Stock Chart Pattern - Indraprastha Gas (An Update)

In the previous update in Apr ‘10, the stock chart pattern of Indraprastha Gas had met two criteria for a bearish double-top pattern, but had not met the third – a drop below the ‘valley’ of 205 between the two peaks at 248 and 247.

My recommendation for investors was:

‘Existing holders can book partial profits. New entrants can await a likely dip, or buy after a convincing move above 248.’

The one year bar chart pattern of Indraprastha Gas is an example of why small investors should consider such a fundamentally strong, debt free, cash flow positive, dividend paying, well managed company for the long term. That it has a monopoly in gas distribution in Delhi and the NCR region is an added attraction.

The double top at 248 did not get confirmed because the stock’s price never fell below 205. But investors did get an opportunity to enter when the stock fell to 215, where it received support from the rising 100 day EMA.

Earlier, the 248 level was breached on intra-day basis but continued to provide resistance to up moves till the middle of Jun ‘10. A high volume break out on Jun 17 ‘10 was followed by a pullback to the 248 level, which turned into a support and offered another opportunity to enter.

The stock rose quickly to 303 in Jul ‘10 on solid volume support, and after a brief dip to the rising 20 day EMA, rallied strongly to touch an all-time high of 374 on Sep 7 ‘10. A bearish ‘reversal day’ pattern preceded a correction down to the 303 level and an intra-day low of 295.

For the past 5 months, the stock has been consolidating sideways between 303 and 374, and has traded above the rising 200 day EMA. On Jan 31 ‘11, the stock touched an intra-day low of 296 – where it received support from the 200 day EMA and bounced up.

What next? There are bullish and bearish possibilities, and I’ll discuss both. First, the bullish arguments. Rectangular sideways consolidations are continuation patterns. That means the up trend before entering the pattern should resume. The bulls will take heart from the fact that despite a 21% correction from the top of 374 to the low of 295, the stock is trading above its rising 200 day EMA.

The bears have strong counter arguments. The stock touched a high of 374 again on Jan 3 ‘11, forming a possible double top. A breach of the 200 day EMA and the 295 level can take the stock price down to 248. Note that all four technical indicators reached lower tops when the stock touched 374 a second time. The combined negative divergences can push the stock price lower.

The technical indicators are all bearish. The MACD is below its signal line, and sliding lower in negative territory. The ROC is negative and about to drop below its falling 10 day MA. The RSI has re-entered the oversold zone after spending a few days above it. The slow stochastic found resistance from its 50% level and has turned downwards.

Bottomline? The stock chart pattern of Indraprastha Gas has been consolidating after a fabulous 300% rally from its bear market low of 92 to an all-time high of 374 (which was more than double its previous bull market high of 182 – far outperforming the Sensex). With the Sensex touching lower levels each day, there may be more selling pressure on the stock. Partial profit booking may be prudent. New entrants should bide their time.

Gold Chart Pattern: is this a good time to buy?

In last month’s analysis of gold’s chart pattern, a bearish triple-top was getting formed. A decent correction looked imminent. I had mentioned that a break below 1340 would confirm the triple-top. Gold’s price dropped all the way down to 1315 on Jan 27 ‘11, correcting about 7.5% from the Nov ‘10 top of 1421.

Since then, gold’s price has pulled back above the falling 14 day SMA, and managed to close at 1356 on Feb 3 ‘11 – a 38.7% retracement of the fall from 1421 to 1315, and marginally higher than the 38.2% Fibonacci retracement level. That may be one of the reasons why the chart is struggling a bit to move higher.

But that isn’t the only reason. Let us look at the 2 year closing chart pattern of gold to understand why:

Note that the pullback is facing resistance from the falling 30 day SMA. That opens up the possibility of a drop down to test support from the rising 200 day SMA. There is a third reason as well. The US stock markets have been bullish and investors are regaining their appetite for riskier assets.

The doom and gloom reports about the US and European economies are getting less frequent. GDP growths remain meagre, but growth is definitely more visible. Inflation remains low. Same with interest rates. That points to a further rally in the equity markets, and a correspondingly lower investor demand for safer havens, like gold.

Is the bull market in gold over? Far from it. As long as gold’s price remains above the rising 200 day SMA, the strategy should continue to be: ‘buy the dips’. Last month, I had advised new entrants to accumulate below the level of 1340. A possible drop to the 200 day SMA may provide an opportunity to add. A convincing close above 1356 can also be used to accumulate.

Please don’t forget to maintain adequate stop-losses. This close to an all-time high is not the time to throw caution to the winds. 1350 is a support-resistance level. If the support holds, gold’s price is likely to move higher – may be after a period of consolidation. A break below 1350 could lead to a test of the 200 day SMA.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Feb 04, ‘11

S&P 500 Index Chart

The S&P 500 index chart pattern is a clear example of why technical analysis is not a science, and should be treated as a decision making tool that isn’t 100% foolproof. The big sell-off on Jan 28 ‘11 was accompanied by weakness in the technical indicators, which pointed to a likely correction down to the rising 50 day EMA. No such thing happened.

The bulls took just two trading sessions to wipe out the fall. The index closed above the 1300 level four days in a row last week, touching another new high of 1311 on Fri. Feb 4 ‘11. The technical indicators are beginning to turn bullish. The MACD has inched above its signal line in positive territory. The slow stochastic has jumped back into the overbought zone. The RSI bounced up from the 50% level and is trying to hang on to the 60% mark.

The bears are not completely out of the game. The distance between the 50 day and 200 day EMAs is widening, and the index is trading 50 points above the 50 day EMA. These are warning signs of an impending correction. All three technical indicators failed to make new highs with the index. The combined negative divergence is a bearish sign. Looks like the S&P 500 wants to defy gravity, and one should not try to argue against that. Maintain trailing stop-losses and stay invested.

The market seems to be discounting the economic recovery too much in advance. The housing market keeps contracting. The unemployment rate fell to 9%, but there were only 36000 jobs added in Jan ‘11. Many people are starting home-based businesses due to lack of employment opportunities. Much more needs to be done to improve job growth, otherwise the economic growth will remain tepid at best. 

FTSE 100 Index Chart

The FTSE 100 index chart pattern spent an entire day below the rising 50 day EMA, and touched an intra-day low of 5815 on Mon. Jan 31 ‘11. That formed a bearish lower tops and lower bottoms pattern. Just when the bears were getting ready to dominate, the bulls mounted a strong counter attack. The index moved above the 50 day EMA and closed the week just below the 6000 level.

Note that the slow stochastic made a higher bottom while the index touched a lower one – a positive divergence that helped the index to pullback. The indicator is looking bullish as it has risen above the 50% level. The RSI has risen to its 50% level. The MACD bounced off the ‘0’ line, and is about to cross above the signal line. The bulls are back in command and the index should resume its up move.

Bottomline? The single day’s sell-off in the S&P 500 index chart and a decent correction in the FTSE 100 index chart have been followed by a resumption of the bull markets. Institutional investors appear to be booking profits in emerging markets and redeploying in the developed markets. At some point in time, the valuation gap between the two will reduce sufficiently for a proper correction. Till then, enjoy the ride.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Feb 04, ‘11

In last week’s post, I had mentioned that the zone between the Apr ‘10 and Aug ‘10 tops would provide support, but the support was unlikely to hold. Market sentiments had turned negative, and the technical indicators were quite bearish.

After yesterday’s (Feb 3 ‘11) upward bounce on net buying by the FIIs, some market players expected a decent pullback. Today’s heavy volume of selling put paid to bullish hopes. A bearish ‘reversal day’ pattern (higher high, lower close) has been formed. What next?

BSE Sensex Index Chart

Today’s (Feb 4 ‘11) intra-day low was 17927 – just 127 points above the next support zone between 17500 (Oct ‘09 top) and 17800 (Jan ‘10 top). The Sensex has closed 7 straight trading sessions below the 200 day EMA, and it appears that the next support zone may also get breached. The weekly close above the 18000 level is a small consolation.

As long as the 50 day EMA remains above the 200 day EMA, bullish hopes will remain alive. But the ‘death cross’ is likely to lead to some panic selling. The technical indicators are not holding out much hope for a pullback rally.

The MACD is below its signal line, and both are sliding into deeper negative territory. The ROC is negative, and again failed to move above its 10 day MA. The RSI has got its nose above the oversold zone. The slow stochastic has spent almost 4 weeks inside the oversold zone. The ROC has made a higher bottom, which could lead to a brief bounce. The 18500 level will be a hurdle on the up side.

NSE Nifty 50 Index Chart

As expected, the first support zone between 5400 and 5550 has fallen by the wayside. The Nifty closed just below the 5400 mark at 5396 – so it can’t be termed a convincing break yet. The higher volumes on down days show that the selling pressure hasn’t abated. The next support zone between 5200 (Oct ‘09 top) and 5300 (Jan ‘10 top) is in the bear’s sights. Any pullback is unlikely to move above 5550.

The much-publicised arrests of the former telecom minister and his cohorts hasn’t cut much ice with the Opposition, the general public or the FIIs. The latter seem more concerned about the rising inflation rate and the comparatively lower valuations of their home markets. Another round of rate hikes by the RBI will not help the bullish cause.

There is no trigger for an upward move till the budget. If the Opposition continues to stall the Parliament during the budget session, the stock market will continue to slide. Q4 results in Apr-May ‘11, election results in a couple of states and the advent of monsoon will be the next set of events that may shake the bulls into some action.

Just remember that India’s growth story has slowed down a bit, but is still far ahead of the developed markets. Relative valuations are causing the FII’s to sell. As the US and UK markets keep rising and India keeps falling, the valuation gap will be narrowing down. 2011 is unlikely to be a repeat of 2008. It may be more like 2004 or 2006, when the markets corrected by 30% only to move up much higher.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are under strong bear attacks. Investors were waiting for a big correction in 2010 to enter at lower levels. Now that the indices are falling, not many are in the mood for buying. This is one pattern that gets repeated again and again. Now is a great time to prepare a ‘buy list’ of fundamentally strong stocks, and wait patiently for them to come down to more reasonable valuations.

10 DOs and DON’Ts for making money in the stock market

Making big money – really big money – that allows you the freedom to do what you want, when you want and wherever you want must be the dream of every human being in the planet (except those who become monks or nuns). Only a few manage to make the dream a reality.

Those who follow the straight and narrow path end up toiling all their lives – slaving at a job, or trying to run a profession or business. Those who prefer a more crooked road usually have a short career and end up as state guests with free room and board – unless they manage to become politicians powerful enough to stay away from the long arm of the law.

Making really big money is not a realistic goal for most law-abiding citizens. But making a lot of money – enough that you can have a comfortable retired life that doesn’t require you to cut corners and lets you enjoy some of the material pleasures that life has on offer – is a more achievable goal. The stock market is a place that can help you to achieve the goal by supplementing your regular earnings.

Here are 10 DOs and DON’Ts for making money in the stock market:

DO…

1. Make a financial plan. You don’t have to be a CA to do this. All you need is a little common sense and some knowledge of arithmetic. Think of all the major expenditures – children’s education, daughter’s marriage, buying a flat – at different times in the future and assess how much money will be required for each. That will give you an idea of how much you need to save.
2. Make an Asset Allocation plan. This is the key. You need to know how much of your savings you should invest in risk-free instruments like Post Office MIS or bank fixed deposits, and how much you can afford to invest in riskier instruments like mutual funds and shares. By maintaining a plan, you will know when to buy and when to sell.
3. Learn about the stock market before entering it. Can you get into an IIT or IIM from the Kindergarten? Can you face the fast bowling of a Brett Lee or a Dale Steyn if all you have played is tennis ball cricket? In the stock market, you will be playing against the likes of Rakesh Jhunjhunwala and Ramesh Damani. If you don’t know what you are doing, they will take all your money. Read books by Gurus like Graham and Lynch.
4. Learn how to select stocks and build a portfolio. Haphazardly buying and selling stocks (or funds) on some one’s advice or your ‘gut feel’ is a sure way to make losses. Learn the process of selecting stocks for a portfolio, and holding for the long-term. There are several articles on this blog that can get you started.
5. Learn to be patient and disciplined. The stock market is not a place for showing off how smart or enterprising you are. Those qualities are great for a business venture. In the stock market, you have to be observant and vigilant. Choose the times you want to buy (near bear market bottoms) and the times you want to sell (near bull market tops) carefully. The rest of the time, just wait and watch. Rome wasn’t built in a day. Neither will your wealth.

DON’T…

1. Think that making money in the stock market is easy. The stock market isn’t a zero-sum game. While there is a buyer for every seller, only a few make money. The majority lose. They are the ones who thought making money was easy.
2. Feel like a genius if you have made some money. It was most likely a combination of luck and a bull market. Going through bull, bear and sideways markets with your wealth intact requires determination and perseverance. If you are feeling excited and having fun, a loss is just around the corner.
3. Forget Buffet’s Rule No. 1. Regardless of whether you have a shorter or longer investment time frame, always set stop-losses. That will help you to limit your losses. If a stock is running up fast, set a trailing stop-loss. (If you don’t know anything about stop-losses, you need to read my eBook. It is FREE.)
4. Be too greedy. Have profit targets for each stock (or fund) in your portfolio. Once the target is hit, sell 50% and hold the rest with a trailing stop-loss. Sell all when the trailing stop-loss gets hit.
5. Ever trade. According to Peter Lynch, the odds of success are greater at the race track or casino. Most trade to get rich quick. But there are no short-cuts in life. Trading is the best way to get poor quick; or, to become a reluctant long-term investor (when the trade goes completely wrong!).

There are no sure-shots in the stock market. But if you follow this simple set of DOs and DON’Ts, you will make a lot of money. Not tomorrow, or the day after. But after 20 years. Might as well get started now.

Stock Chart Pattern - Gayatri Projects Ltd (An Update)

One of the comments made in the previous update of the stock chart pattern of Gayatri Projects in Apr ‘10 bears repetition because of the subsequent calamity that has befallen the stock:

‘The stock … made an intra-day top at 472 in Feb '10 - thereby correcting almost 66% of its huge 94% bear market fall from 696 (in Jan '08) to 42 (in Mar '09). Small and mid-cap stocks take a long time to recover from such massive falls - one of the inherent risks of investing in such stocks. Stupendous returns are often followed by soul-destroying collapses.’

The one year bar chart pattern of Gayatri Projects will reveal why that statement has relevance today:

The stock moved up on strong volume support to touch a new high of 503 on May 18 ‘10 – a whopping 1100% gain from the Mar ‘09 low of 42, but only a 70% retracement of its entire bear market fall. It turned out to be a high volume ‘distribution day’. The stock opened with a gap up at 503, fell to 462 intra-day and closed at 485.

The subsequent correction dropped the stock to its 100 day EMA, a bounce up made a lower top, and the stock tested support from the 100 day EMA again. The next upward bounce ended with another ‘distribution day’ on Jun 14 ‘10. This time the stock drifted down to the 200 day EMA in end-Jul ‘10. For the next three months, the 200 day EMA propped up the stock price till it broke down below the long-term moving average in end-Oct ‘10.

After the ‘death cross’ of the 50 day EMA below the 200 day EMA in end-Nov ‘10, the next leg of the correction has been sharp and swift – pushing the stock into a bear market. Today (Feb 2 ‘11), the stock hit an intra-day low of 234 – a 53% correction from the May ‘10 peak, and a 58% retracement of the rally from the Mar ‘09 low. What happened? Why this sudden turnaround in fortunes?

The company has been booking a variety of orders – a road project in Nagaland, a civil construction project for NALCO, Orissa, an electrical substation project at Indore – and had an order book of Rs 8000 Crores at the end of Q2, when it declared a decent set of results.

The problem lies elsewhere. Negative cash flows from operation in the year ending Mar ‘10. Mounting debt with a Debt/Equity ratio of 2.2, which caused interest payments to double and exceed the net profit. An over-ambitious diversification into a power project in Nellore, AP as a joint venture with Nagarjuna Construction that will involve an investment of Rs 1000 Crore, which will be funded partly through a rights issue and the rest through more borrowings.

That means the balance sheet is going to further worsen. The market has not been kind to infrastructure companies – specially those with a lot of debt on its books. The technical indicators are looking quite bearish. The RSI and slow stochastic are both in their oversold zones. The MACD is negative, and below its signal line. The ROC is also negative, and below its 10 day MA. The only saving grace is the higher bottoms in the MACD and ROC, though these have not been supported by the RSI or slow stochastic. Any bounce up will just be another opportunity to sell.

Bottomline? The stock chart pattern of Gayatri Projects is an example of what technical analysts love to say: All the fundamentals are reflected in the price. I don’t necessarily agree with that point of view – but in this case, I’m making an exception. The stock can go much lower. Avoid.

12 Sensex stocks displaying the ‘death cross’

The main reason why the Sensex isn’t showing a ‘death cross’ yet, is that only 12 of the 30 Sensex stocks are showing the ‘death cross’. The balance 18 are technically still in a bull market. For the uninitiated, the ‘death cross’ is the 50 day EMA crossing below the 200 day EMA on a price chart, signalling the beginning of a bear market. (The 50 day EMA crossing above the 200 day EMA, signalling the beginning of a bull market, is called a ‘golden cross’.)

Chart patterns of the 12 Sensex stocks displaying the ‘death cross’ (marked by blue ovals) are discussed below:

BHEL

BHEL is a PSU blue-chip that started correcting after hitting a peak in Oct ‘10. The correction in the Sensex from Nov ‘10 exacerbated the fall. The ‘death cross’ occurred in end-Nov ‘10, two days after the stock dropped sharply to an intra-day low of 2060. A strong pullback took the stock up to 2379, where it faced strong resistance from the combined 100 day and 200 day EMAs.

Though technically in a bear market, the stock is trying to build a base. A move above 2379 will create a bullish pattern of higher tops and higher bottoms. The RSI and slow stochastic are showing positive divergences, having reached higher tops as the stock made a lower top. Use the dip to accumulate.

DLF

DLF, the real-estate high flier, doesn’t really score very high on management ethics, accounting transparency or investor friendliness. The stock is in a long-term bear market. A brief rally took the stock to a 52 week high of 397 in early-Oct ‘10. That was an opportunity to sell. The ‘death cross’ in Dec ‘10 has restored the bear market. With the recent tightening of loans to real-estate players by banks and housing finance companies, you can forget about investing in this stock even as a contrarian play. It may be headed down to two-digits.

Hero Honda

Hero Honda was one of the stars of the bull market till its peak of 2094 in Apr ‘10. A technically overbought condition started a corrective spell. The confirmed news of Honda, Japan pulling out of the joint venture was given a thumbs down by the market. The uncertainty about the future has led to heavy selling. The ‘death cross’ in end-Jan ‘11 is signalling a bear market for this blue-chip. Avoid.

Jaiprakash Associates

Jaiprakash Associates has been in a down trend since touching a high of 180 in Oct ‘09. The ‘death cross’ occurred in May ‘10, confirming the bear market. The rally from Sep-Nov ‘10 was an exit opportunity. Launching huge projects and borrowing money by the truck-load seems to be the core competency of this company. The stock is headed towards low double-digits. Avoid.

Larsen & Toubro

It is a bit disappointing to see a blue-chip like Larsen & Toubro in this group of bearish Sensex stocks. It started correcting with the Sensex after touching a peak of 2212 on Nov 4 ‘10. The sharp fall in Jan ‘11 was partly due to the less-than-expected Q3 performance. The re-structuring into 9 separate companies has also caused some uncertainty in the minds of investors. The ‘death cross’ will occur tomorrow, but I would use this dip to accumulate the shares of this fundamentally strong and investor-friendly company.

Maruti Suzuki

Maruti Suzuki’s chart pattern has two ‘death crosses’ – one in May ‘10 and the other in Jan ‘11. What does it indicate? Technical analysis is not a science, and no rule is sacrosanct. The ‘death cross’ usually indicates the start of a bear market. But not in this case. The stock has been consolidating sideways since reaching a top of 1740 in Sep ‘09 – causing the ‘death cross’ to occur twice without entering a bear market. Yesterday’s low of 1170 formed a possible double-bottom. The RSI and slow stochastic are indicating a likely upward bounce. Accumulate.

NTPC

The NTPC stock chart pattern is also showing two ‘death crosses’ – the first in May ‘10 and the second in Nov ‘10. The stock has been drifting downwards since touching a peak of 242 on Dec 31 ‘09, and is in a bear market. The hype about the phenomenal growth and profit opportunities in the power sector has proved to be just that – hype. Avoid.

ONGC

The ONGC chart also has two ‘death crosses’ – one in Apr ‘10 and the other in Jan ‘11. The first one didn’t cause too much damage to the bulls. The current one is unlikely to do much damage also – because the FPO has been scheduled for Mar ‘11, and the DIIs are likely to buy at dips till the FPO goes through. This is a great company but the government’s meddling has messed up its operations. This is a major reason why I avoid all PSU stocks. Accumulate.

Reliance Comm

Where is the ‘death cross’ in the Reliance Communications chart? It happened more than two years back, and is not showing up in the one year chart pattern! The stock is in a long-term bear market and should ideally be removed from the Sensex 30 index. Only big-brother can bail this company out. Don’t go anywhere near this.

Reliance Infra

Reliance Infra chart also has two ‘death crosses’. The first one was caused by the sideways movement in Feb ‘10. The next one in Sep ‘10 signalled the bear market. Anil Ambani has proven to be a big bag of wind with a slow leak. If you are invested in this company, bail out now before it becomes too late.

Reliance Ind.

Reliance chart has two ‘death crosses’ as well – one in Aug ‘10 and the other in Jan ‘11. The first one was due to the sideways consolidation that has generated negative returns in the past one year. But the second one looks more ominous. The fall in Jan ‘11 has been steep and on increasing volumes. If Reliance doesn’t recover soon, it will drag down the Sensex with it. The technical indicators are hinting at a further fall. Wait for the correction to play out before entering. 

Tata Power

The ‘death cross’ in the Tata Power chart hasn’t yet happened – even though it has been marked in Sep ‘10. The 50 day EMA spent only a few trading sessions below the 200 day EMA due to the sideways consolidation, followed by a 52 week high. The current corrective spell may push the stock into a bear market. Wait for the correction to play out before entering.