Nifty chart: a midweek technical update (Nov 20, 2019)

FIIs were net sellers of equity on Mon. and Tue. (Nov 18 and 19), but were net buyers on Wed. (Nov 20). Their total net selling was worth Rs 6.2 Billion. DIIs were net buyers of equity on on all three trading days. Their total net buying was worth Rs 7.5 Billion, as per provisional figures.

Economists at SBI, Capital Economics and Nomura have lowered their Q2 (Sep '19) GDP growth forecasts to figures between 4.2% and 4.7%. Q2 GDP data will be published on Nov 29.

The government remains in denial. Jr Finance Minister stated in Parliament that there is no 5% GDP growth slowdown and the government has no intention of revising the fiscal deficit target.

The daily bar chart pattern of Nifty has been consolidating sideways within a 'rectangle' pattern for the past three weeks. The index is still struggling to cross above the 12000 level in a convincing manner.

A 'rectangle' usually acts as a 'continuation' pattern. Since the index is trading above its three rising EMAs in a bull market, the likely breakout from the 'rectangle' is upwards.

However, a 'rectangle' is also an unreliable pattern. That means, a downward breakout can't be ruled out. It may be prudent to wait for the breakout before taking any buy/sell decision.

Daily technical indicators are in bullish zones, but not showing much upward momentum. MACD is moving sideways below its falling signal line. RSI is gradually moving up towards its overbought zone. Slow stochastic is also moving sideways. 

All three indicators are showing negative divergences by failing to move up towards their previous highs. Some more consolidation within the 'rectangle', or a correction towards 11700 is possible. 

Nifty's TTM P/E has moved down to 27.23, which remains well inside its overbought zone and much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is moving down sharply in neutral zone, and may limit near-term index upside.

The index rally during the past couple of days has been narrow, and led mainly by a spurt in the price of RIL. Caution is advised for those who are getting ready to jump into the market.

Sensex, Nifty charts (Jan 11, 2019): poised to breakout from 'diamond' patterns

FIIs were net buyers of equity on Mon. and Wed. (Jan 7 and 9) but net sellers on the other three days during the week. Their total net selling was worth Rs 5.7 Billion. DIIs were net sellers of equity on Mon., but net buyers on the other four days. Their total net buying was worth Rs 11.3 Billion, as per provisional figures.

India's IIP (Index of Industrial Production) dropped to a disappointing 17 months low of 0.5% in Nov '18 from an upwardly-revised 8.4% in Oct '18, due to a high base effect and a contraction in manufacturing growth. The previous low of 0.3% occurred in Jun '17 (a month before GST introduction).

BSE Sensex index chart pattern

The bearish 'rising wedge' pattern (refer last week's post) on the daily bar chart pattern of Sensex has morphed into a 'diamond' pattern, which usually has bearish implications. In other words, the likely breakout from the pattern is downwards.

Since a 'diamond' - a somewhat rare pattern - tends to be a reversal pattern that forms at a market top (refer this post), its formation was ignored earlier. But now it has become visibly obvious that Sensex has been consolidating within a 'diamond' during the past 10 weeks or so. 

Since a 'diamond' can sometimes be a continuation pattern, an upward breakout can't be ruled out. The index has closed above its three EMAs in bull territory with a 0.9% weekly gain. That gives bulls a slight advantage.

Note that a 'diamond'  can be viewed as a 'head and shoulders' reversal pattern with a bent 'neckline'. In this case, the 'head' is actually a bearish 'double top' reversal pattern with two left and two right 'shoulders'. 

A 'diamond' starts out as a bearish 'broadening top', which is followed immediately by a 'symmetrical triangle' pattern. The eventual breakout follows the 'rules' of a breakout from a 'triangle'.

That means, all four possibilities are on the table - a downward breakout, an upward breakout, a 'false' upward/downward breakout, and a sideways move through the right 'apex' of the 'diamond' that negates the pattern. (Hope you are not thoroughly confused!)

Remember that the 'height' of the 'diamond' (~2300 points on Sensex chart above) should be added/subtracted to the breakout point to set the upward/downward target. Wait for the breakout before taking a buy/sell decision.

Daily technical indicators are giving conflicting signals, which is often the case during periods of consolidation. MACD is facing resistance from its gradually sliding signal line in bullish zone. ROC is about to cross below its 10 day MA in neutral zone. RSI has moved above its 50% level. Slow stochastic is rising towards its overbought zone.

Of the few Q3 (Dec '18) results announced so far, TCS has met expectations but Infosys has slipped badly. IndusInd and Bandhan Bank have shown downward pressure on margins due to large provisions for IL&FS loans. 

The macroeconomic environment is favouring bears again. Oil's price has started to rise. The Rupee is slipping against the US Dollar. After weak auto sales growth in Dec '18, the shock of the dreadful IIP number in Nov '18 may be the proverbial straw that breaks the back of bulls. 

NSE Nifty index chart pattern

The bearish 'rising wedge' pattern on the weekly bar chart pattern of Nifty has been replaced by a visibly obvious 'diamond' pattern. The 'diamond' is usually a 'reversal' pattern. That means the likely breakout from the pattern is downwards. (Read gory details about the 'diamond' pattern in Sensex post above.)

A 'diamond' has measuring implications. The 'height' of the 'diamond' (~700 points on Nifty chart above) should be added/subtracted to the breakout point to set the upward/downward target. Wait for the breakout before taking a buy/sell decision. 

Weekly technical indicators are giving conflicting signals. MACD has merged with its signal line, and is moving sideways just below its '0' line. ROC has dropped sharply from its overbought zone. RSI has moved above its 50% level. Slow stochastic is rising towards its overbought zone. 

Nifty's TTM P/E is at 26.00, which is well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is rising in neutral zone, hinting at near-term index correction.

Bottomline? Sensex and Nifty charts have been consolidating within 'diamond' patterns for the past 10 weeks. Breakouts from the patterns appear imminent. Remember that an upward breakout should be accompanied by a volume surge. A downward breakout doesn't require volume support for confirmation. Wait for the breakout before initiating any buy/sell decisions.

(Note: Markets fluctuate, but there are always opportunities if you know where to look. Learn how to choose fundamentally strong stocks. Become a paid subscriber of my Monthly Investment Newsletter. A limited number of new subscriptions are being offered till Jan 21, 2019. Enrollments have started. Contact me for details: mobugobu@yahoo.com.)

Gold and Silver charts: consolidating sideways between support and resistance zones

Gold chart pattern

Since the second week of Jan '18, the daily bar chart pattern of Gold has been consolidating sideways within a broad 60 points rectangular range (between 1305 and 1365).

Note that the entire consolidation has occurred above the rising 200 day EMA in a bull market, with gold's price receiving support from the zone between 1300 & 1310, and facing resistance from the zone between 1360 & 1370.

Rectangular consolidation patterns are often continuation patterns. Since gold's price entered the consolidation zone after a rally from its Dec '17 low, the probability of an upward breakout above the resistance zone (between 1360 & 1370) is greater.

However, it may be better for longer-term investors to wait for the eventual breakout to initiate any buy/sell action because a 'rectangle' is a fickle pattern that can also act as a 'reversal pattern'.

Daily technical indicators are in bullish zones, and showing slight upward momentum. Another test of resistance from the zone between 1360 & 1370 is likely. Keep a close watch on the US Dollar index to get clues about gold's future price movements. 

On longer term weekly chart (not shown), gold’s price closed above its three rising weekly EMAs in long-term bull territory.  Weekly technical indicators are in bullish zones, but not showing any upward momentum. Some more consolidation is likely.

Silver chart pattern

Since the beginning of Feb '18, the daily bar chart pattern of Silver has been consolidating sideways in a rectangular range (between 16.10 & 16.90) in bear territory. 

Silver's price has been facing resistance from its gradually sliding 200 day EMA, and getting strong support from the zone between 16.10 & 16.20.

Daily technical indicators are looking bearish to neutral, but are showing positive divergences by touching higher tops while silver's price has been touching lower tops.

A rally above the 200 day EMA is a possibility. Bears are likely to use the opportunity to sell again.

On longer term weekly chart (not shown), silver’s price closed at its 20 week EMA, but below its sliding 50 week and 200 week EMAs in a long-term bear market. Weekly MACD and Slow stochastic are in bearish zones. RSI is in neutral zone.

Sensex, Nifty charts (Mar 01, 2018): consolidating sideways within triangle patterns

During Feb '18, FIIs were net sellers of equity worth Rs 186.2 Billion, as per provisional figures. It was their heaviest monthly net selling since Sep '17. 

DIIs almost matched them with net buying of equity worth Rs 178.1 Billion - which was their strongest monthly net buying since Sep '17.

India's GDP grew 7.2% in Q3 (Dec '17) against a revised 6.5% growth in Q2 (Sep '17) on the back of a rebound in industrial activity.

Auto sales showed good growth in Feb '18. 2-wheelers, 3-wheelers and Commercial Vehicles showed double-digit growth. In passenger vehicles, Tata Motors and Maruti showed double-digit growth, but M&M, Ford, Hyundai, Toyota showed mid to low single digit growth.  

BSE Sensex index chart pattern

For the past 4 weeks, the daily bar chart pattern of Sensex has been consolidating sideways below the 132 points downward 'gap' formed on Feb 5. By touching lower tops and higher bottoms during the consolidation, the index is forming a 'symmetrical triangle' pattern. 

Triangles are unreliable but tend to be continuation patterns. Since the 'triangle' has formed after a correction from the Jan 29 top, the likelihood of a downward breakout is higher.

That opens up the possibility of a test of support from the rising 200 day EMA. In case of a less likely upward breakout, the 'gap' is going to provide resistance.

Daily technical indicators are looking bearish. MACD has merged with its falling signal line in bearish zone. ROC and RSI have slipped back into bearish zones. Slow stochastic is in bullish zone, but showing downward momentum.

DII buying has managed to put a temporary floor on the index. However, with a slew of IPOs in the pipeline, liquidity in the secondary market may begin to dry up.

The index is trading above its rising 200 day EMA. The long-term trend remains bullish. In the near-term - at least till Mar 31 '18 - 'sell on rise' may be a more profitable option. 

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty spent a fourth week below a 33 point downward 'gap' but managed to close above its 20 week and 50 week EMAs in a bull market.

The index appears to be forming a 'symmetrical triangle' pattern from which the likely breakout is downwards. 'Triangle' patterns tend to be unreliable, so it is better to wait for the breakout before taking any buy/sell decision.

In case of an upward breakout, the 'gap' should provide resistance. But an upward breakout seems unlikely - unless FIIs resume buying. Interestingly, they were net buyers on Thu. Mar 1 - ahead of the long weekend. 

Weekly technical indicators are looking bearish. MACD is falling below its signal line in bullish zone. ROC is falling below its 10 week MA and looks ready to enter bearish zone. RSI is seeking support from its 50% level. Slow stochastic is moving sideways below its 50% level.

Nifty's TTM P/E has moved down to 25.59 - but remains well above its long-term average. The breadth indicator NSE TRIN (not shown) is oscillating in neutral zone after falling sharply from its oversold zone. Some more sideways consolidation is possible. 

Bottomline? Sensex and Nifty charts are undergoing bull market corrections after touching lifetime highs 5 weeks ago. The downward 'gaps' formed on Mon. Feb 5 have acted as resistance zones. Both indices have formed 'symmetrical triangle' patterns from which downward breakouts are likely. Use a 'sell on rise' strategy in the near-term.

Nifty chart: a midweek technical update (Dec 13 ‘17)

During the first three days of trading this week, FIIs were net buyers of equity worth Rs 0.8 Billion. DIIs were net sellers of equity worth Rs 8.6 Billion, as per provisional figures. Interestingly, both were net sellers of equity today. Nifty lost 73 points (0.7%).

There has been a setback in India's macroeconomic front. CPI inflation increased to a 15 months high of 4.88% in Nov '17 against 3.58% in Oct '17 due to rising food and oil prices. RBI may have no option but to raise interest rates.

The Index of Industrial Production (IIP) slowed to 2.2% in Oct '17 against an upwardly revised 4.14% in Sep '17 due to a contraction in consumer durable goods production for the second straight month.

The following remarks were made in last week's update on the daily bar chart pattern of Nifty: "Can the index bounce up from here? Technical signals...are conducive, but a sharp rally - like the one during Oct '17 - seems unlikely."

On Wed. Dec 6, the index was testing support from its 100 day EMA (not shown), and did bounce up above its 20 day and 50 day EMAs during the next three trading sessions. 

Bears sold the rise and pushed the index to a close below its 50 day EMA today. By bouncing up after touching an intra-day low of 10033 on Dec 6, a bullish 'flag' pattern has been formed.

Nifty has been consolidating within the 'flag' for the past 5 weeks - after touching a lifetime high of 10490 on Nov 6. Since a 'flag' is usually a continuation pattern, the expected breakout is upwards.

Daily technical indicators are looking bearish and showing downward momentum. MACD and RSI are in bearish zones. Slow stochastic is in bullish zone. Some more correction within the 'flag' is possible.

Nifty's TTM P/E is at 26.1 - which is much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is rising towards its oversold zone - and can limit index downside. 

Bulls seem undecided about the likely outcome of Gujarat state elections. Anything short of a majority for NDA can lead to more index correction.

Nifty is trading above its rising 200 day EMA in a bull market. Dips can be used to add to existing holdings. Buy more on a convincing breakout above the 'flag' - whenever that occurs.

Technical updates – Tata Chemicals and Tata Steel

The Tata Group hasn't been the quite the same after Ratan Tata decided to hang-up his boots. Cyrus Mistry ruffled feathers of the Tata Sons board, and his short tenure ended in litigation and acrimony. N. Chandrasekaran's tenure has started off more cautiously.

Low inflation and oil prices, and a stronger Rupee has helped keep India's current account deficit in control. Demonetisation and GST implementation led to a slowdown in growth. 

A slew of reforms introduced by the NDA government is likely to bring economic growth back on track from FY 2018-19. The stock market has been rallying in anticipation. The stock prices of Tata Chemicals and Tata Steel have benefitted from the rally.

Tata Chemicals

The stock price of Tata Chemicals touched a 2 yr low in Feb '16 and has been in an up trend since then. The 'golden cross' (of the 50 day EMA above the 200 day EMA) in May '16 technically confirmed a return to a bull market.

Note the consolidation within 'Rectangle 1' during Aug-Nov '16. A 'rectangle' is usually a continuation pattern - so the eventual breakout should have been upwards.

Negative divergences (marked by blue arrows) visible on all four technical indicators led to a breakdown below the 'rectangle'. However, the up trend resumed thereafter.

A breakdown below 'Rectangle 2' has now occurred - triggered by weak Q1 (Jun '17) results. Note that the stock had already corrected below its 20 day and 50 day EMAs following negative divergences visible on three of the four technical indicators. 

All four indicators are looking oversold. The up move is likely to resume after some consolidation around current levels.

Tata Steel

Tata Steel's stock was trading in a bear market below its falling 200 day EMA till
Feb '16. The 'golden cross' (of the 50 day EMA above the 200 day EMA) in Mar '16 technically confirmed a return to a bull market.

The stock price has tested support from, but not fallen below, its rising 200 day EMA since then. The company is gradually extricating itself from the leveraged mess created by its Corus acquisition back in 2008.

Daily technical indicators are looking overbought. The stock can correct some more. The dip is providing an adding opportunity. The stock may have 20-25% more upside left in the current rally.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Stock Chart Pattern – Diamines and Chemicals (an update)

Shortly after posting the previous update, the stock chart pattern of Diamines and Chemicals had entered a long bear phase that finally ended at a closing low of 18 in Mar '14.

The subsequent rally took the stock price to a high of 50 in Sep '14 - a quick return of 177% in 6 months. Another correction ensued. The stock formed a 'double bottom' reversal pattern during Mar-Jun '15.

That was a signal that the bear phase had finally come to an end. But bulls didn't have it easy.

The stock price rose to a lower top of 46.40 on Aug 5 '15 and began a long sideways consolidation within a 'rectangle' pattern. A 'rectangle' - though unreliable - is usually a continuation pattern.

Since the stock price had entered the 'rectangle' from below, the expected breakout from it was upwards. The breakout finally occurred with good volume support on Oct 25 '16, after a couple of failed attempts.

A pullback towards the top of the 'rectangle' found good support from the rising 50 day EMA on Nov 18. The next leg of the rally ensued - giving an opportunity to enter for those who may have missed buying during the initial breakout above the 'rectangle'.

The stock faced resistance from the 72 level in Jan '17 and corrected nearly 20 points to a low of 52.50 on Feb 16 '17. The subsequent rally took the stock past 72 to a new closing high of 84.25 on May 16 '17 before correcting a bit.

Daily technical indicators are in the process of correcting overbought conditions. The company has declared very good Q4 (Mar '17) results after a couple of years of poor performance. Dips can be used to add. 

S&P 500 and FTSE 100 charts (Apr 07 '17): bears put up strong road blocks

S&P 500 index chart pattern

The following comment had appeared in last week's post on the daily bar chart pattern of S&P 500: "A convincing move above the purple down trend line (currently at about 2375) is required for bulls to regain complete control."

On Wed. Apr 5, the index crossed above the purple down trend line intra-day and touched a high of 2380, but dropped down to close below its 20 day EMA. The index closed about 7 points lower for the week.

The purple down trend line has been acting as a strong resistance after the index touched a lifetime high of 2401 on Mar 1 '17. Bears will have the upper hand till the index can move convincingly above the trend line.

Daily technical indicators are moving sideways in neutral zones. Some more consolidation below the trend line is possible.

Lower than expected US job growth and cruise missile attack on a Syrian airfield helped the cause of bears.

On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators have corrected overbought conditions, and are showing downward momentum.

FTSE 100 index chart pattern

After touching a lifetime high of 7447 on Mar 17, the daily bar chart pattern of FTSE 100 corrected 190 points (2.5%), and has been consolidating sideways within a 'rectangle' (shaded) pattern for the past three weeks.

A 'rectangle' is usually a continuation pattern. Since the index entered the 'rectangle' from above, it should eventually break down below the 'rectangle'. 

However, a 'rectangle' can also act as a 'reversal' pattern. So, an upward break out can't be ruled out. Either way, a 130 points move (height of the 'rectangle') can be expected from the break out point.

Daily technical indicators are in neutral zones. Only Slow stochastic is showing upward momentum.

On longer term weekly chart (not shown), the index closed 26 points higher for the week - well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones. Slow stochastic formed a 'double top' reversal pattern inside its overbought zone - which is a bearish sign.

Nifty chart: a midweek technical update (Oct 26 '16)

News of the surprisingly unceremonious sacking of the Tata Sons Chairman sent a shock wave through the Indian stock market. The initial reaction was a sell-off in most of the stocks of Tata companies.

As Cyrus Mistry refused to back down without a fight and chastised the Tata Sons board of directors for their unprofessional attitude, FIIs voted with their feet.

Their total net selling in equities touched nearly Rs 24 Billion during the first three trading days of the week. As per provisional figures, DIIs were net buyers of equity worth Rs 17 Billion - not enough to prevent Nifty from dropping below its 20 day and 50 day EMAs.

The daily bar chart pattern of Nifty made an unsuccessful attempt to break out above the downward-sloping channel within which it has been trading for the past 8 weeks.

Many small investors - particularly those who entered the market last month - may be wondering whether this is the early stage of another bear phase. 

The chart structure doesn't suggest that. As long as the 200 day EMA is rising and the index is trading above it, bulls remain in the driver's seat.

As suggested in last week's post, the index appears to be forming a 'flag' pattern, which is quite a reliable 'continuation' pattern.

That means the current corrective phase should end with an upward breakout from the downward-sloping channel.

Can the index correct some more? How much further can it fall? What will be a good level to start buying?

Daily technical indicators are looking bearish and showing downward momentum. Nifty's TTM P/E remains higher than its long-term average at 23.30. The breadth indicator NSE TRIN (not shown) has dropped inside its overbought zone. Some more correction is likely. 

Downside supports can be expected from the 8500 level; the lower edge of the 'flag'; the 'gap' formed on Jul 11 '16; and the rising 200 day EMA.

Support levels can get washed away in a wave of selling. FIIs have turned bears, which should be a worrying sign for bulls. However, buying is likely to emerge in the zone between 8500 and 8300 - which has four strong supports.

Quit worrying about when and at what level to start buying. It requires skills that elude even experienced investors. Small investors should not even bother to try.

Just select fundamentally strong companies that have delivered good and steady performance over many years. Accumulate them slowly and dispassionately. 

If you haven't yet mastered stock-picking skills, SIP into an equity fund or a balanced fund.

BSE Sensex and NSE Nifty charts (Oct 21, 2016): form bullish flag patterns

FIIs remained net sellers of equity during the week gone by. Their net selling was worth Rs 6.6 Billion, as per provisional figures. DIIs were net buyers of equity worth Rs 22.2 Billion. 

Sensex gained 1.46% and Nifty gained 1.3% on a weekly closing basis. Both indices broke down below 'descending triangle' patterns - as mentioned in last week's post.

However, subsequent recoveries from support levels have negated the triangle patterns. Both indices appear to have formed bullish 'flag' patterns - from which the likely breakouts should be upwards.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex dropped and closed below the long-term support level of 27600 on Mon. Oct 17 but bounced up sharply the next day, only to face resistance from its entangled 20 day and 50 day EMAs.

The index oscillated about its two shorter-term EMAs for the rest of the week. The upper down trend line (of the redrawn 'flag')  - which was earlier part of the 'descending triangle' pattern - provided resistance on the upside.

Can the index correct some more, or will it breakout upwards right away? That will depend on how Q2 (Sep 16) results pan out. 

Last week's FII selling was well absorbed by the DIIs. Still the index failed to make much headway.

Daily technical indicators are not looking strongly bullish, though all four are showing some upward momentum. MACD and ROC are still inside their respective negative zones. RSI and Slow stochastic have crossed above their 50% levels.

The lower edge of the 'flag' is inside 'Gap1' formed on Jul 11, and should provide good support if the index corrects some more. An upward breakout may face resistance from the 28600 level.

Sensex is trading well above its rising 200 day EMA in a bull market. A 'flag' pattern is a fairly reliable 'continuation' pattern. So, expect the index to breakout upwards. 

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty dropped below the 8550 level and the 20 week EMA, but bounced up strongly after receiving good support from the 8500 level.

In a mid-week technical update, the earlier bearish 'descending triangle' pattern was redrawn as a bullish 'flag' pattern. Why the switch? Because technical analysis is not a science, and is based on price action that reflects the combined greed and fear of market participants.

Chart patterns evolve and change and don't always play out as expected - just as market mood changes from bullish to bearish and back to bullish during the same day.

Weekly technical indicators are looking bearish. MACD, RSI, Slow stochastic are showing downward momentum in bullish zones. ROC is in neutral zone - trying to recover after slipping into negative territory.

Nifty's TTM P/E at 23.23 remains higher than its long-term average. The breadth indicator NSE TRIN (not shown) is hovering above its overbought zone. Some more correction within the 'flag' pattern is possible before the eventual upward breakout.

Bottomline? Sensex and Nifty charts appear to have formed bullish 'flag' patterns, from which the likely breakouts should be upwards. The correction is providing adding opportunities. Be stock specific and buy in small lots.

Nifty chart: a midweek technical update (Oct 19 '16)

FIIs were net sellers of equity worth Rs 4 Billion during the first three days of trading this week, as per provisional figures. DIIs were net buyers of equity worth Rs 11.3 Billion.

Q2 (Sep '16) results declared so far have been more or less as per expectations. There has not been any indication of significant earnings improvements.

The news of Essar Oil's sale to Rosneft has come as a boost for the beleaguered banking sector, which has been reeling under the weight of mounting NPAs. Hopefully, a major portion of the sale proceeds will be used to retire debt.

The ongoing 7 weeks long correction on the daily bar chart pattern of Nifty now appears to be forming a 'flag' pattern, which has bullish implications.

Why bullish? Because 'flag' patterns are 'continuation' patterns that move in a direction opposite to the previous price move. Since the previous move was a bull rally, the 'flag' is a small pause before the rally can resume.

What happened to the bearish 'descending triangle' patterns that were being discussed in previous posts? 

The expected breakdown below 8650 on Sep 29 was immediately followed by an upward bounce - negating the first (smaller) 'descending triangle'. The expected breakdown below 8550 on Oct 17 was also followed immediately by an upward bounce, which negated the second (larger) 'descending triangle'.

Chart patterns evolve continuously and do not always play out as expected. The 'flag' pattern appears to be more plausible now - so we will stay with it till a breakout occurs. 

The fact that Nifty received support from the 8500 level without testing the lower edge of the 'flag' on Oct 17 also raises the possibility of an upward breakout.

Can the index drop below 8500 and fall below the 'flag'? Nothing can be ruled out on price charts. If it does fall, support can be expected from the 'gap' formed on Jul 11 and below it, from the rising 200 day EMA.

Since 'flag' patterns are quite reliable 'continuation' patterns, a fall below the 'flag' has low probability. However, the index may continue to correct within the 'flag' for a while longer.

A 'flag' has measuring implications, since it often forms in the middle of an up (or down) move. Since the rally from the Feb '16 low covered about 2150 points to the Sep '16 top, the index has an upward target of 2150 points from the upward breakout level.

Remember that an upward breakout should be accompanied by a significant increase in volumes for the breakout to be technically valid.

Daily technical indicators are in bearish zones, and not showing any upward momentum - except Slow stochastic, which has recovered sharply from its oversold zone.

Nifty's TTM P/E remains high at 23.35. The breadth indicator, NSE TRIN (not shown), has dropped sharply towards its overbought zone - hinting at a correction.

Any dip should be used to buy. 

Stock Chart Pattern - Infosys Ltd. (An update)

Bobby Hebb wrote the song 'Sunny' within 48 hours of a double tragedy on Nov 22, 1963. That was the day popular and charismatic US President John Kennedy was assassinated - and Bobby's elder brother was stabbed to death outside a Nashville nightclub.

What does that have to do with the chart pattern of Infosys? Well, Infosys also suffered a double tragedy - due to their disastrous policy of rotating the company's leadership among the original promoters.

As mentioned in the previous update, the two promoter-CEOs that followed Narayanamurthy and Nilekani neither had the dynamism nor the leadership skills required for a company with global aspirations.

With the induction of a professional manager with leadership experience in a global company (SAP), Infosys is ready to sing the following line from the song: "Now the dark days are gone, and the bright days are here". 

Should they? Let us see what the chart foretells.

The closing chart pattern of Infosys Ltd. touched a low of 553 in Apr '13 (adjusted for two subsequent 1:1 bonus offerings - marked by blue bells - in Dec '14 and Jun '15). 

The stock formed a 'double top' reversal pattern at around 950 (in Jan '14 and Mar '14). Negative divergences in three of the four technical indicators (marked by blue arrows) led to a correction within a 'falling wedge' pattern with bullish implications.

An upward breakout from the wedge started a fresh leg of the bull rally that culminated with another 'double top' reversal pattern at around 1180 (in Aug '15 and Oct '15). 

Once again, negative divergences in three of the four technical indicators (marked by blue arrows) led to a correction below the three daily EMAs, but the stock formed a small 'double bottom' reversal pattern and bounced up.

Daily technical indicators are in bullish zones, but giving mixed signals. The stock price has been consolidating sideways within a large 'rectangle' pattern between 960 and 1180 (i.e. 220 points) for the past 14 months.

Rectangles are usually 'continuation' patterns, with price target implications. An expected upward breakout can take the stock to a target of 1400 (= 1180 + 220).

But a 'rectangle' can also be a 'reversal' pattern - in which case, the downward target will be 740 (= 960 - 220). 

Since the stock is trading in a bull market (above its three EMAs), one can use the 'consolidation' to accumulate with a stop-loss at 1020.

[Wishing all blog visitors, blog followers, blog subscribers, twitter followers and newsletter subscribers a very happy and prosperous 2016.] 

Technical updates – L&T and JK Lakshmi Cement

Stocks from the infrastructure sector were in doldrums due to the economic slowdown, and had fallen to two year lows during the second quarter of 2013-14. The ground-swell from Modi’s campaign brought them out of bear markets.

Once the Modi government came to power, many infrastructure stocks rose spectacularly, and provided multibagger gains. However, during the past one year, there has not been much progress in disentangling of stuck projects or initiation of new ones. High interest rate also played spoilsport.

Earnings of infrastructure companies haven’t kept pace with their stock prices. While stock prices haven’t crashed, large-cap and mid-cap stocks are down from their two year highs, and have entered sideways consolidations. The stocks of L&T and JK Lakshmi Cement are good examples.

L&T

After a 1:2 bonus issue in Jul ‘13 (marked by bell on chart), the stock of L&T dropped to a low of 695 on Sep 3 ‘13. From there, it rose to touch a high of 1752 on Jun 9 ‘14 – a huge 150% gain in 9 months.

The stock has since been in a sideways consolidation within a ‘rectangle’ pattern. The stock broke out above the ‘rectangle’ on good volume support and touched a two year high of 1843 on Mar 2 ‘15. But it failed to sustain above the ‘rectangle’. It subsequently formed a ‘head-and-shoulders’ reversal pattern with an upward-sloping neckline within the ‘rectangle’, and corrected below its 200 day EMA.

Daily technical indicators are looking bearish and oversold. A pullback towards the upward-sloping neckline is a possibility. A ‘rectangle’ pattern is usually a continuation pattern – which means the eventual break out should be upwards. But there has already been a failed break out and a reversal pattern formation. It may be better to wait for upcoming annual results to decide whether to buy, sell or hold.

JK Lakshmi Cement

The stock of JK Lakshmi Cement rose from a two years low of 55, touched on Aug 5 ‘13, to a two years high of 407, touched on Jan 19 ‘15 – a whopping 640% gain in less than 18 months. The stock has been consolidating sideways within a ‘rectangle’ pattern with a downward bias since touching its Jan ‘15 high.

The stock is currently receiving twin support from the lower edge of the ‘rectangle’ (at 340) and its 200 day EMA. Despite the correction, valuation looks quite stretched.

Daily technical indicators are in bearish zones, but showing some upward momentum. A technical bounce is a possibility. Sequential QoQ results have shown decline in top and bottom lines for the past three quarters. Check annual results before initiating any action.

BSE Sensex and NSE Nifty 50 index chart patterns – May 31, 2013

The volatility in the Sensex movements last week seems to have stumped even seasoned investors and analysts. Too bad they don’t spend a little time looking at chart patterns and technical indicators, that had pointed to the possibility of the correction continuing for a while.

Heavy selling by FIIs on the last day of the week saw a steep fall in the index, but a slightly higher weekly close. The gyrations over the past two weeks have been within a small symmetrical triangle, from which the likely break out is upwards. Why? Because a triangle is usually a continuation pattern.

Since the triangle has formed after an up move, the break out should, logically, be upwards. But triangles are notorious for being unreliable. That means there can be a downward break out or even a negation of the pattern if the index rolls out through the apex of the triangle. In other words, any buying should be done with a strict stop-loss.

BSE Sensex index chart

Daily technical indicators are looking mildly bullish - except the ROC, which has dropped below its falling 10 day MA into negative territory. MACD is positive, but falling below its signal line. RSI is resting at its 50% level. Slow stochastic is ready to slip below its 50% level. Note that MACD and ROC are showing negative divergences by touching lower bottoms; but RSI and Slow stochastic touched higher bottoms along with the index. Such confusing and contradictory signals do occur during periods of consolidation.

The new up trend line (connecting the Jun ‘12 and Apr ‘13 bottoms) is intact. Both the 50 day EMA and 200 day EMA are rising, with the index trading above them. The consolidation within the triangle is providing an opportunity to add to existing holdings.

NSE Nifty 50 index chart

The drop below 5% in the Q4 GDP number wasn’t really a surprise for the market. Results announced by biggies like Tata Motors and M&M weren’t great, but beat expectations. Then why the selling by FIIs? Well, they can’t just go on buying every day. Some times profits need to be booked – otherwise how do you make money?

There were rumours of a buy-back announcement by Glaxo Pharma. The stock price spiked up in anticipation. A similar announcement some time back had done wonders to Glaxo Consumer stock’s fortunes. A low floor price announced for Novartis’ OFS (offer for sale) led to buying. Horrible results from Opto Circuits saw a steep drop in the stock’s price.

Negative divergences in all four weekly technical indicators (marked by blue arrows) were observed last week. Some correction/consolidation was expected. Nifty closed flat on a weekly basis, and traded above both its 20 week and 50 week EMAs.

All four indicators are in bullish zones. There is no immediate threat to the bull market. However, to comply with SEBI’s orders, many companies are expected to offer shares for sale during June to bring down the promoter’s holding to 75% (for private sector)/90% (for public sector). Some liquidity will get diverted from the secondary market.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are consolidating after touching 2 year highs. Both indices should rise to new highs after the consolidation is over. Hold (or add to) existing portfolios.

(PS: If you are thinking of adding good mid-cap/small-cap stocks to your portfolio but are not sure which stocks to pick, book your subscriptions in advance to my Monthly Investment Newsletter. New subscriptions will be offered from July 1 ‘13.)

Why Sensex should touch 25000 – a long-term view

When you stand very close to a large tree and look straight at it – all you will see is wood (i.e. the trunk). Step back a few yards, and you will see branches, leaves and flowers. Step back some more, and you may see several trees of different shapes and sizes. Only when you get to the top of a cliff can you see an entire forest full of trees.

Look at Sensex from the beginning of 2013, and you see an index trying to reverse a down trend that shaved off 2000 points (10%). The view from the beginning of 2012 till date shows a bull phase that gained 5000 points (33%). From the beginning of 2011 till date, the Sensex had a bear phase followed by a bull phase, and made zero gains.

Now let us go all the way back to the beginning of 2008. What we get is the ‘cliff view’ of the chart. While the Sensex has made no gains since touching the bull market top, there are three distinct phases visible in the long-term chart of Sensex below:

Phase I: A sharp bear market of about 14 months (from Jan ‘08 to Mar ‘09). The index dropped from 21200 to 7700 within 10 months, followed by 4 months of sideways consolidation.

Phase II: A bull market that began in Mar ‘09 with a quick jump above the 200 day EMA, followed by a large ‘gap’ that opened up after election results in May ‘09. The ‘gap’ was partly filled in Jul ‘09. The next leg of the bull phase was more gradual, and culminated with a slightly lower top of 21100 in Nov ‘10. A ‘diamond’ reversal pattern marked the end of the 20 months long bull phase that retraced the entire fall from Jan ‘08 to Oct ‘08.

Phase III: From the beginning of 2011 till date, Sensex has formed a bullish consolidation pattern known as a ‘cup-and-handle’. The formation of the ‘cup’ took 2 years with the Sensex touching 20200 in Jan ‘13. Note the ‘rounding bottom’ shape of the 200 day EMA that has smoothened out the fluctuations of the ‘cup’. The subsequent correction formed the ‘handle’.

A rise above the ‘rim’ of the ‘cup’ (right edge at 20200) on strong volume support will confirm the successful completion of the ‘cup-and-handle’ pattern, which is usually a continuation pattern in a bull market. The pattern has target measuring implications: the rise above the right edge should equal the depth to the bottom of the ‘cup’.

In this case: 20200 – 15100 (bottom in Dec ‘11) = 5100 (depth of cup from right edge). So, upward target of Sensex: 20200 + 5100 = 25300. 

Caveat: Technical analysis is not a science and the stock market doesn’t understand arithmetic and formulae. However, the ‘gurus’ of technical analysis have suggested the above formula after observing thousands of price charts over many years.

Gold and Silver Chart Patterns: an update

Gold Chart Pattern

Gold’s price had formed a double-top reversal pattern after touching 1900. The double-top was confirmed when the price dropped below the ‘valley’ level 1750 between the two tops. Downward target of 1600 was achieved quickly on gold’s chart, after which gold’s price has been consolidating within an upward-sloping ‘wedge’ pattern.

Most consolidation patterns tend to be continuation patterns. That means, the trend before entering the pattern – down, in this case – would continue once price break out happens. Unlike triangle and rectangle patterns, from which break outs can happen in either direction, the rising wedge is fairly dependable. It forms during bear phases, and the price break out is downwards.

Bulls may feel enthused that gold’s price is trading above the 14 day SMA, and the 200 day SMA is still rising – indicating that the bull market is far from over. But the possibility of a break below the rising wedge pattern, and a test of support from the 200 day SMA should induce caution.

Existing holders can keep a stop-loss at 1540 (the level of the 200 day SMA) and continue to hold. New entrants can wait for a likely upward bounce from the 200 day to accumulate. (Note: At the time of writing this post, gold’s price has dropped sharply to 1630, indicating a break below the rising wedge.)

Silver Chart Pattern

After dropping like a brick below the 200 day SMA, silver’s price has been consolidating within a symmetrical triangle. Though silver’s price is trading above the 14 day SMA – a short-term positive – the longer-term outlook is not bullish.

The 30 day SMA (not shown in chart above) has slipped below the 200 day SMA, and the 60 day SMA is likely to follow suit. The 200 day SMA is flattening and may turn downwards soon. Silver’s price is in a clear down trend, marked by lower tops and lower bottoms. Downside targets are 24 and 20. Wait for the correction to play out.