BSE Sensex and NSE Nifty 50 index chart patterns – Jun 28, 2013

Just when everyone started wailing ‘bear, bear’ and speculating about the depths to which the Indian stock market would collapse, the bears turned into bulls. The FIIs bought big on the last day of the week.

Shorts went scurrying to the exit doors. Government’s announcement of an increase in gas prices could not have come at a more opportune time. Suddenly, the dark clouds of gloom and doom parted and the sunshine of higher index levels shone through.

Did the fundamentals change suddenly? It never does. Technically, indices were oversold. That doesn’t always mean a turn around in trend. Is this a relief rally, or a return to a bull market?

Some concluding comments from last week’s analysis are worth repeating: “Both indices should rise to new highs after the corrections are over. Use the dips to add to existing portfolios, but maintain suitable stop-losses.”

BSE Sensex index chart

The daily bar chart of the Sensex briefly breached the up trend line connecting the Jun ‘12 and Apr ‘13 bottoms. But the breach wasn’t convincing, as the index remained within the 3% ‘whipsaw’ limit. Technically, the support from the trend line held.

The subsequent bounce created an upward ‘gap’ as Sensex moved above its 200 day EMA. A break out with a ‘gap’ is considered a ‘stronger’ break out. Note that the ‘gap’ zone between 18060 and 18290 (formed back in Sep ‘12) again provided support to the Sensex – just as it had done in Nov ‘12 and Apr ‘13.

Daily technical indicators are turning bullish. MACD has turned up from its oversold zone to touch its falling signal line. ROC has climbed above its 10 day MA into positive territory. RSI has moved up to its 50% level. Slow stochastic is also rising towards its 50% level.

Sensex has moved above all its three EMAs, back into bull territory. The up move is likely to resume.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty shows two blue up trend lines – the first is a longer-term up trend connecting the Dec ‘11 and Jun ‘12 lows (marked ‘1’) and the second is a shorter-term up trend connecting the Jun ‘12 and Apr ‘13 lows (marked ‘2’).

Ignoring the ‘error trade’ on Oct 5 ‘12 because it isn’t technically significant, up trend line ‘1’ has not yet been breached. Up trend line ‘2’ was breached intra-week during the past two weeks, but the index failed to close below the trend line. Technically, up trend line ‘2’ has not been breached either.

Nifty formed a ‘reversal week’ bar (lower low, higher close) that should end the previous 5 weeks’ corrective move. The index crossed above its 50 week EMA on strong volumes and closed exactly on its 20 week EMA.

Weekly technical indicators are showing some signs of strength. MACD is below its signal line in positive territory, but has stopped falling. ROC has crossed below its 10 week MA, but remains positive. RSI has moved above its 50% level. Slow stochastic has slipped below its 50% level, but its downward momentum is waning.

Nifty is likely to resume its up move and attempt to scale new highs – provided FIIs continue their buying.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices received good support from their up trend lines after correcting from 2 year highs. Both indices should rise to new highs on the back of renewed FII buying. This is a good time to accumulate fundamentally strong stocks for the long-term.

(PS: If you are planning to add good mid-cap/small-cap stocks to your portfolio, but are not sure which stocks to pick, book your subscriptions to my Monthly Investment Newsletter. New subscriptions will be offered from July 1-21, ‘13.)

Nifty chart: a mid-week technical update

Nifty’s daily bar chart pattern seems poised at an interesting cross road, though bears (i.e. FIIs) seem to have the upper hand. Here are some technical indications why bears may retain their dominance in the near term:

1. The down trend from the May ‘13 top has breached the blue uptrend line connecting the Jun ‘12 and Apr ‘13 bottoms. The breach is not quite convincing as yet – since Nifty has not dropped more than 3% below the trend line. But it is a breach nevertheless – which is bearish.

2. The 20 day EMA is about to drop below the 200 day EMA, though it hasn’t done so yet. If the falling 50 day EMA drops below the 200 day EMA also, the ‘death cross’ may end the bull market.

3. Daily technical indicators are bearish, and looking oversold. However, markets can remain oversold for long periods – so there may not be any immediate prospect of a turnaround.

Bulls are not completely out of the game. Here is why:

1. Nifty is just above the gap area – formed in Sep ‘12 between 5447 and 5527. The ‘flash crash’ on Oct 5 ‘12 was due to an ‘error trade’ that did not show up in either Nifty Futures or Sensex charts, and will be ignored for technical analysis purposes.

That means, the ‘gap’ has not yet been filled completely. The ‘gap’ provided support to Nifty back in Nov ‘12, and again in Apr ‘13 (when the ‘gap’ was partially filled); it may do so again.

2. Even if the ‘gap’ gets completely filled, the index is likely to resume its up move soon thereafter. The longer-term uptrend line connecting the Dec ‘11 and Jun ‘12 lows (not shown in chart above) is currently at about 5400 – just below the ‘gap’ zone.

3. During the last 5 trading sessions, the up-day volumes on Fri. Jun 21 and Tue. Jun 24 have been higher than on the three down-days. The selling pressure may be easing.

The scales will remain tilted towards the bearish side, as long as the FIIs keep selling. But DIIs have turned buyers, and that is preventing a crash in the Nifty chart – even though there seems to be no respite for mid-cap and small-cap shares.

WTI and Brent Crude Oil charts: an update

WTI Crude chart

The 1 yr daily bar chart pattern of WTI Crude oil briefly breached the resistance level of 98 to touch 99 on an intra-day basis. Sliding volumes and proximity to the resistance level were not encouraging signs for bulls. After forming a ‘reversal day’ pattern (higher high, lower close) oil’s price plunged below all its three EMAs before bouncing up.

For the last 3 months, oil’s price has made a bullish pattern of higher tops and higher bottoms. The 200 day EMA is gently rising. These are bullish signs. However, strong volumes on down days means bears are using every opportunity to sell.

Daily technical indicators are turning bearish. MACD is positive, but has crossed below its signal line. RSI has slipped below its 50% level. Slow stochastic has dropped below its 50% level.

For nearly 12 months, oil’s price has traded in a broad sideways range between 84 and 100 – providing decent trading opportunities. A convincing move above 100 can bring bulls to the fore.

Brent Crude chart

Two weeks back, an analysis of the 1 yr daily bar chart pattern of Brent Crude oil contained the following concluding comments: “Remember that oil’s price is in a bear market, so any further up move is likely to attract selling pressure. The zone between 106 and 108 is going to provide strong resistance.”

Sometimes, chart patterns play out almost exactly as expected. Oil’s price rose above the 106 level four days in a row, but couldn’t quite get past the 107 level. The falling 200 day EMA wasn’t even tested. High volume selling pushed oil’s price down below its three EMAs – deeper inside a bear market.

Daily technical indicators have turned bearish. MACD has crossed below its signal line into negative territory. RSI has dropped below its 50% level. Slow stochastic is dropping like a stone towards its oversold zone. Bears have regained control.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jun 21, ‘13

S&P 500 Index Chart

The following comments were made in last week’s analysis of the daily bar chart pattern of S&P 500 index: “All three technical indicators are showing negative divergences by touching lower bottoms (than the ones touched in Apr ‘13) while the index touched a higher bottom. Some more correction/consolidation is likely.”

The index rose to touch an intra-day high of 1654 on Tue. Jun 18 ‘13, but formed a bearish ‘rising wedge’ pattern (marked by dark blue lines), from which it dropped sharply below the 1600 support level on a volume spurt. Friday’s upward bounce failed to cross above the 1600 level despite strong volumes – highest volumes seen since Dec ‘11 – which means the support level may have turned into a resistance level.

Daily technical indicators are looking bearish. MACD has fallen into negative zone below its signal line. RSI is moving down towards its oversold zone. Slow stochastic has already entered its oversold zone. At the time of writing this post, the index is trading 1.5% below last week’s closing level of 1592.

A test of support from the rising 200 day EMA is on the cards. A breach of the long-term moving average may put the bull market in jeopardy. Wait for the correction to play out. Initial jobless claims and manufacturing data continues to signal modest economic growth.

FTSE 100 Index Chart

The following comments made in last week’s analysis of the daily bar chart pattern of FTSE 100 index bear repetition: “While the bull market is still intact, keep a close watch on the 6200 level, which had earlier provided support during Feb ‘13 and Apr ‘13. A breach of 6200 would also mean a breach of the 200 day EMA – which would be bearish.”

The upward bounce from the 200 day EMA took the index up to the 6400 level before the bears took charge. High volume selling pushed the index well below the 6200 support level and the 200 day EMA. At the time of writing this post, the index is trading more than 1.5% below Friday’s close.

Daily technical indicators are looking bearish and oversold. MACD is falling below its signal line and ready to enter its oversold zone. RSI is at the edge of its oversold zone. Slow stochastic has remained inside its oversold zone for most of the month.

If the index falls below the 6000 level – which is the next support level – it can drop to the next support zone between 5500 and 5800. Caution is advised.

Bottomline? The 6 months daily bar chart patterns of S&P 500 and FTSE 100 indices are in the midst of strong corrections after touching new highs in May ‘13. Both indices have breached support levels, and more correction is likely. Wait for the corrections to play out.

BSE Sensex and NSE Nifty 50 index chart patterns – Jun 21, 2013

There is an old proverb: Misfortunes never come singly. The Indian Rupee – already reeling from the burgeoning current account deficit due to imports far exceeding exports – was dealt a body blow by US Fed’s recent announcement of a possible slow down in its bonds buying programme (better known as QE3).

There was a global sell off in equity and bond markets, and India wasn’t spared. Was the reaction overdone? Apparently so. First, QE3 will be tapered down by the end of this year, not now. The availability of cheap money will continue for at least another 6 months. Second, the tapering down will depend on continued growth of the US economy – and there is every possibility that growth will be tepid at best.

That means the present correction may be providing a good opportunity to add fundamentally strong stocks at fair prices. The best way to make money in the stock market is to think and act differently from the herd. 

BSE Sensex index chart

There is good reason for investors to feel bearish. FIIs have been selling for two straight weeks. Technically, the weekly bar of Sensex has closed below its 50 week EMA. Weekly technical indicators are turning bearish. MACD is positive, but has crossed below its signal line. ROC is also positive, but is falling towards its 10 week MA. RSI and Slow stochastic are below their 50% levels.

But bulls are not going to keel over and die. The concluding comment in last week’s analysis was: “Keep a close watch on the blue up trend line connecting the Jun ‘12 and Apr ‘13 bottoms – currently at 18660. A drop below may lead to a deeper correction.” Note that last week’s bar dropped below the up trend line (marked 2) intraweek, but closed above it.

The 18500 level (marked by blue dotted line) – corresponding to the previous top touched in Feb ‘13 – is likely to act as a support. Also, the longer-term up trend line (marked 1) connecting the Dec ‘11 and Jun ‘12 lows has not been tested.

A drop below 18500 may lead to a test of the up trend line (marked 1). A breach of this up trend line – currently at 17250 – may end the 18 months long bull phase. So, be cautious and keep proper stop-losses, but no need to panic.

NSE Nifty 50 index chart

The daily bar chart pattern of Nifty shows a break down below a ‘falling wedge’ pattern (usually a bullish pattern) followed by a ‘pullback’ to the lower edge of the wedge. Such a pullback offers a selling opportunity that was gleefully utilised by bears. Note that despite an intra-day breach of the blue uptrend line, the index closed on top of the line, giving temporary respite to bulls.

Daily technical indicators are bearish, and looking oversold. MACD is below its falling signal line, and hurtling down towards its oversold zone. ROC has moved up from its oversold zone and touching its falling 10 day MA. RSI and Slow stochastic are inside their oversold zones. Two of the four indicators – ROC and Slow stochastic – are showing positive divergences by touching higher bottoms while Nifty touched a lower bottom.

A continuation of last Friday’s bounce is possible. But the correction is expected to resume if FIIs continue their selling spree.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are at import support levels after correcting from 2 year highs. Both indices should rise to new highs after the corrections are over. Use the dips to add to existing portfolios, but maintain suitable stop-losses. If FIIs continue to sell, the bull markets may be in jeopardy.

(PS: If you are thinking of using the correction to add good mid-cap/small-cap stocks to your portfolio, but are not sure which stocks to pick, book your subscriptions in advance to my Monthly Investment Newsletter. New subscriptions will be offered from July 1 ‘13.)

Sensex falls 500 points – time to buy or time to run?

To succeed in the stock market, one needs to think and act differently from the herd. Most small investors enter the market with very little knowledge about how the stock market functions, which sectors perform consistently, which sectors are cyclical in performance, and which sectors are perennial laggards.

A motley collection of stocks are acquired based on well-meaning advice from friends or colleagues, and not-so-well-meaning tips from web sites and SMS marketers. When many of these stocks start to fall in price soon after buying, more quantities are purchased in a desperate hope that ‘averaging’ will some how retrieve the situation. End result is loss of capital.

Such a pattern of behaviour gets repeated again and again, and is one of the main reasons why small investors rarely make money from stocks. Some learn from their mistakes by spending the time and effort to read investment books written by well-known stock market ‘guru’s. Most give up stock investing all together.

How does one think and act differently from the herd? Step one is to do some basic preparation before entering the market. Visit web sites like investopedia.com. Read books by Peter Lynch, Jeremy Siegel, Martin Pring to get an idea about how to invest for better returns.

Step two is to make a financial plan, based on one’s likely income and expenditure. Without a plan, goals can’t be set; without goals, not much can get achieved. Goals should be specific and realistic - ‘x’ amount of money for buying a car/bike in 2 years; ‘y’ amount for children’s education in 15 years; ‘z’ amount for a holiday every 3 years.

Step three is to make an ‘asset allocation’ plan. Such as, 40% of savings to be invested in fixed income instruments (like bank FD, PO MIS, NSC); 50% of savings to be invested in stocks; 5% in gold; 5% in cash for exigencies. The percentages can be tweaked according to one’s age and risk tolerance.

Only when you have completed the three steps should you start to buy stocks. What if you don’t have enough money yet to buy stocks? Build up your capital by regularly investing in a bank recurring deposit or a good balanced fund. It may take 3 years or 5 years before you accumulate sufficient capital to invest according to your asset allocation plan.

So be it. What is the rush? Rome wasn’t built in a day. A strong investment portfolio that can generate wealth takes years and years of effort of disciplined investing and monitoring. It is not rocket science. Neither is it sexy or exciting.

John Templeton had famously said: The best time to invest is when you have the money. If you are diligent about saving and investing according to your plan, you will always have some money available for taking advantage of sudden opportunities – like the one provided by a sudden drop in the Sensex for no apparent reason.

It takes courage to buy, when every one else seems to be selling and running. Easier said than done. But being a contrarian and acting differently (not foolishly) is the key to investment success.

That was the long answer. The short answer is: Your asset allocation plan should dictate what you should do.

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Gold and Silver charts: an update

Gold Chart Pattern

The 6 months daily bar chart pattern of gold continues its sideways consolidation in a bear market. A similar sideways consolidation in a price range between 1550 and 1625 during Feb-Mar ‘13 had ended with a high volume ‘panic bottom’ pattern.

Since a ‘panic bottom’ seldom holds, gold’s price is likely to seek levels lower than its Apr ‘13 low. Daily technical indicators are looking bearish. MACD is rising above its signal line, but remains in negative territory. RSI is moving sideways below its 50% level. Slow stochastic is sliding down below its 50% level.

Higher volumes on down days is a sign of distribution. Avoid the temptation to do any bottom fishing. Enter only on a convincing move above 1500.

Silver Chart Pattern

The 6 months daily bar chart pattern of silver is consolidating sideways with a downward bias. The falling 20 day EMA is providing strong resistance to all attempted up moves since Feb ‘13.

Daily technical indicators are bearish. MACD is above its signal line, but inside negative territory. RSI continues to drift below its 50% level. Slow stochastic has bounced up weakly from the edge of its oversold zone.

Only a revival in worldwide industrial production can change the fortunes of silver bulls. Stay on the sidelines till then. Enter only if silver’s price convincingly crosses above 25.