Hang Seng Index Chart Pattern - May 01, '09

Last week's Hang Seng index chart pattern discussion ended with the following statement:-

'The index is back in the sideways consolidation range where it is likely to meander for a while.'

Meander is exactly what the Hang Seng did. In fact, the chart pattern for the entire month of April '09 shows a sideways consolidation with a slight upward bias within a band of 14000 to 16000.

A look at the 6 months bar chart pattern of the Hang Seng index will confirm my earlier assertions that the rally may be ending sooner than later:-

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

The 20 day and 50 day EMAs are both moving slowly upward. The 200 day EMA is flattening. The index is facing strong resistance at the long-term average but also getting supported by the short-term one. The volumes, which had shown a spurt in late Mar '09, have dropped somewhat.

The slow stochastics has slipped down from the overbought zone and is straddling the mid-point. Ditto for the ROC and RSI. The MACD is still above the zero line but is dropping and has fallen below the signal line.

The uptrend line connecting the daily bottoms since the Mar '09 low was broken 8 trading sessions back and the index has failed to attempt a meaningful 'pullback' to the uptrend line. The Hang Seng index and the technical indicators are saying: 'We are not out of the bear market yet.'

Compare the Hang Seng with the BSE Sensex index chart pattern discussed yesterday. In the 2 years weekly charts, the Hang Seng index is below the long-term downtrend line. It is also below its 200 day EMA. Whereas, the Sensex has broken above both these indicators - even if the break is not quite convincing yet.

Bottomline? I'm expecting - like everyone else who isn't convinced by the past 2 months' rally - a wave of selling in the near term. That will provide long-term investors with an entry point. Till then, don't be a bull or a bear - be patient, like an African python.

Don't be a bull or a bear in the stock market, be an African python

The triangular headed South African python is a truly awe-inspiring reptile - massive in length and weight, immensely strong with an intricately patterned shining skin. The other day, on the National Geographic channel, the camera followed such a beauty as it slowly slithered through the bushes and weeds and glided into a watering hole.

There it hid with only its snout above the water - and waited patiently. Day followed night and night followed day - and still it waited. Animals big and small, arrogant and shy, came to the watering hole for a drink. The python didn't move.

Six days and nights passed - and no body except the camera-person knew that the python was lying in wait. On the 7th evening a herd of deer came for a drink. A younger and frisky member ventured a little further from the water's edge - unaware of the peril.

Suddenly, the water hole exploded into action. With its immense muscle power, the python lunged out like greased lightning and in the blink of an eye had wrapped itself around its prey. The poor animal probably didn't even know what hit him.

The South African python is used to spending weeks and even months without feeding. Some times it eats the odd rodent or bird. But when it really wants to eat, it plans its every move and with infinite patience grabs a large meal so that it won't have to eat for a long time.

Like the python, a successful long term investor does not need to 'feed' (i.e. trade) every day or every month. Once in a long while, the stock market provides an ideal opportunity to grab a few frontline stocks at mouth-watering prices. Back during the 2002-2003 bear market period, stocks like Tata Steel was available at 100, M&M at 90, ITC at 60 (actually 600 for a Rs 10 share). All three subsequently offered bonus shares at 1:2, 1:1 and 1:2 ratios respectively.

There were many other shares going for a song and which made a ton of money for savvy long term investors. Since then, we had a one-way bull-market with V-shaped corrections in 2004 and 2006. But after 5 long years we are now in a full-fledged bear market which seems to have completed its first leg at 12500.

For long term investors, this is the right time to behave like the python. Don't jump yet. Conserve your muscle power (i.e. cash), decide on a few target companies and wait patiently for the market to exhaust its second leg. This will possibly happen in the 15500-16500 range. (A few 'dud' shares in your portfolio can be sold in that range.)

The Q1 results declared so far show that top line growth has been satisfactory for most companies. But margins growth has been far lower and below expectations. With inflation rate still in double digits, interest rates are unlikely to come down any time soon. The lower oil prices and political stability are the silver linings.

The Q2 results are likely to be worse than Q1. The market will probably have a third leg down to test the 12500 bottom, and panic and doom will be all around. Time frame should be around October. That will be the right time to lunge.