Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Jan 29, '10

FTSE 100 index chart

In last week's analysis of the FTSE 100 index chart pattern, I had concluded with the following comment:

'Friday's low of 5303 was higher than the Dec '09 low of 5176. The bulls can use that as a rallying point to fight back quickly, otherwise the bears may regain complete control.' 

It was one of those fortuitous occasions that has created such a worldwide following for technical analysis. The index fell further, as expected, and closed at a low of 5146 on Thursday, Jan 28 '10. Technically, that can't be treated as a breach of the Dec '09 low since it was within the 3% 'whipsaw' leeway.

Sure enough, the bulls managed a small pullback and the week's and month's close was at 5189. Does that mean that the bear grip has been loosened? The technical indicators shows otherwise.

The 200 day EMA is still moving up, but the 20 day EMA has dropped to the falling 50 day EMA. The corrective move has been on good volumes, which should be a worrying sign for the bulls.

Both the RSI and slow stochastic are in the oversold zone. The MFI is below the 50% level but managed to stay above the oversold zone. The MACD is falling in the negative zone and is below the signal line.

DAX index chart

The DAX index chart behaved similarly to the FTSE 100 chart. Thursday's low of 5540 was below the Dec '09 low of 5605 but within the 3% leeway. Friday's close was at 5609.

Could this be a 'double bottom' leading to a new up move? That seems unlikely as the bears are not going to give up in a hurry. The technical indicators are supporting the bear cause.

The 20 day EMA has fallen and merged with the falling 50 day EMA. The slow stochastic is well inside the oversold zone. The RSI is just above the oversold zone. The MACD is falling in the negative zone and is below the signal line. The MFI is below the 50% level.

CAC 40 index chart

The CAC 40 chart is looking quite similar to its European counter parts, with a low on Thursday and a pull back on Friday. The recent corrective move has been on good volumes.

The 200 day EMA is rising, but the 20 day EMA has dropped to the falling 50 day EMA. The slow stochastic is in the oversold zone. The RSI has entered its oversold zone. The MFI is below the 50% level. The MACD is falling in the negative zone and is below the signal line.

Bottomline? The European indices are still in bear grip and are poised at tantalising support levels. The bulls may attempt a pull back, but bears are unlikely to release their firm grip. Wait for lower levels to enter.

BSE Sensex Index Chart Pattern - Jan 29, '10

During last week's analysis of the BSE Sensex index chart pattern, I had mentioned that the index was facing a bear attack and may fall further. I had also made the following comment:

'There are previous tops at the 16000 level made in early and late Aug '09. Previous tops usually act as supports. In other words, the 16000-16600 zone should help the bulls to stage a comeback.'

It was almost as if the Sensex wanted to humour me and did exactly what I had surmised! Some times technical analysis works quite well, and this time it did, but it fails just as often.

Let us look at the 3 months bar chart pattern of the BSE Sensex index to see how the holiday-shortened F&O expiry week fared:-

Heavy FII selling continued to take its toll on the world indices, and the Sensex was no exception - despite efforts by the DIIs to stem the rot. A fall on rising volumes doesn't augur well.

With PSU divestments around the corner, the Government can't 'allow' the index to fall too much. End of week and end of month considerations led to some short covering that aided the Sensex to recover somewhat.

The bearish lower tops and lower bottoms pattern during the current correction remains in place. A further fall to test the Nov '09 low of 15331 (at the extreme left of the Sensex chart) can be expected.

The CRR tightening by 75 basis points by the RBI to stem inflation seemed to be taken in its stride by the market. A 50-100 basis point hike was discounted. The system is flush with liquidity. Interest rates may not rise in the near term.

Both exports and imports are down and corporate borrowing from the Indian banking system hasn't picked up much. The economy is still recovering.

The technical indicators are looking pretty weak and hint at a further fall. The RSI and slow stochastic have both entered the oversold zone. The MFI just managed to stay above its oversold zone. The MACD is falling in negative territory and is below the signal line.

Bulls may try a pullback - taking heart from the fact that they managed to defend the 16000 level. The falling 20 day EMA is resting on the 50 day EMA. The 200 day EMA is still moving up and may support a further Sensex fall.

The importance of the 16000 level needs to be emphasised. It is the 61.8% Fibonacci retracement level of the entire bear market fall from 21200 to 7700. Once the bull rally breached that resistance level, it has become a support level.

Bottomline? The BSE Sensex index chart pattern is showing the effects of a bear carnage. Longs don't need to panic as long as 15331 and the 200 day EMA remains unbreached. Investors can start to accumulate fundamentally strong stocks on any break of the two supports.

Stock Index Chart Patterns - Shanghai Composite, Hang Seng, Taiwan TSEC - Jan 29, '10

Shanghai Composite index chart

During my last look at the Shanghai Composite chart pattern 3 weeks back, the bulls were struggling to extricate themselves from the bear's clutches. Things have gone from bad to worse since then - perhaps due to the talk of credit tightening.

The index has once again dropped down to the 200 day EMA where it is hanging on for dear life. The 20 day EMA has given a bearish cross below the falling 50 day EMA.

The slow stochastic has entered the oversold zone. The MACD is negative and below the signal line. The ROC is in negative territory and sliding further. The RSI is trying to keep its head above the oversold zone.

The lower tops and bottoms on the chart pattern show that the bears have a firm grip on the situation.

Hang Seng index chart

In the previous week, the Hang Seng chart was under a severe bear attack. The bears have further consolidated their position. The index has fallen below the crucial support of the 200 day EMA and went below the 20000 level during the last day of the month.

The slow stochastic is well inside the oversold zone. The MACD is negative and below the signal line. The ROC is deep in the negative zone. The RSI has also entered the oversold zone.

Looks like the bull rally has ended for now.

Taiwan (TSEC) index chart

The last look at the Taiwan (TSEC) chart pattern 5 weeks back showed the bulls in irrepressible form, but there were some concerns of the index being overbought. The concerns were not misplaced.

The index continued to make newer and higher highs right through the middle of Jan '10 before the global selling onslaught brought the index crashing down.

The TSEC has fallen through the supports of both the 20 day and 50 day EMAs and fell below the 7500 level on an intra-day basis on the last day of the month.

The slow stochastic has entered the oversold zone. The RSI is about to do the same. The ROC is in negative territory. The MACD has also entered the negative zone and is below the falling signal line.

Bottomline? The Asian indices have succumbed to a strong bear onslaught. Stay on the sidelines for the correction to play out. Better and cheaper entry points should be available in the near future.

Investors may find something fishy about this post

I was pondering about the current uncertain state of the stock market, when I remembered the story of the three fishes that was part of my school curriculum many many moons ago.

There were several ponds within a large tract of land owned by a wealthy land-owner. In one of the ponds lived three large fishes. One was called 'Anagatavidhata'. The second was called 'Pratyutpanyamatitwa' and the third was called 'Jadvabishya'.

Not being literate in the Sanskrit language at that early age, the names sounded rather complicated and unnecessarily long for fishes. The purpose of such strange-sounding names may become clear from the story.

One day, some fishermen were standing near the pond where the three fishes lived and were chit-chatting about the impending wedding of the landowner's daughter. One said: The wedding will surely include a huge feast. Another said: If we can catch some big fishes alive, the landowner will surely give us a nice tip.

Over-hearing such talk, the three fishes went into a huddle to decide the next course of action. Anagatavidhata didn't want to take any chances and decided to escape into the neighbouring pond, which was much larger and deeper and would be easier to hide in. He immediately started to burrow in the mud to dig a hole into the next pond.

Pratyutpanyamatitwa would have none of it. He knew that the wedding was still a couple of months away, so there was no immediate danger of getting caught. Jadvabishya believed that it was the destiny of all fishes to get caught and slaughtered, so why get all worked up about it?

Two months later, the fishermen came with a huge net and cast it into the pond and caught all the fishes in it. Anagatavidhata had already escaped into the neighbouring pond and was saved.

Pratyutpanyamatitwa decided to play dead and did not struggle at all when the net was pulled in. The fishermen took all the fishes that had died struggling to get out of the net, and threw them back into the pond.

Pratyutpanyamatitwa also got thrown back in with the dead fishes and lived happily ever after. Jadvabishya kept desperately struggling to get out of the net, and became a part of the wedding feast.

Moral of the story? When the market starts to tank after making an intermediate top, it is better for conservative investors to book their profits and stay out, so that they can live to invest again at lower prices.

The smarter investors can remain in the thick of it and use their market timing and asset allocation strategies to reap maximum benefit.

Those investors who believe that being able to profit from the stock markets is pre-ordained and depends more on luck than strategy, are destined to lose money.

Stock Chart Pattern - Hindustan Unilever (An Update)

When I analysed the stock chart pattern of Hindustan Unilever more than 8 months ago, this was one of my comments:-

'If you want to preserve your capital during vicious bear attacks and like steady returns from tax-free dividends, there are very few stocks that can match HUL. This is not a stock for day traders. But there are plenty of opportunities for longer term trading.'

Now that the world indices are facing a co-ordinated bear attack by the FIIs, it may be a good time for a re-look at one of the favourite defensive stocks of all time.

Let us peruse the 9 months bar chart pattern of Hindustan Unilever (HUL) to check how the stock chart has played out since May '09:-

The stock peaked at 306 in Jul '09 on high volumes, but a 'reversal day' formation ended with a 3 weeks long sharp correction to 248 in Aug '09, where it got good support from the 200 day EMA. The stock subsequently made lower tops of 295 in Oct '09 and 288 in Nov '09 before sliding down below the 200 day EMA, which is very bearish.

But technical analysis requires verification from several other indicators for a confirmation. Look at the On-balance Volume (OBV). While the stock was making lower tops in Oct and Nov '09, the OBV was making higher ones - a positive divergence.

Even though the stock dropped below the 200 day EMA, it made a higher bottom of 252 last Friday, Jan 22 '10 and is trying to move up above the long-term moving average.  Note that after falling below the 50 day EMA, the 20 day EMA is resting on the 200 day EMA.

The RSI bounced off the oversold zone and reached the 50% level before dipping down. The OBV has been moving sideways with an upward bias as the stock corrected for the past two months. The MACD is in negative territory, but has given a bullish cross above its signal line.

Are you all confused with the conflicting bullish and bearish signals? Time to take a look at a longer term chart - a 3 years closing chart pattern of HUL which gives a completely different picture:-

Now you know why I keep harping about long-term investing! The bull rally in the HUL stock that started in 2007, and progressed upwards right through the bear market in 2008, remains in tact.

The last 2 months' corrective move has merely brought the stock down towards the lower end of the upward trending channel (which can be drawn by connecting the tops and bottoms of the 3 years chart pattern) - giving an opportunity to enter.

Bottomline? With the Sensex undergoing a much needed correction, the HUL stock chart pattern looks poised for another rise within its bullish up-trend channel. Existing investors should hold on. New entrants can expect a 25% gain in the near term - but remember to maintain a tight stop-loss.

What can small investors learn from the Put-Call Ratio (PCR)?

Before launching into a discussion about the Put-Call ratio, I need to make a disclosure. I strongly feel that small investors should stay far away from Futures and Options (F&O) trading. Most options contracts expire worthless and investors lose the premium amount that they had paid.

(I had made this point very clear in 'Chapter 3: What are your Future Options?' of my eBook. Haven't got your copy yet? Get your FREE eBook today!)

A put option owner has the option, but not an obligation, to sell the underlying security (a stock or an index) at a pre-determined price within a specified time. Likewise, a call option owner has the option, but not an obligation, to buy the underlying security at a pre-determined price within a specified time.

The Put-Call ratio (PCR) is calculated by dividing the total number of put options traded by the total number of all options traded. A ratio of more than 1 means more put options were traded than call options (i.e. more investors were feeling bearish). A ratio 1 or less means more call options were traded than put options (i.e. more investors were feeling bullish).

If small investors are supposed to stay away from F&O trading, why should they be interested to learn about the Put-Call ratio? The short answer is: the PCR is a short-term contrarian sentiment indicator.

As stock market indices drop near a bottom during a bear market, investors turn extremely pessimistic in panic and fear and expect to see further downsides. Many more put option contracts are traded than call options, and the PCR ratio keeps going higher.

How high is high? There are no fixed benchmarks. But a ratio of 1.5 or more means that bearishness is becoming excessive. As option traders are generally incorrect in their market sentiment assessment, a high PCR is taken as a contrarian 'buy' signal.

When stock market indices rise to a top during a bull market, investors become excessively greedy and euphoric and expect to see newer highs. More call options are traded than put options, and the Put-Call ratio drops below 1. This is used as a contrarian 'sell' signal.

Most business channels and pink papers make a big noise about the PCR. Just keep your eyes and ears open. Whenever the PCR gets to 1 or less, a correction may be close at hand. When the PCR gets near 1.5 or higher, it may be a good time to enter.

Like all technical analysis indicators, the usefulness of the Put-Call ratio (PCR) should be taken with a pinch of salt. It is not infallible. So never take buy/sell decisions based only on the PCR indicator. It should be used in conjunction with other indicators.

Dow Jones (DJIA) Index Chart Pattern - Jan 22, '10

It was almost like a bolt from the blue. The Dow Jones (DJIA) index chart pattern was moving up merrily, ignoring all concerns about weak fundamentals and low volumes.

The index not only tested the previous high of 10767 on the first day of a holiday-shortened week, but closed at 10725 - the highest close in 15 months (since Oct 1, '08).

The complacency of the bulls may have brought about the sudden and vicious bear attack. In three days, the index lost more than 600 points on strong volumes.

The much-awaited correction seems to be unfolding at last. The Dow has dropped below the 50 day EMA for the first time in more than 6 months. Friday's low of 10133 is below the Dec '09 low of 10207.

Let us look at the 6 months bar chart pattern of the Dow Jones (DJIA) index to check the likely supports to a further fall:-

 

The low made on Nov 2, '09 was 9647. That is a bit below where the rising 200 EMA has reached currently. We can expect support in the 9600-9700 zone, should the correction continue. There are good supports in the 9000-9500 zone as well.

The technical indicators are hinting that the bulls may find it difficult to get out of the bear grip that easily. The ROC has plunged into the negative zone. The RSI is below the 50% level and falling. Likewise for the slow stochastic. The MFI is just above the 50% level, but is ready to drop below.

Note the negative divergences in the ROC, RSI and slow stochastic - all of which failed to make new highs with the index. Will the bulls quickly engineer a pull back, as they have done several times during this rally? It won't be surprising if they do.

Bottomline? The Dow Jones (DJIA) index chart pattern is facing a determined bear attack. Wait and watch for the correction to play out. It may not be prudent to start buying right away.