Sensex, Nifty charts (Feb 20, 2020): sideways consolidation continues

In a holiday-curtailed trading week, FIIs were net sellers of equity during the first three days, but net buyers on Thu. (Feb 20). Their total net buying was worth Rs 8.56 Billion. DIIs were net sellers of equity on Mon., Tue. and Thu. (Feb 17, 18 and 20), but net buyers on Wed. (Feb 19). Their total net selling was worth Rs 5.73 Billion, as per provisional figures.

On a YoY basis in Jan '20, India's passenger vehicle, commercial vehicle and two-wheeler registrations contracted by 4.6%, 6.8% and 8.9% respectively. Registrations for three-wheelers and tractors grew by 9.2% and 5.1%.

As per ASPA, India's counterfeit auto parts market was worth Rs 1 Trillion in 2019 -  adversely affecting the automobile industry. Selling spurious parts results in a tax revenue loss of Rs 22 Billion to the government.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex oscillated about its 20 day and 50 day EMAs, while trading sideways within a range of 800 points during a truncated trading week. The index managed to close above the 41000 level, but lost about 90 odd points on a weekly closing basis.

Daily technical indicators are in neutral zones - not giving any directional signals. MACD is moving sideways above its signal line. RSI is treading water near its 50% level. (Since Nov '19, MACD and RSI have been showing negative divergences by forming bearish patterns of 'lower tops, lower bottoms'.) Slow stochastic is rising towards its 50% level after falling below it.

After touching a lifetime high of 42274 on Jan 20th, and forming a large 'reversal day' bar (higher high, lower close) that often signifies an intermediate top, the index has been consolidating sideways within a 'symmetrical triangle' pattern. 

Sensex may also be completing a two months long 'diamond' pattern. A 'symmetrical triangle' or a 'diamond' pattern can act as a continuation pattern. But they can also act as 'reversal' patterns.

So, will the index breakout upwards or downwards? The negative divergences visible on MACD and RSI - which have touched lower tops for the past four months - may tilt the balance towards bears.

Small investors should keep their bullish bets small and stop-losses tight. It may be prudent to wait for the eventual breakout - which should happen sooner than later - before placing any large buy or sell orders.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty closed above its three weekly EMAs and the psychological level of 12000, but lost about 30 odd points on a weekly closing basis. A bullish pattern of 'higher tops, higher bottoms' - formed during the past 18 months - shows that bulls are dominating.

The index has failed to make any upward progress since touching a lifetime high of 12430 four weeks back. Nifty needs to cross convincingly above 12500 for the bull rally to progress further. However, a slowing economy and a rapidly spreading corona virus has negated bullish fervour.

Weekly technical indicators are looking neutral to bearish. MACD is sliding down below its signal line after falling from its overbought zone. RSI has moved above its 50% level but its upward momentum has stalled. Slow stochastic has crossed above its 50% level after falling below it. 

Nifty's TTM P/E has moved up a bit to 27.50, which is well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is oscillating about the edge of its oversold zone, hinting at more near-term index consolidation.

Bottomline? After touching lifetime highs in Jan '20, Sensex and Nifty charts have been consolidating sideways. With the budget and Q3 (Dec '19) results out of the way, very few positive triggers are left for the stock market in the near-term. Investors should stay invested, but maintain stop-losses.

Announcing re-opening of paid subscriptions to my Monthly Investment Newsletter

I am pleased to announce the re-opening of paid subscriptions to my monthly investment newsletter for a 3 weeks period from Jul 1-21, 2018. A limited number of subscriptions are being offered to blog visitors, blog followers, blog subscribers and twitter followers – on a first-come first-served basis – to enable me to provide personalised attention and guidance to each subscriber.

If you are interested in subscribing, please send an email to: mobugobu@yahoo.com today for details.

The newsletter has completed 100 issues, with its share of hits and misses. Sensex and Nifty touched lifetime highs in Jan, 2018 and have since been in corrective phases during which small-cap and mid-cap stocks have faced sell-offs. That has affected overall performance. It is gratifying that subscribers have still kept faith in my stock picking abilities.

Those who have been regularly following my blog posts know what kind of stocks to select, and what type of stocks to avoid. The guiding principle is to choose well-managed, financially prudent companies that generate cash from operations, have manageable debt, give steady (rather than spectacular) returns and have growth prospects.

Non-subscribers may be interested to know how the recommended (mostly mid-cap and small-cap) stocks have fared during the past 18 months. Without revealing the names of the stocks (it won’t be fair to my subscribers to do so), here is a brief summary of performance as on Jun 29, ‘18:

• 11 stocks gained more than 25%, of which 6 gained between 25-49%; 1 gained between 50-99%; 4 gained more than 100% (of which 1 gained more than 250%)
• Of the balance 7 stocks, 4 gained between 10-24%, 3 gained between 1-9%

The stock market has been in a consolidation-cum-correction phase from which it is yet to recover fully - thanks to FII selling. Several stocks have lost their gains and some have slipped into the red - despite good fundamentals. 

However, monthly technical updates with suitable stop-losses have enabled investors to preserve their gains and/or kept their losses small.

What is important to understand is that none of these stocks were ‘cheap’ valuation-wise – fundamentally strong stocks rarely are - and some had already run up a lot when they were recommended.

If you wish to learn how to add fundamentally strong mid-cap and small-cap stocks with growth potential to your portfolio, why wait? Just subscribe to my Monthly Investment newsletter. Send me an email (at mobugobu@yahoo.com) today – subscriptions will close on Jul 21, 2018.

Nifty chart: a midweek technical update (May 16, 2018)

FIIs were net buyers of equity on Mon. May 14, but net sellers on the next two days. Their total net selling was worth Rs 5 Billion. DIIs were net buyers of equity on all three days this week. Their total net buying was worth Rs 14.5 Billion, as per provisional figures.

Inflation is inching up again. India's CPI inflation in Apr '18 moved up to 4.58% from 4.28% in Mar '18. Core inflation - comprising non-food and non-fuel components - hit a 34 months high of 6%.

India's WPI inflation touched a 4 months high of 3.18% in Apr '18 against 2.47% in Mar '18 due to higher fuel and vegetable prices. Any further rise may force RBI's hand in increasing interest rates.

The following comments were made in last week's update on the daily bar chart pattern of Nifty: "The interesting pattern to observe is that the index has failed to close above the trend line despite intra-day upward breaches on Mon. & Tue. (May 7 & 8). That may encourage bears to mount a stronger attack if the index tries to move up further."

The index did move up further to touch an intra-day high of 10929 on Tue. May 15, but closed more than 125 points lower on profit booking to form a 'shooting star' candlestick pattern that often marks an intermediate top.

Note that the index failed to close above the (purple) up trend line even for a single day after falling below it on May 4. Bears used the hung Karnataka assembly as an excuse to mount a strong attack today.

Bulls gave up ground reluctantly. The index slipped below the downward 'gap' (formed on Feb 5) intra-day, but recovered to close just above it - forming a 'long-legged doji' candlestick pattern that indicates indecision among bulls and bears.

Daily technical indicators have started correcting. MACD is just below its overbought zone and is about to cross below its signal line. RSI has started to fall after facing resistance from the edge of its overbought zone. Slow stochastic has dropped from its overbought zone.

Though Nifty is trading above its three rising EMAs in a bull market, some more correction can't be ruled out. The May 4 low of 10602 can be maintained as a stop-loss by those holding long positions.

Nifty's TTM P/E is at 26.66 - which is much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is rising towards its oversold zone, and can limit index down side. 

The breach of a steep up trend line does not mean that the trend has changed. However, today's fall away from the trend line is a warning for bulls to close long positions. A fall below 10602 can lead to a deeper correction.

Nifty chart: a midweek technical update (May 09, 2018)

FIIs were net sellers of equity worth Rs 14.4 Billion during the three days of trading this week. DIIs were net buyers of equity worth Rs 26.2 Billion, as per provisional figures.

After first filling and then falling below the downward 'gap' and the up trend line last week, Nifty pulled back to close above the 'gap' today.

Walmart has acquired 77% stake in Flipkart for US $16 Billion, making it the largest eCommerce acquisition in the world. 

This can be a game-changer for Indian retail industry if Walmart replicate their African strategy of incentivising farmers to produce better quality vegetables and fruit, and then selling those products online.

The following remarks made in last week's update on the daily bar chart pattern of Nifty are worth noting: "The up trend line - typical of a counter-trend rally - is a bit too steep and unlikely to sustain much longer...Some consolidation or correction is possible, but a deep correction appears unlikely."

On Fri. Mar 4, the (purple) up trend line was breached, as expected. But the index didn't fall further. Instead, it has pulled back past the filled 'gap'. 

The interesting pattern to observe is that the index has failed to close above the trend line despite intra-day upward breaches on Mon. & Tue. (May 7 & 8). That may encourage bears to mount a stronger attack if the index tries to move up further.

Daily technical indicators are just below their respective overbought zones, but not showing much upward momentum. The index is trading above its three rising EMAs in a bull market. However, a fall below Friday's (May 4) low of 10602 may shift the advantage back to bears. 

Nifty's TTM P/E has moved up to 26.66 - which is much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is falling towards its overbought zone, and can limit index up side. 

Trump's pullout from the Iran nuclear deal will push oil prices higher. The stock market may have already discounted a BJP win in Karnataka state elections. Expect petrol pumps across India to raise prices next week.

If you are long in this market, either keep a tight stop-loss or, book some partial profits.

When is the Right Time to Sell a Stock?

The following comments appeared in a post titled "When should you 'hold' and When should you 'fold' a stock?":

"Buying a stock doesn't make any one any money. Holding it for a reasonable length of time, and then selling it at a profit completes the cycle." 

It may seem like a no-brainer, but in reality many small investors find it difficult to decide when is a good time to sell a stock.

If you are a long-term investor with a 'core' portfolio of good large-cap stocks, then there should be only three reasons (explained in the post referred above) for selling a stock.

However, if you also have a 'satellite' portfolio of mid-cap and small-cap stocks then Warren Buffett's strategy of 'holding forever' may not be a good idea.

Setting a price target and a stop-loss - and selling when the target or stop-loss is reached is often a better idea.

In a recent article in investopedia.com, Steve Economopoulos explains how you can fine-tune your selling strategies and provides a technical analysis example of setting a price target after buying, and selling when the target is reached.

Read the article here.

Sensex, Nifty charts (Jun 23, 2017): consolidating before GST implementation

After the previous week's heavy selling, FIIs were net sellers of equity worth only Rs 2.5 Billion - thanks to their net buying on the last two days of the week. DIIs were net buyers of equity worth Rs 13.7 Billion, as per provisional figures.

The battle between bulls and bears remained unresolved. Sensex closed marginally higher (by 0.2%) while Nifty closed marginally lower (by 0.1%) for the week.

Trading activity may remain muted next week. Monday's Eid holiday will be followed by F&O expiry on Thursday. Market participants appear somewhat jittery about GST implementation from July 1.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex has been consolidating sideways within a 'rectangle' pattern for the past four weeks. Such a pattern is unreliable, because a breakout can occur in either direction.

The index received good support from 'fan line 3' during the first four days of the week, and rose to touch a new high of 31523 on Thu. Jun 22. However, all four technical indicators touched lower tops.

The combined negative divergences led to a sharp drop below 'fan line 3' towards the lower edge of the 'rectangle' on Fri. Jun 23. Like in the previous week, the 20 day EMA provided support to the index.

In case supports from the 20 day EMA and the lower edge of the 'rectangle' get breached, the index can drop to test support from its rising 50 day EMA.

Daily technical indicators are looking bearish. MACD is sliding down below its signal line in bullish zone. ROC, RSI and Slow stochastic are re-entering their respective bearish zones.

Some more consolidation is likely. The index may try to pullback towards 'fan line 3'. But only a convincing breakout above the 'rectangle' will restore control to bulls.

Stay invested, but maintain a stop-loss.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty closed lower for the second week in a row, but stayed well above its two rising weekly EMAs in a bull market. 

For the past four weeks, the index has been consolidating sideways within a 'rectangle' pattern - from which a breakout can occur in either direction. An upward breakout is more logical in a bull market. But markets often defy logic.

Weekly technical indicators are inside their respective overbought zones, but MACD, RSI and Slow stochastic are showing downward momentum.

Nifty's TTM P/E is at 24.37 - much above its long-term average. The breadth indicator NSE TRIN (not shown) has fallen deep inside its overbought zone.

Some more consolidation within the 'rectangle' is likely before a breakout occurs. Bulls may feel encouraged that FIIs were net buyers of equity on Thu. & Fri. (Jun 22 & 23).

Bottomline? Sensex and Nifty charts are consolidating after touching new highs. Some more consolidation or correction will improve valuations and enable the indices to climb higher. Stay invested. Avoid impulsive buying or selling.

Nifty chart: a midweek technical update (May 31 ‘17)

For the month of May '17, FIIs were net sellers of equity worth Rs 4.5 Billion, which included today's net buying of equity worth Rs 10.5 Billion - as per provisional figures.

DII were net buyers of equity worth Rs 42.8 Billion, which included today's net selling worth Rs 9.4 Billion. Nifty gained more than 300 points (3.4%) for the month.

India's GDP growth in FY 2016-17 slowed down to a three year low of 7.1% against 7.9% (revised upwards to 8% due to revisions in IIP and WPI series) in FY 2015-16. Q4 (Mar '17) GDP growth fell to 6.1% against 7% in Q3 (Dec '16) - thanks to demonetisation. 

The daily bar chart pattern of Nifty received good support from its 20 day EMA and bounced up strongly. It rallied past the 9600 level for the first time ever on May 26, and touched a new high of 9649.60 today.

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

The index is more than 800 points above its 200 day EMA - an empirical observation of an overbought condition that usually precedes a correction.

Nifty's TTM P/E ended the month at 24.35 - well above its long-term average - after rising to a high of 25.23 on May 17th. Decent earnings growth of Nifty component companies helped to moderate P/E growth.

(On a two years forward earnings estimate, Nifty's P/E is at a reasonable 15.5. But forward earnings estimate should be taken with a pinch of salt. It had to be revised downwards considerably for FY 2016-17.)

The breadth indicator NSE TRIN (not shown) has risen towards its oversold zone - giving an interesting contra-indication of more upside for the index.

So, will the index rally first and then correct? Or, will it correct first and then rally? 

For small investors, guessing market movements is a waste of time and energy. Don't fight the trend - which is clearly up. Stay invested, but maintain a stop-loss.

Nifty chart: a midweek technical update (May 24 ‘17)

FIIs were net sellers of equity worth Rs 6.4 Billion in the first three days of trading during F&O expiry week. DIIs were net buyers of equity worth Rs 18.1 Billion, as per provisional figures.

Nifty closed just below its 20 day EMA, losing 67 points from last Friday's closing level of 9428, but is trading well above its rising 50 day and 200 day EMAs in a bull market. 

The Government has abolished the 25 years old FIPB (Foreign Investment Promotion Board) since 90-95% of the sectors are already under the automatic route. Individual ministries will look after the 11 sectors not covered under automatic route. 

The daily bar chart pattern of Nifty has corrected almost 200 points since touching a lifetime high of 9533 on Wed. May 17.

Several overbought technical indications had suggested the possibility of an impending correction (refer last week's post).

Daily technical indicators have corrected overbought conditions, and are turning bearish. MACD has crossed below its signal line in bullish zone. RSI has dropped into neutral zone and is seeking support from its 50% level. Slow stochastic has slipped below its 50% level in neutral zone.

The index had opened with an upward 'gap' of 25 points (between 9225 and 9250) on Apr 25. That 'gap' remains unfilled till date. Nifty may attempt to fill this 'gap' either partly or completely - after which the up move should resume.

Can the index fall below the 'gap' (marked in grey on the chart)? If FIIs continue to sell, anything can happen. 

However, the rising 50 day EMA is just below the lower edge of the 'gap' - and should provide some support. Also, FIIs were net buyers of equity today. They may increase their buying on a further dip.

In case Nifty falls below its 50 day EMA, stronger support can be expected from the zone between 9000 and 9100.

Nifty's TTM P/E is at 24.73 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has risen sharply from its overbought zone into neutral zone.

Some more correction or consolidation is possible before the index decides which way it wants to move.

Stay invested, but maintain a stop-loss - just in case FIIs turn aggressive sellers. 

Why a stop-loss is the difference between gambling and investing

Many small investors - particularly old timers - prefer to invest in 'safe' options. Like bank fixed deposits, tax free bonds, national savings certificates. They get a fixed rate of return - regardless of the state of the economy or volatility in the stock market. Plus, they rest assured that their principal amount will be returned intact on maturity.

For 'safe' investors, investing in stocks is nothing short of gambling. A company one invests in can go out of business. Even if they remain in business, they may make losses and not pay any dividends. In other words, there are no guarantees of any returns, plus there is a risk that the invested principal may get  depleted. (The same logic applies for equity mutual funds.)

In some ways, investing is gambling if you have no idea of what you are doing. If you buy a company's stock without doing adequate research about its background, competition, business outlook, management capabilities then the possibility of making any money through capital gains or dividends will be like betting on a cricket or football match. You will either win, or lose.

Since you have no control over the outcome of a sporting contest, you will lose your entire wagered capital if your team loses. You won't have much control over the performance of a company either - specially if you hold only 200 or 500 shares.

However, you may use a stop-loss - set 3% (or 8%) below your invested amount in a company's share. If a share's price falls more than 3% (or 8%), you can sell the share at a small loss and recover more than 90% of your invested capital.

This loss mitigation technique is the major difference between gambling and investing. One would think that most investors would be disciplined about setting stop-losses for each of their purchases, and sell when the stop-losses get hit.

Experience says otherwise. Setting a stop-loss (or a trailing stop-loss) is an art that few investors learn and even fewer investors practice. 

There is another important difference between gambling and investing: regular dividends. Only long-term investors benefit from it. If you do proper research before buying a stock and then hold on to it for 5 years or more, reinvesting the dividends that a company pays can add up to substantial returns.

In gambling, there are no dividend payments for betting over long periods. Since each bet usually has a short time limit, you either win or lose quickly. Then you place your next bet, with similar results.

You can read more here.

S&P 500 and FTSE 100 charts (Mar 17 '17): bears getting ready to mount another attack?

S&P 500 index chart pattern

The following was the concluding comment in last week's post on the daily bar chart pattern of S&P 500: "Weekly technical indicators are still looking overbought, and hinting at some consolidation."

The index dropped down to test support from its rising 20 day EMA for the second time in two weeks, bounced up with good volume support but drifted sideways to close with a modest 6 points gain for the week.

The rate hike by the US Fed was expected, but the dovish stance on future rate hikes disappointed bulls. The US Dollar index slipped down.

After touching a lifetime high of 2401 on Mar 1, the index has been consolidating sideways within a small 'symmetrical triangle' pattern, while trading above its three rising EMAs in a bull market.

The logical breakout from the triangle should be upwards. However, triangles tend to be unreliable patterns. The sharp volume spike on Fri. Mar 17 raises concerns of another bear attack.

Daily technical indicators have corrected overbought conditions, but giving mixed signals. All three are in bullish zones, but MACD and RSI are showing downward momentum. Slow stochastic is showing upward momentum.

Wait for a breakout above 2400 or a correction below 2350 to decide whether to buy or sell.

On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are still looking overbought, and not showing any upward momentum. Expect some more consolidation or correction. 

FTSE 100 index chart pattern

The daily bar chart pattern of FTSE 100 moved convincingly above its previous (Mar 2) top on Thu Mar 16, and touched new lifetime intra-day (7447) and closing (7425) highs on Fri Mar 17. 

The index gained more than 1.1% for the week, and is trading well above its three rising EMAs in a bull market.

Daily technical indicators are in bullish zones, but showing negative divergences by failing to touch new highs with the index. A correction may be on the cards. (The index is trading about 15 points lower at the time of writing this post.)

The entire trading for the past two months has been within a large 'rising wedge' pattern from which the likely breakout is downwards. Maintain a stop-loss at 7300.

On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are looking overbought and their upward momentum has stalled.

Is Selling Short riskier than Going Long?

'Selling Short' is a strategy when you are feeling bearish. You expect that the stock market as a whole, or a specific stock you may or may not hold, will be falling lower. So, you decide to sell first - and try to buy later at a lower price.

Shorting usually means selling some thing that you do not already own. You obviously can't own the index. But you can buy/sell an index in the F&O segment or buy/sell an index ETF.

How can you 'short sell' a stock that you don't own? By borrowing the stock - either from a friend, or from your broker. You may need to pay a 'margin' amount for doing this.

'Going long' is the opposite of 'selling short'. You are feeling bullish, and expect the stock market or a specific stock will be rising higher. So, you decide to buy first with the expectation of selling at a higher price in future.

Most small investors take the 'going long' route. It is an easier concept to understand and implement. But it works best when a stock or an index is in a bull market.

A stock or an index doesn't move up in a straight line. There are periods when there is an up move, followed by periods of correction. Such corrections provide opportunities for adding more. The tactic is called 'buying the dip'.

'Selling short' works best when a stock or index is in a bear market. Every fall in a stock or index is followed by periods of correction when there is a price rise. Such corrections provide opportunities for selling more. The tactic is called 'sell on rise'.

Now that you know all about 'selling short' and 'going long', which strategy should you follow? It should depend on the strategy with less risk. So, which is the less riskier strategy? This can be explained with examples.

Let us say you buy a stock at Rs 50. The price rises to Rs 70 and then corrects to Rs 60. You 'buy the dip'. The price rises to Rs 90 and then corrects to Rs 80. You 'buy the dip' again. This time the stock price touches Rs 100 and you decide to book profit.

But making money in the stock market is never that easy. What if the stocks price drops to Rs 40 after you bought it at Rs 50. Will you 'buy the dip' by 'averaging down' or sell the stock at a loss? 

Many small investors lose a lot of money when they 'average down' by buying a stock as it falls. Theoretically, the stock's price can fall to zero, and you can lose your entire investment.

A better strategy when a stock or an index is falling is to 'sell short'. But there is a problem here. What if you ' short sell' the stock at Rs 50, expecting it to go down, but it rises to Rs 60? Your friend or broker - who loaned the stock to you - may want the stock back.

You have two choices. Buy back the stock at Rs 60 and bear the loss of Rs 10 per stock. Or, you can keep your short position 'open' by paying an interest (called 'margin') and hoping that the price will eventually fall.

But the price keeps on rising, till you are forced to buy back at a much higher price and sustain a considerable loss. Theoretically, the stock price can rise to infinity, which means your loss can be infinite.

That may not happen in real life, but it isn't impossible for a Rs 50 stock to rise to Rs 500 (a 'ten bagger'). By 'going long' on a Rs 50 stock, you can lose Rs 50 at most (unless you 'average down' - in which case you can lose a lot more). By 'selling short' a Rs 50 stock, you can lose Rs 450 if the stock rises to Rs 500!

By applying a proper stop-loss to what you buy or sell, you can limit how much you can lose on a particular transaction. However, the fact remains that 'selling short' involves a greater risk than 'going long'.

(In a bear market, a less risky strategy is to 'short' a stock you already own. That means no borrowing and no paying of 'margin' money. Say, you decide to sell Tata Motors at Rs 500 - hoping to buy it back at a lower price. But the price moves up to Rs 550. You don't lose any money because you already owned the stock. But you do lose the opportunity of making an extra Rs 50.)

Read this article in investopedia.com to learn more.

Five Stock Investing Pitfalls To Avoid

Before you start on any project - whether it be building a house, or travelling to New Zealand on vacation - you need to make a plan. And to make a plan, you need to gather information and consult experts (like an architect or a travel agent).

Investing in stocks to build wealth for the long term is also a 'project'. It requires a lot of effort in learning and consulting experts and planning. Otherwise buying and selling stocks become random activities with little chance of building wealth.

Even after you do your homework and have proper financial and asset allocation plans in place, you need to understand and apply fundamental and technical analysis concepts to decide which stocks to buy, which stocks to sell and appropriate times for buying and selling.

Those are the easy steps to learn and implement. Far tougher is to learn how to control your emotions. To remain impassive and do disciplined investing according to your plans when the stock market is rapidly climbing or falling steeply requires years of experience.

Successful wealth building through stock investments involves planning, regular investing, staying patient and avoiding mistakes. Here are five common pitfalls (mentioned in a recent investopedia.com article) that prevent many small investors from becoming successful:

1. 'Cheap' is not necessarily good value for money - Small investors have a tendency to avoid large-cap stocks because they are 'too expensive'. In any case, mid-cap and small-cap stocks give better returns - don't they? A stock is 'cheap' for two reasons - either the company's operating fundamentals are weak or, it has not yet caught the eye of savvy investors. The trick is to be able to distinguish between the two. Even a fundamentally strong company can trade in the stock market at low valuations for a long time. 

2. A high P/E ratio doesn't mean a stock is overvalued - P/E ratio is an important metric that is often misunderstood. A P/E ratio of 12 doesn't make a stock a better buy than one with a P/E ratio of 42. Why? Companies that require frequent capital expenditure often trade at low valuations. If the average P/E for a sector is 10, and a stock from the sector is trading at a P/E of 12 then it is 'expensive'. But if a company is continuously growing and earnings are keeping pace with growth, then a P/E of 42 can give an excellent investment opportunity.

3. Cutting your winners quickly and letting your losers run - Most small investors should do the exact opposite. Booking profits quickly in a winner and keeping a loser for a long time in the hope of getting back the 'buy' price is a ticket to disaster. Learning how to set a 'stop-loss' will prevent a small loss from becoming a big one. A 'trailing stop-loss' allows you to ride the profits in a winning stock.

4. Averaging when a stock's price is falling - Averaging down is one of the biggest pitfalls that can turn a small loss into a huge one. Why? Because theoretically, a stock's price can become zero. You can go on buying as the price falls, but it can fall even more. If you are really convinced about a company, wait for the stock price to stop falling and then average on the way up.

5. Not being aware of the broader market trend - During a bear phase, big money is made by selling first and then buying back at a lower price later. Such a strategy - called 'short selling' - is not recommended for inexperienced investors. Bear phases eventually come to an end. During bull phases, one can buy at a lower price and sell at a higher price for profit. (Many small investors in mutual funds stop their SIPs during bear phases. That is not recommended.)

Read more

Related Posts
How to Lose Less with a stop-loss
Some do's and don'ts about Cost Averaging

Stock Chart Pattern - Tata Motors (An Update)

The following were the concluding comments in the previous post on Tata Motors on Feb 7 '13: "The stock chart pattern of Tata Motors is in a bull market, but facing both fundamental and technical headwinds. However, the correction may be a good opportunity to enter the stock..."

The stock had corrected further and touched a closing low of 255 a couple of months later. Since then, it had almost a one-way bull rally that culminated with a small 'double top' reversal pattern - when the stock touched a lifetime closing high of 605.10 on Jan 27 '15 and a slightly lower top of 602 on Feb 3 '15.

Those who may have bought the stock after reading my previous post would have more than doubled their investment in two years.

The 'double top' triggered a year long correction. The stock dropped below its three EMAs and touched a closing low of 285.25 on Sep 28 '15 - wiping out all the gains made between Feb '13 and Feb '15. 

In a classic 'double bottom' reversal pattern formation, the stock price had a sharp 'V' shaped recovery that rose briefly above its 200 day EMA, formed a small 'double top' at 423 in end-Nov '15, and dropped to a lower bottom of 275.65 on Feb 11 '16.

The subsequent bull rally is still going strong. The stock touched a closing high of 589.35 on Sep 6 '16 - more than doubling in 7 months - but has been in a corrective mode that is providing an adding opportunity.

Daily technical indicators are in bullish zones but their upward momentum is not looking strong. Some more correction or a consolidation around current levels can be expected.

The recent sharp fall in UK's Pound against the US Dollar will make JLR cars cheaper in the largest car market in the world. Commercial vehicles have been selling well in the domestic market. Even domestic passenger cars business seems to be turning around.

Long-term investors with 2-3 years time frame can accumulate with a stop-loss at 475.

Is stock investing risky?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BSE Sensex and NSE Nifty charts (Aug 05, 2016): bulls fight off a bear attack

FIIs were net buyers of equity worth Rs 2800 Crores during the first trading week of Aug '16. DIIs were net sellers of equity worth Rs 1500 Crores, as per provisional figures, but were net buyers on Fri. Aug 5 - enabling both Sensex and Nifty to close with small weekly gains.

The expected passing of the GST constitutional amendment bill in the Rajya Sabha had already been discounted by the stock market. A lot of administrative steps are required after the Lok Sabha and at least 16 of the states ratify the bill, and a GST Council is set up. 

Analysts are falling over each other in trying to explain the likely effects of GST on various business sectors. Investors should wait for the GST Council to be set up and decide on the various slab rates. Despite all the publicity, there will not be a single GST rate, as luxury items may attract a higher rate and some items will be exempted or have lower rates.

BSE Sensex index chart pattern

The following comments appeared in the previous post on the daily bar chart pattern of Sensex: "The index looks poised for a correction. FIIs may buy the dip and prevent a big fall." 

The index touched an 11 months high of 28285 on Aug 1, but formed a 'reversal day' bar (higher high, lower close) that triggered a correction down to the support level of 27600.

Combined buying by FIIs and DIIs on Fri. Aug 5 led to an upward bounce, with a small gain of 26 points on a weekly closing basis. The index has been consolidating sideways within a 650 points range for the past 4 weeks.

Daily technical indicators are turning bullish. MACD is below its signal line in positive zone, but has stopped falling. ROC has re-entered positive zone and crossed above its 10 day MA. RSI has crossed above its 50% level after a brief drop below it. Slow stochastic dropped close to the edge of its oversold zone, but is turning up.

The index needs to move above its Aug 1 top of 28285 to prevent the formation of a bearish 'head and shoulders' pattern. Any breach of the 27600 level can lead to a test of support from the rising 50 day EMA. 

Sensex is trading above its three EMAs in a bull market. If DIIs join the bull party - like they did on Fri. - resistance from the 28600 level will be overcome easily.

Remain cautiously optimistic, and stay invested. (Sensex P/E is at 20.8 - higher than the long-term average value.)

NSE Nifty index chart pattern

The following comments appeared in last week's post on the weekly bar chart pattern of Nifty: "All four weekly technical indicators are looking overbought. That doesn't mean Nifty can't move even higher."

The index touched a new high of 8711, only to drop below the 'rising wedge' pattern to a low of 8518, but bounced up to close above the resistance level of 8650 with a weekly gain of 0.5%.

Nifty has closed within the bearish 'rising wedge' pattern for 11 weeks in a row. Only a convincing move above the upper edge of the wedge will negate the pattern.

Three of the weekly technical indicators - MACD, RSI, Slow stochastic - are rising inside their overbought zones. However, ROC has corrected down from the edge of its overbought zone and crossed below its 10 week MA.

Nifty's TTM P/E is at 23.74 - much higher than its long-term average value. The index touched a new 52 week closing high, but was backed by lower volumes. Downside risk is increasing by the week.

Stay invested, but maintain a trailing stop-loss.

Bottomline? Sensex and Nifty charts show that bulls are refusing to allow bears to dominate. Index valuations on a TTM basis continue to look expensive, increasing downside risk. A dovish RBI policy announcement next week may trigger a rally to test lifetime highs.