Chart Patterns of Housing Finance Companies (an update)

A few days after the Sensex and Nifty peaked in Nov ‘10, news of the housing finance scam dampened investor sentiments further. I had written a post on the chart patterns of housing finance companies at that time - all of them were correcting from their respective peaks.

Multiple interest rate increases since then have taken a toll on interest-rate sensitive industries, including housing finance companies. However, there are always one or two stocks that buck the trend. Those are the ones to put on your buy list. Let us look at the current charts in alphabetical order:

Can Fin Homes

After touching an intra-day high of 172 in Aug ‘10, the stock has been in a long down trend – halving in value when it touched an intra-day low of 86.55 in Feb ‘11. It has been consolidating within a bearish descending triangle pattern. The likely break below the support level of 90 can push the stock deeper into a bear market. On the upside, the 200 day EMA and the blue down trend line will provide strong resistances. Avoid.

Dewan Housing Finance

The stock peaked at 347 in Nov ‘11 before starting a prolonged correction within a downward sloping channel. So far, the stock has corrected 47% from its peak. Today’s high volume spurt was on news of its fund-raising plans. The stock is in a bear market, and such news driven spurts are good selling opportunities. Avoid.

GIC Housing Finance

The stock has been trading within a downward sloping channel, and is in a bear market. The drop from its Nov ‘10 high of 161 to its recent low of 74 has corrected 54% from its top – making it the worst performer among the housing finance stocks. Avoid.

GRUH Finance

This HDFC subsidiary has been a star performer – outperforming even its better known parent. After making a double-bottom (311 in Feb ‘11 and 310 in Mar ‘11) pattern, the stock embarked on a strong bull rally that peaked at 629 in Nov ‘11 – a 100% gain in 8 months. This was one of the two top picks in my previous post, and has certainly lived up to expectations. Add on dips.

HDFC

The stock was the other top pick in my previous post. It has been a favourite of the FIIs. That perhaps led to its relative underperformance, even though the fundamentals remain strong. The FIIs have been net sellers of Indian equity in 2011, and stocks like Infosys and HDFC have borne the brunt of their selling. The stock has been moving sideways – oscillating around its 200 day EMA. Hold.

LIC Housing Finance

This scam-tainted stock had a sharp fall, followed by a 5:1 stock split (marked by light blue bell) that exacerbated the fall as a large number of stocks hit demat accounts. The company had no alternative but to make top-level changes, which led to a decent recovery. The stock has been trading within a rectangular consolidation pattern for the past 8 months. Hold.

Bottomline? The stock chart patterns of housing finance companies clearly show that high interest rates have affected performance – with the sole exception of GRUH Finance. Its business concentration in the state of Gujarat – one of the best administered states in India – has helped its cause.

Gold and Silver Chart Patterns: consolidating

Gold Chart Pattern

Gold’s chart has been consolidating within a symmetrical triangle pattern (in yellow) for the past 10 weeks or so, and is ripe for a break out of the triangle. In which direction? Knowing the answer can make some one seriously rich! Triangles are quite unreliable and the break out can occur in either direction.

On an upward break out – which should be accompanied by heavy volumes for the break out to be valid – gold’s price can reach 2000. On a downward break, the price can fall to 1450. There is a third possibility. Gold’s price can continue to consolidate and move sideways through the apex of the triangle (at around 1725). In the latter case, the triangle pattern would fail.

Since gold’s price chart is in a bull market – it is trading well above its rising 200 day SMA – an upward break out has greater probability. But technically, the chart is showing some weakness. Note that the recent rally faced resistance from the 1750 level and failed to reach the upper edge of the triangle. That may be a prelude to a break below the triangle.

Await the break out before taking a decision to buy or sell.

Silver Chart Pattern

Ever since the steep drop below the 200 day SMA about 10 weeks back, silver’s price has been in a sideways consolidation between 28 and 36. The 200 day SMA is beginning to flatten out and should start falling – confirming a bear market.

In my previous post, I had mentioned that silver’s price has been trading within a downward-sloping channel (in yellow). The trend is down, and will remain so till the upper end of the channel is convincingly breached. With manufacturing activities contracting in Europe and the emerging markets, there is little likelihood of a boost in silver’s price any time soon.

Stay away till clarity emerges about a resolution of the Eurozone debt problems.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Dec 2, ‘11

S&P 500 Index Chart

The downward break from a symmetrical triangle pattern (in yellow) observed on the chart of the S&P 500 index last week, met its downward target of 1160. Instead of falling deeper into a bear market, the index made a surprising turn around to climb above all three EMAs in another attempt to return to a bull market.

Note that the S&P 500 is facing resistance from a horizontal dotted line drawn from the apex of the symmetrical triangle. The index did cross above the dotted line on an intra-day basis but has failed to close above it convincingly. Except for a volume spike on Wed. Nov 30 ‘11, when the index climbed above all three EMAs, the volumes during the latest rally hasn’t been great. Rallies need volume support to sustain.

The technical indicators are looking mildly bullish. The slow stochastic has climbed above its 50% level. But the RSI dropped back on to the 50% level after briefly crossing it. The MACD has moved above its signal line, but is still negative. The ROC reached its ‘0’ line, but has slipped back into negative territory. Expect a bit of consolidation before the index makes up its mind about the next move.

The trigger for the sharp rally was the joint decision by six central banks - including the US, Canada, Japan, UK, Swiss and ECB - to make dollar liquidity swaps cheaper by 50 bps to provide more liquidity to global money markets. China simultaneously lowered its liquidity reserve requirements. The steps won’t solve the sovereign debt problems by any means, but will provide some breathing room. The positive US employment data (drop in unemployment rate and increase in non-farm payrolls) and increase in consumer confidence helped the bullish cause.

The economic growth in the US remains painfully slow, and it will take a long time for a full recovery. A good time to be cautiously optimistic – not wildly bullish. 

FTSE 100 Index Chart

The FTSE 100 chart had broken down below the descending triangle pattern (in yellow) last week, but the break turned out to be a ‘false’ one. Some times, break outs turn out to be ‘false’ if the volumes accompanying the break out on the downside are unusually large. That wasn’t the case here. Triangles tend to be unreliable in giving hints about the direction of the eventual break. These are challenges faced in technical analysis.

The FTSE 100 closed the week just above its 200 day EMA, and the technical indicators are pointing to a continuation of the rally. The slow stochastic has risen above its 50% level. The ROC has entered positive territory. The MACD is above its signal line, and about to enter the positive zone. But the RSI has dropped below its 50% level.

Despite the bullishness in the index, the ground realities remain grim. The UK unemployment rate rose to its highest level in 15 years. British factories are facing sharp slowdowns. Consumer confidence is falling. Inflation is up to 5%. The UK economy is showing all signs of dipping into another recession.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices have turned around after ‘false’ break downs from triangle patterns. Both indices may be preparing for a year-end rally – thanks to the action by central banks to flood the money markets with more liquidity. Enjoy the ride while it lasts – eventually some one will have to pay the piper.

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 2 ‘11

Both the BSE Sensex and the NSE Nifty 50 index chart patterns are bouncing around inside downward sloping channels and touching lower tops and lower bottoms. Q2 results have not helped to change the market sentiments. Decent top line growth didn’t translate to much profit growth. Higher interest rates took a toll on margins. Q3 results may be a little worse, as the GDP slowdown starts to affect sales. Despite news-driven counter-trend rallies from time to time, the trend is clearly down and may remain so for a while.

BSE Sensex index chart

The Sensex jumped back above the 15700 level, which provided good support during Aug ‘11 and Sep ‘11. Technically, 15700 has not yet been breached. That will happen when the Sensex closes convincingly below it. On the upside, expect resistances from the 20 week and 50 week EMAs and the upper end of the channel.

The apparent trigger for last week’s rally was the news that the USA has made dollar loans easier for Eurozone countries. The USA is justifiably worried that a Eurozone collapse will have severe repercussions for the global economy in general and the USA in particular. Since the bail-out fund (EFSF) didn’t reach anywhere near the required amount, the USA decided to step-in and steady the rocking boat.

FIIs turned net buyers, and our stock markets benefitted from a global rally. Short covering helped the bulls. Will the rally last much longer? Both external and internal factors deem otherwise. The 51% FDI in multi-brand retail announcement, which can be a game changer for growth and employment in India, has become embroiled in petty politics. The BJP, which had originally mooted the idea, has now become its opponent! Without adequate numbers in parliament to vote the ruling combine out of power, they have resorted to disrupting and shutting down proceedings.

The technical indicators are giving mixed signals. The MACD is entangled with its signal line in negative territory, but trying to move up. The ROC has crossed above its 10 week MA into the positive zone. The RSI has got its nose above the 50% level. The slow stochastic is below the 50% level. All counter-trend rallies provide selling opportunities to the bears.

NSE Nifty 50 index chart

The NSE Nifty 50 chart had a gap-up move on Thu. Dec 1 ‘11 and closed above the 50 day EMA by the end of the week. But volumes slipped as the index moved up. That means follow-up buying was lacking. The government has decided to go slow on implementing its retail FDI policy – possibly to pacify its allies. Such policy flip-flops are not going to help in attracting foreign investments or pushing growth.

Despite the 13 months long down trend, the Nifty valuations are quite a bit higher than other emerging markets. FIIs are unlikely to pour in the kind of money they did last year. The effectively devalued Rupee is making our deficit situation even worse. Inflation has shown some moderation – more due to the ‘base effect’. If prices don’t come down significantly, the ‘base effect’ may work in reverse next year and inflation may start to rise again.

The technical indicators are correcting from oversold conditions, but are not quite bullish yet. The MACD has crossed above its signal line, but remains negative. The ROC has climbed too quickly above its 10 day MA into the positive zone. The RSI has risen towards its 50% level, but is yet to cross it. The slow stochastic has just about moved past its 50% level. Expect a bit of consolidation before the Nifty makes another attempt to reach the upper end of the channel.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns continue to trade within their downward sloping channels. The macro-economic situation is not conducive for a change of trend in the near future. Preserve cash and dispose of underperformers during rallies. Accumulate good large-cap stocks slowly on dips. This is not a time to look for multibaggers among mid and small-cap stocks. They may have fallen a lot already. That doesn’t mean they won’t fall even more.

Stock Index Chart Patterns - BSE Sectoral Indices, Dec 2, '11

The BSE Sectoral index charts were looking down and out when I had looked at them three months back. The Sensex rally in Oct ‘11 was led by the auto and FMCG sectors. The other sectors failed to make much progress.

BSE Auto Index

The BSE Auto index chart has been redrawn from a bearish descending triangle to a more neutral rectangular consolidation pattern. The Oct ‘11 rally propelled the index above its blue down trend line, and all the way up to the 9770 support-resistance level. The index subsequently dropped back inside the triangle to the 8115 level (the lower edge of the rectangle), only to jump up above the down trend line last week.

The technical indicators are correcting the oversold condition but haven’t turned bullish yet. The 200 day EMA is moving sideways with the index oscillating around it. A break below 8115 will push the Auto index into a bear market. Hold.

BSE Bankex

The BSE Bankex had broken below the support level of 11400 in Aug ‘11. The support level turned into a strong resistance level and effectively thwarted all subsequent up moves. The ‘death cross’ in Aug  ‘11 had confirmed a bear market, and the index is falling deeper inside bear territory. Q3 results may be worse. Stay away.

BSE Capital Goods Index

The BSE Capital Goods index struggled vainly to cling on to the support level of 12160 in Sep ‘11, failed to cross above the falling 50 day EMA, and has been sliding down ever since. The sector has been hard-hit by the slow down in infrastructure projects due to the high interest rate regime. It may take a couple more quarters before the sector shows some signs of life. Avoid.

BSE Consumer Durables Index

The BSE Consumer Durables sector tried valiantly to remain in a bull market. The lower top formed in Oct ‘11 seemed to be the last straw that broke the sector’s back, as it plunged into a bear market.

Technically interesting are the three fan lines drawn on the chart. Note how the index kept rising in Sep ‘11 but stopped short of the first fan line. The failure to move above the first fan line was a sign of weakness. The index got good support from the second fan line before breaking below it. A break below the third fan line (where it is currently receiving support) may push the sector deeper into a bear market. Sell.

BSE FMCG Index

The BSE FMCG index is still in a bull market, despite its failure to cross above the first fan line. The 200 day EMA is rising; the 20 day and 50 day EMAs as well as the index are trading above the 200 day EMA. The second fan line is acting as the revised up trend line.

It is the only sector still in a bull market and has prevented the Sensex from collapsing. Now you know why it is my favourite sector. It saves your portfolio during bear markets. Accumulate.

BSE Healthcare Index

The BSE Healthcare index has been trading within a large triangle pattern. In spite of the ‘death cross’ (of the 50 day EMA below the 200 day EMA) in Sep ‘11, the index hasn’t fallen much. It may continue to consolidate within the triangle for some more time before finally breaking out.

Logically, the break out should be upwards, since consolidations tend to be continuation patterns. But triangles are unreliable, so be prepared for a downward break. Hold.

BSE IT Index

The BSE IT index collapsed into a bear market in Aug ‘11. The recovery has been quite stunning. The index rallied for three straight months before stalling at the upper edge of the downward sloping channel. It has been trading within the channel for the past month.

The technical indicators are showing some bullish signs. Unless the Eurozone debt problems get resolved satisfactorily, the IT sector will continue to face headwinds. The good news is that the US economy is finally showing some signs of improvement. Hold.

BSE Metal Index

The BSE Metals index had dropped below its downward sloping channel in Aug ‘11, and has stayed below it – making a series of lower tops and lower bottoms as it falls deeper inside a bear market. Unless the metals sector and the capital goods sector turn around, the Sensex will not be able to come out of the bear’s grip. Avoid.

BSE Oil & Gas Index

The BSE Oil & Gas index is falling within a broad downward sloping channel in a bear market. The government continuous meddling and failing to take tough decisions of decontrolling diesel and kerosene prices is pushing the sector into huge losses and increasing the subsidy burden.

Reliance, the market favourite, is under all kinds of threats and pressures. The company has been an acknowledged expert not just in backward and forward integration of its businesses, but in bending every rule in the book. Thanks to Anna Hazare’s anti-corruption campaign, government officials are now seeing snakes under every rock. Without the support of ONGC and Reliance, the sector will remain in the doldrums. Avoid.

BSE Power Index

The BSE Power index failed to rise above the support-resistance level of 2250 during the Oct ‘11 rally. After breaking down below the downward sloping channel, it is attempting a pullback towards the channel. If it fails to do so, the index may fall much lower. The great hype about the power sector has fizzled out. Avoid.

BSE Realty Index

The BSE Realty sector continues to be the worst performer among the BSE Sectoral indices. After three months of sideways consolidation between 1625 and 1900 the index broke down below the rectangular zone. It is attempting to re-enter the rectangular band but facing resistance from the falling 20 day EMA. Avoid.

(Note: I have suggested a few ‘Hold’s and an ‘Accumulate’. The rest are ‘Avoid’s. That doesn’t mean individual stocks in the sectors should be avoided. One or two may be good contrarian buys. It may be better to avoid basket buying in the underperforming sectors.)

Stock Index Chart Patterns – Hang Seng, Singapore Straits Times, Malaysia KLCI – Dec 2 ‘11

Two weeks back, the chart patterns of the Asian stock indices were in bear grips after a spirited rally during Oct ‘11 that raised prospects of trend reversals. Hopes of a resolution of the Eurozone debt crisis had triggered the rally. Realisation dawned that the funding required for bailing out some of the beleaguered nations may not be readily forthcoming.

Another rally started this week. The US decided to offer dollar loans under less stringent conditions to the Eurozone nations. That raised hopes of cobbling together the necessary bail-out fund. Short covering helped the cause of the mauled bulls. Will the rallies continue or fizzle out?

Hang Seng Index Chart

The Hang Seng index chart had dropped to a low of 17613 a week ago. The technical indicators indicated oversold conditions, so a brief pullback was on the cards. The news of monetary easing in China and the likely availability of US dollars triggered a gap up jump above its 20 day and 50 day EMAs on good volume support.

Note that the index is trading below its recent (Oct ‘11 and Nov ‘11) tops, and well below its falling 200 day EMA. It is technically in a bear market. Even if the current rally takes the Hang Seng above the 200 day EMA, bears are unlikely to give up their control.

The technical indicators are turning bullish, and hinting at a continuation of the rally next week. The MACD has just crossed above the signal line in negative territory. The ROC has risen sharply above its 10 day MA into positive territory. But such sharp moves do not sustain for long. The RSI climbed out of its oversold zone, but failed to cross its 50% level and turned down. The slow stochastic has climbed vertically out of its oversold zone, and managed to cross its 50% level.

Don’t try to chase the rally. Talk of resolution doesn’t mean actual resolution of a deep-seated debt problem in Europe.

Singapore Straits Times Index Chart

The Singapore Straits Times index has been following the footsteps of the Hang Seng index of late – including the gap-up jump above its 20 day and 50 day EMAs. It is also trading below its recent tops and well below its 200 day EMA. Note today’s volume bar. The index closed 11 points higher than yesterday (Dec 1 ‘11) on half the volume. A bearish sign.

The technical indicators are turning bullish. The MACD is negative but has just crossed above its signal line. The ROC has risen too sharply above its 10 day MA into the positive zone. The RSI has turned down before reaching its 50% level. The slow stochastic has just about managed to climb above the 50% level.

The rally may provide the bears with another selling opportunity.

Malaysia KLCI Index Chart

The Malaysia KLCI index seems to be extricating itself from the bear’s grip. It rose above its 200 day EMA and its recent tops to its highest level in more than 3 months. Note that the rally has been accompanied by rising volumes, and the index has formed a bullish pattern of higher tops and higher bottoms.

Does that indicate a change of trend? Not yet. The 20 day EMA and the 50 day EMA need to cross above the 200 day EMA; the 30 point gap (between 1509 and 1539) has to be filled; and the KLCI has to breach the Jul ‘11 top of 1584. The bears won’t give up the fight that easily. Today’s trading bar indicates bull’s are hesitating – the index opened and closed at almost the same level on a high volume day.

The technical indicators are bullish. The MACD has crossed above its signal line in positive territory. The ROC has risen above its 10 day MA into positive zone. The RSI has moved above its 50% level. The slow stochastic has reached the edge of its overbought zone.

Bottomline? The Asian index chart patterns have started counter-trend rallies once again. The Hang Seng and the Straits Times indices are still in bear markets. The KLCI is trying to re-enter a bull market. Next week’s trading should be interesting. Bears may become active again. Conserve your cash till a clearer picture emerges.

Will FDI in retail be good or bad for India?

Let me make it clear at the outset that the people of India should respond to that question. Or, at least a small subset of the people of India who have access to the Internet and may read this post. In other words, you, dear reader, get a chance to voice your opinion.

An opinion based on gut feel, or hearsay, or belief does not count for much. So, I’m going to present some cold, hard facts (from a reasonably reliable though may be a biased source – the current Secretary General of FICCI – published in a newspaper article today). Please read the facts, and then decide.

1. The idea of FDI in retail was proposed by the NDA government 7 years back. (It also found a place in BJP’s election manifesto in 2009. Yes, the same BJP which is now making a song and dance about opposing it and stalling Parliament proceedings.) The UPA is finally taking steps to implement this important economic reform.

A very uncomfortable Yashwant Sinha, when cornered by a TV journalist about the above, said: “Lot of water has flown down the Ganges. I have become older and wiser.” (Why is it that people become wiser when they are no longer in power? It’s a rhetorical question – no need to answer it!)

2. The retail market is expected to double from its current size of $490 Billion to $1 Trillion over the next 20 years. The current share of organised retail (including foreign ones) is expected to quadruple from 4% to 16%. That means, the market size for the ‘kirana’ type stores will go up from the current $470 Billion to $840 Billion over the next two decades. (Forget about job losses!)

3. Large format retail stores with FDI will be permitted in cities and towns with a population of 10 Lakhs or more. About 53 such cities and towns will make the cut today. This number is expected to increase to 76 in the next 20 years. (Not likely to be a plunder of the country like the East India Company did.)

4. More than 30 Crore people are expected to migrate to urban locations from the hinterland over the next two decades. The ‘kirana’ stores are unlikely to be able to meet the extra demand or employ a significant percentage of the influx.

5. To maintain India’s GDP growth rate at 9%, 1.2 Crore additional jobs will need to be created every year for the next 15 years. Such a large number of jobs are unlikely to be created by manufacturing units (which rely more and more on automation) or IT services (which is reaching growth limits).

6. Despite presence of large format retail stores like Spencers, Big Bazaar, Reliance Fresh, Trends - ‘kirana’ stores haven’t gone out of business. Both small and big format stores are co-existing.

7. The real differentiator in retail business is not at the front-end, the actual stores where we go to buy clothes or lipstick or kitchenware. It is the back-end operations involving logistics, supply chain management and sophisticated computer systems. These require knowledge, experience and large investments.

Large format retailers in India have managed the front-end well, raising the shopping experiences of Indians. But they have fallen way short in the back-end operations.

You have the facts. Now, it is your turn to opine. Will FDI in multi-brand retail be good for India, or will it be bad?

Related Post

Is Organised Retail a Great Business or a Mediocre Business?