Sensex, Nifty charts (Sep 20, 2019): short covering causes euphoric upward breakouts

FIIs were net sellers of equity during the first four trading days of the week, but were net buyers on Fri. (Sep. 20). Their total net selling was worth Rs 33.7 Billion. DIIs were net buyers of equity on all five days of the week. Their total net buying was worth Rs 48.2 Billion, as per provisional figures.

After three disappointing 'booster' packages, the Finance Minister hit the ball out of the park by announcing a significant cut in corporate taxes on Fri. Sep 20. Sensex and Nifty soared - trapping unwary short sellers - and business leaders sang 'Hallelujah'. 

The GST council announced reduction in rates for hotels, outdoor caterers, precious/semi-precious stones but hiked rates for caffeinated drinks and railway wagons. No major relief was provided to auto and cement sectors.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex fell steadily on the back of sustained FII selling, and dropped to test support from the lower edge of the 'support zone' (between 35900 and 37100) on Thu. Sep 19.

There was a sea change in market sentiment after the FM announced corporate tax rate cut on Fri. Sep 20. The index did a sharp U-turn as traders rushed to cover their shorts. Sensex closed above its three EMAs in bull territory for the first time in nearly three months.

Daily technical indicators are turning bullish. MACD has crossed above its rising signal line in bearish zone. ROC has risen sharply to the edge of its overbought zone. RSI has moved above its 50% level. Slow stochastic has emerged from its oversold zone. Some more near-term upside is possible.

Small investors should avoid getting caught in the sudden euphoria. The devil is in the details. How many companies actually pay more than 25% tax? If they do, will they be willing to forego existing tax incentives? Will tax benefits be passed on to consumers, or used to pare debt? Will rural consumers rush out to buy two-wheelers, tractors and cars? Will MSMEs start opening new factories just because tax has been reduced by 3.5%?

Only time will provide answers to those questions. In the meantime, follow your asset allocation plan, continue SIPs, use the sentiment boost to get rid of non-performing stocks/funds and stay invested in good companies/funds for the long-term. That is the best way to build wealth - whether Sensex is falling or suddenly jumping northwards.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty breached the lower edge of the 'support zone' (between 10700 and 11100) intra-week, but bounced up sharply on Fri. Sep 20 to close above both its 50 week and 20 week EMAs for the first time since early Jul '19.

Reduction in corporate taxes - announced by the Finance Minister on Fri. Sep 20 - triggered a sharp technical bounce due to short-covering. Nifty closed at its highest level in eight weeks.

Weekly technical indicators are in bearish zones, but showing upward momentum. MACD appears to be forming a bullish 'saucer' pattern below its falling signal line. ROC has crossed above its falling 10 week MA. RSI has emerged from its oversold zone. Slow stochastic has started rising towards its 50% level. Expect some more near-term index upside.

Nifty's TTM P/E has moved up to 27.72 - which is well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is oscillating near the edge of its oversold zone, hinting at near-term index consolidation.

Bottomline? Sensex and Nifty charts have broken out upwards after consolidating sideways for seven weeks. Sharp short-covering bounces were triggered by a cut in corporate taxes, which may not boost consumer demand in the near term. Stay calm, and follow your investment plans.

Six Asset Allocation Strategies That Work

Asset allocation is a very important part of creating and balancing your investment portfolio. After all, it is one of the main factors that leads to your overall returns—even more than choosing individual stocks.

Establishing an appropriate asset mix of stocks, bonds, cash, and real estate in your portfolio is a dynamic process. As such, the asset mix should reflect your goals at any point in time.

Read more at:
https://www.investopedia.com/investing/6-asset-allocation-strategies-work/

Why Understanding Asset Allocation Is Key

Most investors are extremely diligent in determining what investments should be a part of their portfolios. Certainly, you want to make sure that any specific security or fund is serving a purpose and is chosen because it has the potential to meet your needs and goals.

However, what investors often overlook or neglect is their specific asset allocation. The truth is that the combination of investments in your portfolio can actually be more important to achieving your goals than the specific investments selected.

Read more at:
https://www.investopedia.com/advisor-network/articles/why-understanding-asset-allocation-key/

Sunday musings: Lessons for small investors from Vishwamitra's dalliance with Menaka

Once upon a time, King Kaushika was touring his kingdom with a large army when he chanced upon the ashrama (hermitage) of Rishi (Sage) Vashishtha near a forest.

The Rishi greeted the King and offered his hospitality. Kaushika declined the offer because he thought it will be a great financial strain for Vashishtha to feed such a large army.

Vashishtha insisted and said it would not be a problem as he owned a wish-fulfilling (kamadhenu) cow, Sabala. Sure enough, Sabala arranged a grand feast which greatly pleased the King.

But a King won't be a King unless he coveted the possession of others. Kaushika felt that Sabala will be of more use to a King than a Sage. So, he offered ample monetary rewards to Vashishtha in exchange for Sabala.

The Sage politely refused the offer, which angered the King. He ordered his army to forcibly seize Sabala, at which point Sabala mournfully requested Vashishtha not to part with her.

Vashishtha suggested that Sabala raise an army of her own and defeat King Kaushika's soldiers - which she promptly did.

Kaushika decided to perform spiritual penance for 12 years. That pleased Lord Shiva, who granted him a wish. Being a King, who was humiliated by a humble Sage, Kaushika wanted the best weaponry that Lord Shiva could offer.

An emboldened Kaushika went on the attack and hurled his newly acquired divine weaponry at Vashishtha. But to no avail. Vashishtha's superior spiritual (yogic) powers repelled the attack easily.

Kaushika realised that physical powers were no match for spiritual powers. This time he went ahead with a more serious effort at penance to become the spiritual equal of Vashishtha.

In the process, he became Sage Vishwamitra. Lord Indra, King of Heaven, was disturbed by the severity of Vishwamitra's meditation and the yogic powers he might attain, and sent the beautiful apsara (celestial nymph) Menaka to seduce him.

Menaka did as she was instructed. Vishwamitra's spiritual resolve was overcome by the sheer beauty of Menaka. Their dalliance resulted in the birth of a daughter. 

Unfortunately, Menaka revealed to Vishwamitra the real reason why she had descended from Heaven. Vishwamitra was enraged by Lord Indra's devious move. He banished Menaka, abandoned their daughter and returned to his meditations.

[The daughter - named Shakuntala - was raised in Sage Kanva's hermitage. She later married King Dushyanta. Their child was called Bharata, after whom India was originally named.]

Moral of the story? There are two:

1. Thou shalt not covet others' possessions - which can be paraphrased as 'Keeping up with the Joneses'. It is a futile activity. Be happy with what you own. Greed isn't always good - particularly near a stock market top.
2. Dalliances should be avoided - regardless of the attractiveness of the opportunity.

The second moral is of particular importance to small investors. Remain steadfast in your discipline of maintaining a financial plan and following an asset allocation plan. Financial powers will follow inevitably albeit gradually.

Let not the Menaka's of the investment world - penny stocks, F&O trading, commodities trading, forex trading - lure you. Behind these Menaka's are the devious moves of the Lords (i.e. Professional Traders) of the stock/commodities/forex markets - designed to test your financial resolve.

Sensex, Nifty charts (Oct 27, 2017): bulls dominating again

Both DIIs and FIIs were net buyers of equity during F&O expiry week. DIIs were net buyers on 3 days and net sellers on 2 days. Their total net buying was worth Rs 2.8 Billion, as per provisional figures. 

FIIs were net buyers worth Rs 11.8 Billion. On Wed. Oct 25, they bought equity worth a huge Rs 35.8 Billion - probably due to short-covering of PSU bank stocks - following the recapitalisation announcement by the Finance Minister. They were net sellers on the other 4 days.

Sensex gained 2.4% while Nifty gained 1.7% on weekly closing basis. Both indices touched new highs.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex had been consolidating sideways along the upper edge of the downward-sloping channel since an unconvincing upward breakout on Oct 16. 

On Wed. Oct 25, Sensex broke out with an upward 'gap' above the narrow consolidation zone on the back of heavy FII buying, and rose to touch new intra-day (33287) and closing (33157) highs on Fri. Oct 27. 

All three EMAs are rising, and the index is trading above them in a bull market. However, daily technical indicators are looking overbought, which can trigger a pullback towards the downward-sloping channel. 

Note that ROC, RSI and Slow stochastic are not only showing negative divergences by failing to touch new highs with the index, but may also be forming bearish 'double top' reversal patterns inside their respective overbought zones.

The index recently completed a 10 weeks long sideways consolidation. So, there is no reason to expect a deep correction. The economy is in the process of recovery from the stresses caused by demonetisation and GST implementation.

Nevertheless, caution is advised near a market top. If you are ready to jump in due to a 'left-out' feeling - don't. The 'low-hanging fruits' have already been picked. Stock selection skills will separate the men from the boys.

If you have savings that need to be invested, follow your asset allocation plan and a gradual accumulation process rather than buying in a lump-sum.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched new intra-week (10366) and closing (10323) highs, and continues to trade above its rising weekly EMAs in a long-term bull market.

Weekly technical indicators are in bullish zones, and looking a bit overbought. All four are showing negative divergences by failing to touch new highs with the index.

Nifty's TTM P/E has moved up to 26.67 - well above its long-term average. The breadth indicator NSE TRIN (not shown) is trying to move up inside its overbought zone, which can limit index upside.

Q2 (Sep '17) results of India Inc. declared so far have shown some top line growth, but bottom line growth is still weak. Without earnings growth, index valuation will remain high. That is one of the main reasons why FIIs have been selling Indian equity.

Bottomline? Sensex and Nifty charts have risen to touch new highs. Bulls are dominating. Any corrections should be welcomed as buying opportunities. This is not the time to be greedy or fearful. Be sensible.

(Note for blog visitors: I intend to take a brief break from a big city to a more tranquil place, where access to the Internet will be limited. My next blog post will be next week's Sensex and Nifty update.)

Nifty chart: a midweek technical update (Sep 20 ‘17)

FIIs were net sellers of equity worth Rs 30 Billion during the first three days of trading this week. DIIs were net buyers of equity worth Rs 16.4 Billion, as per provisional figures. Nifty touched a new closing high of 10153 on Mon. Sep 18 and a new intra-day high of 10179 on Tue. Sep 19.

After the fiasco of demonetisation, GST implementation is turning out to be another thorn in the flesh for the NDA government. The balloon of July's tax collection of Rs 950 Billion was punctured by input tax credit claims of Rs 650 Billion.

Tata Steel has announced a 50-50 joint venture in Europe with Thyssenkrupp. The JV is expected to absorb a large portion of Tata Steel Europe's debt (which was used to acquire Corus 9 years ago).

The daily bar chart pattern of Nifty touched a new high of 10179 on Sep 19, but formed a 'reversal day' bar (higher high, lower close) that often marks an intermediate top.

Despite strong selling by FIIs, large inflows into domestic mutual funds and the consequent buying by DIIs propelled the index to a new high. The index is trading well above its three rising EMAs in a bull market.

Daily technical indicators are in bullish zones. But caution is advised because MACD and RSI are showing negative divergences by touching lower tops while the index rose higher. Some correction or consolidation may follow.

The entire 7 weeks' trading from Aug '17 onward has formed a large 'rising wedge' pattern, which has bearish implications. Bulls are struggling to move the index above its Aug 2 top of 10138 in a convincing manner.

Nifty's TTM P/E is at 26.39 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is hovering just above its overbought zone, and can limit index upside.

Small investors may be feeling confused about what to do. Confusion comes from lack of a plan for long-term investing. As has been repeated ad nauseam in this blog, your asset allocation plan should decide what needs to be done regardless of the state of the market.

A bull market is supposed to climb a wall of worries. If you are tired of waiting for a correction and can't stop the urge to jump in to the market, select your stocks very carefully, and use a strict 'stop-loss' every time you buy a stock.

Sensex, Nifty charts (Aug 04, 2017): bulls keep charging ahead

FIIs were net buyers of equity on Wed. & Thu., but net sellers on the other three days of the week. DIIs were net sellers of equity on Wed. & Thu., but net buyers on the other three days.

For the week, FIIs were net sellers of equity worth Rs 25 Billion. DIIs were net buyers of equity worth Rs 35.5 Billion. Sensex eked out a 15 points gain, while Nifty gained 52 points (0.5%) on a weekly closing basis.

Manufacturing and services sectors were hit by the switch to GST regime in Jul '17. Nikkei India Manufacturing PMI contracted to 47.9 against 50.9 in Jun '17. Services PMI contracted to 45.9 against 53.1 in Jun '17. (The 50 point mark separates expansion from contraction.) The composite PMI (manufacturing + services) dropped to 46 from 52.7 in Jun '17.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex touched a new high of 32686 on Wed. Aug 2, but formed a 'reversal day' bar (higher high, lower close) that triggered a shallow correction of 580 points (1.8%).

The index found support from its rising 20 day EMA on Fri. Aug 4 and formed another 'reversal day' bar (lower low, higher close) that enabled Sensex to close higher for the week.

Daily technical indicators have dropped from their respective overbought zones. Negative divergences (marked by blue arrows) on ROC, RSI and Slow stochastic - which touched lower tops while the index touched a new high - led to the correction. 

The index is trading above its three rising EMAs in a bull market. Some more correction or consolidation is possible, but large liquidity inflows into the stock market is keeping the index buoyant.

Q1 (Jun '17) results are almost out of the way, with no significant increase in earnings. So, index valuation remains much higher than its long-term average. The stock market is looking ahead to better Q2 and Q3 results on the back of GST implementation.

Investing near a market top is always a risky proposition. So is sitting out for a correction and watching the index rise even higher. Small investors often face this problem. What is the solution? 

I have mentioned this many times before but don't mind repeating it: Have financial and asset allocation plans in place. The plans will guide you what to do under different market conditions. Otherwise, investing turns into a game of chance. 

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched a new high (10138) and closed higher for the 5th week in a row. All dips are being bought as bulls are beginning to run amok.

The index is trading well above its two rising weekly EMAs in a bull market. All four weekly technical indicators are inside their respective overbought zones - as they have been for the past 6 months.

However, ROC, RSI and Slow stochastic are showing negative divergences by showing slight downward momentum as the index touched a new high. A bit of correction or consolidation may be in the offing.

Nifty's TTM P/E is at 25.61 - much above its long-term average. The breadth indicator NSE TRIN (not shown) has moved up inside its overbought zone, and is likely to temporarily limit index upside.

Bottomline? Sensex and Nifty charts touched new highs again. With FIIs booking profits and DIIs continuing to buy, any correction is unlikely to be deep. Stay invested. Book partial profits - particularly in mid-cap and small-cap stocks.

Nifty chart: a midweek technical update (Jul 19 ‘17)

FIIs were net buyers of equity worth Rs 16.9 Billion during the first three days of trading this week. DIIs were net sellers of equity worth Rs 14.3 Billion, as per provisional figures.

The index closed above the 9900 level for the first time on Mon. Jul 17. But bulls were stopped in their tracks as the GST Council raised the cess on cigarettes.

Nifty lost more than 120 points on Tuesday as bears battered the stock of ITC - which has a large weightage on the index.

The daily bar chart pattern of Nifty has been consolidating sideways within a 150 points range (between 9780 and 9930) after breaking out above a bullish 'ascending triangle' pattern on Mon. Jul 10.

All three EMAs are rising, and the index is trading above them in a bull market. The distance between the index and its 200 day EMA is more than 850 points, which indicates overbought condition as per empirical observations.

Daily technical indicators are also looking overbought. Nifty's TTM P/E is at 25.28 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has fallen deep inside its overbought zone.

With all these technical signals flashing red, what should small investors do? Remember that indices (and stocks) can remain overbought for long periods. That doesn't mean it will be a straight-line rise to new highs.

Leo Puri, MD of UTI Asset Management, said in a recent TV interview: "There is a large space between the two extremes of greed and fear." Learn to become comfortable in that space.

If you have spent the time and effort in creating a good financial plan and an Asset Allocation plan, then there is nothing to worry about. Just stick to the plans regardless of index gyrations.

If you have been buying and selling willy-nilly based on tips or friendly advice, you may be in big trouble already. The best way to get out of trouble is not to 'average' but to get out of losing positions.

Avoid taking large positions on the long or the short side. Remember the story of the hare and the tortoise. Investing is a marathon, not a sprint. You need to have a plan and pace yourself along the way.


(Note: Thinking of adding quality mid-cap and small-cap stocks to your portfolio? Subscribe to my Monthly Investment Newsletter. Paid subscriptions are being offered to blog visitors, followers and subscribers for 2 more days only - till Jul 21, 2017. Contact me at mobugobu@yahoo.com for details.)

The stock market is at a lifetime high - should you buy, sell or hold?

A TV anchor was interviewing a fund manager when the market started to correct after touching a new high. The following is a brief excerpt of the Q&A session:

Q: You are holding 16% in cash. Is it because you are expecting a big correction in the market?

A: It's not like that. We hold a basket of stocks and have price targets for each stock. When a target is hit, we book profits.

Q: You mean several stocks have hit their targets during the recent rally - that is why you have excess cash? Why are you not redeploying in other stocks?

A: It is difficult to find new ideas near a market top, as everything appears overvalued. So, we have invested in money market instruments.

This is a classic problem that fund managers face. They can't afford to hold large amounts of cash because it affects fund performance. But they are wary of redeploying at high valuations in case the market turns against them.

Small investors with a long-term outlook need not be bothered by such a problem - provided they have a proper asset allocation plan.

The asset allocation plan will determine the investment strategy. How?

Let us look at an example - a plan with 70% in equity shares, 25% in fixed income instruments and 5% in cash. That means, out of a monthly saving of Rs 10000, Rs 7000 is being invested in an equity fund, Rs 2500 in a debt fund and Rs 500 in a liquid fund.

After a year, the invested amounts are Rs 84000 in the equity fund, Rs 30000 in the debt fund and Rs 6000 in the liquid fund. 

Due to the bull rally, the NAV of the equity fund has gone up 20% - so the amount in the equity fund has increased to Rs 100800. The amount in the debt fund has increased to Rs 31500 (say), and the amount in the liquid fund is Rs 6500.

The asset allocation has now changed (due to the rally) to 73% in equity fund, 22.5% in debt fund and 4.5% in liquid fund.

You now have three options: 
(i) book partial profits in equity fund and redeploy in debt and liquid funds to restore the original allocation and continue with your monthly SIPs; 
(ii) restore the original allocation by adjusting your monthly SIPs by investing less in equity fund and more in debt and liquid funds; 
(iii) continue with your monthly SIPs and ride the bull rally a little longer - allowing the equity allocation to rise to 75% before choosing options (i) or (ii).

From the point of view of simplicity, option (i) is the least complicated. The reallocation is suggested after one year to avoid paying any long-term capital gains tax on your equity fund profits.

What about the answer to the question? As was mentioned earlier - you have no need for it.

Nifty chart: a midweek technical update (May 03 ‘17)

FIIs were net sellers of equity worth Rs 11.3 Billion during the two days of trading this week (May 1 was a holiday). DIIs were net buyers of equity worth Rs 6.5 Billion, as per provisional figures.

Increased selling by FIIs and reduced buying by DIIs has temporarily halted Nifty's rally.

Strong performances by Maruti, Honda, Tata Motors, Nissan and Toyota helped passenger vehicle sales grow 16% in Apr '17. However, commercial vehicle sales took a hit due to the Supreme Court ban on sale of BS-III vehicles.

After touching new intra-day and closing highs last week, the daily bar chart pattern of Nifty has failed to progress any further.

Technical headwinds had led to the following concluding remarks in last week's post: "The upside appears limited. Think about partial profit booking and re-balancing of asset allocation."

All three EMAs are rising, and the index is trading above them in a bull market. But Q4 (Mar '17) results declared so far are showing that earnings of companies are lagging behind expectations.

Daily technical indicators are not showing any upward momentum. MACD and RSI are moving sideways in bullish zones. Slow stochastic is about to fall from its overbought zone after forming a 'double top' reversal pattern.

Nifty's TTM P/E remains well above its long-term average at 23.65. The breadth indicator NSE TRIN (not shown) is deep inside its overbought zone - hinting at a correction or more consolidation.

Stick to your asset allocation plans and SIPs as the index consolidates. Unless FIIs stop selling, the index may not move much higher.

Nifty chart: a midweek technical update (Apr 26 ‘17)

FIIs were net sellers of equity worth Rs 5.9 Billion during the first three days of trading in F&O expiry week. DIIs were net buyers of equity worth a huge Rs 29.9 Billion, as per provisional figures.

The combination of reduced selling by FIIs and increased buying by DIIs sent Nifty soaring to lifetime intra-day (9367) and closing (9352) highs. 

Q4 (Mar '17) results declared so far have been better than expectations. An appreciating Rupee will help reduce India's trade deficit.

The daily bar chart pattern of Nifty crossed above its previous (Apr 5) top of 9274 with good volume support, and closed above 9350 for the first time ever. The bearish 'head and shoulders' pattern that was developing on the chart has been negated.

(The Sensex closed above 30000 for the first time ever. The event was celebrated with exchange participants cutting a 30 kg cake.)

Investors should not get swayed by bullish euphoria. There are a few dark clouds on the horizon.

All three daily indicators are in bullish zones, but showing negative divergences by touching lower tops while the index rose higher. 

Nifty's TTM P/E has touched 23.75 - much above its long-term average. The breadth indicator NSE TRIN (not shown) is falling inside its overbought zone.

The index is trading above its three EMAs in a bull market. However, the distance between the index and its rising 200 day EMA is more than 700 points. That indicates overbought conditions (as per empirical observations).

The upside appears limited. Think about partial profit booking and re-balancing of asset allocation.

Nifty chart: a midweek technical update (Mar 29 ‘17)

FIIs were net buyers of equity worth a huge Rs 74.5 Billion during the first three trading days this week. DIIs were also net buyers of equity - worth Rs 10.4 Billion, as per provisional figures.

Despite all the buying, Nifty has been stuck in a range between 9000 and 9150 after an intra-day move above 9200 on Fri. Mar 17.

NDA government is facing flak from opposition parties by trying to introduce a large number of amendments to the Finance bill. The GST bill has also been tabled in Parliament. Transition of power in UP has caused a lot of turmoil so far.

The daily bar chart pattern of Nifty has so far received good support from the 85 points 'gap' formed on Mar 14. 

The index dropped inside the 'gap' (marked by grey rectangle) twice - on Mar 22 and Mar 27 - but bounced up on both occasions.

Part filling of the 'gap' should have been followed by a resumption of the up move from the Dec '16 low. F&O expiry on Thu. Mar 30 may be the reason for a bit of caution among market players.

All three technical indicators are in bullish zones after correcting overbought conditions, but are not showing much upward momentum. Some more consolidation or correction can't be ruled out.

The index is trading above its three EMAs in bull territory. The distance between the index and its 200 day EMA is almost 650 points - which is not a 'healthy' condition technically.

Nifty's TTM P/E has inched up to 23.74 - much higher than its long-term average, and limiting index upside. The breadth indicator NSE TRIN (not shown) is in neutral zone. 

The Rupee is strengthening against the US Dollar - thanks to FII and FDI inflows. With DIIs also turning buyers, the index can move higher. 

This is a good time to think about asset reallocation by booking partial profits in equity holdings.

Sensex, Nifty charts (Mar 24, 2017): pause after touching new highs

FII net buying in equities was lower than the previous week at Rs 37.1 Billion, as per provisional figures. DII net selling in equities was higher than the previous week at Rs 25.9 Billion.

However, both indices closed lower for the week - Sensex by 0.8% and Nifty by 0.6%. Some profit booking after both indices touched new highs was only to be expected.

India's Current Account Deficit (CAD) for Q3 (Dec '16) rose to four-quarter high of 1.4% of GDP (at US $ 7.9 Billion) against 0.6% of GDP for Q2 (Sep '16). CAD for Q3 (Dec '15) was also 1.4% of GDP (at US $7.1 Billion). 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex shows how news can affect market technicals in the short term. 

There was a downward breach on Mar 8 '17 of the blue up trend line drawn from the Dec 26 '16 low (marked 1). An upward 'gap' on Mar 14 '17 - following announcement of state election results - took the index back above the up trend line '1'.

After touching a new 52 week high of 29825 (and closing at a lifetime high of 29649) on Mar 17 '17, the index corrected on profit booking. Trend line '1' was breached on the downside again - on Mar 21 '17.

Note that the mere breach of a trend line may not necessarily indicate a trend reversal. Some times it is a warning of an impending reversal.

A second up trend line (marked 2) has been drawn through the Dec 26 '16 and Mar 22 '17 lows. Any downward breach of trend line '2' may not indicate a trend reversal either. But it will be a second warning.

As per 'corrective fan principle', only a breach of a third up trend line - should it need to be drawn after a downward breach of trend line '2' - will confirm a reversal of the up trend (or a much deeper correction).

Since the index is trading above its three rising EMAs in a bull market, there is no need to panic and sell. Neither should any one go on a buying spree.

Daily technical indicators are in bullish zones but giving conflicting signals. MACD and Slow stochastic are showing downward momentum. ROC and RSI are showing upward momentum.

If you can't control your urge to buy, choose safer large-cap stocks. Better still, let your asset allocation plan be your guide.

NSE Nifty index chart pattern

Attention is being drawn to the following comments in last week's post on the weekly bar chart pattern of Nifty: "Nifty is trading more than 700 points above its rising 50 week EMA. The last time it did that - in the week ending on Sep 9 '16 - a sharp correction had followed." 

Therefore, last week's correction - albeit a small one - should not have come as a surprise to regular readers of this blog.

Has anything changed in the technical structure of the chart? Not yet. Last week's upward 'gap' has been partly filled. The index may correct a bit more to completely fill the 'gap'.

Either way - i.e. partial or complete filling of an upward 'gap' - should be followed by a resumption of the up move.

Since the index is trading well above its rising 20 week and 50 week EMAs in a bull market, a slightly deeper correction will improve the technical 'health' of the chart - enabling Nifty to climb to new highs. But wishing for a correction doesn't make it happen.

Weekly technical indicators are still looking overbought. ROC is showing the first sign of a correction by dropping down to its rising 10 week MA.

Nifty's TTM P/E remains much higher than its long-term average at 23.65. The breadth indicator NSE TRIN (not shown) has fallen sharply inside its neutral zone. Any further index upside may push TRIN inside its overbought zone.

Bottomline? Both Sensex and Nifty charts are pausing after touching new highs. Q4 (Mar '17) earnings need to catch up as both indices are looking overvalued. Downside risk appears higher. Investors should be thinking about booking profits and buying fixed income instruments.

Long term Gold chart movements linked to Historical events

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

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

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

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

Given below are the events and the corresponding gold prices:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Learn more: 
What Does Investment Diversification Really Mean?

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How to reallocate your assets

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

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Nifty chart: a midweek technical update (Dec 21 '16)

FIIs have been in a strongly bearish mood, putting Nifty bulls at a severe disadvantage. Total net selling in equities by FIIs in three days of trading this week touched Rs 24 Billion. DIIs were net buyers of equity worth Rs 20.3 Billion.

Despite heavy selling by FIIs, Nifty has managed to stay above the 8000 level so far, though it has lost ground for six trading sessions in a row.

Demonetisation blues are still affecting the public at large. In another move to soften the blow, RBI has allowed depositing of demonetised notes of any amount in KYC-compliant bank accounts without asking any questions.

The Government is bringing an ordinance to amend The Payment of Wages Act, 1936 to allow businesses and industries to pay wages electronically or by cheques - with an option to pay by cash.

The following were the concluding comments in last week's mid-week update on the daily bar chart pattern of Nifty: "The balance is tilted towards bears continuing their domination for a while. The small up trend line may be the lower edge of a 'rising wedge' pattern, which has bearish implications."

On Thu. Dec 15, Nifty broke down and closed below the 'rising wedge' pattern. The next day it pulled back to the lower edge of the wedge - giving a selling opportunity. It has been gradually sliding down since then.

All three EMAs are falling and Nifty is trading below them. The imminent 'death cross' of the 50 day EMA below the 200 day EMA will technically confirm a return to a bear market. 

Daily technical indicators are looking bearish and showing downward momentum. Slow stochastic has dropped sharply into its oversold zone. Any technical bounce will provide bears another opportunity to sell.

Nifty's TTM P/E has remained between 21.16 and 21.87 in Dec '16, which is above Nifty's long-term average valuation. The breadth indicator NSE TRIN (not shown) is falling in neutral zone.

The Rupee is depreciating against the US Dollar. That means FIIs are going to remain sellers in the Indian stock market. "Now is the winter of our discontent (unlikely to be) made glorious summer ..." [with due apologies to William Shakespeare].

The down trend line continues to dominate Nifty's chart. Don't be in a rush to buy. Invest according to your asset allocation plan. 

Sensex, Nifty charts: bulls and bears struggle for domination (Dec 02, 2016)

As per provisional figures, FIIs were net sellers of equity worth Rs 31.8 Billion while DIIs were net buyers of equity worth Rs 22.6 Billion. Both Sensex and Nifty closed 0.3% lower for the week.

India's GDP growth touched 7.3% in Q2 (Sep '16) against 7.1% in Q1 (Jun '16). However, growth in Q3 (Dec '16) is likely to be hit by the demonetisation of high value bank notes.

Many automobile manufacturers (Maruti excepted) have reported lower sales in Nov '16. Demonetisation has hit the offtake of rural two-wheelers and used cars.

BSE Sensex index chart pattern

The following was the concluding comment in last week's post on the daily bar chart pattern of Sensex: "Some more consolidation or correction can't be ruled out." 

The index rallied past its falling 20 day EMA to touch an intra-day high of 26769 on Thu. Dec 1 - falling short of its 200 day EMA. Bears struck immediately. The index closed below its 20 day EMA - forming a 'reversal day' pattern (higher high, lower close).

On Fri. Dec 2, Sensex opened with a downward 'gap' and dropped below 26200, before closing slightly higher. The index may correct a bit more and test support from the zone between 25300 and 25900.

All four daily technical indicators have corrected oversold conditions but MACD, RSI and Slow stochastic are still in bearish zones. ROC climbed into positive territory, but has reversed direction.

Expect some more correction or consolidation - atleast till the US Fed increases interest rates. A worrying sign for bulls is that both DIIs and FIIs were net sellers of equity on Fri. Dec 2. If they join hands next week, the index can touch a new low. 

NSE Nifty index chart pattern

Oversold technical indicators led to the following comment in last week's post on the weekly bar chart pattern of Nifty: "A pullback rally towards 8300 is likely. Bears will probably use the opportunity to sell."

The index touched an intra-week high of 8251 but faced strong resistance from its sliding 50 week EMA. It dropped to close slightly lower for the week - forming a 'reversal week' bar (higher high, lower close) and an 'inverted hammer' candlestick pattern.

For the past four weeks, the index has closed within the 'support-resistance zone' between 8000 and 8300. A close below 8000 can trigger a fall towards 7500-7700.

Weekly technical indicators continue to look bearish. MACD has just entered negative territory. RSI has bounced up from the edge of its oversold zone. ROC and Slow stochastic are inside their oversold zones.

Some more correction or consolidation is likely. The index is trading below its 20 week and 50 week EMAs, but well above its 200 week EMA in a long-term bull market.

Bottomline? Sensex and Nifty charts show a struggle for domination between bulls and bears. Bears have the upper hand in the near term, but bulls are far from being vanquished. Stick to your asset allocation plans and invest your savings regularly, but try to avoid any bulk buying.