BSE Sensex and NSE Nifty 50 index chart patterns – Jan 08, 2016

Two downward circuits at the Shanghai stock exchange last week sent FIIs into panic selling mode in global stock markets. Global indices faced their worst weekly losses in four years. Indian market wasn't spared.

FIIs were net sellers of equity worth Rs 3550 Crores during the week - almost 50% more than their entire selling in Dec '15. DIIs were net buyers of equity worth Rs 1560 Crores, as per provisional figures.

Sensex lost 4.7% and Nifty lost 4.5% on weekly closing basis. Will there be more correction next week? Is the worst over? Let us see what the charts are telling us.

BSE Sensex index chart

The daily bar chart pattern of Sensex collapsed under the weight of FII selling - losing more than 1200 points on a weekly closing basis. All is not doom and gloom for bulls yet. Here are some bullish signs on the chart:

• The index found support at the 24840 level where it had received support twice before - in Sep '15 and Dec '15 (marked by green arrows)
• All four daily technical indicators are showing positive divergences (marked by blue arrows) by touching slightly higher lows while Sensex touched a low of 24826 last week; its previous low was 24868 (in Dec '15)
• Three of the four technical indicators (ROC, RSI, Slow stochastic) are looking oversold, which can lead to a technical bounce
• Sensex had formed two back-to-back downward 'gaps' in Aug '15; it formed another downward 'gap' on Thu. Jan 7 '16 - which may be an 'exhaustion gap' that forms at the tail end of a bear phase 

Bears may not pay much heed to these so-called bullish signs. Why? Here are some bearish counter-arguments:

• A 'support' (or 'resistance') level gets weakened if tested frequently - unlike a trend line that gets strengthened by each test
• Technical indicators can remain oversold for long periods during bear phases
• Sensex is trading below the blue downtrend line and its three EMAs in bear territory
• If FIIs continue with their selling spree, all technicals will get blown out of the window

Bears clearly have the advantage in the near term. Note that last week's carnage was caused by the collapse in the Chinese stock market. The fall in the Yuan will make Chinese imports even cheaper and exports to China more expensive.

However, there has been no sudden change in India's economy. Tata Motors faced huge selling due to slowdown in its China operations, but it has more than made up the shortfall with its exports to USA and Europe. Once the dust settles and sanity prevails, FII selling should subside. 

On longer-term weekly Sensex chart (not shown), the index is trading more than 1400 points above its rising 200 week EMA. The long-term bull market is intact.

What should small investors do now? Depends on their investment horizon. Short-term, one should stay with the trend - which is down. Long-term, one can use the dip to accumulate fundamentally strong stocks with appropriate stop-losses.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty faced resistance from its falling 20 week EMA, and dropped sharply to an intra-week low of 7556 - testing support from the 7540 level. 

The long-term 'support/resistance' level had earlier provided support in Aug '14, Sep '15 and Dec '15 (marked by green arrows). Will the support hold? The large volume bar of last week may be a sign of 'selling exhaustion'.

The following comment was made in a mid-week Nifty update: "There is a very good chance that bulls will strongly defend the 7550 level." Despite heavy FII selling last week, bulls were able to defend an important support level. The real test of their resolve will come next week.

Weekly technical indicators are looking bearish and showing downward momentum. MACD is falling below its signal line in negative zone. ROC has dropped inside its oversold zone. RSI and Slow stochastic are moving down below their respective 50% levels.

Some more correction can't be ruled out. If 7540 gets breached convincingly, likely lower support zones have been mentioned in the mid-week update.

Bottomline? Chart patterns of Sensex and Nifty are again testing long-term support levels. The support levels may get breached if FII selling continues. Long-term bull markets are intact, as both indices are trading above their rising 200 week EMAs (not shown). Use the dip to accumulate slowly, but maintain suitable stop-loss levels.

(Note: Don’t worry about index fluctuations! Learn how to choose fundamentally strong mid-cap and small-cap stocks. Become a paid subscriber of my Monthly Investment Newsletter. A limited number of new subscriptions are being offered till Jan. 21, 2016. Enrolments have started. Contact me for details:mobugobu@yahoo.com.)

Stock Buybacks: A Good Thing or Not?

There are many ways in which a company rewards its shareholders. The most common methods are bonus issues, rights issues, dividends, stock splits and share buybacks.

Bonus issues increase the equity capital. The market price of equity shares gets adjusted according to the issue ratio. So, in theory, there is no gain for shareholders. The company can benefit because the higher capital enables them to borrow more. 

In reality, share price often rises following a bonus issue - particularly for established and financially strong companies - as the lower bonus-adjusted price attracts buyers.

Rights issues increase the equity capital, and sometimes also the reserves if the rights issue is offered at a premium to face value. If the issue price is lower than the market price, shareholders benefit through capital appreciation, even though the market price gets adjusted in the same ratio as the rights issue.

Dividends benefit shareholders, because it is tax-free cash in their hands. For companies, the cash outgo indicates that the company does have sufficient resources to pay dividends. 

If the company has to resort to debt in order to pay dividend (or tax), then it is a 'red flag'. This is why studying the Cash Flow statement in Annual Reports is so important. It gives a clear view of a company's cash position.

Stock splits do not increase the share capital of a company. The face value of equity shares get reduced and the number of shares increase proportionately. Again, in theory, there is no benefit for shareholders.

However, the increased number of shares in demat accounts usually leads to near-term selling. Eventually the selling subsides. The lower market price of the split shares attracts buyers, pushing up the market price. 

Here is an example of how bonus and splits can enhance value for long-term shareholders.

Back in 2002, ITC shares of Rs 10 face value were trading at around Rs 600 or so. If someone had bought 100 shares, his investment would be worth Rs 60000 - not a small sum 14 years ago. 

If s/he had the foresight to hold on till today, the holding would have increased to 3000 shares of Rs 1 face value - thanks to two bonus issues (1:2 and 1:1) and a stock split (10:1).

At the current (corrected) market price of Rs 300, the shareholding would be worth Rs 9 Lakhs - a 15-fold increase, not counting the substantial dividends paid each year.

Share buybacks - sometimes at a premium to market price - reduce the equity capital to the extent of number of shares bought back. The bought-back shares are extinguished. Shareholders get an exit opportunity at a profit.

In case they hold on, the market price tends to rise after the buyback (due to higher EPS and lower P/E) - providing capital appreciation.

Read more about pros and cons of share buybacks in this article.

Nifty chart: a midweek update (Jan 06 ‘16)

Global stock markets are perfect examples of the proverb: "Misfortune never comes alone." First it was the Chinese economic slowdown and the Saudi-Iran tussle that sent markets crashing on Mon. Jan 4 '16.

Today came twin shocks of Chinese Yuan devaluation and testing of a hydrogen bomb by North Korea. Jittery markets slipped further.

FIIs have been net sellers of equity worth Rs 1000 Crores during the first four trading days in Jan '16. Net buying in equity by DIIs of a paltry Rs 300 Crores was not enough to stop Nifty's fall of 220 points.

The long-term closing chart pattern of Nifty 50 may be forming a 'rounding top' reversal pattern that is more clearly visible on the 200 day EMA. Such a pattern will get completed if the index falls convincingly below the long-term support level of 7550.

The index is in the process of retracing the entire rise of 3672 points from the Aug '13 closing low of 5285 to the Mar '15 top of 8957. A 38.2% Fibonacci retracement gives a level of 7555 - which coincides almost exactly with the closing low of 7559 touched in Sep '15 and the long-term support level of 7550.

Daily technical indicators are looking bearish and showing downward momentum. That means this week's correction isn't over yet.

There is a very good chance that bulls will strongly defend the 7550 level. But what if FII selling continues and 7550 is breached? How low can Nifty fall?

Here are some possibilities:

• a 50% Fibonacci retracement can take the index down to 7120
• two support/resistance levels are marked by dotted lines at 6840 and 6360
• downward target of the 'rounding top' pattern is 6160

Before you rush towards the exit gate, please remember that Nifty is trading in a long-term bull market - as it is trading well above its rising 200 week EMA (not shown on chart). Nifty should find a floor somewhere between 7550 and 7120 - in case 7550 does get breached on a closing basis.

The corrective move during the past 10 months is a bull market correction that will enable the index to improve its technical 'health' and enable it to rise to new highs.

When? That's a million dollar question. I'm not a betting person, but if I were I would place a bet on "sometime after Sep '16".

Last, but definitely not the least, a BIG thank you to blog follower Karthik Raghavan Ravi for pointing out the 'rounding top' pattern on the long-term chart of Nifty. 

(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 Jan 21, 2016.)

Gold and Silver charts: desperately seeking strong floors

Gold chart pattern

The daily bar chart pattern of gold is trying to find a floor to its relentless fall. The zone between 1040 and 1060 has provided good support during Dec '15 - raising bullish hopes.

Not much should be made of the high volume jump to test resistance from the falling 50 day EMA on Jan 4. That appears to be a knee-jerk reaction to the sharp fall in global stock markets.

China's economy continues to slow down. A Shia-Sunni tussle is brewing in the Middle East. Neither news should have come as a big surprise to gold traders.

Daily technical indicators are showing some bullish signs. MACD has been rising above its signal line for the past month, but remains in negative zone. RSI and Slow stochastic are in neutral zones. 

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

Silver chart pattern

The daily bar chart pattern of silver touched multiple bottoms in the price band between 13.60 and 13.80 during Dec '15, raising bullish hopes of a recovery in price.

That is unlikely to happen anytime soon. The falling 50 day EMA is proving to be an insurmountable resistance. 

Despite a sharp intraday rise with strong volumes on Jan 4, silver's price closed well below its three daily EMAs in a bear market.

Daily technical indicators are in bearish zones, and not showing any signs of upward momentum.

On longer term weekly chart (not shown), silver’s price is trading well below its three weekly EMA in a long-term bear market. Weekly technical indicators are in bearish zones, and moving sideways.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Dec 31, 2015

S&P 500 Index Chart

Trading activity was expectedly at a low ebb in the last trading week of the year. The daily bar chart pattern of S&P 500 tested the support/resistance level of 2080, but dropped down to seek support from its 200 day EMA.

The index has been in a downtrend since touching its Nov 3 '15 top of 2116, and has formed a bearish pattern of 'lower tops and lower bottoms'.

Daily technical indicators are turning bearish. MACD failed to enter positive territory, and is turning down towards its rising signal line. RSI has slipped below its 50% level. Slow stochastic has dropped from its overbought zone.

The index may once again fall down into bear territory - below its three daily EMAs.

On longer term weekly chart (not shown), the index closed at its 20 week EMA, but above its 50 week and 200 week EMAs in a long-term bull market. Weekly MACD and RSI are in neutral zones, but Slow stochastic is in bullish zone and showing slight upward momentum.

FTSE 100 Index Chart

In a truncated trading week due to New Year holiday, the daily bar chart pattern of FTSE 100 climbed above the 6300 level, but dropped down to seek support from its 50 day EMA.

The index is trading nearly 200 points below its falling 200 day EMA in a bear market.

Daily technical indicators are giving mixed signals. MACD is rising towards its positive zone, but has failed to enter it. RSI is sliding down towards its 50% level. Slow stochastic is well inside its overbought zone, and beginning to turn down.

The index is expected to fall down below its 50 day and 20 day EMAs. 

On longer term weekly chart (not shown), the index faced resistance from its falling 20 week EMA, and closed below all three weekly EMAs in a long-term bear market. Weekly MACD is inside its oversold zone, but showing some upward momentum. RSI and Slow stochastic are in neutral zones.

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 01, 2016

For the second month in a row, and in 4 of the last 5 months, FIIs were net sellers of equity. Their net selling was a little under Rs 2400 Crores during Dec '15. DIIs were net buyers of equity worth Rs 6300 Crores in Dec '15.

How come both Sensex and Nifty closed flat for the month? Probably because FIIs were selling large-cap index stocks, while DIIs were buying non-index large-cap and mid-cap stocks.

Maruti, Hyundai, Ford reported double digit growth in domestic car sales during Dec '15. M&M reported token growth. Tata Motors reported 33% de-growth despite launching new car models, but commercial vehicles showed 6% growth. Eicher reported 40%+ growth in 2-wheeler and CV sales.

Core sector manufacturing numbers for Nov '15 were weak - perhaps due to festive season holidays. That may reflect on the IIP number.

BSE Sensex index chart

The daily bar chart pattern of Sensex rallied past its 50 day EMA but could not proceed much further. F&O expiry and New Year eve celebrations kept trading activities muted.

Resistance from the falling 200 day EMA and the blue downtrend line looms above. A convincing move above the downtrend line is necessary to technically confirm the 'double bottom' reversal pattern and end the 10 months long bear phase.

Daily technical indicators are looking bullish, but overbought. MACD is rising above its signal line in positive zone. ROC faced resistance from the edge of its overbought zone, and has crossed below its rising 10 day MA. RSI and Slow stochastic have entered their respective overbought zones.

Expect some correction next week - which will improve the technical 'health' of the chart. Use any dip to add, as the index continues to trade in a long-term bull market, but use appropriate stop-loss levels.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty closed higher for the third week in a row, but could not overcome resistance from its falling 20 week EMA. There is a good possibility that bears will use the opportunity to sell.

Why?  Because the NSE breadth indicator TRIN (not shown) has reached its extreme overbought zone. The NSE A-D line (not shown) is showing positive divergence by moving above its Dec '15 top. So, any correction may not be a deep one.

Weekly technical indicators are showing bullish signs. MACD is about to cross above its signal line in negative zone. ROC is trying to emerge from its oversold zone. RSI has managed to cross above its 50% level. Slow stochastic has bounced up after receiving support from the edge of its oversold zone.

Bulls still have a lot of work left before they can help the index to resume the next leg of its up move.

Bottomline? Chart patterns of Sensex and Nifty bounced up from long-term support levels - forming 'double bottom' reversal patterns that are still awaiting technical confirmation. Long-term bull markets are intact, as both indices are trading well above their rising 200 week EMAs (not shown). Use any dip to add/enter, but maintain suitable stop-loss levels.

Announcing re-opening of paid subscriptions to my Monthly Investment Newsletter

I am pleased to announce the re-opening of paid subscriptions to my monthly investment newsletter for a 3 weeks period from Jan 1-21, 2016. A limited number of subscriptions are being offered to blog visitors, blog followers, blog subscribers and twitter followers – on a first-come first-served basis – to enable me to provide personalised attention and guidance to each subscriber.

If you are interested in subscribing, please send an email to: mobugobu@yahoo.com at the earliest for details.

The newsletter has completed 72 issues, with its share of hits and misses. Though the stock market touched a lifetime high in March, 2015 was a negative-growth year for Sensex and Nifty after three years of positive growth. Many mid-cap and small-cap stocks had made spectacular gains - which made stock selection difficult because finding value was a challenge. The 10 months long correction since Mar '15 has brought down most selected stocks from their peaks – affecting year-end performance. It is gratifying that subscribers have still kept faith in my stock picking abilities.

Those who have been regularly following my blog posts over the past few years already know what kind of stocks to select, and what type of stocks to avoid. The guiding principle is to choose well-managed, financially prudent companies that generate cash from operations, have low debt, give steady (rather than spectacular) returns and have growth prospects.

Non-subscribers may be interested to know how the recommended 18 mid-cap and small-cap stocks have fared during the past 18 months. Without revealing the names of the stocks (it won’t be fair to my subscribers to do so), here is a brief summary of performance as on Dec 31, ‘15:

• 9 stocks have gained more than 25%, of which 4 have gained between 25-50%; 4 have gained between 50-100%; 1 has gained more than 150%
• Of the balance 9 stocks, 2 have gained between 10-25%, 5 have gained between 0-9% and 2 have lost 9-10%
• 17 of the 18 stocks touched higher levels after my recommendations

That may not seem great, but remember that the market has been in a down trend for the past 10 months - thanks to FII selling that affected large-cap stocks the most. So, let me provide a different perspective on the above performance: 

By blindly investing (not recommended) Rs 20,000 in each stock and holding on till Dec 31 ‘15, a subscriber would be sitting on gains of close to Rs 114,000 (31.7%) – comfortably outperforming the Sensex (3%), Nifty (6%), BSE Mid-cap index (19%), and BSE Small-cap index (16%).

What is important to understand is that none of these stocks were ‘cheap’ – fundamentally strong stocks rarely are - and some had already run up a lot when they were recommended.

If you wish to add fundamentally strong mid-cap and small-cap stocks with growth potential to your portfolio, why wait? Just subscribe to my Monthly Investment newsletter. Send me an email (at mobugobu@yahoo.com) soon – subscriptions will close on Jan 21, 2016.