BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jan 07, ‘11

Readers and followers of this blog who have been reading my regular updates of the BSE Sensex and NSE Nifty 50 index chart patterns should not be too surprised by the sharp drop in the markets during the first week of the new year. I had given ample warnings about a couple of bearish possibilities. One of which – an ‘end run’ – seems to be playing out.

BSE Sensex Index Chart

The break out from the symmetrical triangle pattern in the last week of Dec ‘10 was not accompanied by a volume spurt. The technical indicators on the weekly charts were looking bearish. The combined effect of the two led to a ‘false’ break out. The Sensex has dropped back inside the symmetrical triangle and found support at the rising 100 day EMA.

Will the support hold? The technical indicators are not conducive. The MACD is still positive but has dipped below the signal line. The ROC has dropped below its 10 day MA into negative territory. Both the RSI and slow stochastic have fallen sharply below their 50% levels from their overbought zones.

The near-term supports can come from the upward sloping trend line of the symmetrical triangle (at 19400); the rising 200 day EMA (at 18850) and the Aug ‘10 top (at 18500). Can the Sensex go lower? Yes, it can – but then we may be looking at a trend reversal. Till the index trades above its rising 200 day EMA, technically the bull market remains in tact.

On the upside, expect resistance from the downward sloping trend line forming the symmetrical triangle, the 50 day EMA and the 20 day EMA – in that order.

NSE Nifty 50 Index Chart

In last week’s post, I had kept the possibility of an ‘end run’ open. The ‘false’ upward break out from a symmetrical triangle followed by a sharp drop on increasing volumes seems to be in progress.

The fall on rising volume does not augur well for the bull market in the Nifty 50 index. The weakness in the technical indicators are pointing to a deeper correction, and a possible test of the 200 day EMA. Immediate down side targets for the Nifty are 5800 (upward sloping trend line of the symmetrical triangle); 5650 (200 day EMA) and 5550 (Aug ‘10 top).

Any bounce up on high volumes from the current level, or from any of the three down side targets mentioned, would be a buying opportunity. That is likely only if the Q3 results surprise on the up side. Interestingly, the heavy selling by FIIs on Friday (Jan 7 ‘11) was more than covered by the DII buying, still the indices fell. The logical explanation is that the FIIs mostly sold index-constituent stocks.

Food inflation continues to rise – with the Government coming out with new explanations every time. The Minister for Food and Agriculture should be put on the docks for ineptitude, if not downright corruption. RBI may be forced to hike interest rates, which will be detrimental to the bull market.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are once again following a downward trajectory – as it has done in 7 out of the last 10 Januarys. Long-term investors should hold with a stop-loss at the respective Aug ‘10 tops. New entrants should wait for an upward bounce from the support levels mentioned.

Gold Chart Pattern: ready for a decent correction?

A look at the 1 year gold chart pattern tells me that a bullish or a bearish signal – like beauty – is in the eyes of the beholder. For the past 10 years, gold’s price has seen a parabolic rise with only the correction in 2008 dropping it significantly below the 200 day SMA. Since then, gold prices have moved up almost vertically.

Every one and his brother-in-law is buying gold and advising others to do likewise. As a contrarian investor, one should take this as an indication that gold’s price has topped out – at least for the short-term. Has it?

The 1 year gold chart pattern clearly indicates that the upward move in price has hit a technical road block. Since Oct ‘10, gold’s price chart has been making higher bottoms but the Nov 9 ‘10 top of 1421 hasn’t been breached on a closing basis yet (though prices did move higher on intra-day basis).

Note that the Nov ‘10 top was tested twice – on Dec 7 ‘10 and Dec 29 ‘10. That seemed to form a bullish ‘ascending triangle’ pattern (rising bottoms and a flat top) from which the likely break out is upwards. The upward break out may not happen due to several reasons. The strong performance of the US and UK stock markets over the past couple of months is one.

The Dec 29 ‘10 top of 1412 was a lower than the Dec 7 ‘10 top of 1420. The low of 1368 on Jan 5 ‘11 (yesterday) found support on the up trend line connecting the Oct ‘10 and Nov ‘10 lows. If gold’s price falls any further, it will breach the up trend line and drop below the ascending triangle. If the 1363 level (low touched on Dec 16 ‘10) is breached, a bearish pattern of lower tops and lower bottoms will form.

Most bearish of all is the ‘triple top’ pattern formed by the three tops on Nov 9, Dec 7 and Dec 29 ‘10. The pattern will get confirmed only if gold’s price drops below 1340. In which case, the price may fall to 1260. If all this sounds like ‘gloom and doom’, let me assure gold investors that it isn’t.

Corrections are normal and good for the long-term sustainability of bull markets. Gold’s price has dropped below the 14 day SMA, which is negative in the short-term. But it remains well above the rising 200 day SMA, which means there is no threat to the long-term bull market.

Existing holders can stay invested with a stop-loss at 1250 (level of the 200 day SMA). New entrants can use any dip below 1340 to accumulate.

Why do retail investors fall prey to the ‘get rich quick’ syndrome?

Most retail investors enter the stock market for the first time near a peak, after hearing about their friends or relatives who became rich overnight by investing in stocks. They think – like many poor souls before them – that getting rich quickly from the stock market is the best idea since sliced bread.

In a country with a large number of educated youth and inadequate employment opportunities, there are enough con-men and charlatans trying to make a quick buck by promising jobs. They usually lure unemployed youth with guaranteed jobs – even overseas jobs - if they can first cough up a sufficiently large amount of money.

One can appreciate and understand why an unemployed person may get tricked by such scams. He has a genuine need of money to sustain himself and his family. But it is really shocking that young people who are not just well-educated but also well-employed falling prey to the ‘get rich quick’ syndrome.

After announcing the re-opening of subscriptions to my Monthly Investment Newsletter in a recent post, I received an email that went something like this:

‘I lost a large sum trading intra-day. I went long in Nifty futures. The spate of scams made the market tank. Booked heavy loss. Then went short in Nifty futures, but the market moved up. Again booked heavy loss. Now my only hope is your investment calls will not only help me to recover my losses but make some profit also.’

I was at a loss as well – for words. He was expecting more than a 150% gain to cover his losses and make some profit. Why did he get into this mess in the first place? He thought making money in the stock market was a piece of cake. In other words, he had fallen prey to the ‘get rich quick’ syndrome.

Any long-term investor will say with confidence that if one buys good blue chip stocks at reasonable prices and holds on for 3 to 5 years, one can easily make 15-20% per annum returns on investment. Those returns adequately cover the risk-free bank interest and the prevailing rate of inflation.

But one should not expect higher returns over the long-term. Higher returns may happen in a particular year. Not over several years. Rome wasn’t built in a day. A portfolio of strong stocks that provide steady returns year after year also takes time and patience to build.

Unfortunately, today’s generation prefers instant noodles, 20-20 cricket, and paying by plastic cards. ‘Patience’, ‘discipline’ and ‘long-term’ are replaced by ‘I want it now’ in the dictionary. No wonder young investors find Tata Steel and Colgate boring, and run after Suzlon and Bartronics in the hope of getting rich quick.

Stock Index Chart Patterns – Dow Jones (DJIA) and FTSE 100 – Dec 31, ‘10

Dow Jones (DJIA) Index Chart

During the week, the chart pattern of the Dow Jones (DJIA) index touched a new intra-day high of 11655 and closed at a new high of 11585 on Wed. Dec. 29 ‘10. In last week’s analysis, I had mentioned that the technical indicators were hinting at a correction or a consolidation.

Despite the new highs, it turned out to be a week of consolidation. Four days in a row, the Dow ventured beyond the 11600 level. But the index failed to stay above. By the end of the week the index closed flat at 11577.

The technical indicators have weakened a bit. The MACD is positive, but made a lower top and has slipped below the signal line. The slow stochastic has started falling and may drop below the overbought zone. The RSI has dipped below the overbought zone. Some more consolidation, if not a correction, is in the offing.

The US economy is beginning to show some real signs of recovery – as the charts in this article seem to suggest. Stay invested, but maintain trailing stop-losses.

FTSE 100 Index Chart

The chart pattern of the FTSE 100 index was looking overbought a week ago and the possibility of a correction or consolidation was mentioned. In a week shortened by the Christmas holidays, the index touched a new intra-day high of 6021, but slipped down below the 6000 level. It then dropped to test support from the rising 20 day EMA before closing just below 5900.

Both the slow stochastic and RSI have fallen sharply from their overbought zones, but are still above their 50% levels. The MACD is positive but has dropped to touch the signal line. Some more correction is likely.

The belt-tightening by the government is beginning to hurt the UK economy, though it will be good for the country in the long term. Many public services are being cut and/or privatised. There is sure to be job losses.

Bottomline? The chart patterns of the Dow Jones (DJIA) and FTSE 100 indices have corrected from their overbought positions. The Dow is looking a bit more resilient. The FTSE 100 is looking slightly weaker. Both indices are above their rising 50 day and 200 day EMAs, so there is no threat to the bull market. Stay invested. 

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, 2011. Only a limited number of subscriptions will be on offer – strictly 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 12 issues. The first issue was emailed to subscribers at the end of Jan 2010. The past few months have been an interesting and humbling experience for me. Interesting because it was a challenge to find stocks with growth potential at reasonable prices while the Sensex kept reaching new 52 week highs through the year. Humbling because some stocks have not performed up to expectations yet, and still my subscribers have kept faith in my stock picking abilities. 

It is easy to pick stocks when the stock market is in a bull phase – anything you touch soars up. The real challenge in stock selection occurs when the market is in a correction or a sideways consolidation. Through most of 2010, the Sensex traded within a sideways range. It finally broke out to reach its previous 2008 top in early Nov 2010 – only to start a correction for the rest of the year.

Those who have been following my blog posts regularly know by now what kind of stocks I like, and what type of stocks I avoid. The guiding principle has been to choose well-managed, financially sound companies that give steady (rather than spectacular) returns and have growth prospects.

Non-subscribers may be interested to know how the recommended stocks have fared. Without revealing the names of the stocks (it won’t be fair to my subscribers to do so), here is a brief results table with prices on recommended dates, subsequent high and low prices, and gains/losses as on Dec 31, ‘10:

 

Stock	Date	Price	High	Low	Close	Gain/(Loss)
A	JAN 31	206	353	195	332	61.2%
B	JAN 31	131	316	120	250	90.8%
C	FEB 28	78	94	55	84	7.7%
D	MAR 31	178	305	168	236	32.6%
E	APR 30	82	116	70	81	(1.2)%
F	MAY 31	171	247	135	150	(12.3)%
G	JUNE 30	101	156	98	141	39.6%
H	JULY 31	569	610	460	531	(6.7)%
I	AUG 31	274	410	266	359	31.0%
J	SEP 30	130	141	115	122	(6.2)%
K	OCT 31	120	134	101	127	5.8%
L	NOV 30	101	117	93	110	8.9%

All twelve stocks are small caps picked for long-term investment of 2 to 3 years. The fact that some of them are showing decent shorter-term gains – even after falling from their recent highs - is a testimony to their underlying strength. Note that 4 of the 12 stocks are showing losses. That gives me a ‘hit ratio’ of 66.7% – which isn’t too bad for small cap stocks. In a 2-3 year time frame, I expect the laggards to more than make up the slack.

What is important to understand is that these stocks were not ‘cheap’ and had already run up quite a lot when they were recommended. The lesson is that even near 52 week highs of the Sensex, there are stocks available that can prove to be good long-term investments.

To cut a long ‘commercial break’ short, if you need help in selecting good stocks in uncertain times, all you need to do is subscribe to my Monthly Investment newsletter. Send me an email (at mobugobu@yahoo.com) soon – subscriptions will close on Jan 21, 2011.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Dec 31, ‘10

Before discussing the BSE Sensex and Nifty 50 index chart patterns, a quick aside. Dec 31 falling on a Friday means we have a weekly, monthly and yearly closing on the same day. For both the Sensex and the Nifty, we will take a look at the 6 months daily chart for the shorter-term outlook and the 1 year weekly chart for a longer term outlook.

BSE Sensex Index Chart

In last week’s analysis of the daily Sensex chart, I had drawn a symmetrical triangle from which a break out seemed imminent. I had also given a couple of possibilities each for bullish and bearish break outs. The bulls seem to have won this round, which is not too surprising since the Sensex is in a bull market.

The technical indicators are looking bullish. The MACD is above the signal line, and rising in positive territory. The ROC is positive and above its 10 day MA. The RSI and slow stochastic are well inside their overbought regions. The 20 day EMA remained entangled with the 50 day EMA for a month before both started moving up. All four EMAs are rising, and the Sensex is rising above them. The bulls are back in control.

Have the bears been routed? May be not – as per the 1 year weekly chart.

Note that the weekly Sensex chart also shows an upward break out from a symmetrical triangle. The Sensex is rising above its 20 week and 50 week EMAs (the latter is equivalent to the 200 day EMA). The bulls definitely have the upper hand.

The technical indicators paint a slightly different picture. The MACD is positive, but below the signal line. The ROC has just entered the positive zone but is below its 10 week MA. The RSI is barely above the 50% level. Note that it has been falling while the Sensex was rising. The slow stochastic was moving sideways while the Sensex was moving up.

NSE Nifty 50 Index Chart

The volume data on the Nifty 50 chart adds a different dimension. The rise from the previous bottom was on receding volumes. There was a volume spike on Thu. Dec 30 ‘10, but today’s rise was on reduced volumes. Bull markets need volume support to sustain.

The volume data on the weekly chart is more revealing. The break out from the triangle was on lower volumes. Break outs on low volumes may turn out to be ‘false’. Note that volumes have been receding since the Nov ‘10 top. Of greater concern is the higher volumes on ‘down weeks’ and lower volumes on subsequent ‘up weeks’.

What does the volume data indicate? I had warned of a bearish possibility that may be worth repeating:

‘If volumes remain thin due to lack of FII buying, then an upward break out from the triangle may be ‘false’ and the up move may get reversed by an ‘end run’ (a high volume drop).’

The possibility of an ‘end run’ remains open. Another interesting bit of statistics is that all 10 Decembers since 2001 were ‘up months’ but 7 out of the previous 10 Januarys were ‘down months’.

There is no reason to sell off expecting a high-volume drop, or that Jan 2011 will be a ‘down month’. The best way is to stay invested and preserve your profits by maintaining trailing stop-losses and/or booking partial profits.

Happy investing and have a great 2011!

Notes from the USA (Dec 2010) – a guest post

Despite QE2 and the combined efforts of Bernanke, Geithner and Obama, the American consumer is not spending as much as is required for the US economy to get back on track. Corporations are sitting on cash but job openings are few. Consumers have become debt-shy and are using debit cards or cash – as KKP elaborates in this month’s guest post (written before the Christmas holidays).

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How’s the 2010 Shopping Season shaping up in the US?

Santa is out there packaging the gifts for all the deserving kids……How good is he going to be this year? Well for Santa to be good, the parents have to be out there shopping and hiding the gifts in the attic or basement!

People who live in Asia are very used to using cash, although some have started to leverage the ‘other people’s money’ concept. In the US, consumers are all used to leveraging the plastic money and soon moving to electronic money. It seems that with all the debt default issues of the past three years, and the advent of ‘debit’ card, people are shunning credit cards like never before in history. Card issuers are fighting back with huge incentives to get people charging again, as they used to do pre-2008. So far in 2010, it’s not working!

The New York Times reports that the lowest percentage of shoppers in the 27-year-history of a national survey have used credit cards over the Thanksgiving weekend (Nov 21 to 28), while the use of general credit cards like Visa and MasterCard fell 11 percent in the third quarter from a year earlier, according to the credit bureau TransUnion. One of the biggest reasons developing this season is an extremely cold winter season. Temperatures in the upper northern part of the US is between -20 degree and 0 degree Centigrade (bone chilling cold). My friend who called me from the mall today told me that there are barely 200 people including employees in a huge mall with 100 stores (some of them being multi-story department stores).

The consumer has been feeling the pinch in a huge way and just like the 2009 shopping season, we will see the 2010 shopping season to be weak relative to the go-go years. These consumers are just trying to come out of the hole, and there are many avenues teaching the consumer to cut those cards and get back to basics, i.e. debit card or cash. Debit cards allow purchasing to be done if there is money available in the checking account where the card is directly linked.

In the US, the Thanksgiving weekend kicks off the ‘shopping season’ where family and friends buy gifts for people they love, they like and they are related to……This sounds like a big list, and for millions of families, it is a big list. My kids buy gifts for all of their cousins and friends at school. It does get expensive, which is why the normal American spending pattern has shown an average spending of $250 to $500 per family during this season. This used to be $800 to a $1000 per family a few years ago. $250-$500 might not sound a lot, but this is an average. Middle income to high middle income families spent way in excess of this number in the great years, with the ‘replace or upgrade’ attitudes of American consumers.

We have already bought the gifts and handed them to the kids this year, so our Christmas tree is not going to have any surprise gifts on Christmas Eve! It was Aero-jeans, Aero-face jacket, iPod external speakers, Cell phone and fancy head-phones for their iPods. Per Asian tradition, they will probably get some cash on Christmas day, which they will appreciate very much……Kids enjoy the gifts at Diwali and also at Christmas in most Indian families in the US.

In reality, some people are shunning credit cards for budgeting reasons, while others do not have a choice. More than 15 million Americans lost their cards because of strict credit-card regulations that were passed last year, or when issuers cut back on credit during the recession. My tenants at the apartments do not carry credit cards. They all deal with cash or a check book. As per my annual tradition, I closed out many of my cards that we do not use, since it is usually a risk to have them open. After this recent clean-up (closing 7 credit cards), I still have approximately 12-14 cards open for one reason or another. This might be a bit high for an Asian, but I take ‘huge’ advantages of the ‘promotional offers’ that are offered from time to time.

As an example, the “Chase Freedom” and “Discover More” cards are offering $100 bonuses when new credit card customers spend a certain amount within the first three months, along with 5 percent cash back on holiday purchases at department stores and other categories. See, this is what makes me a sucker for these kinds of cards! $100 is enough to get me to act for 20minutes of work (to open, shop and close card)! And, of course, I now have an extra card in my wallet.

Citibank is giving Dividend cardholders 5 percent cash back on spending at department, clothing and electronics stores through Dec 31, 2010. Stores like Target is giving its cardholders a 5 percent discount on purchases, Neiman Marcus is advertising extra rewards points on most purchases on certain days this month, and Sears has been running a variety of no-payment, no-interest offers on its credit cards throughout the holidays.

Back to the report…….it showed that credit-card debt fell for a 26th consecutive time, showing Americans continue to pay down debt, one reason spending has been slow to recover. Revolving debt, which includes credit cards, dropped by $5.64 billion in October, according to the Fed. Non-revolving debt, which in addition to student borrowing also includes loans for cars and mobile homes, rose by $9.02 billion.

Total Revolving Credit

Worries Still Out There

All the worries that we were facing in 2008, 2009 and 2010 are still around. They are masked by the stimulus spending, renewal of tax-cuts, extension to unemployment payments, reconstruction of highways (with stimulus money), and other government programs. If this stays in place long enough while the economy revives, we are out of the woods. If not, then we will go into a much deeper recession/depression again, and will be compounded with the fall in US$. Obama and Bernanke are really struggling to keep the economy going, but the undertone is really still very grim. See stats released recently….

Bottom line is: Attitudes Rule

It's consumer attitudes that Bernanke is fighting in a huge way since he cannot seem to give this economy the kick start, even with all of these finance infusions rolling out. Corporations are also very leery in doing new hiring and according to an ex-CIO I met today, Corporations with job openings are looking for ‘purple monkeys’! This means that they all look for a ‘perfect candidate’ who does not exist and hence delay hiring for months. The QE2 (quantitative easing part 2) is coming out although consumers are still not feeling the ‘comfort’ to spend. So, it is a battle that Bernanke seems to be losing. Let us see what the rest of December brings to this season, and is it credit, debit or cash….

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.