Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Mar 5, '10

FTSE 100 index chart

What a sea change in the FTSE 100 index chart in one week - as if the PIIGS have learned to fly! The realisation that Greece may not default on its sovereign debt after all (thanks to a little help from their Eurozone friends) was a huge relief for the bulls.

The FTSE not only tested its previous high of 5600 made on Jan 11 '10 but edged above it on Friday, and closed bang on the 5600 mark - its highest close since the bull rally began a year ago.

The technical indicators are suggesting that the bull party may continue. The 20 day EMA has moved above the 50 day EMA and all three EMAs are moving up with the index above them.

The slow stochastic is well inside the overbought zone. The MACD is rising in the positive zone and is above the rising signal line. The RSI is about to enter the overbought zone. The MFI is just below the overbought zone.

Have the bears been well and truly routed? Not quite. The FTSE 100 index has touched its previous high but hasn't gone convincingly above it as yet. Last week's rally has been on progressively decreasing volumes. The RSI is also showing a negative divergence. The bears may try to stall, if not stop, the bulls.

DAX index chart

The bulls shook off the bear shackles and made a spirited fight back as the German DAX index sailed above the 20 day and 50 day EMAs on decent volumes.

The slow stochastic has entered the overbought zone. The RSI and MFI are both above their 50% levels. The MACD has entered the positive zone after more than a month and is above the signal line. But the DAX still has to clear the Jan '10 high of 6094 before the bulls can take total control.

CAC 40 index chart

The French CAC 40 index also joined the bull rally with renewed vigour on good volumes. The 20 day EMA is still below the 50 day EMA but should cross above it next week.

The MACD has entered the positive zone and is above the rising signal line. The RSI and MFI are both above their 50% levels. The slow stochastic has entered the overbought zone.

The only solace for the bears is that the CAC 40 index is still 178 points below its Jan '10 high of 4088.

Bottomline? The chart pattern of the European indices show that a cloud (in the form of Greece's debt default) seems to have lifted and there is no holding back the bull rally. Investors can buy selectively after the previous highs are cleared.

BSE Sensex Index Chart Pattern - Mar 5, '10

In last week's analysis of the BSE Sensex index chart pattern, I had mentioned that the bulls may get encouraged by the budget provisions but the rally may face resistance in the 16700 - 17500 zone.

In a 'Holi'day shortened week, the Sensex quickly entered the resistance zone and went as far as the 17100 mark - which was exactly in the middle of the resistance zone and just above the 61.8% Fibonacci retracement level of the fall from 17790 in Jan '10 to 15652 in Feb '10.

Though the index closed about 3.5% higher for the week it failed to close above the 17000 level. So, have the bears been rocked back on to the ropes and awaiting the knockout punch? The 3 months bar chart pattern of the BSE Sensex index would seem to suggest that:-

The Sensex is forming a bullish saucer-like pattern which can take it at least to the Jan '10 high. May be even higher. Can't see the pattern? Take a look at the 20 day EMA, which is smoothly moving up towards the 50 day EMA and should cross above it next week.

The 200 day EMA continues its up move. Volumes have been decent for a change. The slow stochastic has entered the overbought zone. The RSI is about to do likewise. The MACD has turned positive and is well above the signal line. The MFI is above the 50% level and climbing.

Strong FII buying has been the single most important factor in the post-budget rally. The DIIs have sold heavily - may be to raise money for investing in the slew of forthcoming PSU divestments. They had to bail out a couple of recent FPOs.

The bears have a few straws to cling on to. The feel-good factor seems to be returning among retail investors as they try to lap up mid and small cap stocks. Valuations - particularly for the large caps - are beginning to look stretched again.

Technically, the RSI tends to react downwards soon after hitting the overbought zone. Will the Jan '10 pattern get repeated? It is a possibility that investors should keep in mind.

Bottomline? The chart pattern of the BSE Sensex index is poised at an interesting stage. Keep an eye on the Dow, which has started to soar again. The odds are favouring the bulls. Avoid sectors that have already moved up considerably. Look for fundamentally strong scrips in beaten-up sectors.  

Stock Index Chart Patterns - Shanghai Composite, Hang Seng, Singapore Straits Times - Mar 5, '10

Shanghai Composite index chart

The bulls fought hard to keep the Shanghai Composite index above the 50 day EMA and the index closed above the medium-term average on Monday and Wednesday.

The bears gathered forces and mounted a swift counter-attack on Thursday. A 'reversal day' pattern (higher high but lower close) pushed the index down below both the 50 day and the 20 day EMAs. Today's weak attempt at a pull back was resisted by the 20 day EMA.

The corrective move continues as the technical indicators begin to turn weak. The slow stochastic is about to fall from the overbought zone with the %K and %D lines touching each other. The MACD is above the signal line but remains in negative territory.

The ROC is turning down towards the '0' line. The RSI is above the 50% level and moving sideways. We have an interesting technical situation where the 20 day EMA is trying to move up, the 50 day EMA is moving down and the 200 day EMA is almost flat.

Every time a bullish pullback makes a lower top, the bears gain a little more ground. Another test of the 200 day EMA may be on the cards.

Hang Seng index chart

Unlike the bulls in Shanghai, the Hang Seng index bulls warded off Thursday's bear attack a little better. The index got support at the 20 day EMA and today's 200 point pull back took the index back up to the 50 day EMA.

The slow stochastic is at the edge of the overbought zone. The MACD is well above the signal line and about to turn positive. The RSI is above the 50% level and moving sideways. The ROC has turned down after a quick up move.

The corrective move from the Nov '09 top of 23100 has not ended yet.

Straits Times (Singapore) index chart

When I looked at the Straits Times index chart four weeks ago, it was floundering below the 20 day and 50 day EMAs. It recovered its poise slightly, but has remained in a very narrow sideways range of 60 points or so - straddling the short and medium term moving averages.

The slow stochastic is moving sideways below the overbought zone. The MACD is moving up ever so slowly but remains in the negative zone. The ROC is touching the '0' level. The RSI is also moving sideways a bit above the 50% level.

It appears that the Singapore index is treading water, awaiting a clear direction from its two Chinese neighbours.

Bottomline? The corrective moves in the chart patterns of the Asian indices is still not revealing a clear trend. Remain cautious but nimble. Buy if you see value. Get rid of non-performers.

Is every drop in the Sensex a buying opportunity?

There is no easy answer to that question. A drop in the Sensex can happen due to several reasons. Some external event like a terror attack or war can cause a sudden fall. Stock markets recover from such shocks pretty quickly - so it provides a buying opportunity.

It could also be an external event of a more 'fundamental' nature. The recent economic downturn had its origins in the financial excesses of the western world. But its ripple effects - large scale withdrawal by FIIs - caused a major bear market in the Sensex that lasted more than a year.

Many investors who were facing a bear market for the first time made the error of jumping in during April/May 2008 - only to find that the Sensex fell steeply thereafter making a big dent in their savings.

Newsworthy internal events can also induce a sharp fall. Remember the Satyam scam hitting the front pages in Jan 2009? The Sensex had a sharp downward reaction in the middle of a bear market that lasted two months. Most news driven index falls last only 2 or 3 days, and can be bought into.

Internal events of a more fundamental nature - a deteriorating economy or a major stock market scam (a la Harshad Mehta or Ketan Parekh) can cause the Sensex to change its trend from bull to bear in a flash. Bear markets are not the time to buy - except when it is close to, or emerging from, a major bottom.

Being able to identify such reversal points constitute the "Holy Grail" of stock market investment success. Which means it is easier said than done. But it isn't impossible.

One of the thumb rules for the Sensex that I have observed is the widening distance between the 50 day and 200 day EMAs. A reversal or correction occurs when the gap stretches to about 2000 points. Please remember that this is not a rule, but an observation.

The 'correct' answer to the question is another question: Why does it matter? Small investors don't buy the Sensex. They may invest in an index fund or an index ETF. In which case, they should be following a SIP method and be oblivious to Sensex gyrations.

Even if a small investor decides to buy individual stocks, it is unlikely that a particular stock's bull or bear phase will coincide with that of the Sensex.

HUL had a long bull market from 2006 to 2009 - right through the Sensex bear market. It hit its peak in July '09, 6 months before the recent Sensex top, and has been correcting for 8 months.

The bear phase in Tata Motors preceded the Sensex by a good 20 months. The bear market bottoms in the stock and the Sensex were formed together. The subsequent bull rally by the Tata Motors stock hugely outperformed the Sensex.

Keep close track of the individual stocks in your portfolio. Otherwise, the noise and hype created by the media about Sensex movements may confuse you into making a poor investment decision.

Stock Chart Pattern - Tata Motors

Before delving into the technicals of the Tata Motors stock chart pattern, here is a brief recap of what has been going on in this 65 years old stalwart company from the house of Tatas.

Starting out as a locomotive manufacturer, it got into road rollers and then commercial vehicles. 'Tata trucks', initially of one size and subsequently in different shapes and sizes, became synonymous with 'strong and sturdy'. Then came the shift towards passenger vehicles.

First came SUVs like the Safari and Sumo. Then the Indica - which was a lemon when it was first launched, and the development costs caused the company to get into losses. The stock price dived into double digits.

A modified Indica, and its derivatives - the Indigo and Marina - started selling better. Then came the much-hyped announcement of the 'peoples car' Nano - and suddenly things took a turn for the worse again.

The Singur land acquisition fiasco forced the company to shift its manufacturing facility from West Bengal to Gujarat, causing delays in production and deliveries as well as technical glitches. Then the ill-timed and costly takeover of the Jaguar-Land Rover marquee vehicles pushed the company back into the red.

Meanwhile, all these di'worse'ifications had to be funded and internal accruals and resources were not sufficient. So the equity and debt started to get bloated. The consolidated results for Q3 ending Dec '09 came as a pleasant surprise. Jaguar has started to make money for Tata Motors. 

As a long-term shareholder, I had no doubts that eventually the company will extricate itself from the mess and start ruling not just Indian but the global roads. But does that justify the recent buy calls given by several broking houses?

Let us have a look at the 3 years closing chart pattern of Tata Motors to find an answer:-

The bear market for the stock started after it hit the peak of 965 back in May '06 (beyond the range of the above chart). It made a double-bottom at 630 in June and July 2006 and started moving up again. But a test of the previous high fell short at 944 in Jan '07.

The stock then had a long 5-wave correction all the way down to 122 in Nov '08. A cup-and-handle bottoming pattern led to a spectacular 600% rise as the stock made a high of 842 on Jan 5 '10. A correction to 645 on Feb 8 '10 took the stock close to the longer term support level of 630.

The post-budget spike took the stock to an intra-day high of 814 and a close of 807.50 at the end of today's trading. Note that the stock is near the Oct '07 top of 813, which is also on a longer-term support/resistance line.

A correction from the current level will not be surprising, if you take a look at the RSI indicator which is about to enter the overbought zone. The MACD has recently entered the positive zone and is above the signal line, so another 2-3% rise from current levels is a possibility.

After a huge rise, the stock is poised to test its recent high. If a new high is made above the 842 level, expect strong resistance from the 890-965 zone. That zone is just 10% higher. The more likely outcome could be a period of sideways consolidation between 842 and 645.

Bottomline? The stock chart pattern of Tata Motors is near a previous top and close to a strong resistance zone. The high P/E ratio leaves no margin of safety. This is not a time to buy, but to book profits. Stalwart stocks should be bought when the markets hammer them down.

Reversal Chart Patterns - Double Top and Triple Top

Some of the most important resources in a technical analyst's arsenal are indicators that can help identify reversal in chart patterns. Double-top and the rarer triple-top are two such indicators.

These are pattern formations that typically lead to severe price corrections during bull markets. In bear markets, double-bottoms and triple-bottoms reverse downtrends and are followed by a price surge.

The BusinessLine newspaper is something I like to read regularly. They provide fairly unbiased and balanced opinions. In a recent issue, there was a 'buy' call given for Elgi Equipments.

This company wasn't on my 'watch' list so I decided to take a quick look at the price chart pattern. This is what I saw on the longer-term price chart:-

In April 2006, the stock made a high of 97. Shortly thereafter, it collapsed to 52 in July 2006 and then, after a brief sideways consolidation, dropped to 48 in Mar 2007.

Another sideways consolidation was followed by a sharp rise, this time to 95 in Jan 2008. That was a 'test' of the previous top that failed. Once again, the stock collapsed down to 44 in March 2008, going below the previous low of 48.

A quick upward bounce to 70 in April 2008, then a drop to 43 before the bear market took the stock all the way down to multiple bottoms at 27. A classic example of a double-top chart pattern formation.

First, the second top was almost the same as the first. Second, the volumes preceding and during the first top of 97 were higher than the volumes preceding and during the second top. Third, the low between the first and second tops could not support the fall from the second top as the stock dropped much lower.

Unfortunately, the double top can't be confirmed till the low between the two tops gets broken after the second top gets formed. On occasion, the stock price may continue to move upwards after falling briefly from the second top. Now you know why I keep mentioning that technical analysis is more an art than a science!

Next, have a look at another interesting chart pattern formation during the current bull rally. The stock had a sharp up move to 98 in Jan 2010 - almost the exact same level it hit in 2006 and 2008. The correction started immediately, and we may be witness to the much less frequent triple-top chart pattern formation.

Can we conclude that the stock is going to drop steeply once more? There are a couple of indications that suggest so. Except for a single, very large spike in Oct '09, volumes have been just as meager as it was during the formation of the second top.

Also, have a look at the 50 day EMA. Each time that the stock price moved 25-30 points above the medium-term moving average, the stock came crashing down. It could happen again.

If I was a gambling man, I would lay a wager that this is a triple-top reversal chart pattern. But I have lost enough money trying to predict what a chart pattern is going to do next.

A triple-top can't be confirmed till the 48 level is broken on the down side. But for existing holders, this can be as good a time as any to book some profits.

I'm afraid I can't agree with the BusinessLine 'buy' call from a technical perspective, even though the company may be doing fine fundamentally.

This is a good example to support my argument that investors should learn both fundamental and technical analysis. Only when the technicals and fundamentals are in synch should a stock be bought.

(A question: Why do you think the double-top or triple-top patterns get formed? Are there some logic behind them, or are these random patterns that defy logic?)

Dow Jones (DJIA) Index Chart Pattern - Feb 26, '10

Last week, the chart pattern of the Dow Jones (DJIA) index had shown a decent rally by the bulls that took the index above both the 20 day and 50 day EMAs. The receding volumes were not convincing and I had made the following observations:

'Expect the bears to put up some resistance around the 10500-10550 area (several tops in late Nov and early Dec '09). Though the 25 basis points discount rate hike by the Fed was taken in its stride by the Dow, things aren't getting better in the economy.'

The economic recovery does not really warrant the kind of bullishness exhibited by the Dow for nearly a year now. Sales of previously owned homes - which comprises 90% of transactions in the US - fell by 7.2% in Jan '10 to its lowest level in 7 months. Sales of newly built homes dropped by 11% in Jan '10.

A look at the 3 months bar chart pattern of the Dow Jones (DJIA) index shows that the recovery by the bulls got stalled below the 10500 level, as expected:-

The index made a high for the week at 10469 on Monday, Feb 22 '10. That was all the strength that the bulls could muster. After closing exactly on the 50 day EMA on Tuesday, the index managed to close above the 50 day EMA for the rest of the week, but failed to close above the 10400 level even for a single day.

The technical indicators are looking a little more bullish than the previous week. But looks can be deceiving. Note the volume bars. The down days on Tuesday and Thursday had the highest volumes during the week. That goes against the logic of a bull rally.

The slow stochastic is at the edge of the overbought zone with the %K merging with the %D. Both the RSI and MFI have moved above their 50% levels. The MACD has turned marginally positive after spending a month in the negative zone.

The bulls are likely to make another attempt to push the index above the 10500 level, but their real hurdle will be the Jan 14 '10 top of 10767. As long as the 200 day EMA keeps rising and the Dow remains above it, the bulls will hold sway.

Bottomline? The Dow Jones (DJIA) index chart pattern is still struggling to extricate itself from a strong bear grip. Some more sideways consolidation may be in the offing before a clearer trend emerges. Continued caution is advised. Buy only undervalued stocks - if you can find them.