Nifty chart: a mid-week update (Jul 31 ‘13)

Today’s trading action on the daily bar chart pattern of Nifty has produced some interesting technical patterns that have bearish implications. These are:

• The index has dropped below all its three EMAs into bear territory
• the blue up trend line connecting the Jun ‘12 and Apr ‘13 lows has been breached
• The small ‘gap’ between 5700 and 5750 formed in Jun ‘13 has been filled
• Trading volumes have been rising for the past 3 days as the index fell
• All four daily technical indicators are looking bearish

There are a few bullish counter-arguments as well:

• The index had fallen below all three EMAs and the blue up trend line in Jun ‘13 also – but the index had bounced back up into bullish zone; ‘death cross’ of the 50 day EMA below the 200 day EMA that technically signals a bear market was averted
• Filling a ‘gap’ during a bull phase need not be bearish; see what happened back in Apr ‘13, when the larger ‘gap’ (between 5450 and 5525) formed back in Sep ‘12 got partly filled (the Oct 5 ‘error trade’ will be ignored since it didn’t occur on Sensex or Nifty Futures charts)
• Usually, trading volumes rise during up moves and shrink during down moves; rising volumes during a down move may be indicating a selling exhaustion (the index recovered substantially by the end of the day)
• Daily technical indicators ROC and Slow stochastic are in their oversold zones, and RSI is about to enter its oversold zone; though an index can stay oversold for long periods, a bounce-back may be around the corner

Bulls will hope that the older ‘gap’ of Sep ‘12 (marked by blue dotted lines) will once again support the index fall. Even if that ‘gap’ gets filled, the up move is likely to resume thereafter. Many stocks – even large-caps – are trading at attractive, if not mouth-watering, valuations.

A big crash typically follows a euphoric rise when individual stock P/E ratios stretch towards three figures. The gloom and doom all around is hardly conducive to a big crash. It won’t be surprising if smart money starts entering now (if they haven’t done so already – some one is buying the sold shares!).

WTI and Brent Crude Oil charts: an update

WTI Crude chart

Two weeks back, the daily bar chart pattern of WTI Crude oil was consolidating within a small ‘flag’ pattern between 104 and 106 after a sharp, vertical rise. Since a ‘flag’ tends to be a continuation pattern, an upward break out was expected with a target of 120. However, the price rise was too sharp and oil’s price had looked overbought.

The following remarks were made: “Oil’s price may pullback towards the 100 level before resuming its up move…Keep a stop-loss at 100 and stay invested.” Note that oil’s price did break out upwards and rose to about 109, before facing selling pressure. The 20 day EMA seems to be providing good downside support.

Daily technical indicators have corrected from overbought conditions. MACD made a bearish ‘rounding top’ pattern inside its overbought zone and has crossed below its signal line – but remains positive. RSI has dropped from its overbought zone and is drifting down towards its 50% level. Slow stochastic is looking bearish by falling sharply below its 50% level.

Stay invested with a stop-loss at 100. Add on an upward bounce from the 20 day or 50 day EMAs.

Brent Crude chart

Despite spending several consecutive trading sessions above its 200 day EMA, the 6 months daily bar chart pattern of Brent Crude oil has failed to extricate itself from a strong bear grip. After touching an intra-day high around the 109 level on Jul 19 ‘13, oil’s price formed a ‘reversal day’ pattern (higher high, lower close) and started drifting down lower.

Daily technical indicators are showing signs of weakness. MACD is positive, but has formed a bearish ‘rounding top’ pattern and crossed below its signal line. RSI has made a formed a bearish pattern of lower tops and lower bottoms, but has managed to stay above its 50% level. Slow stochastic formed a bearish ‘double-top’ pattern inside its overbought zone, and dropped sharply below its 50% level.

Some more consolidation is likely before oil’s price can make a more decisive attempt to get back into bull territory.

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 26, 2013

Q1 results season is on in full swing. This is the time when the wheat gets separated from the chaff. Better results usually get declared early. Market leaders HUL and ITC declared decent sets of numbers. But slow volume growth for HUL and negative FMCG result for ITC led to some serious selling.

RBI’s efforts at shoring up the value of the Rupee through short-term liquidity squeeze seems to be working. However, growth may take a further hit if the liquidity squeeze is sustained through an increase in CRR. Bank stocks tanked in fear. Prices of oil and gold have stopped rallying, which should help reduce the CAD (Current Account Deficit).

Short-term focus of fund managers and market analysts are evident from the recent spate of ‘sell on rise’ calls. The good news is that the long-term bull market is intact, as can be seen from the weekly bar chart pattern of Sensex below. The bad news is that the index has traded in a sideways rectangular range year-to-date.

BSE Sensex index chart

The weekly bar on the Sensex chart shows a ‘reversal week’ (higher high, lower close) pattern that could lead to some correction or consolidation. Note that the index is trading above the blue up trend line and its two weekly EMAs, but it failed to get past its May ‘13 top by less than 100 points. Attaining a new high may take a little longer.

Weekly technical indicators are showing signs of weakness. MACD is just above its signal line in positive territory, but moving sideways. ROC is below its 10 week MA and has dropped into negative territory. RSI has bounced down from the edge of its overbought zone. Slow stochastic has reached the edge of its overbought zone, but its upward momentum has slowed down.

Downside support is expected from the 50 week EMA and the blue up trend line (both at around 19000). The Jun ‘13 low of 18467 can be maintained as a shorter-term stop-loss. A drop below 18467 will form a bearish pattern of lower tops and lower bottoms. 

NSE Nifty 50 index chart

The following warning was given in last week’s analysis of the daily bar chart pattern of Nifty 50: “The blue uptrend line from the Jun ‘13 low is a bit too steep. Such steep up trends don’t sustain for long.” Note that after moving higher during the first two days of the week, the index comprehensively breached the steep trend line.

This is another example of how technical analysis can provide advance warning of likely changes in direction. A test of, and possible drop below, the 200 day EMA appears likely. Just below the 200 day EMA is the ‘gap’ between 5700 and 5750 that formed on Jun 28 ‘13. There is a good chance the ‘gap’ will support the fall. Even if the ‘gap’ gets filled, the up move should resume thereafter.

Daily technical indicators are beginning to look bearish. MACD is positive, but has just crossed below its signal line. ROC has dropped very sharply below its 10 day MA into negative territory. Such sharp falls in ROC are seldom sustained. RSI bounced up a bit from its 50% level. Slow stochastic has slipped below its 50% level.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices faced temporary technical headwinds, and are undergoing corrections. There are no signs of a huge fall - being predicted by some experts. The dips can be used to add fundamentally strong stocks, but with appropriate stop-losses.

RBI’s liquidity squeezing – a guest post

Vote-bank politics with schemes like NREGA, food securities bill, and hugely hiking the pay of government employees – not to speak of fertiliser subsidy, oil subsidy – has led to a bloated fiscal deficit in India.

Slowdown in global economies – including in India – and rising oil prices have added to the Current Account deficit. Instead of taking pro-active steps to curtail the twin deficits and put GDP growth back on track, the government tried to coerce RBI into reducing monetary controls to re-energise growth.

Instead of succumbing to pressure, the RBI Governor stuck to his hawkish stance against inflation. He is paying the price by not getting an extension of his term in office. His latest step to stem the fall in value of the Rupee by tightening liquidity has not been well-received by the stock market.

In this month’s guest post, Nishit discusses the likely effect of RBI’s action on Gilt Fund yields.

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Recently, the RBI indirectly raised Interest Rates by squeezing liquidity to curb the pressure on the Rupee. This led to a spike in bond yields from 7.5% to 8.1%. Many of the debt funds lost 3-4% of their NAVs. Many must have panicked, as this had never happened before and can almost be called a ‘Black Swan’ event.

So what does it mean for Gilt funds going ahead? The basic objective of Gilt funds is that they are meant for long term investors when the interest rates are coming down, to capitalize on the increase in Bond Prices when yields come down. One is supposed to exit when the trend has changed and the bond yields are going up.

Was RBI’s intervention a signal that Interest Rates may be going up? I do not think so. The economy is in shambles and to simulate the economy, rates have to come down. RBI’s action was just a one-off blip as a desperate government tried to stop the Rupee from devaluing further.

Bond Yields, which had spiked to 8.1% towards the end of the week, came down to 7.9%. If there are no more unpleasant surprises, then the yields could touch the record low of 7.1% by December. The spike in yield was a buying opportunity for the long term investor.

The very fact that the yield rose from 7.56% to 8.10% and back to 7.94% means that the market had over-reacted and yields are coming down.

The RBI policy on the 30^th of July ‘13 will give further guidance on what the RBI intends to do. As I see it, they will maintain a status quo and will neither raise nor cut Interest Rates.

In real terms, home loan rates will not come down. The Auto or the Realty sectors’ hopes of a stimulus will have to keep waiting.

Long-term investors do not need to worry. Only short-term traders, and Banks who conduct treasury operations, will take a hit. Till the economy turns around, I do not see Interest rates rising.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Gold and Silver charts: an update

Gold Chart Pattern

Two weeks back on the 6 months daily bar chart pattern of gold, MACD and RSI were showing negative divergences by touching slightly higher bottoms in Jun ‘13 than in Apr ‘13 while gold’s price dropped lower. However, Slow stochastic didn’t confirm the negative divergence, so a rally was ruled out.

Bulls obviously didn’t care much for my analysis. Gold’s price rallied up to its 20 day EMA on increasing volumes. After a few days of sideways consolidation, gold has surged up to its 50 day EMA on good volumes, gaining 100 points in the past two weeks.

Daily technical indicators have turned bullish. MACD is still negative, but is rising above its signal line. RSI has climbed above its 50% level. Slow stochastic is inside its overbought zone. Can gold’s price move up some more? Sure it can. Is the bear market over? The falling 200 day EMA is suggesting otherwise.

Note that down-day volume on Wed. Jul 17 was the highest in the past two weeks. That means bears are likely to use every opportunity to sell. On the longer-term weekly bar chart (not shown), the 200 week EMA is still falling and gold’s price has spent 10 straight weeks below it. A long-term bear market is looming.

Silver Chart Pattern

Two weeks back, a couple of bullish signals were visible on the 6 months daily bar chart pattern of silver. However, the following cautionary remark was made: “..bullish signs deep inside a bear market should be traded cautiously. What appears to be a rally can turn into a sideways consolidation, followed by another drop.”

Though silver’s price has rallied above its 20 day EMA on good volumes, the past two weeks trading has formed a bearish ‘rising wedge’ pattern from which the price is likely to fall downwards.

Daily technical indicators are looking bullish. MACD is rising above its signal line in negative territory. RSI has moved above its 50% level. Slow stochastic dropped from its overbought zone, but has bounced up from its 50% level. Silver’s price may move up towards its falling 50 day EMA, but not much further.

On the long-term weekly bar chart (not shown), things are looking rather ominous for bulls. Silver’s price has spent 15 straight weeks below its falling 200 week EMA. The 50 week EMA is about to cross below the 200 week EMA. That will technically confirm a long-term bear market.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jul 19, ‘13

S&P 500 Index Chart

The 1 year daily bar chart pattern of S&P 500 index shows the unfolding of a strong bull market despite the tepid growth of the US economy. Three rounds of Quantitative Easing helped the cause of the bulls. A strengthening Dollar added fuel to the bullish fire.

Periodic corrections on the way up has kept the technical health of the chart intact, and helped the index to touch a new life-time high. However, the index is looking overbought. A correction may be around the corner.

Daily technical indicators are looking bullish. MACD is rising above its signal line, and looks ready to enter its overbought zone. RSI is just below the edge of its overbought zone. Slow stochastic is well inside its overbought zone.

The index can remain in overbought conditions for long periods. But negative divergences in all three technical indicators – which failed to touch new highs with the index – may be indicating a period of correction or consolidation.

If the economy continues to grow – albeit slowly – a tapering of QE3 is likely. That is when the resilience of the bull market will be tested. Till then, stay invested, and use dips to add.

FTSE 100 Index Chart

The 1 year daily bar chart pattern of FTSE 100 index is back in a bull market after surviving a sharp bear attack that dropped the index below its 200 day EMA. The 20 day EMA has crossed above the 50 day EMA and the index is trading above all three EMAs.

Daily technical indicators are looking bullish. MACD is rising above its signal line in positive territory. RSI is just below its overbought zone. Slow stochastic is inside its overbought zone. Volumes have started picking up, which augurs well for the continuation of the rally.

The UK economy continues to suffer the pangs of a miserably slow GDP growth. The housing market is starting to recover and retail spending is on the rise, but business investment in the first quarter of 2013 was more than 16% lower than a year earlier.

Bottomline? One year daily bar chart patterns of S&P 500 and FTSE 100 indices overcame sharp bear attacks and are back in long-term bull markets. Stay invested; use dips to add.

BSE Sensex and NSE Nifty 50 index chart patterns – Jul 19, 2013

The start of results season brought with it the usual share of ups and downs. Infosys, TCS, Bajaj Auto declared better than expected results. RIL results were so-so – its net profit boosted by ‘other income’. HDFC results were a bit below expectations.

Following the share buyback by parent Unilever, HUL’s weightage was increased in a couple of global indices. HUL’s share price spurted a whopping 10% in a single day. Other FMCG stocks joined the bull party. Removal of Raymond and Indian Hotels from F&O list had a negative effect on their respective share prices.

RBI raised short-term rates in a bid to squeeze liquidity to prop up the falling Rupee. Bank stocks took a hit. India’s forex reserves rose marginally after a big drop in the previous week. Despite the economic gloom and doom, the bull market keeps chugging along nicely, as can be seen from the weekly chart of BSE Sensex below.

BSE Sensex index chart

The weekly bar chart of Sensex closed higher for the fourth straight week, and seems ready to climb past its May ‘13 top. Both weekly EMAs are rising and the index is trading above them. The blue uptrend line joining the Jun ‘12 and Apr ‘13 lows, which was briefly breached the trend line intra-week in Jun ‘13, continues to rule the chart.

Three of the four weekly indicators are looking bullish. MACD has crossed above its signal line in positive zone. RSI and Slow stochastic have moved up to the edge of their respective overbought zones. But ROC is showing negative divergence by falling below its 10 week MA. Since the negative divergence has not been supported by the other three indicators, any correction is likely to be of short duration.

NSE Nifty 50 index chart

Daily bar chart pattern of Nifty is back in bull territory. The 20 day EMA has crossed above the 50 day EMA and all three EMAs are moving up. The sharp rally from the Jun ‘13 low has completed 4 weeks. But there are a few dark clouds on the horizon.

The blue uptrend line from the Jun ‘13 low is a bit too steep. Such steep up trends don’t sustain for long. Volumes tapered down on the last 2 days of the week. Nifty formed a ‘reversal day’ pattern (higher high, lower close) on Friday. All these point to a temporary halt to the rally.

Daily technical indicators are bullish, but showing some signs of weakness. MACD is rising above its signal line in positive territory. ROC is also positive, but has crossed below its 10 day MA. RSI is sliding down from its overbought zone. Slow stochastic is inside its overbought zone. Three of the four indicators – ROC, RSI, Slow stochastic – are showing negative divergences by failing to touch new highs with the index (marked by blue arrows).

Remember that Nifty is in a bull market, so any dip can be used to add to existing portfolios.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are on their way to touch new highs, but are facing temporary technical headwinds. Any correction/consolidation can be used as an adding opportunity – needless to say, with appropriate stop-loss. Both indices are near their all-time highs; some caution should be exercised.

(PS: If you are planning to add growth-oriented and fundamentally strong mid-cap/small-cap stocks to your portfolio, but are not sure which stocks to choose, book your paid subscription to my Monthly Investment Newsletter now. New subscriptions will be offered till July 21, ‘13.)