5 Rules to take your Trading to the Next Level

In yesterday’s post, a link to an article by Greg Guenthner of Daily Reckoning – that commented on the first 4 of a set of investment rules of Ned Davis - was provided.

These rules have been developed by Davis during 35 years of a successful investment career. Understanding and mastering these rules – which are universal in nature, i.e. not specific to a particular region or market - will help you to become a better investor.

Here are the balance 5 rules:

5. Be disciplined

6. Practice risk management

7. Remain flexible

8. Money management rules

9. Those who do not study history are condemned to repeat its mistakes

Guenthner’s comments of these rules can be found here.

An hour-long interview of Ned Davis is available at this link.

4 Rules You Must Know to Beat the Market

In a recent article in Daily Reckoning, Greg Guenthner discussed the first 4 of a set of investment rules followed by Ned Davis (of Ned Davis Research Group). During 35 years of a successful investment career, Davis has used these rules to beat the market.

If you want to succeed in the market – whether it is in a bull phase, or a bear phase or a sideways consolidation phase – you need to understand and master these set of rules.

Here are the first 4 rules:

1. Don’t fight the tape (i.e. the trend)

2. Don’t fight the Fed (i.e. RBI in our case)

3. Beware of the crowd at extremes

4. Rely on objective indicators

Read the comments by Guenthner on the above rules here.

Nifty chart: a mid-week update (Apr 08 ‘15)

RBI maintained status quo on interest rates, and nudged banks to lower their lending rates. Banks had been reluctant to pass on the benefit of RBI’s two earlier 25 bps interest rate cuts to borrowers.

SBI, HDFC Bank, ICICI Bank and Axis Bank have lowered lending rates by a modest 15 bps (0.15%) each. More banks are likely to follow suit. There are some signs of increasing capital expenditure activity – going by recent corporate announcements.

The government has been proactive with its share divestment plan for the new financial year. The REC OFS (offer for sale) went through smoothly. Expect more such offers in the near term.

FIIs have been net buyers of equity worth Rs 800 Crores during the first 4 trading days of this month (though they were net sellers today). DIIs have also been net buyers of equity worth Rs 80 Crores during the same period.

The daily bar chart pattern of Nifty corrected below its 20 day and 50 day EMAs and the Up trend line 2 to the lower edge of the ‘support-resistance zone’ during Mar ‘15.

It has bounced back spiritedly to retrace more than 50% of its 850 points fall. The 200 day EMA continued to rise during the correction – indicating that the long-term bull market was intact.

Nifty has managed to climb out of the ‘support-resistance zone’ with rising volume support – which is a bullish sign. However, Up trend line 2 has not been convincingly crossed yet.

Daily technical indicators have corrected oversold conditions, and are turning bullish. MACD has crossed above its signal line, but is still in negative zone. ROC has crossed above its 10 day MA to enter positive zone. RSI is facing some resistance from its 50% level. Slow stochastic has risen to the edge of its overbought zone.

Bulls still have a little work left. A strong move above 8850 should send the bears packing.

Gold and Silver charts: bear market rallies approaching strong resistance zones

Gold Chart Pattern

The daily bar chart pattern of gold bounced up strongly from the ‘support zone’ (between 1130 and 1150), and climbed above its 20 day and 50 day EMAs but faced resistance from the 1220 level.

The possibility of an upward bounce – due to oversold technical indicators - was mentioned in the previous post. A likely interest rate hike by the US Fed may have also fuelled some buying.

Note that after dropping below its 20 day and 50 day EMAs in the last week of Mar ‘15, gold’s price rallied to breach the 1220 level intra-day on Apr 6, but dropped to close below it.  In the process, gold’s price may have formed another ‘inverse head and shoulders’ reversal pattern – with the ‘neckline’ at 1220 - from which an upward break out can be expected.

Gold’s price had earlier formed a larger ‘inverse head and shoulders’ pattern (during Sep to Dec ‘14). An upward break out from that pattern had propelled gold’s price above the ‘support-resistance zone’ (between 1240 and 1280) in Jan ‘15. Just when a trend reversal looked imminent, bears struck viciously and pushed gold’s price down below its three EMAs.

Daily technical indicators are in bullish zones. MACD is moving above its signal line and entered positive territory. RSI is rising above its 50% level. Slow stochastic has re-entered its overbought zone. A continuation of the rally is likely to face resistance from the falling 200 day EMA – and stronger resistance from the ‘support-resistance zone’.

On longer term weekly chart (not shown), gold’s price closed just above its 20 week EMA, but is trading below its falling 50 week and 200 week EMAs in a long-term bear market. Technical indicators are in bearish zones, but showing signs of upward momentum.

Silver Chart Pattern

The daily bar chart pattern of silver bounced up strongly from the ‘support zone’ (between 15 and 15.50), and climbed above its 20 day and 50 day EMAs but faced resistance from the 17.50 level.

It dropped to seek support from its entangled 20 day and 50 day EMAs, bounced up once more but fell short of the 17.50 level and closed just below 17.

Daily technical indicators are in bullish zones. MACD is rising above its signal line in positive territory. RSI is treading water above its 50% level. Slow stochastic dropped from its overbought zone, but is trying to move up again.

The bear market rally may continue a bit longer, but is expected to face resistance from the falling 200 day EMA and the ‘support-resistance zone’ (between 18 and 19).

On longer term weekly chart (not shown), silver’s price closed above its 20 week EMA, but is trading below its 50 week and 200 week EMAs in a long-term bear market. Technical indicators are in bearish zones, but showing signs of upward momentum.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Apr 02, 2015

S&P 500 Index Chart

In a holiday-truncated trading week, the daily bar chart pattern of S&P 500 closed marginally higher on a weekly basis, but dropped below the large ‘rising wedge’ pattern once again after briefly pulling back inside the ‘wedge’.

The index closed below its 20 day and 50 day EMAs, but is trading well above its rising 200 day EMA in a long-term bull market. Volumes on Tue. and Wed. (which were ‘down days’) were higher than volumes on Mon. and Thur. (which were ‘up days’). Bears are in no mood to give up just yet.

Some good news for bulls: the index stayed above the 2040 level during the week. A drop below 2040 will technically confirm a ‘double top’ reversal pattern (forming within the large ‘rising wedge’ pattern).

Technical indicators are in bearish zones. MACD is falling below its signal line in negative territory. RSI and Slow stochastic are below their respective 50% levels. The stage is set for a fight for control of the 2040 level.

On longer term weekly chart (not shown), the index bounced up after receiving support from its 20 week EMA, and closed above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones but not showing any upward momentum. The index may be in the midst of a topping formation.

FTSE 100 Index Chart

The following remarks appeared in last week’s analysis of the daily bar chart pattern of FTSE 100: “The prospect of a drop below the ‘wedge’ is looming large.”

The index fell sharply below the ‘wedge’ on Tue. Mar 31, supported by strong volumes (not shown on chart). On the next two days, the index pulled back to the lower edge of the ‘rising wedge’ pattern, but closed below its 20 day and 50 day EMAs – losing 22 points on a weekly basis.

The index is trading above its rising 200 day EMA in a bull market – but for how much longer?

Technical indicators are in bearish zones. MACD has entered negative zone below its falling signal line. RSI is below its 50% level, but showing mild upward momentum. Slow stochastic is plummeting towards its oversold zone.

A drop below the 200 day EMA may signal a trend reversal.

On longer term weekly chart (not shown), the index bounced up after receiving support from its 20 week EMA, and closed above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but showing downward momentum.

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 01, 2015

In a holiday-shortened trading week of just 3 days, DIIs were net buyers of equity. FIIs were net buyers on Tue. and Wed. (Mar 31 and Apr 1). Both Sensex and Nifty bounced up from important support zones.

For the month of Mar ‘15, FIIs were net buyers of equity worth Rs 6600 Crores (as per provisional figures). Thanks to a late buying surge, DIIs were also net buyers of equity – but only worth Rs 200 Crores. So, who was responsible for the correction during Mar ‘15? (Hint: read last week’s post.)

HSBC’s Purchase Manager’s Index (PMI) for Mar ‘15 was 52.1 – higher than 51.2 in Feb ‘15, but lower than 52.9 in Jan ‘15. (A reading above 50 indicates economic expansion.) But the average reading for Q4 at 52.06 was lower than the Q3 average of 53.13.

As per the survey, manufacturing growth is improving but capacity constraints and inflation are stifling growth.

BSE Sensex index chart

The following comment appeared in last week’s analysis of the daily bar chart pattern of Sensex: “Technically, a turnaround seems just around the corner.”

Sensex filled the ‘gap’ near the lower edge of the ‘support-resistance zone’ (between 27350 and 28800) and appears to have resumed its up move. However, the index is facing resistance from its falling 20 day and 50 day EMAs.

A convincing move above 28800 is required break the bear shackles. Will it happen soon?

Daily technical indicators have corrected oversold conditions, but remain in bearish zones. MACD is moving up towards its falling signal line in negative zone. ROC has crossed above its 10 day MA, but is yet to enter positive territory. RSI and Slow stochastic have emerged from their respective oversold zones, but are below their 50% levels.

Bears may put up a fight to defend the 28800 level. Forthcoming Q4 results – not expected to show much improvement over Q3 – will decide their fate.

Note that the 200 day EMA is still rising and the index is trading above it in a long-term bull market. The correction gave a good adding opportunity.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty rallied above its 20 week EMA but is facing resistance from the upper  edge of the ‘support-resistance zone’ (between 8180 and 8630).

The index has pulled back to the dark blue Up trend line 2 after breaching the trend line in the previous week. Is the pullback a selling opportunity? Bears will say ‘Yes’.

Bulls will point out that the index is in a long-term bull market, and is trading above both its weekly EMAs. Also, the breach below the trend line was not convincing (i.e. the previous week’s close was within the 3% ‘whipsaw’ limit).

Three of the weekly technical indicators are looking bearish. MACD is falling below its signal line in positive zone. ROC is falling below its 10 week MA in negative zone. Slow stochastic is falling below its 50% level. However, RSI is looking bullish by bouncing up from its 50% level.

Some consolidation can be expected at current levels before Nifty resumes its up move.

Bottomline? BSE Sensex and NSE Nifty charts show upward bounces from important support levels, but bulls need to overcome strong overhead resistances. Both indices are in long-term bull markets. The strategy in a bull market should be to ‘buy the dips’, or, if you are holding from much lower levels, just ride out such corrections.

Evolving IT Services Market Warrants Attention

The global IT services market may be worth $1 Trillion, but it is highly fragmented. The top three players – IBM, HP, Accenture – account for 12.5% global market share. Other top players – like CAP Gemini, Computer Sciences Corp., Cognizant – account for around 1% share each.

The bulk of the market is shared by hundreds of smaller companies that do low margin but regular work like Business Process Outsourcing, software maintenance, data centre operations, application hosting. Most Indian companies get their bread and butter from such ‘outsourced’ work.

Some of the larger outfits – like TCS, Infosys, HCL Tech – have moved up the value chain through higher margin but more discretionary systems integration projects. But they are well behind the big boys in the top end, high margin consulting business.

In a recent article, Andrew Lange of Morningstar has provided an overview of the current global IT services market and its prospects. Those already invested in the sector, and particularly those planning an investment in some of the smaller Indian players, may find the article useful.