the other exchange should also have stopped trading. But no shut down happened at BSE.

All of the above point to some thing more than an ‘error’ by a dealer at a brokerage terminal, entering trades for an institutional investor. Will the SEBI get to the bottom of this? How about cancelling all the trades that took place from 9:45 am to 10:15 am? Surely that would help small traders and investors who got stopped out by the sudden ‘flash crash’ in the Nifty? Who will restore the confidence of small investors – many of whom believe that the stock market is a big casino with the odds always favouring the house?

Related post

Was it a freak ‘error’ trade or a ‘short and distort’ scam?

http://investmentsfordummieslikeme.blogspot.in/2012/04/was-it-freak-error-trade-or-short-and.html

Was it a freak ‘error’ trade or a ‘short and distort’ scam?

For those who don’t have much experience in the stock market, the trading anomaly observed last Friday (Apr 20 ‘12) may have come as an unpleasant surprise - specially for those who prefer to trade in the F&O segment. Here are the facts, as already published in news media:

1. The Nifty (and the Sensex) were drifting along sideways in a very narrow range for the better part of 5 hours, when suddenly the bottom seemed to fall out.
2. Apparently Nifty’s future contract for April saw a freak trade that valued the contract 300 points lower than the Nifty spot price. Earlier, Infosys stock futures dropped more than 400 points in another freak trade.
3. The two freak futures trades taken together caused spot Nifty (and the Sensex) to plummet.

Several traders tried to explain away the anomaly by calling them trading ‘errors’. But the NSE authorities denied that there were any ‘errors’ and said that the existing systems have enough checks and balances. If there had been only one freak trade, it could have been attributed to an ‘error’. But two freak trades in the same day were too many.

So, what really happened? The answer will get revealed after the SEBI and/or the NSE authorities investigate the freak trades. But circumstantial evidence may be pointing to a well-planned ‘short and distort’ scam. This is a less known scam than the ‘pump and dump’, but the underlying logic is the same - to separate inexperienced investors from their hard-earned money.

How does the scam work? Scamsters first open short positions in an index/stock, and then spread unsubstantiated rumours or distorted facts through email, SMS messages and message board postings in investment groups. In this case, a message doing the rounds earlier in the week predicted that the market will crash on Apr 20. No reasons were given. Some hints about a negative astrological configuration were dropped. When the actual crash came, the short positions were quickly covered. The Nifty bounced up smartly, and closed higher on a weekly basis.

Some times, the scam is also used to get out of tight situations. If some operators had shorted Nifty prior to RBI’s policy announcement and had been caught unawares by the surprising 50 bps rate cut and the subsequent rally, how would they cover their losses? By pushing down the index level below their shorting level – by hook or by crook.

Those who panicked and sold off learned a painful lesson: Do not pay attention to unsubstantiated predictions about the market – even if such predictions turn out to be correct at a later date.

The curious case of Crompton Greaves

This is not a post about a court-room thriller, even though the title may sound like one of Erle Stanley Gardner’s page turners. That doesn’t mean that the process of discovery of the real cause behind the serious hammering of the stock price of Crompton Greaves may not be an exciting one.

First, the facts. A less than stellar Q1 result due to significant reduction in the consumer business (mainly electrical appliances) was a shock. That was followed by the revelation that the erstwhile CEO had dumped his entire stock holdings of 180000 shares earlier in the month.

The former CEO took pains to explain that:

(a) he doesn’t like to invest in the stock market but had received the shares as part of his compensation some 11 years back; at that time he had resolved to sell the shares immediately after retirement

(b) he retired on June 1, 2011 and sold the shares within a month of retirement after following due process of informing SEBI and the stock exchanges.

Doubts remained in the minds of investors because of three reasons:

1. Insider selling of large quantity of shares is considered a warning sign

2. Though he retired on June 1, 2011 Mr Trehan is still associated with the company though he doesn’t draw a salary. That means, he had insider’s knowledge about the poor Q1 performance of the company

3. The timing of the sale seemed a bit fortuitous. What if the stock market was in a deeper correction? Would he have sold his shares at lower prices? Alternatively, if the market was in the midst of a strong bull run, would he have waited a little longer to sell at a higher price?

Only Mr Trehan can answer those questions. Bottom line is that a lot of small investors were shaken by the severity of the stock price crash. Since such a crash didn’t occur when the ex-CEO actually sold his shares three weeks back, fingers are being pointed towards a bear cartel that used the fact of the insider sale as an excuse to hammer down the stock price. A fit case for SEBI to look into.

The Joint Managing Director of Havell’s – a competitor of Crompton in the consumer appliances space – does not believe that there is any cause of worry. Retail prices were hiked some time back due to increase in input costs. That may have led to consumers delaying their buying decisions. Another explanation is that distributors picked up more inventory in Q4 to avail of the then lower prices. That is why they lifted less inventory in Q1.

What should small investors do? On a TTM EPS of 10.61, the P/E at today’s closing price of 182.55 is 17.2. Not mouth-watering valuation by any means, but not hugely expensive either. If you are planning to enter, you may want to wait for Q2 results and then decide.

If you are holding the stock and are in profits, use the short-covering bounce up to book a part of it, and hold on to the rest. Remember the old stock market adage: When in doubt, stay out.