Sensex is recovering after a year-long bear phase; which sectors will lead the next rally?

After touching a lifetime high in Mar '15, Sensex entered a down trend which has not yet been reversed after 13 months. However, the index has formed a small 'double bottom' reversal pattern in Feb '16 and been in a recovery mode since then.

Almost all sectoral indices have been affected by the prolonged down trend to a greater or lesser extent. As always, there are exceptions. One sectoral index has been in an up trend for the past 2 years. Another has been in a sideways consolidation for the past 13 months. Risk averse investors can buy the better stocks from these two sectors.

Those with a penchant for risk can play contrarian by picking stocks from the sectors that are on the road to recovery. Prudence demands that sectors still in doldrums should be avoided. 

BSE Auto Index

BSE Auto touched a 2 years high in Jan '15 and has been in a down trend since then. Thanks to lower petrol and diesel prices and a falling interest rate regime, auto sales are picking up. Even CV sales are on the rise, indicating economic recovery. The index is in bull territory above its three EMAs, but haven't yet reversed the down trend (marked by blue down trend line).

BSE Bankex

BSE Bankex also touched a 2 years high in Jan '15, and has been in a down trend since then. Its recovery from its Feb '16 low has stalled near its falling 200 day EMA. Large NPAs of PSU banks have kept the index subdued. Comparatively, private banks are performing much better.

BSE Capital Goods Index

BSE Cap. Goods touched a 2 years high in Jul '15, only to suffer a sharp correction. After dropping to a 2 years low in Feb '16, the index formed a 'double bottom' reversal pattern and moved convincingly above the blue down trend line. However, it is trading well below its falling 200 day EMA in bear territory.

BSE Consumer Durables Index

BSE Consumer Durables has been in a bull market for the past 2 years, pleasantly surprising the market with its counter-trend performance. The index touched a 2 years high in Nov '15, and has been consolidating sideways with a slight downward bias since then. It is trading above its three EMAs in a bull market.

BSE FMCG Index

A perennial market favourite, BSE FMCG fell victim to a down trend after touching a 2 years high in Feb '15. Two poor monsoons in a row played spoilsport for the sector. Early forecasts of this year's monsoon have indicated a rain surplus. The index has duly breached its down trend line, but it hasn't been a convincing breach yet.

BSE Healthcare Index

BSE Healthcare was in a bull market till Oct '15 when it formed a 'triple top' reversal pattern and entered a down trend. The index is trading below its down trend line and its 200 day EMA in bear territory. FDA strictures against several well-known pharma companies has put a question mark on future growth of the export market. Domestic market has also been affected by price control and government regulation against combined dosages.

BSE IT Index

BSE IT touched a 2 years high in Mar '15 and entered a sideways consolidation within a large 'pennant' pattern. Despite Rupee devaluation, IT companies have not benefitted much due to slow growth in Europe and visa strictures in USA. Market leaders should be able to overcome these near-term issues. Avoid the mid-cap and small-cap companies.

BSE Metal Index

BSE Metal has been a victim of the commodity down cycle - correcting more than 50% from its Jun '14 top. The index is facing resistance from its 200 day EMA. Contrarian investors can pick market leaders, but need to remain patient.

BSE Oil & Gas Index

BSE Oil & Gas has been correcting since touching a 2 years high in Jun '14. Despite lower prices in the international market, higher duties locally and price control have proved detrimental to profitability. The index is trading in bull territory above its three EMAs but remains in a down trend.

BSE Power Index

BSE Power is a sector investors should not touch with a 10 ft. pole. Too much government interference, rampant power theft and poor performance of state electricity boards have turned this sector into a basket case.

BSE Realty Index

BSE Realty is a clear avoid for investors. The index is in a 2 years long down trend and may not be able to reverse the trend anytime soon. However, there may be no better time like now to invest in an apartment or house for personal use. 

Stock Chart Pattern - LIC Housing Finance (an update)

The previous post was written more than 5 years ago after the company's stock suffered a big sell-off following reports that top officials were involved in a major bribe-for-loan scam.

Several officials alleged to be involved in the scam, including the CEO and a number of PSU bank executives, were arrested. CBI conducted raids in six cities to uncover incriminating documents.

Time is a great healer and public memory is short. One look at the 2 years daily closing chart of LIC Housing Finance will prove the veracity of the two proverbs.

After forming a small 'double bottom' pattern at 157 (for the Rs 2 face value stock) during Aug-Sep '13, the stock embarked on a strong bull rally that touched a closing high of 523.60 in Aug '15 - gaining more than 230% in less than 2 years.

Along the way, the stock faced a couple of decent corrections that were preceded by all four daily technical indicators showing negative divergences by touching lower tops (marked by blue arrows) while the stock moved higher.

From Aug '15 onward, the stock has been consolidating sideways within a 'pennant' (i.e. narrow triangle) pattern, from which a break out can occur in either direction.

Despite trading below its three EMAs in bear territory, the stock is in a long-term bull market because the 200 day EMA is still rising. However, the chart will turn bearish if the stock breaks down below the 'pennant'.

Daily technical indicators are in bearish zones, but showing some weak signs of turning around. ROC and RSI are showing positive divergences by not falling lower with the stock price.

The stock is about 15% below its Aug '15 top, and can be accumulated slowly. Alternatively, wait for a convincing break out above the 'pennant' to enter.

WTI and Brent Crude Oil charts: an update

WTI Crude chart

The daily bar chart pattern of WTI Crude has been consolidating sideways for the past 2 months within a ‘pennant’ (narrow triangle) pattern. A ‘pennant’ (like a triangle) is usually a continuation pattern. So, the likely break out from the pattern should be upwards.

However, triangles are unreliable patterns. That means that the price break out can be downwards; or, there may not be a break out at all. Oil’s price may continue to consolidate sideways and eventually pass through the apex of the ‘pennant’.

In the latter case, the price level of the apex of the ‘pennant’ is likely to turn into a ‘support-resistance’ level.

Oil’s price is trading above its rising 20 day and 50 day EMAs but below its sliding 200 day EMA in a bear market. A convincing break out above the ‘pennant’ may propel oil’s price above its 200 day EMA into bull territory. A drop below the ‘pennant’ will restore control to bears.

Daily technical indicators are in bullish zones but not giving any clear signals – which is often the case during sideways consolidations. MACD is entangled with its signal line and sliding down in positive zone. RSI is moving sideways just above its 50% level. Slow stochastic has dropped down after facing resistance from the edge of its overbought zone.

On longer term weekly chart (not shown), oil’s price has spent 10 weeks above its rising 20 week EMA, but is trading well below its falling 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are looking bullish. MACD is rising above its signal line in negative zone, but its upward momentum is slowing down. RSI has just crossed above its 50% level. Slow stochastic is moving sideways inside its overbought zone.

Brent Crude chart

The daily bar chart pattern of Brent Crude oil has been consolidating sideways within a ‘falling wedge’ pattern during the past 2 months. Though oil’s price is trading below its three daily EMAs in a bear market, the ‘falling wedge’ has bullish implications.

That means the likely break out from the wedge pattern is upwards. An upward break out should be accompanied by a volume spike, otherwise the break out may turn out to be a ‘false’ one. Note the strong volumes during recent down-days, but the selling appears to have been well absorbed.

Daily technical indicators are looking bearish. MACD is entangled with its signal line in negative zone. RSI and Slow stochastic have dropped below their respective 50% levels. Some more consolidation within the wedge is likely.

On longer term weekly chart (not shown), oil’s price closed below all three weekly EMAs in a long-term bear market. Weekly technical indicators are turning bearish. MACD is above its signal line in negative zone, but its upward momentum has stalled. RSI is moving sideways below its 50% level. Slow stochastic has dropped down sharply from its overbought zone, but is above its 50% level.

Stock Chart Pattern – Cairn India (an update)

Shortly after the previous update on the stock chart pattern of Cairn India was posted (on Sep 29 ‘11 – marked by grey vertical line on the extreme left of chart below), the stock price formed a small double-bottom and rallied above all three EMAs to touch an intra-day high of 325 on Nov 9 ‘11.

But it turned out to be a ‘reversal day’ (higher high, lower close), and the stock corrected below all three EMAs – only to touch a higher bottom before continuing upwards in a zig-zag move over the next 3 months that culminated with a new intra-day top at 401 on Feb 22 ‘12.

Again, it turned out to be a ‘reversal day’ (higher high, lower close), and the stock price has since been consolidating within a ‘pennant’ (narrow triangle) pattern. Will the stock price of Cairn India be able to break out of the ‘pennant’ pattern any time soon? In which direction?

My recommendation to readers in the previous update had been: “If you are holding the stock, use any rise to exit.” If you had heeded my advice and sold out on the first rally to 325 in Nov ‘11, you would have missed out on the rally to 401. So, it wasn’t such great advice – specially from the short-term point of view. But for long-term investors, the recommendation wasn’t so bad. The stock closed today’s trading at 323.45 – a bit lower than the level touched on Nov 9 ‘11.

Triangle patterns tend to be unreliable, because the direction of the eventual break out can be up or down. However, there is one ‘rule’ about triangles (rules generally don’t work in technical analysis) that seem to work most of the time. A break out usually occurs after the stock price touches each of the upper and lower boundaries twice.

On the Cairn India chart, note that the upper boundary was touched in Feb ‘12 and Sep ‘12, while the lower boundary was touched in Jun ‘12 and Dec ‘12. That means the stock price should be ready for a break out at any time. But in which direction?

Throughout the month of Jan ‘13, the stock price has been attempting to break out upwards. In fact, on Jan 22 ‘13, the stock price broke out upwards when it touched an intra-day high of 350. But it turned out to be another ‘reversal day’ (higher high, lower close), followed by a drop below all three EMAs.

What happened? Apparently, the market wasn’t particularly excited by Cairn India’s Q3 results though on a QoQ basis they have turned a loss to profit. It is a capital intensive company that needs to ramp up its production substantially. This is a stock meant for investors with high risk tolerance and a really long-term outlook.

Daily technical indicators are bearish and looking a little oversold. The stock price may try to bounce up, but may not be able to break out upwards. It may continue to consolidate within the ‘pennant’ and eventually pass through the apex of the ‘pennant’ and negate the triangle pattern.

Bottomline? The stock chart pattern of Cairn India has been consolidating within a narrow triangle (‘pennant’) for the past 11 months. Business has started improving, but there is still a long way to go. Small investors interested in the oil and gas space may be better off investing in the stocks of established players like RIL, ONGC or Oil India.

BSE Sensex Index Chart Pattern - Sep 11, '09

During the previous week's discussion about the BSE Sensex index chart pattern, the bulls seemed to be still in control, and I had advised investors not to sell in a panic.

Hectic buying by the FIIs took the index to a new high of 16435 on Thur, Sep 10 '09. I had indicated that the 61.8% Fibonacci retracement of the entire bear market fall from 21200 to 7700 was at 16043. That hurdle has been almost crossed.

Why almost? Because technical analysis is imperfect, a 'whipsaw' lee way of 3% should always be added to any technical level. Adding 3% to 16043 gives us the final resistance to the bulls at 16524. That is the high water mark that the BSE Sensex index needs to cross to remove any further doubts about the bull market.

The DIIs initially joined the FIIs for the bull party last week. Interestingly, they turned net sellers on the last two days. Wonder why. Is it because the Oil India IPO went through smoothly by Thur Sep 10 '09, so they no longer needed to provide buying support?

Let us take a look at effect of last week's bull charge on the 3 months bar chart pattern of the BSE Sensex index:-

All three EMAs are up and running with the index. The volumes perked up a bit after the dismal show in Aug '09, but is still lagging the Jun and Jul '09 volumes. Unless the volumes pick up, the bull run may stall.

The technical indicators have improved quite a bit. The RSI touched the overbought zone before drifting down. The MFI is just below its overbought zone. No such problems with the slow stochastic, which stayed above the 80% level. The MACD has moved above the signal line.

Bullish readers must be thinking that I've finally exhausted all bearish signals. I've thrown up low volumes, increasing distance between the 50 day and 200 day EMAs, negative divergences, a possible 'broadening top', and even a rare 'island reversal'. The bull market has climbed every wall of worry.

Wait just a minute. There is one more bearish indicator up my sleeve. And this one - as the Yanks would say - is a real 'doozy'. I had pointed out this pattern in a recent post on the Dow Jones index. Last week's trading has formed one in the Sensex chart. The one year bar chart pattern of the BSE Sensex has formed a 'rising wedge':-

The 'rising wedge' is like a 'triangle' or a 'pennant' consolidation pattern, except the two trend lines connecting the tops and bottoms slant upwards. It typically takes 3 to 8 weeks to form, and reverses an intermediate top in a bear market. All the conditions seem to have been met (since the pattern started forming after the low of 13220 on Jul 13 '09), and a 'denouement' can be expected in the coming week.

The Sensex closed higher on Fri, Sep 11 '09 but had a lower top and a lower bottom than Thur, Sep 10 '09. Was it preparing for a fall? Look closely at the 15700 level next week. That level is at the lower trend line of the 'rising wedge'. If that breaks (don't forget the 3% lee way), the much awaited correction could follow.

Bottomline? The BSE Sensex index chart pattern continues to move up against considerable odds. Extreme caution is advised. Intrepid investors can keep trailing stop losses and wait for the index to make up its mind. The faint-of-heart can book profits.

Stock Chart Pattern - Larsen and Toubro

The stock chart of Larsen and Toubro has been in a consolidation pattern since the election and requires a close look. Before that, a brief peek into history.

Two Danish engineers and school mates, Henning Holck-Larsen and Soren Kristian Toubro, left Europe to set up the company in Bombay back in 1938. Their first office was so small that only one of the partners could use it at a time.

How the company grew to become the largest engineering and construction conglomerate in India is a fascinating story. Interested readers can find out more by visiting the L and T site.

After the passing of Larsen in 2003 (Toubro preceded him in 1982), the company seemed to grow a new set of wings. A solid well-managed and fundamentally strong company with steady growth, cash flows and dividends, its stock was not doing anything exciting.

A futile effort by the Ambanis to wrest control of the company perked things up. The divestment of the cement business, which was like a millstone around its neck, to the Birlas of Grasim came as a real boost to growth.

The global economic boom, the emphasis on infrastructure projects in India, a 5:1 stock split followed by two 1:1 bonus issues acted as rocket fuel that made the company shoot up to the must-buy list of FIIs.

Several subsidiaries and joint ventures including units in finance, electronics, information technology are its hidden assets. An apparently disastrous high cost investment in scam-scarred Satyam is turning out to be a blessing in disguise.

Now the technicals. The one year bar chart pattern of Larsen and Toubro has been in a 'pennant' formation, that opens up a few different possibilities:-

After peaking at 2235 on Oct 30 '07, the L and T stock started falling and dropped by 75% to a low of 557 on Mar 9 '09. The subsequent bull rally seemed to stall at the 1000 level, but post election results, a gap-up move took it all the way to 1800 on Jun 18 '09.

The stock entered a consolidation pattern called a 'pennant'. It is a narrow triangular pattern that usually forms after a sharp up (or down) move. Volumes have steadily receded during the formation of the pattern, which is now 7 weeks old. Ideally, it should have broken out upwards from the pattern by now.

Notice how the technical indicators made lower bottoms while the stock made a higher bottom in Jul '09. A negative divergence. Since then, the stock has made a lower top, but the RSI, MFI and slow stochastic made higher tops. A positive divergence. The conflicting signals indicate indecision among market players.

The MACD is marginally positive. The RSI and slow stochastic are turning down from overbought zones, The MFI turned down before reaching its overbought zone.

If the stock breaks out upwards (as it should for a consolidation pattern in an up move), it should go the same distance as it did from the recent bottom of 557 to the top of 1800 (i.e. to about 2800).

If it breaks downwards, it may get support at the zone between its 200 day EMA and the top of the gap at 1100. It may also close the gap and find support at its previous top at 1000.

There is a third possibility. The stock may continue to consolidate sideways, in which case the 'pennant' formation will fail. Now you know why I keep mentioning that technical analysis is not a science!

Bottomline? The stock chart pattern of Larsen and Toubro is showing indecision. Existing holders should hold with a stop loss of 1350. If you want to add or enter, do so on a break above 1600, or on a correction to 1100-1150.

Stock Chart Pattern - Castrol India

The stock chart pattern of Castrol India is a great example of how solid, well-managed market leaders behave through bull and bear periods. It is also an example of why investors should concentrate on individual stocks for their portfolio and not worry too much about the day-to-day fluctuations in the BSE Sensex index chart pattern.

Castrol India has a near 20% share of the automotive lubricants market in India. 70% owned by Castrol, UK, the company has grown steadily albeit slowly - with strong cash flows, regular dividends and negligible debt. The fundamentals justify this as a good long term portfolio stock.

The high cost of oil and the global down turn has affected the performance of the company, and the company had to reduce product prices earlier this year. But the stock price is not showing any adverse effects. The one year bar chart pattern of Castrol India shows some interesting formations that could lead to longer term trading opportunities:-

The stock made a 52 week low at Rs 234 on July 4, '08 and then entered a 'pennant' (or, wedge-like) formation, which indicates a 'continuation' pattern. Since the stock chart pattern entered the 'pennant' formation from below, the likely breakout is in the upward direction.

The stock did break out on higher volumes on June 17, '09 and hit Rs 399, which beat its previous high of Rs 374 made on Dec 31, '07. Since then it has been consolidating within a triangle pattern.

Three times during the 10 month long continuation pattern, the stock made higher tops while both the RSI and slow stochastic made lower tops. On the first two occasions - in Sept '08 and Jan '09 - the stock followed these negative divergences with corrections that lasted over two months. Both times it took support on the lower edge of the 'pennant'.

Is the pattern likely to repeat this time around as well? It might. Then again, it might not. This is what makes technical analysis so exasperating. If you sell the stock - rest assured it will probably go up!

So what is a small investor supposed to do? Look for other signals. Notice how the 50 day EMA has been supporting the stock for the past two months? It should support any corrective fall at 340 level. If the 50 day EMA fails, then the lower edge of the pennant should support at 320 level.

The other thing to watch will be the small triangle being formed after the recent upward breakout from the pennant. A break upwards may get resisted at the previous high of 400. Clearing which it could go to 450.

Bottomline? The longer term chart pattern of Castrol India made a low of Rs 154 on June 14, '06. It has been in a bull market for 3 years. Wait for the budget. Any adverse news may pull the stock down. Pick up a small quantity then.

PS: I haven't commented on the MACD and OBV indicators. What do you think they are signalling? Bullish? Bearish? Neutral?