Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Feb 05, '10

FTSE 100 index chart

The concluding remarks after last week's analysis of the European indices were:

'The bulls may attempt a pull back, but bears are unlikely to release their firm grip. Wait for lower levels to enter.'

As if on cue, the FTSE 100 index chart moved up during the first three days of the week before encountering stiff resistance from the falling 20 day EMA.

A 'reversal day' pattern (higher high, lower close) on Wednesday led to a sharp fall on high volumes on the last two days of the week. The 20 day EMA dipped below the falling 50 day EMA. The index is still above the rising 200 day EMA.

The bulls can find some solace from the positive divergence in the RSI, which made a higher low as the FTSE 100 sank to a new low. The other technical indicators continue to look weak.

The slow stochastic is inside the oversold zone. The MACD is below the signal line, and falling in negative territory. The MFI is below the 50% level and just above the oversold zone.

Bears remain in control, as they quickly squashed the feeble pull back attempt of the bulls.

DAX index chart

The pull back attempt by the bulls in the DAX index chart faced a slightly worse fate than in the FTSE 100 index. Strong resistance from a falling 20 day EMA pushed the index down to the 200 day EMA on higher volumes.

The slow stochastic is in the oversold zone. The MACD is below the signal line and falling in negative territory. The MFI is below the 50% level. So is the RSI, which is showing a positive divergence - giving some hope to the bulls.

CAC 40 index chart

The CAC 40 chart is looking the most bearish. The pull back attempt of the bulls was thwarted by the falling 20 day EMA, which has dropped below the 50 day EMA. The index has moved below the 200 day EMA.

The technical indicators are looking just as weak as those of the FTSE 100 and DAX. The fall on high volumes is not good news for the bulls.

Bottomline? The European indices are bearing the brunt of the bad news of the likely sovereign debt default of the PIIGS (Portugal, Ireland, Italy, Greece, Spain). The situation has changed to 'sell on every rise'. Bide your time for lower entry points.

BSE Sensex Index Chart Pattern - Feb 05, '10

Last week, I had mentioned the importance of the 16000 level in the BSE Sensex index chart pattern. For the first four days of the week, the bulls managed to stave off the marauding bears and stoutly defended the 16000 level.

Friday's strong selling by the FIIs, despite equally strong buying by the DIIs, finally broke the support of the 16000 level. The fight between the bears and bulls will be quite evident from the 3 months bar chart pattern of the BSE Sensex index:-

The special trading session today (for testing a new software update at the NSE) was used by market players to cover their shorts. The Sensex moved up by 125 points, but could not move above the 16000 level.

For a valid penetration of a long-term support or resistance, we need to maintain a 3% 'whipsaw' lee way. That gives a level of 15500. A fall below will confirm the break. Till then, the bulls have some hope.

The bears will have their sights set on the 200 day EMA and the 15331 level (the low made in early Nov '09). Will the Sensex go even lower? The technical indicators seem to suggest a resounding 'YES'.

The 20 day EMA has crossed below the drooping 50 day EMA. The slow stochastic remains inside the oversold zone. The MACD is negative and continues to fall, dragging the signal line with it. The RSI and MFI seem ready to enter the oversold regions.

To set down side targets - should the 15331 and 200 day EMA supports break - one needs to revert to the Fibonacci retracement levels again. The intermediate rally covered 10100 points - from 7700 to 17800.

A 38.2% retracement gives a level of approximately 14000. Which will bring down the index almost to the top of the post election result 'gap' in the chart pattern. A more likely 50% retracement means 12750, and a filling of the 'gap'.

'Gaps' in chart patterns eventually get filled, so however unlikely the level of 12750 may seem now, investors need to stay prepared for the possibility.

Q3 results season is almost over. There are no positive triggers left. The next big event is the budget on the 26th. The bulls may attempt a pull back before then. It can be used to book profits.

Bottomline? The BSE Sensex index chart pattern is in the midst of the much awaited correction. Don't jump in to buy every time the Sensex drops a few hundred points. Much lower levels are likely. If you do see value, pick up a token quantity.

Stock Index Chart Patterns - Shanghai Composite, Hang Seng, Singapore Straits Times - Feb 05, '10

Shanghai Composite index chart

Last week, the Shanghai Composite index chart was trying to hang on to the 200 day EMA for dear life, as the bears took charge of the situation. The index slipped below the long-term moving average on the first two days of the week before swinging back up on the next two days.

Just when bulls started hoping that they would be able to do a repeat performance of the end Aug '09 and end Sep '09 recoveries, a renewed bear attack dashed their hopes and caused the index to slip below the 200 day EMA once again.

The technical indicators are hinting at a further fall. The 20 day EMA is well below the 50 day EMA with both moving down. The 200 day EMA has stopped rising.

The slow stochastic is in oversold zone. The RSI made a feeble attempt to recover from the oversold zone. The ROC is in negative territory and moving down. The MACD is also negative and below the signal line.

Hang Seng index chart

The attempt at a recovery by the Hang Seng index chart was a little stronger than that of the Shanghai Composite chart. But the end result was no different.

The index managed to move above the 200 day EMA, only to face resistance from the falling 20 day EMA. Today's heavy selling pressure took the index below the psychological 20000 level where it closed at its lowest point in 5 months.

The slow stochastic is in oversold zone. The MACD is negative and below the signal line. The ROC is also negative. The RSI is trying to emerge from the oversold zone.

Straits Times (Singapore) index

Four weeks back, the Straits Times (Singapore) index was soaring up and making new highs. But I had warned about bearish possibilities:

'The bears need not lose heart. There are negative divergences in the technical indicators. A correction could be in the offing.'

A sharp 8% correction from 2947 to 2706 followed before the index started a sideways consolidation. The Singapore index remains well above the rising 200 day EMA, though it has fallen below the 20 day and 50 day EMAs.

The bulls are in slightly better shape than their Chinese counterparts, but the technical indicators are all looking weak.

Bottomline? A coordinated bear attack is decimating the Asian indices. Keep your 'buy list' ready and await the correction to play out.

What should investors do when stock markets turn volatile?

The Sensex is undergoing some volatile movements this week - flat on Monday, down 200 points on Tuesday, up 300 the next, down nearly 300 today - going nowhere in particular.

This is a trying time for investors, who are bewildered about what Mr Market is up to. Is this a good time to buy, or sell, or sit on the sidelines?

Patient, long-term investors are probably waiting for a clear trend to emerge. Die-hard traders may be using this opportunity to make some quick trading profits.

To decide what to do, one must understand the cause of stock market volatility. It is usually caused by uncertainty in the minds of market participants. Uncertainty about what? About the near-term market trend.

We had a long bull rally, which made an intermediate top at 17790 on Jan 6 '10. The index had a sharp 10% (1800 points) fall. Since then it is neither going up, nor falling down. Is this the correction before a new rally, or a pause before a bigger fall? Or, is this the beginning of a sideways consolidation movement?

No one really knows. That is the main reason of anxiety among investors, which is causing the volatility. Jeremy Siegel (author of 'Stocks for the Long Run') has observed in his research that stock markets show a tendency to 'revert to mean'.

The current P/E of the Sensex is above 20, and the mean value is closer to 15. Reversion to mean means a bigger fall should be the logical outcome.

High volatility is usually indicative of a change in trend. That again points to a fall, because the previous trend was up. Most analysts and experts have started suggesting different lower levels for the Sensex.

That can be a contrarian play. When every one agrees that the index will fall, Mr Market tends to do just the opposite.

There are no easy answers to the question - except my favourite one. Forget about the index and remain stock specific. Watch your portfolio like a hawk. If you own some less than stellar scrips which are moving up, book profits.

If you own fundamentally strong stocks that are moving down, don't sell in a hurry. If the fundamentals have not changed for the worse, use the dips to add. If you are in doubt, stay out. Wait for a clearer trend to emerge.

Stock Chart Pattern - Maharashtra Seamless (An Update)

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

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

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

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

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

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

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

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

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

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

Should you invest in lump sum or gradually?

Some frequent investor questions I face go like this:

'I have some spare cash. Should I invest it gradually in SIP (Systematic Investment Plan) or in a lump sum?'

'I have recently booked some profits from my portfolio. What should I do with the cash?'

'The market has moved up so much. Should I keep my savings in a fixed deposit or in a liquid fund?'

The answer will be different for different investors. Why? Because no two investors have the same financial situation. Some have aged parents to take care of. Some have EMIs on their residential accommodation. Some are planning to get married. Others have young school-going children.

But if I had to give a single answer, it would be: 'Follow your asset allocation plan.' (If you don't know how to go about making an asset allocation plan, read Chapter 12: How to Reallocate your Assets in my FREE eBook.)

Once you have an asset allocation plan in place, it will be a lot easier to decide what to do with your spare cash. If your equity allocation is too high already, don't buy any more shares. Invest in fixed income, or a gold ETF or in a liquid fund.

If the market is tanking and your equity allocation has dropped below your benchmark level, then only venture into equities. If you are unable to decide which stock to buy, then buy some Nifty BeES or an index fund.

The thumb rule about investing a lump sum amount - which you may have received as a gift, or as a bonus, or due to the maturity of a long-term investment - is to invest all of it, but without deviating from your asset allocation plan.

The best avenues to invest systematically and gradually are additional amounts in your company provident fund (or, Public Provident Fund for the self-employed), a bank recurring deposit, or a SIP in an index fund.

May be all three together. You may be surprised by the tidy sum that will accumulate after 5 years.

Dow Jones (DJIA) Index Chart Pattern - Jan 29, '10

Last week, I had mentioned that the bulls may find it difficult to extricate themselves from the bear grip, but may attempt a pull back. The mild attempt to move up during the first three days of the week didn't succeed. By the end of the week, the Dow lost more than 100 points.

The GDP number at 5.7% was quite a bit above expectations. Consumer spending is picking up. Bernanke got re-appointed. Q4 '09 results of companies have been better.

So, why did the index drop? A closer look at the GDP figure revealed that the rise was caused mainly by inventory re-stocking. The trauma of unemployment is permeating into the psyche of investors. The economy will need to get a lot better before it can be considered to be in good health.

Let us take a look at the 3 months bar chart pattern of the Dow Jones (DJIA) index:-

The bear onslaught has caused the 20 day EMA to drop down to the falling 50 day EMA. The index struggled through the week to move higher, but the medium-term moving average provided strong resistance. The 200 day EMA is still moving up - the long-term up trend remains in tact.

The effort by the bears to push the index below the Nov '09 low of 9647 was well supported at the 10000 level. The higher volumes on the last two down days of the week indicate that the bears may mount a renewed attack.

Both the RSI and MFI are below the 50% level and moving down. The slow stochastic has entered the oversold zone. The MACD is falling in negative territory and is below the signal line.

Bottomline? The Dow Jones (DJIA) index chart pattern is still in a bear grip. The bulls managed to avert a bigger sell-off, and may make another attempt to regain control. Investors can sit on the side lines till a clearer trend emerges.