10 years Gold Chart Pattern: a parabolic rise

Two months back, the gold chart pattern indicated a slow down of upward momentum which led me to caution investors that a drop below the 14 day SMA may be the first warning of a possible change of trend.

I had also mentioned the possibility of a bearish double-top pattern forming on the gold chart, which could also lead to a change of trend. Neither of the bearish scenarios played out. All that happened was a brief dip to the 14 day SMA, followed by a $100 rise to a new high above the $1350 level.

A bout of profit booking took gold’s price below the 14 day SMA for a few days, but the $1300 level was not breached on the downside. The next up move took the price to another new high above the $1400 level, where some consolidation is taking place.

I have been looking at the 1 year chart of gold prices, and failed to observe the long-term bullish strength of the yellow metal. This time, let us look at the 10 years closing chart pattern of gold:

Gold prices have seen a parabolic rise during the strong bull market of the past 10 years. The bear phase during 2008 was the only occasion when gold prices dipped significantly below the 200 day SMA.

If this parabolic rise continues, gold prices could double or even triple from current levels within 18-24 months. The recent QE2 announcement by the Fed seems to have provided fuel to the bullish fire. Should investors enter at this late stage of the bull market?

That should depend on your experience, comfort and asset allocation plan. Remember that an investment in gold doesn’t provide any returns in terms of dividends, splits, rights issues or bonuses – like an IBM or TCS stock does. The entire play in gold is about safety and low-risk capital appreciation. A 100% gain in two years is no mean achievement.

To put things into perspective, the TCS stock has gained 300% in the past two years (adjusted for the 1:1 bonus issue last year) – and that doesn’t include all the annual and interim dividend payments. Even silver has outperformed gold by rising 200% in the past two years.

By all means, consider investing in gold even at current prices if you haven’t invested earlier. But keep the allocation to gold at 5-10% of your total portfolio value. Physical gold has associated safety and storage issues. Gold ETFs are readily bought and sold on the stock market like shares. 

Stock Chart Pattern – Delta Magnets

There is one – and only one – reason for discussing the stock chart pattern of Delta Magnets. It is to warn small investors to stay away from buying small-cap companies with unknown products or services and horrendous fundamentals that start shooting up like Diwali rockets only to explode with a loud bang.

Such companies suddenly become ‘hot stocks’ near bull market tops, burn a big hole in the pockets of small investors and disappear without a trace. Some times, they reappear again in a new ‘avatar’ – just like Delta Magnets has done – to go through the entire cycle of shooting up out of nowhere and burning bigger holes in investor pockets.

May be this time it is different? I don’t think so. Let us go back in history. A company called G. P. Electronics started manufacturing hard ferrite (ceramic compound) magnets with Japanese collaboration at its factory in Nashik back in 1985. These magnets – of various shapes and sizes, viz. arc, ring, rectangular – find applications in motors and dynamos used in bicycles, two, three and four wheelers, as well as in loudspeakers, telephones, headphones.

After 25 years of operations, the company’s sales were Rs 9.32 Crores in 2009-10, on which it made an ‘adjusted’ net profit of Rs 13 lakhs. On a TTM EPS of 1.46, the P/E ratio is 47.6 at today’s closing price of 69.55. No one knew or cared much about the company. For the past 9 years the stock has oscillated between Rs 5 and Rs 25 – except for peaks of 42 in 2005 and 43 in 2008. That same year, the name of the company was changed to Delta Magnets. That didn’t prevent the stock from making a low of Rs 9 in Dec ‘08.

Then, from a level of Rs 21 in Jul ‘10, the stock shot up to touch Rs 70 in 4 months. What happened? The market became aware that Delta Magnets is owned by Delta Corp – another ‘hot stock’ with poor fundamentals that supposedly has expertise in real estate and casinos. But wait a minute! Isn’t Delta Corp the new name of an unknown textile company called Arrow Webtex?!

To summarise, an unknown textile company changed its name to become an overnight expert in casinos, and then acquired a hard ferrite manufacturer that has been showing losses at the operating level for the past five years (may be even more?), and changed its name as well! Reminds me of a school mate who used to bring up the rear in class. He changed his name through an affidavit in court just before going through an arranged marriage. Wonder why?!

If you are one of those who think that it is all about taking risks and making quick short-term gains, have a look at the one year chart pattern of Delta Magnets before you throw all your money away:

Since Jul ‘10, the stock has been moving up by hitting frequent upper circuits and all three EMAs are moving up with the stock well above them. Typical sign of a bull market, right? Yes and no. While it looks like a very bullish chart, look at the peak volume days on Jul 16 ‘10, Aug 27 ‘10 and Nov 1 ‘10. All three were down days that occurred after the stock hit a new high. A clear sign of ‘pump and dump’ distribution.

The RSI and slow stochastic are in their overbought zones. The MACD is above the signal line and both are moving up sharply. The ROC (and RSI) failed to make new highs, and are showing negative divergences with the stock’s price. The stock is getting primed for another ‘dump’ operation.

Looks like retail interest is pushing the stock higher – thanks to a number of ‘buy’ calls by self-styled stock ‘gurus’ who copy-paste each others’ recommendations in different fora. The stock may move up some more – thanks to the hype created by frequent announcements of acquisitions in India and abroad. Wonder where the money for the acquisitions is coming from!

Bottomline? The stock chart pattern of Delta Magnets is a classic example of how small investors get duped by pump-and-dump schemes. If you enter now, be sure you understand the consequences of  the ‘greater fool theory’. Smart investors can read this post for entertainment (hope I’ve provided enough!) and avoid the stock like the plague.

3 year charts of some Sensex 30 stocks trading below all-time highs

The BSE Sensex is trading near its all-time high. That doesn’t mean all the 30 stocks that comprise the Sensex index are trading near their all-time highs. Here are the charts of some of the Sensex stocks that are trading below their earlier peaks:

BHEL is a PSU star and a leader of the infrastructure pack. Despite power being a priority sector and BHEL being the major supplier of large capacity steam turbines and boilers that form the heart of thermal power stations, the stock is yet to reach its 2007 peak.

The 200 day EMA is rising and the stock is trading above it, which is a bullish sign. But volumes have trailed off as the stock is trying to move higher, which is not so encouraging. Add on dips.

The realty sector was most favoured by investors in the previous bull market, with DLF being the undisputed king. Questionable business practices and opaque financial statements had a disastrous effect on the stock’s fortunes. Though it is trading above its 200 day EMA, it has failed to regain even 50% of its bear market fall. Avoid.

NTPC is one of the better managed PSUs and the largest power generation company in India. But that hasn’t translated into superior stock performance. Despite all the hype surrounding the power sector – specially during the previous bull market – most power generation companies are not highly profitable. One of the major reasons being that growth in power generation is dependent upon frequent and huge capital expenditure.

The stock is trading below the 200 day EMA and falling. Avoid.

Jaiprakash Associates is one of the leading companies undertaking large infrastructure and real estate projects that require massive capital outlays, which have been mainly financed through debt. The huge interest burden has proved a detriment to the stock’s performance. After retracing 50% of its bear market fall, the stock has been making a bearish pattern of lower tops and bottoms. Avoid.

Tata Steel’s large debt burden caused by the Corus acquisition was compounded by the economic slowdown in Europe (where Corus sells most of its output). The stock is trading well below its Jan ‘08 peak, but has formed a bullish cup-and-handle continuation pattern. It is trading above its rising 200 day EMA and can be added on dips.

Stock Index Chart Patterns – Dow Jones (DJIA) and FTSE 100 – Nov 5, ‘10

Dow Jones (DJIA) Index Chart

The chart pattern of the Dow Jones (DJIA) index finally cleared the Apr ‘10 top of 11309 and hit an intra-day high of 11506 on Fri. Nov 5 ‘10 before closing the week at a two year high of 11444. Volumes picked up as investors felt energized by the election results, employment news and QE2. The fact that QE1 failed to boost the economy – though it boosted the stock market – was brushed aside by the bulls.

All is not well with the technical indicators, which continue to display negative divergences that were observed two weeks back. The slow stochastic has entered the overbought zone. The MACD is positive and moved above the signal line. The ROC is positive and the RSI is above the 50% level. But all four indicators made lower tops as the Dow made a new high.

The tardy progress of the economy led to a dip in investor bullish sentiment. 151000 new job additions in Oct ‘10 couldn’t reduce the unemployment rate below 9.6%. But increasing pick-up truck sales indicate that the economic recovery is for real.

Investors can wait for a dip towards the rising 20 day EMA before buying.

FTSE 100 Index Chart

The FTSE 100 index chart pattern followed the Dow in rising above its Apr ‘10 top of 5834 to almost touch the 5900 level before closing the week at a two year high of 5875. All three EMAs are rising with the index, and volumes picked up as bulls finally regained control.

The slow stochastic is just below the overbought zone. The MACD is positive and edged above the signal line. The RSI bounced up after touching the 50% level. The ROC is back in positive territory. These would be treated as bullish signs, but for the fact that all four technical indicators made lower tops as the FTSE 100 reached a new high.

The negative divergences may lead to another dip towards the rising 20 day EMA – which will provide an opportunity to enter.

Bottomline? The chart patterns of the Dow Jones (DJIA) and FTSE 100 indices have cleared their Apr ‘10 tops and are back in bull markets after a 6 months long corrective spell. There is still a lot of ground to cover before the all-time peaks of Oct ‘07 are scaled. Buy the dips, with appropriate stop-losses.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Nov 5, ‘10

BSE Sensex Index Chart

The New Samvat began with a bang! The BSE Sensex index chart pattern closed above the 21000 mark for the first time ever. The index had moved above the 21000 level intra-day three days in a row in Jan ‘08 – but the highest close it had achieved was 20873 on Jan 8 ‘08.

While we do look at intra-day movements in the short-term, the closing level of the index is used for long-term analysis. The one year closing chart pattern of the BSE Sensex index is in a long-term bull market and there shouldn’t be any doubt that this bull market will last for a while.

The bearish head-and-shoulders pattern that I had observed in the Sensex chart last week did not lead to the expected correction. This shows that technical analysis is not a science, and therefore needs to be used judiciously. The flood of FII inflows is turning technical analysis on its head. The strong listing of Coal India added to the buoyant mood.

That doesn’t mean that one should open the bubbly and go on a buying spree. Note that from Jun ‘10 onwards, volumes have been receding. All four technical indicators, which are in bullish zones, are showing negative divergences – as they failed to make new highs while the Sensex soared to an all-time high. A correction may be round the corner. Wait for the likely dip to enter good sectors and stocks that haven’t performed.

An empirical observation is the distance between the 50 day and 200 day EMAs. A correction or trend change occurs when the distance between the medium-term and long-term EMAs reaches 2000 points. This hasn’t occurred yet. That means there may be some upside left in this phase of the rally. It will be interesting to see if the Sensex pauses near its all-time intra-day high of 21207 touched on Jan 10 ‘08.

NSE Nifty 50 Index Chart

The NSE Nifty 50 index chart also closed at a life-time high level of 6312. Its previous closing high was 6288 on Jan 8 ‘08 – the same day on which it touched its all-time intra-day high of 6357.

The slow stochastic bounced off sharply from the edge of the oversold zone and rose above the 50% level. The MACD has moved above the signal line after falling below it. The RSI has inched above the 50% level. The ROC has risen quickly into positive territory after spending some time in the negative zone. These are all bullish signs, but with one important exception.

None of the indicators reached new highs while the Nifty closed at an all-time high. The negative divergences could be the harbinger of a correction in the near future. There are no signs of a change of trend and there won’t be – as long as the index stays above the rising 50 day and 200 day EMAs.

Most of the good news have been ‘discounted’ by the market – good Q2 results, good monsoon, rising auto sales. Looks like the FIIs will determine the index movements till the end of the calendar year 2010. They will need to book some profits to dress up their books for the New Year. If you enter now, maintain adequate stop-losses.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices have closed at life-time highs. Many small investors get lured into the market when indices are at their peaks. Follow the discipline of buying the dips, holding for the long-term and booking partial profits to rebalance your portfolio. If you don’t know how to pick good stocks – stick to mutual fund investments. And as Rakesh Jhunjhunwala advised on Muhurat Day – please don’t trade.  

Stock Chart Pattern - Thermax Ltd. (An Update)

The stock chart pattern of Thermax was last analysed at the beginning of the year when it was struggling to go past 650. That was the 61.8% Fibonacci retracement level of its massive bear market fall from a peak of 968 in Oct ‘07 to a trough of 151 in Dec ‘08.

The spectacular 500 points rise from the low got the stock back into a bull market but the technical indicators were showing negative divergences. I had advised existing holders to book partial profits, and new entrants to wait for a likely correction to enter – as the 650-700 zone was a long-term support/resistance level.

Let us take a look at the one year bar chart pattern of Thermax Ltd to find out if my advice proved useful for investors:

As it turns out, it did – for those who heeded it. Shortly after I posted the previous analysis, the stock broke out above the 650 level on strong volumes – only to face overhead resistance from the 700 level. On Jan 21 ‘10, the stock touched a new high of 745, but it turned out to be a high volume ‘reversal day’ (higher high, lower close).

The month-long correction that followed took the stock below both its 20 day and 50 day EMAs. After a drop of nearly 25% – from 745 to 560 – the stock found support at its previous low, formed another high-volume ‘reversal day’ pattern (lower low, higher close) and moved up sharply to touch the 700 level once more.

The entire month of Mar ‘10 was spent in consolidating within the 650-700 zone. In Apr ‘10, the stock managed to move above the 700 level, which turned into a support level. After reaching a new high of 750 on Apr 23 ‘10, the stock again corrected down to the 650 level and spent May ‘10 consolidating within the 650-700 zone.

In Jun ‘10, the stock finally moved above the 700 level, and this time there was no turning back. The rising 50 day EMA provided good support to the upward journey. A new high of 850 was touched on Jul 26 ‘10 – which again was a ‘reversal day’ but on tepid volumes.

The next three months were spent in another sideways consolidation between 750 and 850. A high-volume break out on Oct 28 ‘10 took the stock above the consolidation range, and the subsequent sharp rally ended the year with a high of 927 and a close bang on the 900 level.

Both fundamentally and technically, the stock is looking overbought and ripe for a correction. On a trailing twelve month (TTM) basis, the stock is trading at a high P/E of 54.6. The loss in the Mar ‘10 quarter is partly responsible for the lower TTM EPS. The excellent Q2 ‘10 results are the probable cause of the recent price spike.

The MFI, RSI and slow stochastic have all entered their overbought zones. The MACD has moved sharply above the signal line. While technical indicators can remain overbought for a while, a correction or consolidation is likely to follow soon.

Bottomline? The stock chart pattern of Thermax Ltd exemplifies the benefit of choosing a fundamentally strong stock and patiently holding it for the long-term. The ability to discern and interpret technical analysis signals enable good entry/exit points for optimising returns. The stock has been a six-bagger from its Dec ‘08 low. Existing holders can book partial profits, if they wish. New entrants should wait for a 15-20% correction.

RBI raises interest rates again but inflation remains untamed. What next?

The RBI raised both the repo rate and reverse repo rate by 25 basis points. The repo rate (i.e. the rate of interest at which RBI loans money temporarily to banks) is now 6.25% and the reverse repo rate (i.e. the interest rate which RBI pays to banks for temporary deposits) is now 5.25%.

No real surprises there. The market was expecting a 25 basis point hike. The CRR rate has been untouched and remains at 6%. What is the purpose of these periodic interest rate hikes? It is an attempt to stifle the liquidity in the market. In other words, make the cost of borrowing a little less attractive.

Why would RBI want to stifle liquidity in the market just when things are going great? Tax collections are improving. So is industrial production. Cars are selling like hot cakes. The stock market is at a peak. My staid uncle and aunt – who never ventured beyond Puri or Darjeeling for their annual holidays – visited Sri Lanka! Why try to fix some thing that hasn’t broken yet?

To give the devil its due, the RBI is being proactive by erring on the side of caution. One of the main reasons that the Indian economy didn’t collapse during the recent global recession was the stringent steps and controls put in place by the RBI and Finance Ministry. There was a real estate bubble – particularly in Mumbai and the Delhi region – but the banks managed to come out of the fiasco reasonably unscathed.

India’s huge fiscal deficit, plus a continuous flow of FII funds (some of which have a very questionable dark colour and are being re-routed from a picturesque country in the Alps) can lead to rising inflation. By acting before things begin to go out of control, the RBI has shown commendable financial acumen.

Are these frequent rate hikes (the sixth since Mar ‘10) having the desired effect? The jury is still out. Inflation has been contained at best but doesn’t show any tendency of going south. Specially food inflation. In spite of a good monsoon, vegetable and fruit prices remain high.

The RBI has to walk a fine line between reducing inflation and ensuring that economic growth doesn’t get affected. If interest rates are hiked by a larger amount, companies may hold back on their borrowings and curtail their expansion plans. If rates are left untouched, inflation may increase.

What could be done, and isn’t being pursued vigorously by the Indian government, is to find a methodology to channel the flow of overseas funds into productive uses rather than being used in ‘benaami’ transactions in real estate and the stock market. That would solve many problems in one go, considering the stupendous amounts stashed away overseas by our venerable “people’s representatives”.

Wishful thinking, I suppose. What next for investors? The US Fed is likely to announce the next round of ‘Quantitative Easing’ later in the week. That means more inflows into the emerging markets. It won’t be surprising to see the Sensex reach a new all-time high before we say good-bye to 2010.

With not much left in its armoury, the RBI may continue to raise interest rates in baby steps. At some point, investors will opt for risk-free bank fixed deposits by cashing out some of their riskier equity holdings. Year-end profit considerations may lead to some FII selling. Any dips in the Sensex should be used to buy fundamentally strong stocks that are trading well below their 52 week highs. (Such stocks are difficult to find with the Sensex above 20000 – but not impossible.)

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