Gold and Silver charts: an update

Gold Chart Pattern

The following remarks were made in the previous post on the daily bar chart pattern of gold: “The bullish pattern of 'higher tops and higher bottoms' from the Mar '15 low still remains in force. But for how much longer? Strong volumes on down days show that bears are regaining control.”

Gold’s price touched an intra-day low of 1162 on Jun 5 ‘15. The subsequent technical bounce faced resistance from its falling 50 day EMA.

By falling below the May ‘15 low of 1170, the bullish pattern of ‘higher tops and higher bottoms’ from the Mar ‘15 low of 1140 has been negated. All three EMAs are moving down, and gold’s price is trading below them in a bear market.

Daily technical indicators are showing some upward momentum, but remain in bearish zones. MACD has moved up to touch its falling signal line in negative zone. RSI is making another attempt to cross above its 50% level. Slow stochastic has climbed up towards its 50% level. Bears are unlikely to give up control anytime soon.

On longer term weekly chart (not shown), all three weekly EMAs are moving down, and gold’s price is trading below them in a long-term bear market. Weekly technical indicators are in bearish zones but not showing much downward momentum.

Silver Chart Pattern

The daily bar chart pattern of silver faced strong selling and dropped sharply below its 20 day and 50 day EMAs into bear territory at the beginning of the month. It has been consolidating in a range between 15.75 and 16.25 since then.

Strong volumes on up days is a sign of accumulation. The bullish pattern of ‘higher tops and higher bottoms’ from the Mar ‘15 low of 15.25 remains in force – but may not be for long. Bears are still ruling the chart.

Daily technical indicators are in bearish zones, but showing a bit of upward momentum. MACD is below its falling signal line in negative territory, but its downward momentum has stalled. RSI is below its 50% level, but trying to move up. Slow stochastic has formed a ‘rounding bottom’ bullish pattern inside its oversold zone.

On longer term weekly chart (not shown), silver’s price is trading below its three weekly EMAs in a long-term bear market. Technical indicators are in bearish zones.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jan 10, ‘14

S&P 500 Index Chart

The 6 months daily bar chart pattern of S&P 500 spent a week of sideways consolidation with a slight upward bias, closing marginally higher for the week. All three EMAs are rising and the index is trading above them, which shows a bull market in progress.

Daily technical indicators corrected from overbought conditions, but remain in bullish zones. MACD has just crossed below its signal line in positive territory. RSI is rising towards its overbought zone after briefly slipping below its 60% level. Slow stochastic has moved back inside its overbought zone.

A concern for the bulls is the high volumes on a mid-week down day. The index is still trading 150 points above its 200 day EMA – a condition that can lead to a sharp correction at any time.

Even though the unemployment rate has fallen much faster than expected in the past year — tumbling 0.3% in December — the decline has been driven mostly by increasing numbers of people deciding to "drop out" of the labor force, rather than by an increasing pace of hiring.

FTSE 100 Index Chart

The 6 months daily bar chart pattern of FTSE 100 consolidated sideways between 6700 and 6800, closing a tad higher for the week. All three EMAs are rising and the index is trading above them. Bulls have regained control of the index after an interim down trend. Note that volumes rose during the week, which is a sign of ‘accumulation’.

Daily technical indicators are bullish, but looking overbought. MACD is above its rising signal line in positive territory. RSI is moving up towards its overbought zone. Slow stochastic is inside its overbought zone.

Some more consolidation may help the index to cross above the 6800 level.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 indices are in long-term bull markets, but undergoing sideways consolidations. Both indices should move up further to touch new highs. Corporate results may provide the boost. Hold existing positions, but maintain trailing stop-losses.

Stock Chart Pattern: Akzo Nobel India (ICI India) – An Update

More than a year back (in Sep ‘09), I had analysed the chart pattern of ICI India – now renamed Akzo Nobel India. The stock had just broken above the resistance of the 550 level, after consolidating in a bullish ascending triangle pattern. The resistance level then turned into a support level for the next couple of months.

Dutch multinational Akzo Nobel, a world leader in specialty chemicals and coatings, bought ICI UK’s paints business two years back and became the new owners of ICI India. They took their time in consolidating the Indian business by selling off the remaining non-core subsidiaries and businesses. Only the starch business still remains.

The end result? A pure paints company, debt free with a cash kitty of nearly Rs 1000 Crores, ready to expand, acquire and take on the big boys like Asian Paints, Kansai Nerolac and Berger Paints.

The market has become aware that this former diversified subsidiary of a UK company with assorted unrelated businesses is about to transform itself into a growth-oriented and focussed paints and coatings company that can benefit from India’s infrastructure growth story.

Let us have a look at the 13 months bar chart pattern of Akzo Nobel India (formerly ICI India) and find out how the stock has fared, and what lies ahead:

The stock consolidated in a sideways band between 550 and 600 before breaking out in mid-Dec ‘09, and moved up to touch a high of 680 on Jan 22 ‘10.

Nothing much happened during the next four months, as the stock declined slowly down to the support of the 200 day EMA. While the MACD, RSI and slow stochastic drifted down with the stock, the OBV remained flat. The positive divergence gave a hint that accumulation was going on. Note the volume spikes while the stock was oscillating in the narrow space between the falling 20 day EMA and the flat 200 day EMA.

The inevitable happened in Jun ‘10. The Akzo Nobel India stock rose sharply from a low of 570 to 750, and then started a rally that culminated at the all-time high of 970 on Sep 21 ‘10. A gain of 70% in 4 months. There may not be a better example of the benefits of holding a fundamentally strong stock for the long-term.

Note that the MACD, RSI and slow stochastic made lower tops as the stock moved higher from Jun ‘10 to Sep ‘10. The negative divergences has caused a month-long bout of profit booking. The stock hit a low of 845 on Oct 18 ‘10 retracing 31% of the 400 points rise, and has dropped below the 50 day EMA. The 20 day EMA is about to do likewise.

The technical indicators are suggesting that the stock is oversold. The MACD is below the signal line and falling in negative territory. The space between the two lines is widening. The RSI and slow stochastic have both entered oversold zones. The slow stochastic can remain in the oversold zone for a while, but the RSI rarely spends much time in oversold territory.

But the most interesting is the OBV. It has remained flat while the stock fell from 970 to 845. Smart money is accumulating the stock, and the next price spurt could reach 4 digit territory.

Bottomline? The stock chart pattern of Akzo Nobel India (formerly ICI India) is taking a break in the midst of a major up move. Existing holders can remain invested with a stop-loss at 750. A drop below 845 can be used to add/enter. With reserves exceeding 25 times the equity capital of Rs 37 Crores, a bonus issue will not be surprising.

Stock Chart Pattern - Ratnamani Metals and Tubes (An Update)

In my previous analysis of the stock chart pattern of Ratnamani Metals and Tubes back in Dec ‘09, it was observed that the OBV was moving up while the stock was correcting after touching a high of 118 in Sept ‘09. That was an indication of ‘accumulation’. However, the RSI and slow stochastic were indicating bearishness.

On the longer term charts, the stock was struggling to recover after a huge bear market fall from a high of 302 in Jan ‘08 (adjusted for a 5:1 stock split) to a low of 32 in Mar ‘09. Small cap stocks rarely recover from such a large fall of almost 90%. The fundamentals of the company looked good, but I had clearly mentioned that it was a high risk bet that could touch 150 if it cleared the high of 118.

With the Sensex climbing to new highs, very close to its all time high of 21200, it is an appropriate time to check how this small-cap stock has fared. The one year bar chart pattern of Ratnamani Metals and Tubes reveals that things haven’t gone too well:

The stock moved up to touch an intra-day high of 121 in Jan ‘10 – which was within the 3% ‘whipsaw’ leeway of the Sep ‘09 high of 118. Note how the stock dropped right back to 95. There could not be a better example of the reason why the 3% technical leeway should be used to confirm any breach of a previous top (or bottom).

The stock chart formed a nice cup-and-handle continuation pattern over the next four months and finally broke above the 121 level on decent volumes in Apr ‘10. Note how the OBV remained flat initially and then started to move up when the ‘cup’ was being formed. More sign of accumulation.

After reaching a high of 135, the stock corrected down to 114 and then started a steady climb upwards from Jun-Aug ‘10, using the 20 day EMA as a ramp. It recently touched an intra-day and 52 week high of 148.55 – close enough to the target of 150 mentioned in my earlier post.

Note that while the Sensex has been moving up after breaking out above a year long trading range, mid-cap and small-cap stocks have been facing selling pressure. No wonder, the Ratnamani Metals stock price has corrected sharply down to the 20 day EMA. At its recent high of 148.55, the stock retraced only 43% of its bear market fall.

The 50% Fibonacci retracement level of the bear market fall is at 167. That hurdle needs to be crossed for the stock to re-enter a bull market – even though it is trading above the three rising EMAs. The slow stochastic has dropped below the 50% level and the RSI is about to follow suit. The stock may correct some more before it resumes its up move.

Fundamentally, things weren’t so good last year. Sales dropped by 10% in FY ‘10 though profits were maintained. Cash flow from operation turned negative. Debt burden has increased but remains within manageable limits. Promoter holding is now 57%. It was 60% when I looked at the stock in Dec ‘09. FII holding has gone up from 1% to 5%. The stock is available at a P/E of less than 8, and can be looked at on dips for accumulation.

Bottomline? The stock chart pattern of Ratnamani Metals and Tubes almost attained the first target of 150. The next target is 180. The stock isn’t my favourite in the pipes and tubes space, and remains a high risk bet.

Stock Chart Pattern - Indian Hotels (An Update)

The previous look at the stock chart pattern of Indian Hotels back in June '09 didn't seem particularly exciting for would-be investors in this leading company of the Indian hotels sector.

Why? Because the bull rally from the Mar '09 low was showing signs of fizzling out, consolidating at the 65-66 level after touching a high of 80. I had recommended that it was a good entry point for patient investors.

The woes of the hotels sector still continues, as occupancy rates and average room rates (ARRs) have not recovered to a great extent following the global economic downturn. Large capacity addition in the hotels sector is also likely to contribute to depressed ARRs.

The high-end properties of Indian Hotels depend a lot on big spending overseas business visitors and tourists. The flagship Taj Hotel that bore the brunt of the Nov '08 terrorist attack is yet to be fully operational. International properties of the largest Indian hotel chain are also not doing great. This led to disappointing Q3 '09 results.

The company is trying to de-risk its business model by concentrating on the more reasonably priced Ginger brand, and by doing away with the Residency brand. The newer Vivanta brand has been positioned in-between the Taj and the Gateway brands.

The current capacity of around 11500 rooms will be increased to 20000 rooms by financial year 2011. The number of Taj Safari jungle lodges (currently 4 - all in Madhya Pradesh) will be increased to 10 across the country. That should contribute to an increase in revenues and profits in the next couple of years.

A look at the 2 years bar chart pattern of Indian Hotels clearly shows that smart investors have been accumulating the stock:-

The stock chart consolidated in a triangle pattern between Jun '09 and Sept '09 before an upward break out on good volumes took it to a high of 110 in Jan '10. Why did it halt at 110? No prizes for correct guesses. It happens to be the 50% Fibonacci retracement level of the entire bear market fall from 180 to 35.

A correction ensued as the stock dropped to make two intra-day bottoms at 85 - below both the 20 day and 50 day EMAs. Note that both the MACD and RSI made lower tops as the stock hit a higher one. Negative divergences like these can be a signal for a correction - it happened in this case, but it may not happen always.

The double-bottom has led to a resumption of the up move that has taken the stock close to its Jan '10 high. If it can move above 110, it is likely to face resistance at 120 - the May '08 high. The 61.8% Fibonacci retracement level of the bear market fall is at 125.

The OBV indicator shows that there has been buying interest even during the correction in Jan '10. Those investors who heeded my advice to enter the stock at 65-66 and are still holding, can book partial profits if the stock hesitates near the 110-125 band. Long-term investors can keep a stop-loss at 100 and stay long. Any dips can be used to add to the holdings.

Bottomline? The stock chart pattern of Indian Hotels has risen steadily if not spectacularly. Crossing 125 convincingly will be the first indication that things are getting better. Full recovery in the fundamentals is still a year or two away. Patient investors will get their due rewards by holding on.

Stock Chart Pattern - Bartronics India (An Update)

The reason for analysing the stock chart pattern of Bartronics India back in June 2009 was not because this small investors' and brokers' favourite was looking like a 'good buy'. It was to suggest to existing holders that it was time to say 'good bye' to the stock.

Why? The company is in a supposedly high-tech field with great growth opportunities. Technically also, the chart was looking impressive. But one look at the fundamentals painted a completely different picture. It supports my oft-repeated refrain that a stock should be bought only when the technicals and fundamentals are indicating a 'buy'.

The cash flow from operations for year ended Mar '09 improved considerably over the previous year, but still remained negative. Which means, the 10% dividend and the tax on 'profits' were paid out of borrowed money. No wonder the debt to equity ratio increased from 1.3 to 1.8 and financial expenses zoomed more than 5 fold from Rs 4 Crores to Rs 22 Crores.

That dented the NPM from 17.8% to 12.8%. Prudent management would not have declared a dividend on such worsening financials. May be it was an effort to improve sentiment and keep the stock price high. Guess what? It didn't work.

The 2 years bar chart pattern of Bartronics India shows that the stock has gone nowhere:-

Nine months back, the stock had closed at 165. Today it closed at 150. In between, it peaked at 194 in July 2009, made a trough at 130 in Nov 2009 and fluctuated within the 130-194 band.

The stock has sought support from the 200 day EMA several times and both the MACD (which is in the negative zone) and the RSI (which is below the 50% level) are showing weakness.

Only the OBV is showing positive divergence - moving up while the stock moved sideways. But looks can deceive. What looks like 'accumulation' is actually 'distribution'. Why? A look at the shareholding pattern will reveal all.

The Indian promoters (27% holding) and the FIIs (6% holding) have been reducing their holdings while the general public, which now holds a whopping 45% of the steadily rising equity capital, have increased their share over the previous two quarters. No better example of stocks moving from strong hands to weaker ones.

Bottomline? The stock chart pattern of Bartronics India and the fundamentals are looking quite weak. Get out before it is too late. Die-hard hopefuls should note the strong resistance zone between 180 and 195. Only a cross above the zone can take the stock to a new high.

Stock Chart Pattern - Maharashtra Seamless (An Update)

The stock chart pattern of Maharashtra Seamless was looking overbought when I had looked at it in May '09, just after the election results were declared. I had advised medium-term investors to await a possible correction to the 200-220 level before entering this cash rich, low debt, fundamentally strong company.

Let us have a look at the 9 months bar chart pattern of Maharashtra Seamless to see how investors who entered the stock may have fared:-

Instead of correcting in May '09, the stock consolidated in a flag-like pattern between 230-260 before another sharp up move took it to 325 on Jun 4 '09. A 5 weeks long correction brought the stock down to the 230 level - below the 50 day EMA.

A steady up move followed as the stock received good support from the 50 day EMA as it moved all the way to a high of 393 on Jan 18 '10. The stock faced strong headwinds and dipped more than 15% to 332 - below the 50 day EMA again - on Jan 29 '10. It is currently attempting a pull back.

In the longer-term chart (above), the stock had made a very bearish triple-top pattern - 675 in Jul '07, 672 in Sep '07 and 660 in Jan '08 - before collapsing in a heap to a low of 112 in Mar '09. The fall of 563 points from 675 to 112 was a huge 83% drop.

Is there any reason why the stock faced corrective moves when it reached 325 and 393? Regular readers of my technical analysis of chart patterns should not have any difficulty in answering that question.

If you are new to technical analysis, 325 and 393 are almost exactly the 38.2% and 50% Fibonacci retracement levels of the 563 points fall from the top. Here is why: (112 + 563 x 0.382 = 327); and (112 + 563 x 0.5 = 393.5). Those levels tend to act as resistance levels.

So, what should investors do now? The prudent ones may like to wait till the stock convincingly clears 393 before entering. They can also wait for a correction down to the 200 day EMA (at 300).

Note the interesting pattern of the OBV indicator. It has not fallen during the recent (and earlier) corrections and continues to move up - a sign of accumulation by knowledgeable investors. The MACD is in negative territory and below the signal line, but is attempting to move up. The RSI fell below the 50% level but has turned back upwards.

Bottomline? The stock chart pattern of Maharashtra Seamless is looking bullish. On crossing 393, it can move up to 460. On the down side, expect support in the 260-300 zone. This is a good mid-cap stock for long-term portfolios.

Stock Chart Pattern - Ratnamani Metals and Tubes

The stock chart pattern of Ratnamani Metals and Tubes had a spectacular run from a low of 32 on Mar 16 '09 to a high of 118 on Sep 16 '09 - gaining more than 250% in 6 months. The stock has subsequently been in a corrective mood.

Before getting into the nitty-gritty of the technicals, a few words about the fundamentals. A two-decade long presence in the stainless steel pipes and tubes segment; profit making and dividend paying, with positive cash flows from operations; low debt/equity ratio; low P/E; nearly 60% of the Rs 9 Crores equity held by the promoters; a recent order of Rs 150 Crores from GAIL; clients include IOC, HPCL, Reliance, BHEL.

All point to a stock that smart investors may want to include in their portfolio. Now let us see whether the one year stock chart pattern of Ratnamani Metals and Tubes is supporting the fundamentals or not:-

After hitting the recent high of 118, the stock has been in a sideways correction, well-supported by the 50 day EMA. Today's lower close has sent the slow stochastic tumbling into the oversold zone. The RSI has also dropped below the 50% level. Both indicators are suggesting a continuation of the correction.

The on-balance volume gives a completely different picture. For nearly three months, the stock has made a sequence of lower tops and bottoms. But the OBV is moving higher - a positive divergence and a clear indication of accumulation. So why am I not enthusiastically recommending a 'buy'?

Let us look at a more longer term chart pattern:-

The stock made a high of 302 on Jan 4 '08, from where it fell 89% to 32 in Mar 16 '09. Small cap stocks usually have trouble recovering from such a massive fall. At its recent high of 118, the stock retraced less than 32% of its entire fall of 270. Compare that with the Sensex, which retraced more than 70% of its bear market fall.

This is one of the reasons why investing in small cap stocks is so risky, and best avoided by small investors. The returns may be huge if you can enter at the early stages of a bull phase. But the fall in a bear phase can be soul-destroying.

Bottomline? Enter only if you have very high risk tolerance. If it can clear the recent high of 118, then it may reach 150 and even 180. If you like the pipes and tubes segment, there may be better opportunities elsewhere.

(Note: Thanks to reader Abhijit for suggesting this stock.)

Stock Chart Pattern - 3i Infotech Ltd

The stock chart pattern of 3i Infotech Ltd looks a little different from other stocks that have been analysed recently. It made a high of 165 back in May '07 (actually 330, but adjusted for the subsequent 1:1 bonus). The bears attacked almost immediately, and the stock gradually slid down to 115 in Sep '08, before it fell off a cliff.

It finally bottomed at 25 in Mar '09 - dropping 85% from its peak. A swift 3 months rally took the stock to 95 in Jun '09 - an exact 50% Fibonacci retracement of the entire Rs 140 fall over 2 years. Thereafter, the stock has been in a consolidation phase within an 'ascending triangle'.

Let us have a look at the 1 year bar chart pattern of 3i Infotech Ltd:-

 

The RSI has moved above the 50% level. The MACD is positive, but marginally below the signal line. The slow stochastic is below the 50% level but the %K line has just crossed above the %D. All three are indicating mild bullishness. The OBV is providing the real clue to the underlying strength - the gradual rise indicates 'accumulation'.

3i Infotech is part-owned (39.5%) by ICICI Bank, and its revenues are a 50-50 split between software products and services. Its product portfolio - mainly targeted at banks and financial institutions - helps to generate a high net margin of close to 30%.

A low P/E of 6.25 means an earnings yield (E/P) of 16% - which is double the current fixed deposit rates in banks, leaving a good 'margin of safety'. Solid top and bottom line growth and strong cash flows from operations make this an ideal portfolio candidate.

Then why is the stock under-performing the Sensex (which has already retraced 70% of its bear market fall)? The company has been aggressively pursuing growth through the inorganic route. That means, it has been acquiring a number of software companies and businesses in India and overseas.

The danger of such a strategy - when leveraged through debt - is that the interest payments become due sooner than later, whether there is a global economic downturn or not.

3i Infotech is less reliant on clients in US and Europe (where the financial services outsourcing business has been hit the hardest) than most Indian software services companies. But the bears have mauled it just the same. And there lies an opportunity for smart investors.

Bottomline? The stock chart pattern of 3i Infotech is indicating that the smart money has been accumulating the stock, and an upward break from the ascending triangle may be imminent. Enter, or add more, on a close above 95. Keep a stop-loss at 70.

(Some questions: Why is the stop-loss set at 70? If you enter now, should you set a tighter stop-loss? At what price?)

Stock Chart Pattern - ICI India Ltd (An Update)

The stock chart pattern of ICI India was analysed 6 months back, when the BSE Sensex was near its nadir. A cash rich company with generous dividend payments and steady growth, it has enhanced share holder value by divesting unrelated businesses and using some of the cash to buy back its own shares.

Let us have a look at the 1 year bar chart pattern of ICI India and check out how the stock has fared in the past 6 months:-

In early Mar '09, the stock was at 416 and below its 200 day EMA. The bull rally had already started from the Oct '08 low - as confirmed by the progressively higher tops and bottoms. Note the gradual up move, well supported by the 50 day EMA.

The stock is neither a trader's favourite, nor one that FIIs lap up - hence the low volume of transactions. The low OBV reading indicated that right up to Jun '09, when the stock entered a bullish consolidation pattern called an 'ascending triangle' (i.e. flat top and a rising bottom).

The consolidation continued with a small up-tick in volume till the end of Aug '09. The slowly rising OBV indicates 'accumulation'. Volumes peaked at the  end of Aug '09, and the stock broke out above the resistance at the 550 level. There has been some selling after the break out, and now the resistance level has turned into a support level.

Both the RSI and MACD are showing negative divergence, making lower tops as the stock made a new high. The slow stochastic has dropped from the overbought zone and is now at the 50% level with the %K line below the %D. The stock may consolidate, or correct some more.

The rise of the ICI India stock from 416 to 557 means a return of 34% in 6 months. Add the Rs 16 dividend, and the return becomes a little more than 37.5%. That means an annualised return of 75%. Not bad for a boring, stalwart stock that manufactured paints 10 years ago and will continue to do so 10 years from now. It won't cause you sleepless nights and can be held 'forever'.

How to Profit from the Cup-and-Handle Chart Pattern

An interesting addition to the technical analysis tool set is the Cup-and-Handle chart pattern. It is very much like a bullish 'saucer' or 'rounding bottom' pattern, but provides additional points of entry.

There is no better way to learn about new stock chart patterns than to look at a practical example. I have chosen the 1 year bar chart pattern of Maharashtra Seamless, because it has made a classic, and clearly identifiable, cup-and-handle pattern:-

The stock made a previous high of Rs 328 in Aug '08 before continuing its bear market down move. It finally made a low of 112 in Mar '09, before embarking on a sharp rally with the rest of the market. In the process, it made a 'rounding bottom' bullish pattern.

The stock went all the way up to Rs 325 in Jun '09 - nearly tripling in value from its Mar '09 low. Not unexpectedly, it faced resistance near its previous high, and the first attempt on Jun 5 '09 failed to go past it. Three subsequent attempts on lower volumes also failed.

The stock then entered a corrective downward sloping channel that has taken it towards its 50 day EMA at Rs 250, where it is currently seeking support.

The horizontal line connecting the two tops of Aug '08 and Jun '09 forms the top rim of the 'cup' at Rs 328. The 'rounding bottom' pattern completes the body of the 'cup'. The downward sloping corrective channel is the 'handle' of the 'cup'.

The progress of the 'handle' needs to be closely observed, because it can provide clues to what might happen next. The depth of the cup is a move of Rs 216 (= Rs 328 - Rs 112).

The 'handle' can retrace between a third and a half of the 'cup' depth. That means a retracement of between Rs 72 (=Rs 216/3) and Rs 108 (=Rs 216/2). So, the correction of the 'handle' should stop in the price zone between Rs 256 (=Rs 328 - Rs 72) and Rs 220 (=Rs 328 - Rs 108).

On completion of this corrective move, the stock price should break up wards again. This provides three possible entry points - should you be interested in entering this stock.

1. The first, and riskiest, point of entry is any time the stock goes below Rs 256 - like it has done now. Why riskiest? Because the 'handle' can go below the Rs 220 level and possibly negate any up move for now.

(There are other reasons why you may want to enter now. Rs 250 is a support/resistance level - as can be observed from the chart patterns made in Jul '08 and Sep '08 (supports) and Oct '08 and May '09 (resistances). The 50 day EMA is another likely support. The RSI has entered oversold region.)

2. The second, and less risky, point of entry will be when the stock breaks out upwards from the downward sloping trend line of the 'handle' formation.

3. The third, and safest point of entry will be when the stock moves above the cup rim level of Rs 328.

The Cup-and-Handle stock chart pattern usually shows up as a continuation pattern in a bull phase. In this case, however, it has formed a bottoming pattern. (There are some other stocks that are also showing a similar formation. Curious readers may want to try and find out some of  these stock charts, as an exercise.)

An inverse Cup-and-Handle can form in bear phases or at market tops - as a variation of the rounding-top bearish pattern.

Here are some questions for my readers. What do you think about the 'handle' formation? Why is it happening? Is it an 'accumulation' or a 'distribution' pattern? (Just use your common sense, and provide your answers in the 'Comments' link, or email me directly.)

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Stock Chart Pattern - Gayatri Projects Ltd

The stock chart pattern of Gayatri Projects Ltd has several interesting formations. But before I start discussing them, questions may arise. Why discuss Gayatri Projects? Why not IVRCL or Punj Lloyd?

Good questions. The short and simple answer? Cash flows from operations. Most of the construction and infrastructure companies generated more hype than cash. During the boom period between 2004 to 2008, IVRCL and Punj Lloyd had bloated order books but negative cash flows from operations.

Gayatri Projects created far less hype but not only booked good orders, they executed them and collected payments. It helped them to generate decent cash flows from operations. Taxes and dividends came out of this cash. The current downturn has dented their margins - but they are unlikely to go around with a begging bowl.

At the height of the bull market in Jan '08, this Rs 10 face value stock almost hit the Rs 700 mark. The dramatic drop all the way to Rs 40 in Mar '09 was way overdone. Let us look at the 6 months bar chart pattern of Gayatri Projects Ltd to see what happened:-

Making a 'V' shaped bottom, the stock quickly ran up past the Rs 90 mark and then entered a bullish saucer-shaped consolidation pattern. The breakout from the pattern was stunning. 11 straight upper circuits took the stock past the Rs 160 mark!

After almost hitting Rs 200 - a 5-bagger within the space of less than 3 months - the stock reversed from a strong resistance zone, and has entered a downward sloping channel. In spite of the sharp run-up, the stock has barely retraced 25% of the massive fall from the Jan '08 top.

During the ongoing correction, the volumes on up days have been much stronger than those on down days. The OBV indicator is reflecting this accumulation by smart investors.

The RSI has moved down sharply from heavily overbought territory and is about to enter the oversold zone. The MACD is still positive but below its signal line. Both are moving downwards.

The slow stochastic reacted from the overbought zone, corrected briefly around the 50% mark and has once again resumed its downward journey towards the oversold region.

Today's trade has taken the stock below the 20 day EMA. This is short-term bearish. The technical indicators are hinting at a further correction to the Rs 140 level where the 50 day EMA may provide support. A breach of the 50 day EMA could set the next target at Rs 120 - which would be a 50% retracement of the recent rise.

Reaching the all-time high any time soon may be a tall order. After the correction runs its course, the stock may hit upside targets of Rs 225/250/320 before facing major resistance. That means a possible 50-100% rise from the current level.

Bottomline? Existing holders of IVRCL or Punj Lloyd may think about switching to this hidden gem. The stock chart pattern of Gayatri projects is encouraging enough for even new investors to get their feet wet in the infrastructure sector. But please do not forget to maintain stop-losses.

PS You can read more about Gayatri Projects at Rajeev's blog.

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Stock Chart Pattern - Indian Hotels

The stock chart pattern of Indian Hotels Co Ltd is unlikely to get investors all excited about jumping in. The stock made a low in Mar '09 and participated in the subsequent rally but failed to beat even its Sept '08 high.

The stock corrected about 50% of its recent rise, down to its 50 day EMA, and started to consolidate sideways. Indian Hotels, from the house of Tatas, is supposed to be the best hotel company in India. Any one who has spent even one night at any of the Taj Group of hotels will surely agree. So what gives?

The global economic slowdown is the main reason for the poor performance of all hotel stocks. Indian Hotels has been no exception. Their overseas properties have done pretty badly. The luxury end of the hotel business - which is the forte of the Taj Group - has borne the brunt of the downturn. It is unlikely that the situation will improve any time soon.

Some times, stalwart companies suffer because of a temporary blip in their environment. The Indian Hotels stock got hammered due to the erosion in their bottom line. Is it the end of the road for them? Hardly. Will they regain their glory? Surely - but not immediately. It may take two or three more quarters.

Smart investors probably know that, and if you look at the 1 year bar chart pattern of Indian Hotels below, you will notice that during the recent consolidation after the correction, the OBV is gradually moving up. That is a sign of accumulation.

After a continuous slide, the stock made a low in early Dec '08. A brief recovery was followed by another drop to the Rs 35 level in Mar '09. The rounding bottom formation in Mar '09 has been marked. Notice that the bottom formation period was less than 3 months - so the subsequent rise was less.

Volumes didn't pick up appreciably till late in May '09. All through the rally, while the stock was making higher tops, the RSI was making lower tops. This negative divergence cut the rally short before it could break convincingly above the Rs 80 level.

The OBV was negative till the end of May '09, and only moved up into positive territory in Jun '09. The MACD is just about in the positive zone but way below its signal line.

The RSI has just reversed off the 30% line. The slow stochastic had a positive crossover, i.e. the %K line moved above the %D line, though both are in the oversold region. These two indicators, along with the rising OBV is signalling that smart money has started to re-enter the stock.

Bottomline? The chart pattern of Indian Hotels Co Ltd is indicating that this may be a good time to enter for patient investors. The benefits may take a while to come your way - but it will come.

BSE Sensex Index Chart Pattern - Jun 12, '09

Last week's BSE Sensex index chart pattern discussion had started off with a line from an old Dylan song. This week's BSE Sensex chart pattern resembles the previous week's chart so much that you can't help but remember another 1960's corny pop song by the Herman's Hermits called "I'm Henry the Eighth I am" - where all the verses were the same. (Whoopy Goldberg did a great take of that song in the Patrick Swayze-Demi Moore movie 'Ghost'.)

Let us have a look at the two years weekly chart pattern of the BSE Sensex index:-

Every thing on the chart pattern looks pretty much the same as the previous week's. This also exemplifies that on longer term charts, so much of the tensions of day-to-day index gyrations get smoothened out. One more advantage of being a long-term investor!

The RSI and slow stochastic continue to remain snugly in overbought zones. The divergence between the MACD and its signal line has increased. The possibility of an 'island reversal' remains open because the big gap in the Sensex caused on May 18, '09 is still unfilled.

The new indicator added is the OBV, which I discussed in an earlier post this week. Look how it continues to move up because of the high volumes. Since an 'upwardly mobile' OBV indicates accumulation, the Sensex may continue its sideways drift with an upward bias for a while longer.

The improved positive industrial production figures for April '09, after 4 months of negatives should nudge the BSE Sensex chart a little further up, towards the 16000-16500 zone. Most industry watchers feel that the worst of the economic downturn is behind us.

But I remain cautious simply because of the continued 14 positive weeks of rally without any meaningful correction. That increases the possibility of a steep fall.

Bottomline? No need to get out all at once. Keep your stop-losses tighter on individual stocks, and keep taking some profits off the table.

About Volume and On-Balance Volume (OBV)

I have been writing about the importance of transaction volume for confirmation of stock or index chart pattern moves. Price rise should be accompanied by higher volumes. Price falls should be on lower volumes.

Rising price on static or lower volumes produces a 'negative divergence' - which indicates the rise may end soon. But what if the stock price or index is moving sideways and the volume is going up, or down? Does that have any technical significance for market movements?

Enter the concept of 'On-Balance Volume', a momentum indicator developed by Joseph Granville in 1963. It is calculated on the basis of a rather simplistic assumption about the closing price of a stock, or the closing level of an index:

If the closing price or index level of a particular day is higher than the immediately preceding trading day's, then the entire volume of transactions is added to a cumulative volume total (named On-Balance Volume, or OBV).

If the closing price or index level is lower than the immediately preceding trading day's, then the entire volume of transactions is subtracted from the OBV.

If the closing price or index level of a particular day remains unchanged from that of the immediately preceding trading day's, the OBV also remains unchanged.

What is the significance of this momentum indicator? A rising OBV means accumulation (i.e. the entry of smart-money); a falling OBV means distribution (i.e. stronger hands transferring their holdings to weaker ones).

Why is the calculation of OBV simplistic? A stock or index usually has several up and down movements throughout the trading day. On a higher closing day, the volume of all buy and sell transactions are added to the OBV. Logically, the total volume of all sell transactions should be subtracted from the total volume of all buy transactions before adding to the OBV.

Likewise, for a lower closing day, the difference between the total sell volume and the total buy volume should be subtracted from OBV. When the indicator was developed by Joe Granville, computers were not as readily available or accessible. So to keep matters simple, logic was given short-shrift.

Let us look at an example. What better choice than the BSE Sensex index chart pattern?

During Sept '08 and Oct '08, the OBV followed the Sensex downwards. In Nov '08 and Dec '08 also, the OBV danced together with the Sensex in lock-step.

Now comes the interesting part. See what happened during Jan '09 and Feb '09. While the Sensex fell, the OBV remained flat. A positive divergence, indicating a possible trend change.

Also interesting to observe is what happened when the rally took off during Mar and Apr '09. The OBV made a higher top in Apr '09 when the BSE Sensex index was at around 11000, than when the index was at 16000 in Aug '08. This was a true sign of accumulation.

Unfortunately, this particular charting software doesn't have volume information updated from May '09 onwards.

I would like to thank reader Rajeev for asking a question about accumulation and distribution in the 'comments' thread of this post. It motivated me to write this article.

Related posts

A rectangular Sensex chart pattern

Three phases of a Bear Market

Sensex in a narrow band

Stock Chart Pattern - Cummins India

Yesterday I had analysed the stock chart pattern of IRB Infrastructure purely from a technical point of view because of the interesting double-bottom formation. I had very little idea of the fundamentals of the company and would not contemplate purchasing the stock because it belongs to a sector that I'm sceptical about.

No such doubts about Cummins India. It is just the kind of stock I like to hold for long term. A market leader in the manufacture of diesel engines of different sizes and used in different industries. A strong overseas collaborator which is also a client. Regular dividends. Good operating cash flows. Steady growth. Low debt. Low risk.

Stalwart stocks like Cummins India won't bring you overnight riches. Neither should you lock it up in a vault and forget about it. The way to benefit from such stocks is to be on the alert for the occasional longer term trading opportunities.

The 1 year bar chart pattern of Cummins India has a couple of notable formations:-

The chart pattern above shows a single bottom in a 'V' shape. Note that the bottom was formed on Mar 9, '09 - the day most world indices formed their bottoms. Both the fall to the bottom, and the subsequent rise, have been gradual and not as sharp as most other stocks.

From the bottom of Rs 148 the stock moved up to Rs 231 in 2 months for a decent gain of 56%. After a short consolidation came a volatile spurt on May 19, '09 - the day after the markets were shut due to extreme volatility after the election results.

The stock chart pattern of Cummins India then entered an interesting consolidation pattern called a 'symmetrical triangle'. The main criteria for such a formation - lower tops and higher bottoms with at least two tops and two bottoms touching the sides of the triangle - have been met.

Triangles can be quite fickle - with three possible options. The most likely one is an upward breakout that will be a continuation of the previous up move. The breakout must be on significantly higher volumes. If the breakout happens on low volumes, then it could be a 'false breakout' - termed an 'end run', with the stock eventually moving downwards.

There can be a downward breakout on low volumes - though a triangle is generally not a reversal pattern. Sometimes such downward breakouts can be 'false' on higher volumes, with the stock subsequently moving up. It is then termed a 'shakeout', i.e. a ploy by strong players to get rid of weaker hands (viz. retail investors) so that they can get back into the stock at lower rates.

The third option is the chart pattern meandering sideways on low volumes and eventually moving out of the triangle near its apex. This option, though possible, seems unlikely because of the increased volume during the triangle formation. This is rather unusual, and indicates possible accumulation.

The breakout - either upward or downward - should happen while the chart pattern is anywhere between half and three-quarters of the distance between the base of the triangle and its apex. The stock chart pattern of Cummins India is in that region now, so we can expect a breakout over the next few days.

The technical indicators are beginning to weaken - not unusual during a triangle formation. The slow stochastic and RSI have slipped down from overbought zones. The MACD is positive but has moved below its signal line. The ROC has dropped close to the mid-point.

Bottomline? Cummins India is a solid long-term portfolio stock, but it has moved up quite a bit from its recent bottom. In any case, one should wait for the breakout from the triangle to initiate action. Should the stock chart pattern break upwards, the next resistance is likely at Rs 350. On a downward breakout, support will be at Rs 230.

Stock Chart Pattern - Maharashtra Seamless

The stock chart pattern of Maharashtra Seamless will reveal that you can not keep a good stock down for too long. It is a market leader in its niche of seamless pipes used in gas and oil exploration in India and overseas.

With low debt, positive cash flows from operations (except a blip in '06), regular dividend payments and steady growth, Maharashtra Seamless should find a place on the buy list of mid-cap stocks for seasoned investors.

The headwinds of the global slowdown and the lower oil prices have curtailed investments and affected most players in the oil and gas segment. Maharashtra Seamless is no exception.

But its credibility in the export and domestic markets, overseas tie-ups coupled with a decent cash hoard will help it to ride out the downturn better than its competition. A recent repeat order from ONGC worth Rs 750 Crores will surely help its cause.

Enough about fundamentals. Now a look at the technicals:-

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

The stock has broken upwards after making a bullish 'rounding bottom' pattern that indicates gradual accumulation by smart investors.  There are a couple of interesting things to note.

Both the RSI and slow stochastic moved out of their oversold zones and gave 'buy' signals even before the stock price moved above its 20 day EMA. By the time the 20 day EMA crossed above the 50 day EMA, confirming the bullishness, the stock had completed the 'rounding bottom' pattern.

The expected correction followed briefly and formed a 'cup-and-handle' pattern. The correction was well supported by the 20 day EMA as the stock continued to march upwards.

The lower volumes in Mar and Apr '09 were a concern. But the volume has picked up considerably in May '09, supporting the bullish move.

Is it a good time to enter the stock? Yes, if you are an investor with a 3-5 year outlook. If you have a 1-2 year outlook, you may want to wait for the next correction to enter. It is possible that the stock may drop to the 200-220 level to seek support again from its 20 day EMA.

The rise in May '09 has been too steep and the stock looks overbought. Both the RSI and slow stochastic have made lower highs while the stock has moved further up. This is a negative divergence and suggests caution.

Bottomline? If you like mid-caps and are looking for a fundamentally strong, profitable, low debt company with real cash in its books, look no further than the chart pattern of Maharashtra Seamless.

A rectangular Sensex chart pattern

In a prior post on July 13, 2008 I had discussed about identifying stock market trends using moving averages. It is time to take a re-look at the current market trend.

After the prolonged bull market that started in May 2003 at about 2900 and took the Sensex all the way up to 21200 in Jan 2008, a  bear market reversal pulled the Sensex down to 7700 in Oct 2008.

We had a clear up trend for close to 5 years - interspersed with several bull market reactions, followed by a sharp down trend for 10 months - with a few bear market rallies.

After the Oct 2008 low of 7700, a swift rally took the Sensex to 10950. Thereafter, the Sensex seems to be meandering sideways with apparently no clearly visible up or down trend.

Let us take a look at the Sensex chart of the past 3 months.

The 200 day EMA is still moving down. The 50 day EMA and the Sensex are well below the 200 day EMA. So we are still firmly in a bear market.

But the Sensex is bouncing along sideways within a rectangular band between 7700 and 10950. Volume of transactions - given in the lower chart - are low. What does this indicate?

A rectangular chart pattern is a period of consolidation before the market makes up its mind where it wants to go. Such indecision amongst bulls and bears typically happens after a sharp move up or down.

A market consolidation - represented by a sideways rectangular chart pattern - can be of three types: accumulation, distribution or continuation.

At market tops the 'smart money', i.e. institutional and high net worth investors, sell. The 'weaker hands', i.e. retail investors and funds, buy. Shares are 'distributed' from stronger to weaker players.

At market bottoms, the opposite happens. The stronger hands 'accumulate' the shares from the weaker investors, who get tired of waiting for the market to move up.

In the middle of a clear up (or down) trend, a consolidation period is called a 'continuation', as the market pauses for breath before continuing the up ward (or down ward) journey.

Since we are not at a market top, this is not a distribution pattern. Is it then a period of accumulation at a market bottom or continuation for a further fall? There lies the conundrum.

The short answer is: we don't know. When and how will we know? Only when the market makes up its mind and decides to either move above 10950 or break below 7700.

Fundamentally, the macro economic situation is showing improvement. Inflation, as indicated by the WPI (Wholesale Price Index) is moving down. Oil prices have fallen drastically in the international market. Interest rates are also coming down.

We are now in the midst of the results season with companies declaring their Q3 or Q4 results for the period Sep to Dec 2008. Consensus amongst the experts is that most companies will declare awful results.

But the market is already expecting (i.e. 'discounting') that and unless there are more Satyam-like skeletons, it is unlikely that there will be a big fall below 7700.

On the day the Satyam scam broke, the volumes were very high and the market dropped 750 points but remained well within the rectangular pattern. The following two trading days also saw high volumes but much smaller falls. These are positives.

So, the scales look slightly tipped towards this pattern being an accumulation rather than a continuation. Why slightly? Because on some of the recent up days, the volume of transactions has been less than on down days. This goes against conventional wisdom of higher volume on up days and lower volume on down days.

If you are a patient investor, wait out this consolidation period. Such patterns can continue for a very long time - months, may be even years.

If you are itching for some action, start putting in small amounts of money in Nifty BeES or any good index fund. I would not rely on stock-picking skills at such a time.