BSE Sensex and NSE Nifty 50 index chart patterns – Jul 10, 2015

News on the manufacturing front remains indifferent. The IIP number for May ‘15 was 2.7%, compared with 5.6% in May ‘14. The Apr ‘15 number was revised downwards to 3.4% (from 4.1%).

As per provisional figures, FIIs and DIIs were both net sellers of equity during the past week. FII net selling was worth Rs 900 Crores; DII net selling totalled Rs 180 Crores. Sensex and Nifty closed lower for the week.

A Greek bailout is being negotiated. China’s stock market intervention has stopped the fall. Monsoon rains have been fairly widespread. Three concerns for the market are out of the way.

Q1 (Jun ‘15) results will provide the next trigger. Expectations of good results are muted. Any positive surprises from companies will boost their stock prices.

BSE Sensex index chart

The daily bar chart pattern of Sensex crossed and closed above the 28100 level (which is at the middle of the ‘support-resistance zone’ between 27350 and 28800) during the first two days of the week, but formed a small ‘reversal day’ pattern on Jul 7 ‘15.

The subsequent correction found good support from the 50 day EMA. The index has formed a bullish pattern of ‘higher tops and higher bottoms’ from the low of 26307 (touched on Jun 12 ‘15).

Daily technical indicators have corrected overbought conditions, and are looking a bit bearish. MACD has just crossed below its signal line in positive territory. ROC is below its falling 10 day MA, and is trying to emerge from its negative zone. RSI and Slow stochastic have slipped below their respective 50% levels.

Expect some consolidation as the market digests Q1 results.

NSE Nifty 50 index chart

The following comment was made in last week’s post on the weekly bar chart pattern of Nifty: “The possibility of a pullback towards the down trend line (or even a drop below it) can’t be ignored.”

The index did pullback to the down trend line, and formed a ‘reversal week’ pattern (higher high, lower close) – breaking the sequence of three straight higher weekly closes.

Strong volumes on down weeks show that bears are active. However, the index is trading above its rising 50 week EMA in a bull market. That means, the pullback is providing an adding opportunity.

Weekly technical indicators are giving mixed signals, hinting at some consolidation before the up move can resume. MACD and RSI are in bearish zones, while ROC and Slow stochastic are in bullish zones.

Bottomline? The down trends on BSE Sensex and NSE Nifty charts have ended, but bears are still active. Both indices are back in bull territories. Stay invested, or add to existing portfolios. If you are planning to enter the market for the first time, choose a good balanced fund and gradually build up your capital. Leave stock-picking to expert fund managers.

(Note: Are you looking to add good quality mid-cap and small-cap stocks to your portfolio? Subscribe to my Monthly Investment Newsletter. A limited number of paid subscriptions are being offered till July 21, 2015.)

Technical updates – Cairn India and Castrol

After crossing the $105 per barrel mark back in Jun ‘14, WTI Crude oil price fell off a cliff. It touched a low near $40 in Mar ‘15, but bounced up above $60 in May ‘15 – where it consolidated for the next 2 months. Oil’s price has started sliding again.

Lower oil price is good for India’s current account deficit. It is also good for oil marketing companies, and value-added producers like Castrol India. But it is not so good for oil drillers like ONGC and Cairn India.

A look at the 2 years closing charts of Cairn India and Castrol (below) clearly shows which company is benefitting and which one is getting affected by lower oil prices. Cairn India is further hampered by an impending amalgamation with Vedanta.

Cairn India

Cairn India’s stock price touched a 2 years closing high of 382.75 on Jun 10 ‘14 – coinciding with the high touched by WTI Crude oil. It has been in a down trend ever since – failing to match the brief recovery in oil’s price during Mar-Apr ‘15.

In Aug ‘14, the 50 day EMA crossed below the 200 day EMA – the ‘death cross’ (marked by light blue oval) technically confirming a bear market. Since then, all three EMAs have been moving down and Cairn’s stock price is trading below them.

The stock price touched a 2 years low of 165 on Jul 9 ‘15, but three of the four technical indicators – MACD, RSI, Slow stochastic – touched higher lows (marked by blue arrows). The positive divergences can lead to an upward bounce. Use it to exit - in case you are holding the stock.

Castrol

The stock price of Castrol India consolidated sideways with a downward bias from Jul ‘13 to May ‘14 before spiking up with good volumes in Jun ‘14 – about the time WTI Crude oil price started correcting.

The stock closed at a 2 years high price of 532.90 on Dec 5 ‘14, but has been in a down trend (marked by blue down trend line) since then. After slipping below all three EMAs into bear territory, the stock appears to have found a bottom at 427.

The three EMAs are in close proximity of each other – a condition often followed by a sharp price move. Since the stock is trading above its three EMAs in a bull market, the price move is likely to be upwards.

If the stock price breaks out above the down trend line with good volumes, it will be a buying opportunity. If volume is insufficient during the upward break out, expect the stock price to pullback towards the down trend line – which will be another buying opportunity. Keep a stop-loss at 414.

(Note: Castrol’s chart is an example of the benefits of a ‘buy and hold’ strategy for quality stocks. The positive price action happened during 6 months – from Jun to Nov ‘14. The balance 18 months during the 2 years period, the stock price consolidated with a downward bias.)

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

Just when the Greek debt tragedy appeared to be fading out from TV headlines, a Chinese typhoon blew over global stock markets and smashed down share prices.

A Chinese stock market bubble was building for some time due to excessive leveraged speculation. The Shanghai Composite was in a downward trajectory any way, so why the sudden panic?

Expected slowdown in the Chinese economy led to a crash in global commodity prices that had a cascading effect on all markets. FIIs turned net sellers of equity today after 5 straight sessions of net buying.

The daily bar chart pattern of Nifty crossed above the blue down trend line and headed towards the upper edge of the ‘support-resistance zone’ between 8180 and 8630 - after taking the Greek referendum’s ‘No’ vote in stride.

But the index formed a small ‘reversal day’ pattern (higher high, lower close) on Tues. Jul 7, followed by a ‘gap down’ day today that dropped the index to seek support from its 20 day and 50 day EMAs and the blue down trend line.

The break out above the down trend line last week was not accompanied by a significant increase in volumes. That had opened up the possibility of a pullback towards the down trend line.

The Greek and Chinese turmoil provided bears with just the right opportunity to assert themselves.

Overbought conditions visible on technical indicators was another warning of a consolidation or correction. Some more correction, and a drop below the trend line, may be on the cards but bulls can be expected to fight back soon.

The index is trading above its rising 200 day EMA in a bull market. That means pullbacks and dips are adding opportunities.

(Note: If you already have a stock portfolio, and are looking to add good quality mid-cap and small-cap stocks, subscribe to my Monthly Investment Newsletter. Paid subscriptions are being offered till July 21, 2015.)

Gold and Silver charts: slip slidin’ away

Believe we're gliding down the highway
When in fact we're slip slidin' away – Paul Simon

Gold Chart Pattern

After briefly crossing above its three EMAs into bull territory and touching a high of 1232 on May 18 ‘15, the daily bar chart pattern of gold resumed its down trend.

A bearish pattern of ‘lower tops and lower bottoms’ has formed. Gold’s price is trading below all three EMAs in a bear market that is entering its 34th month.

Daily technical indicators are looking bearish. MACD is below its signal line in negative zone. RSI is below its 50% level. Slow stochastic is inside its oversold zone.

Avoid bottom fishing. Volume bars clearly show that brief spells of buying are being immediately followed by selling.

On longer term weekly chart (not shown), all three weekly EMAs are moving down, and gold’s price is trading below them in a long-term bear market. Weekly technical indicators are in bearish zones.

Silver Chart Pattern

The following comments appeared in the previous post on the daily bar chart pattern of silver: “The bullish pattern of ‘higher tops and higher bottoms’ from the Mar ‘15 low of 15.25 remains in force – but may not be for long. Bears are still ruling the chart.”

Silver’s price has dropped below the Apr 24 ‘15 low of 15.55 and touched a low of 15.40 on Jun 30 ‘15 – negating the bullish pattern and establishing a bearish pattern of ‘lower tops and lower bottoms’.

All three EMAs are falling and silver’s price is trading below them in a bear market.

Daily technical indicators are in bearish zones, but showing some signs of upward momentum. MACD is trying to move up towards its signal line in negative zone. RSI has bounced up strongly from the edge of its oversold zone. Slow stochastic is trying to emerge from its oversold zone.

On longer term weekly chart (not shown), silver’s price is trading below its three weekly EMAs in a long-term bear market. Technical indicators are in bearish zones.

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 03, 2015

A dark cloud hanging over global stock markets is the Greek referendum on whether to accept austerity measures proposed by ECB and IMF, or not. As per opinion polls, there is a 50-50 split between ‘Yes’ and ‘No’ votes.

The Greek government has been campaigning for a ‘No’ vote – which can have repercussions on the stability of the Euro zone. Some of the backlash may temporarily affect the Indian market, though the possibility of a ‘No’ vote has been largely discounted.

Reports of increase in government spending, unlocking of stalled projects, a decent monsoon so far, announcements of big-ticket schemes like Smart Cities, Digital India, solar power and irrigation helped to boost bullish sentiments.

FIIs turned net buyers of equity worth Rs 1000 Crores during the first three trading days of Jul ‘15, as per provisional figures. DIIs turned net sellers – with their selling totalling just under Rs 400 Crores. Both Sensex and Nifty closed higher for the third week in a row.

BSE Sensex index chart

In last week’s post on the daily bar chart pattern of Sensex, “…a pullback to the down trend line or, even below it to the 200 day EMA” was mentioned as a possibility. The index did just that on Mon. Jun 29 ‘15, but bounced up to close above its three EMAs and the down trend line in bull territory.

The 28100 level – which is right in the middle of the ‘support-resistance zone – is providing a bit of resistance. This is one of those ‘coincidences’ that frequently appear on price charts, and make technical analysis an interesting pursuit.

The 20 day EMA is about to cross above the 50 day EMA. All three EMAs have started rising, and the index is trading above them in a bull market. There may be technical headwinds ahead, but the correction from the Mar ‘15 lifetime high seems to be over.

Daily technical indicators continue to look bullish and overbought. MACD is rising above its signal line towards overbought territory. ROC is looking a little weak by correcting from its overbought zone and crossing below its 10 day MA. RSI and Slow stochastic are well inside their respective overbought zones, but not showing much upward momentum.

The index appears to be waiting for the outcome of the Greek referendum and Q1 (Jun ‘15) results to resume its up move. Overbought conditions may lead to some consolidation or correction.

NSE Nifty 50 index chart

The following remarks appeared in last week’s post on the weekly bar chart pattern of Nifty: “Expect another interesting fight for dominance between bulls and bears next week – with bulls having a slight advantage.”

Note that the index dropped lower during the week to test support from the lower edge of the ‘support-resistance zone’, but bounced up strongly to close well above its two weekly EMAs and the blue down trend line.

Is it time to celebrate for bulls? The week’s smaller volume bar suggests otherwise. Any upward break out (in this case, above the down trend line) should be accompanied by an increase (and not a decrease) in volumes.

The possibility of a pullback towards the down trend line (or even a drop below it) can’t be ignored. Since the index is trading above its two weekly EMAs in a bull market, any pullback can be used as an adding opportunity.

Weekly technical indicators are turning bullish. MACD is started rising towards its falling signal line, and looks poised to enter positive zone. ROC is showing strong upward momentum by crossing above its 10 week MA and entering positive territory. RSI has just managed to move above its 50% level. Slow stochastic is expected to follow suit.

Bottomline? The 4 months long down trends on BSE Sensex and NSE Nifty charts appear to have ended. Bears are still not out of the game, but are fighting a losing battle. Both indices are back in bull territories. Stay invested. If you have some savings and are itching to enter the market for the first time, start a SIP in a good balanced fund and build up your capital. The stock market can be an expensive teacher.

(Note: If you already have a stock portfolio, and are looking to add good quality mid-cap and small-cap stocks, subscribe to my Monthly Investment Newsletter. Paid subscriptions are being offered till July 21, 2015.)

How price ‘anchoring’ can hurt stock market returns

Price ‘anchoring’ is a cognitive bias. That means, your mind tends to play tricks with you at certain price points. You tend to take decisions based on perceptions or gut feelings that are often illogical.

Next time you visit a shoe shop, take a close look at the price tags on different shoe models. You will come across price tags of Rs 399 or Rs 999 or Rs 1499 or Rs 2999. Is the shop owner trying to fool you?

The answer is: Yes. Apparently, the number 99 has a strange effect on the mind. You know it is less than a 100, and that is some how very effective in closing a sale!

How does this bias work in the stock market? Here are three examples.

1) You have received a ‘tip’ about a bargain stock from a friend and decide to enter it at a price of Rs 32. It had touched a high of Rs 50 a couple of weeks back, but had corrected since then. Your friend says it can’t go any lower.

As often happens, the stock continues its correction after you buy. You wait for a month or two, but the stock fails to cross above Rs 25. You decide to hold on to get back your ‘buy price’. The stock moves up to Rs 28 – but you refuse to sell.

You get ‘anchored’ to your ‘buy price’. Only you know about this price. The market doesn’t, nor does it care. The stock falls below Rs 10 and stays there for the next 3 years. You finally sell it at Rs 6.

2) You do a decent amount of research and prepare a short list of stocks you wish to buy. You start tracking the stocks regularly. You are particularly keen on a stock that moved from Rs 50 to Rs 100, but is hovering around the Rs 85 level.

Finally, the stock dips to Rs 75 and you jump in to buy a decent quantity. You decide to be smart, and sell half your holdings when the stock hits Rs 150. The balance of your holding would then become ‘free of cost’.

Clever strategy – except that the stock refuses to move past Rs 135. You keep holding, but the stock drops to Rs 120. So, you hold some more – and it rises to Rs 135 again. But your mind is ‘anchored’ to Rs 150, and you don’t sell.

After a while (and by this time 2 years may have gone by), the stock drops to Rs 100. You sell off – happy to make a 33% profit on your ‘buy price’. But you lost out on a chance to make 80% profit by not selling at Rs 135.

3) You decide to enter the NBFC segment and short-list a stock trading at Rs 70. The company is a subsidiary of a well-known engineering giant. You decide to get a confirmation from an analyst friend before entering.

The friend suggests a different stock belonging to a less known business house that is trading at Rs 900. But your mind gets ‘anchored’ to the ‘cheaper’ price because Rs 70 is much less than Rs 900.

You think, with limited resources, you can only buy 30 shares at Rs 900. But you can buy 400 shares for Rs 70. So, you ignore your friend’s advice and buy the Rs 70 stock.

What you fail to realise is that the Rs 70 stock is actually not ‘cheap’ at all, because it is trading at a high P/E of 44; whereas, the more ‘expensive’ Rs 900 stock is trading at a much lower P/E of 16.

Sound familiar? It should. Most small investors end up making such errors in decision making due to their cognitive bias. (Yours truly is no exception. Been there, done that.)

The trick to making money in the stock market is to learn from your mistakes by documenting them and not repeating them.

Nifty chart: a mid-week update (Jul 01 ‘15)

FIIs were net sellers of equity for the second month in a row. Their net selling in Jun ‘15 touched Rs 8200 Crores – the highest net selling during a month since Jun ‘13.

DIIs more than compensated by net buying of equity worth Rs 12000 Crores. That may explain the 500 points rally from the Jun 12 ‘15 low of 7940, which has taken the index above the blue down trend line.

After failing to meet IMF’s debt repayment deadline of Jun 30 ‘15 and threatening to leave the Euro zone, Greece’s leaders toned down their rhetoric and agreed to a bailout offer that turned global stock markets bullish.

The monsoon delivered surplus rains during June, but has weakened during the last couple of days – raising the spectre of deficient rains during Jul ‘15.

Auto companies like Maruti, Hyundai and Tata Motors showed marginal growth in sales during Jun ‘15, but sales of M&M and Toyota slipped. Two-wheeler sales were higher except for HeroMoto, which had flat sales.

The daily bar chart pattern of Nifty briefly crossed above the blue down trend line on Thu. Jun 25 ‘15, with decent volume support, but failed to attract follow-up buying from bulls.

The sovereign debt concerns of Greece led to a sharp drop of the index below its three EMAs - to the lower edge of the ‘support-resistance zone’ during Monday’s trading.

Bulls used the opportunity to buy. The index has crossed above its three EMAs and the down trend line to close today at its highest level since May 22 ‘15.

The index has formed a bullish pattern of ‘higher tops and higher bottoms’ after touching its Jun ‘15 low of 7940.

However, daily technical indicators are again looking overbought. Some consolidation can be expected before the index can gather the necessary momentum to cross above the ‘support-resistance zone’.

Note that Nifty has formed an ‘inverse head and shoulders’ pattern with a downward sloping neck line. Since the pattern has formed at the end of a down trend, it is most probably a ‘bottom reversal’ pattern.

The downward sloping neck line has been breached in today’s trading. Since there was no significant rise in volumes - which would have technically validated the breach - bears may engineer a pullback to the down trend line.

Stay invested, or use any dips to add to existing portfolios.