Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Mar 12, '10

FTSE 100 index chart

In last week's analysis, it was observed that the FTSE 100 index chart had edged above the 5600 mark and closed exactly on this crucial level. The technical indicators were suggesting a continuation of the bull rally, but there were some bearish concerns that led me to conclude: 'The bears may try to stall, if not stop, the bulls.'

The FTSE 100 closed above the 5600 mark on all 5 days of trading but remained within a narrow range of 84 points - trading between the low of 5563 on Mar 9 '10 and the high of 5647 on Mar 12 '10.

The slow stochastic is well inside the overbought zone. The MACD is rising in the positive territory and remains above the signal line. But the RSI has moved down from the overbought zone and is showing negative divergence. So is the MFI, which is dropping towards the 50% level.

The up tick in volume on Friday was encouraging. All three EMAs are moving up with the FTSE 100 index more than 100 points above the 20 day EMA. The distance between the 50 day and 200 day EMAs is widening. A correction could lead to a bearish double-top chart pattern. The economic recovery is a lot slower than the bullish stock market seems to indicate.

DAX index chart

The bullish fervour continued in the DAX index chart, which soared towards the 6000 level and closed just about 150 points below the Jan '10 high of 6094. The 20 day EMA has crossed above the 50 day EMA and all three EMAs are moving up.

The slow stochastic is in the overbought zone. The MACD is rising in positive territory and is above the signal line. But both the RSI and MFI are showing negative divergences while drifting down above the 50% level.

The bears may try to make a stand as the DAX index nears the previous high. But the odds seem to be stacked against them.

CAC 40 index chart

The bulls continued their domination as the CAC 40 index chart remained well above the rising 20 day and 50 day EMAs. There is still hope for the bears as the index remains more than 150 points below its Jan '10 high of 4088.

The slow stochastic is in the overbought zone and the MACD is rising in positive territory - as in the FTSE and CAC indices. But the RSI is showing negative divergence. So is the MFI, which has dropped to the 50% level.

Bottomline? The chart pattern of the European indices are at or near their Jan '10 highs. The bulls are almost in total control once again. However, there is a good possibility of a correction, more so if the earlier highs are not crossed convincingly (i.e. by 3% or more). Buy with strict stop-losses.

BSE Sensex Index Chart Pattern - Mar 12, '10

The BSE Sensex chart pattern closed the week at 17167, its highest weekly close since the week ending Jan 15 '10. Time to celebrate and pop open the bubbly? The bulls would certainly like to do that. Almost a 1000 point rally post-budget is no mean feat.

The FIIs continued their buying spree - in the cash market as well as in the F&O market. The DIIs played counterpoint with their selling. What may give bears some hope is the way the market seemed to ignore the excellent IIP numbers. The expected upward bounce in the Sensex was noticeably lacking.

The 6 months bar chart pattern of the BSE Sensex index does not give too many clues about a halt in the bull party:-

The 20 day EMA has just given a bullish cross above the 50 day EMA, and both are rising along with the 200 day EMA. The slow stochastic is in the overbought zone. The MACD is rising in positive territory. The RSI is hesitating at the edge of the overbought zone. Only the MFI is showing negative divergence and has dropped towards the 50% level. A test of the previous high of 17790 seems imminent.

The view from 30,000 feet looks less bullish. The BSE Sensex 12 years monthly bar chart pattern shows some interesting formations:-

The period from 2000 to 2004 shows a cup-and-handle pattern that was followed by the biggest bull run in India's stock market history. Elliott Wave fans (and I can't really count myself as one) may see a clear 5-wave pattern from the low of May 2003 to the high of Jan 2008.

What happened subsequently was one of the worst bear market corrections ending with the low of March 2009. The current up move seems to be forming a bearish rounding-top pattern, with volumes declining.

A further correction can be quite severe - if it does happen. One can never be sure with technical analysis, specially when liquidity seems to be sloshing around in the financial system all over the globe. But die-hard bulls may have something to ponder about.

Bottomline? The chart pattern of the BSE Sensex index is looking bullish in the short-term, which means there can be some more gains. But the longer term chart hints at the possibility of a strong correction. Investors should stick to their asset allocation plans. This is not a time for aggressive buying or selling.

Stock Index Chart Patterns - Shanghai Composite, Hang Seng, Korea KOSPI - Mar 12, '10

Shanghai Composite index chart

Another weak weekly effort by the bulls at the Shanghai Composite index failed to produce any conclusive result in the continuing battle with the bears.

A sideways move within the narrow range of the falling 50 day EMA and the flat 20 day EMA ended with a lower week-on-week close today below the 20 day EMA, and a test of support from the 200 day EMA.

The technical indicators show that the bears are gradually regaining ground. The slow stochastic has dropped below the overbought zone and is falling. The MACD didn't quite make it to the positive territory and is touching the signal line. The ROC is barely positive. The RSI is dropping to the 50% level.

Watch out for support from the 200 day EMA. If the bulls aren't careful, the Feb '10 low of 2890 could get broken. That'll form a bearish lower-top-lower-bottom chart pattern.

Hang Seng index chart

The bulls seem to be in much better shape at the Hang Seng index as the entire week's trading was above the 50 day EMA and the psychological 21000 level. The 20 day EMA has moved up to touch the 50 day EMA.

But looks can be deceptive. Note that the the week's trading started with a gap which remained unfilled, forming an 'island' and leaving the door open for a bearish 'island reversal' chart pattern. A positive spin to that is Thursday's partial filling of the gap, which is bullish. Investors should be prepared for both possibilities.

The volumes dropped off during the week which isn't too promising for the bulls. The slow stochastic is overbought. The MACD is rising in the positive territory. But the ROC has dipped towards the '0' line. The RSI is above the 50% level but indicating negative divergence.

The Hang Seng index chart pattern is interestingly poised with the bulls winning on points during this week's fight.

KOSPI (Korea) index chart

Four week's back, the Korea KOSPI index chart had bounced off the 200 day EMA and was facing some resistance from the falling 20 day EMA and the 1600 level.

The bulls seem to have regained control with a vengeance as evinced by the higher volumes during the week's trading. The 20 day EMA has moved up and merged with the 50 day EMA.

The slow stochastic is in the overbought zone. The MACD is in positive territory and rising above the signal line. The ROC has dipped down towards the '0' line. The RSI has also dropped towards the 50% level.

Like in the Hang Seng index chart, the KOSPI chart may be developing a possible bearish 'island reversal' pattern that could end the bull recovery.

Bottomline? The Shanghai Composite index chart pattern is looking weak. The Hang Seng and KOSPI charts indicate more bullishness, but there are a few bearish concerns. At times like these - with no clear trend discernible - investor patience and resolve is tested. Curb the urge to 'do something'.

Do you have the temperament to invest in the stock market?

'The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.' - Warren Buffet

There are several definitions of the word 'temperament' in the Merriam-Webster's online dictionary. The one most appropriate for an investor is: Characteristic or habitual inclination or mode of emotional response.

Do you feel elated when a stock you have picked rises 50% within a short time after you buy it? Of course you do, but what you do next is crucial. Do you buy more? Do you sell it all and book short-term profits? Do you sell a little and hang on to the rest? Do you hold on to all for much bigger returns?

What if the opposite happens and the stock dips by 20% immediately after you buy it and starts to drift down further? Do you have sleepless nights thinking about how you will recoup your losses? Do you sit tight, convinced that it will rise back up sooner than later? Do you buy more to lower your average cost of holding? Do you admit making a mistake and sell it at a loss?

Trying to answer these questions honestly (that means, no cheating allowed) to yourself will reveal what kind of an investor temperament you have.

In an article published in The Journal of Investment Consulting in 2004, Statman and Wood adapted the Keirsey Temperament Sorter that groups people into four main characteristics:-

1. Guardians are adept at logistics - managing, organising, checking and supporting. They tend to be savers and mostly invest in less risky fixed income instruments.

2. Artisans are good at tactics - troubleshooting and manipulating instruments and equipment. They often save less and make aggressive investments in stocks and mutual funds - which can lead to great fortune or total ruin.

3. Idealists shine in diplomacy - clarifying, unifying, inspiring, counselling. They are averse to risk and money may not be a priority in their lives.

4. Rationals excel in strategy - conceptualising, theorising, engineering, coordinating. Their analytical approach leads to some success in the stock market but the irrationality of markets can upset their plans.

I'm not expecting investors to suddenly become experts in psychology or behavioural science. But it may not be a bad idea to introspect and find out about your innate nature and understand your emotional responses to the ups and downs in the market.

By learning more about yourself, you will learn to be a better investor.

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Stock Chart Pattern - Sintex Industries (An Update)

My previous look at the stock chart pattern of Sintex Industries was 9 months ago. The stock had jumped more than 250% from a low of 70 to a high of 250 in 3 months before pausing for breath. I had then advised investors to await a correction to the 140-150 level before adding this Rs 2 face value stock.

Let us have a look at the 1 year bar chart pattern of the Sintex Industries stock to check its progress through this long bull rally:-

The stock did correct, but only down to 183 in July '09 before embarking on an up move that took it to a new high of 297 in Jan '10. Note that both the RSI and MFI made slightly lower tops while the stock made a new high.

The negative divergence led to a correction down to 233 before the post-budget bullishness pushed the stock up to today's high of 280 on decent volumes. Will the stock break above its previous top of 300?

The stock has long term resistance at the 300-310 zone. Also have a look at the RSI and MFI. Both are touching their overbought zones - from where they have retreated several times earlier. Chances are that the current up move may make limited progress.

The consolidated profits for Q3 '09 were flat while the standalone profits dipped more than 11%. The fly in the ointment was the poor performance of the textile segment and the not-so-great results of its overseas acquisitions.

With the automobile plastic moldings segment showing an up tick and the overall plastics business contributing nearly 87% of total revenues, the company should get back on the higher profits track from next year. The steady rise in the OBV indicates that investors are logging in.

After a dip in 2008, the cash flows from operations have perked up considerably. The company had resorted to a lot of borrowing (for a failed German acquisition) and is therefore sitting on a cash pile. A few more acquisitions may be on the cards. It acquired 6 companies in the past 2 years - 2 in the USA, 1 in France and 3 in India.

In the longer term charts, the stock had made a mountain-like pattern with a peak at 615 in Jan '08 followed by a steep drop of 88.6% to 70 in Mar '09. Small and mid-cap stocks usually have a tough time recovering from such huge falls. It is no wonder that the stock has retraced only 42% of its bear market fall and hasn't gained much in the past 9 months.

Bottomline? The stock chart pattern of Sintex Industries is getting close to a resistance zone with limited up side potential. Add only after a deep correction down to the 150-180 band. Existing holders can take some profits home.

Are you thinking of buying gold ETFs or a gold fund?

Four weeks back, I had raised the question: Is this a good time to buy gold? Guess I should have been a little more specific. I meant gold ETFs (or a gold fund) - not physical gold.

Buying physical gold has lots of associated hassles. How much should you buy? Coins, or biscuits, or bars? Where will you store them? Bank locker? Under the concrete floor of your basement?

Who will you buy it from? Your trusted jeweller? A Tanishq store? From a bank? How can you ensure purity? What if you want to resell some of it to raise liquidity? How will you go about it? How quickly can you complete the transaction?

Too many questions - which has prevented me from ever buying physical gold. But with the advent of gold ETFs and gold funds, almost all hurdles to 'buying gold' can be easily overcome.

Now comes another set of questions. Which gold ETF or gold fund to buy? How stable is the asset management company? What will be the returns like?

For the uninitiated, an ETF is like a mutual fund unit that can be traded in a stock exchange like an equity share. The NAV of each unit of a gold ETF approximately corresponds to the price of 1 gram of physical gold. So all gold ETFs give the same returns.

Now it is your choice whether you want to buy the ETFs from Benchmark (with the largest AUM) or SBI (the smallest) or from any one of the other handful of fund houses.

There are also gold funds that invest in gold mining companies and fund of funds (FoF) that invest in gold ETFs as well as in money market instruments, corporate debt and units of debt and liquid funds.

In the past one year, gold ETFs have returned about 5.5% - better than many debt funds, but a pale shadow when compared to more than 100% returns for the Sensex. The scene was different a year back, when gold ETFs were returning greater than 20% while the Sensex was in the red.

As I mentioned in my earlier post, allocate only a small portion of your portfolio to gold ETFs. Now a quick look at the 1 year gold chart pattern:-

After correcting from a high of USD 1212 in Nov '09 down to 1050 in Feb '10, gold prices started rising again and formed a bullish inverse head-and-shoulders pattern with the right shoulder getting support from the 14 day SMA.

The neckline at around 1140 was pierced from below, after which a pull back down to the neckline is in progress. The price chart pattern is likely to take support once again from the 14 day SMA which is almost at the same level as the neckline at 1140.

Till the previous peaks at 1150 and 1212 are not conquered, the bears will remain in the game, even though they seem to be losing ground rapidly. The 200 SMA continues its steady climb, so bulls have little to fear.

Dow Jones (DJIA) Index Chart Pattern - Mar 5, '10

In last week's analysis of the Dow Jones (DJIA) index chart pattern, I had made the following observations:

'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.'

Factory payrolls were up in the ISM report and the unemployment report came in better than expected along with same store retail sales that climbed by +4.1% year over year.

Bulls used the 'good news' to mount another rally but were thwarted by the bears from crossing the 10500 level during the first four trading days of the week. A final effort on Friday, accompanied by decent volumes took the Dow above the resistance zone of 10500-10550.

The 3 months bar chart pattern of the Dow Jones (DJIA) index remains below the Jan '10 high of 10767, and till the previous high is conquered the bears can not be counted out:-

The Dow is making a pattern of higher tops and bottoms since the Feb '10 low. The 200 day EMA is moving up with the index nearly 1000 points above it. The 20 day EMA has just crossed above the 50 day EMA. These are all good omens for the bulls.

The slow stochastic is inside the overbought zone. The RSI and MFI are both above their 50% levels. The MACD is above the signal line and both have entered positive territory. Again, all bullish signs.

But all is not well with the economy - in spite of the year-long stock market rally. Housing sales and auto sales – the two biggest drivers of the US economy – remain deep in recession, not to say depression – as they have fallen into a trough from which it is hard to see a way out.

Bottomline? The Dow Jones (DJIA) index chart pattern shows that the bulls are beginning to regain control - thanks to the ample liquidity from the economic stimulus. The index may rise some more, but valuations are beginning to look stretched. Investors may buy, but very selectively.