Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 28, ‘14

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: “All three technical indicators are in bullish zones, but showing negative divergences by touching lower tops. A consolidation or corrective move is likely. Has the index formed a ‘double top’ reversal pattern? Technically, the answer is ‘no’.”

The index corrected down below its 20 day EMA but found good support from its rising 50 day EMA and the 1840 level before bouncing up. By not falling below its previous low of 1840, the possibility of a ‘double top’ reversal has been avoided.

For the past 4 weeks, the index has been consolidating within a rectangular band between 1840 and 1880. Rectangular consolidations tend to be continuation patterns, but can be reversal patterns also – hence are unreliable. In other words, the break out from the rectangle has to be awaited before initiating any buy/sell decision.

Daily technical indicators are turning bullish. MACD is below its signal line in positive territory, but has stopped falling. RSI has bounced up above its 50% level. Slow stochastic is moving up towards its 50% level. Note that during a period of consolidation, indicators often give conflicting signals.

The important thing to remember is that an upward break out above 1880 should be accompanied by a volume surge. A break below 1840 does not require strong volume support.

Stay invested with a stop-loss at 1840.

FTSE 100 Index Chart

The 6 months daily bar chart pattern of FTSE 100 managed to temporarily wriggle out of a strong bear grip by closing above its 200 day EMA and the 6600 level, but failed to overcome the resistance from its falling 20 day EMA. The bears will remain in control unless the index convincingly moves above its falling 50 day EMA.

The index is consolidating within a rectangular band between 6500 and 6630. Rectangles tend to be continuation patterns but are unreliable. That means a downward break below 6500 is likely. However, waiting for the eventual break out would be prudent. Stay invested with a stop-loss at 6500.

Technical indicators are in bearish zones, but turning bullish. MACD is about to cross above its falling signal line in negative territory. RSI is gradually moving up towards its 50% level. Slow stochastic has emerged from its oversold zone and rising towards the 50% level. At the time of writing this post, the index is trying to break out above 6630.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 are consolidating sideways within ‘rectangle’ patterns. The eventual break out from the rectangles can be in either direction. Stay invested with suitable stop-losses.

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 28, 2014

An appreciating Rupee, falling inflation, contracting Current Account Deficit, growing exports and concerns about economic slowdown in China and many emerging markets have turned India into a favoured destination for overseas investors.

RBI extended the deadline for implementation of Basel III capital raising norms by a year. PSU banks celebrated the news. With inflation coming under control, RBI is expected to maintain status quo on interest rates.

Both Sensex and Nifty indices are at life-time highs – in ‘blue sky’ territory with no known resistances. Does that mean they will continue to move higher? For how long? Till elections, or even after that? Let us see whether the price charts can throw some light.

BSE Sensex index chart

The daily closing chart pattern of Sensex shows an upward break out from the rectangular consolidation zone, followed by a further consolidation within a small ‘falling wedge’ pattern and another up ward break out from the wedge.

Rectangles have measuring implications: the height of the rectangle (about 1150 points) should be added to the top level of the rectangle (about 21350) to arrive at a minimum target of 22500. Sensex is just 160 points short of the target.

Technical indicators are bullish, but looking overbought. MACD has re-entered its overbought zone. ROC has crossed above its 10 day MA in positive zone. RSI has dropped to the edge of its overbought zone. Slow stochastic is inside its overbought zone.

All four indicators are showing negative divergences by failing to reach new highs with Sensex. A correction or consolidation can be expected. The pause will enable the index to move even higher.

With macro-economic conditions turning favourable, even a fractured mandate in the elections may not cause a huge fall.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty has thumbed its nose at all the naysayers to soar to lifetime highs. The 5 months long consolidation within a ‘rectangle’ had given a good opportunity to accumulate fundamentally strong stocks. Hope blog readers paid heed to my exhortations to buy.

The upward break out from the rectangle has measurement implications: the height of the rectangle (about 400 points) should be added to the top level of the rectangle (about 6350) to arrive at a minimum target of 6750. Nifty is just 50 points short of the target.

Technical indicators are bullish, but looking overbought. MACD is rising above its signal line towards its overbought zone. ROC has crossed above its 10 day MA and about to enter its overbought zone. RSI has reached the edge of its overbought zone. Slow stochastic is inside its overbought zone.

A correction or consolidation may be around the corner. Remember that markets can stay overbought for a long time – so don’t be surprised if Nifty continues to rise. Whatever you do, don’t try to short the index when bulls are in complete control.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty indices are in ‘blue sky’ territory with no known resistances. If you have invested at lower levels, enjoy the ride but maintain a trailing stop-loss to protect profits. If you have that ‘missed the bus’ feeling, suppress your impulse to jump in. Most of the low-hanging fruits have been plucked. Be very selective about the stocks you do choose to enter.

Stocks in the news this week (Mar 28, ‘14)

With Sensex and Nifty touching new highs on a daily basis, the last of the bears may be throwing in the towel – as can be seen from a host of stocks breaking out of long downtrends or consolidation zones.

Even stocks of realty companies are beginning to show signs of life after being shunned by investors. Charts of a couple of them are given below.

When stock indices start moving higher daily, many small investors suddenly realise they are ‘missing the bus’ and jump in feet first. The smart thing to do would be to wait for a correction and then enter.

These are not recommendations to buy or sell. Please do your due diligence before taking any decision.

Ambuja Cement

Infrastructure stocks have been out of favour for a while now, and Ambuja Cements has been no exception. The stock had been trading sideways with a downward bias, but appears to have formed a bottom at 150. The recent price spurt after a period of sideways consolidation was on news of a court decision permitting amalgamation with parent company Holcim.

ROC, RSI and Slow stochastic are showing negative divergences by failing to touch new highs. MACD is in overbought zone. A correction may follow.

Godrej Properties

After a long bear phase, the stock price of Godrej Properties was making a ‘rounding bottom’ bullish pattern. The final volume spurt that caused a break out above the falling 200 day EMA was due to announcement of new residential projects at Pune and Chennai.

All four technical indicators are looking overbought. Expect a correction or consolidation.

Oberoi Realty

The stock of Oberoi Realty was struggling to get out of a bear market. A high volume price spurt above its 200 day EMA was caused by news of acquisition of a large land parcel in Borivali from the Tatas.

Oberoi was a debt-free realty company – a rarity. But it will now be saddled with a large debt for the land purchase. Remember that it will take a couple years for the company to monetise the land by building and selling residential flats.

Talwalkars

The stock price of Talwalkars has been struggling to get back into bull territory for the past 6 months. The high volume rise to a new high was on news of a likely stake sale.

Is it a good time to buy IT stocks? – a guest post

Restrictions on gold imports, lower capital goods imports due to a slowing economy and strong FII inflows have contributed to a strengthening Rupee and a lower Current Account Deficit. While that may be good for the Indian economy, it may not be so great for exporters.

Most Indian IT companies generate a significant amount of revenues from exports. A depreciating Rupee had helped companies to increase profits. But a strengthening Rupee has led to profit booking in IT stocks, which are trading below their recent highs.

In this month’s guest post, Nishit makes a strong case for using the corrections to enter IT stocks now. What do you think? Do you feel IT stocks are too expensive? Good things in life usually are.

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IT stocks have corrected from their recent highs. The corrections range from at least 10% from the tops in case of TCS and HCL Tech and 15% in case of Infosys. So, is it a good time to buy IT stocks? Let us try and examine the pros and cons.

Why have the IT stocks corrected? The rupee has strengthened 5-6% since January 2014 due to lower gold imports and FII inflows in the hope of a Narendra Modi led Government being sworn in. A strengthening rupee hits the profit margins of all exporters, including IT companies.

The upside to the profits is capped for the time being because of rupee appreciation. Also, IT stocks have run up in the past 1 year. TCS itself has gone up 70-80% from its lows and Infosys has doubled from its lows.

TCS recently had a con-call where it expects 2015 to be a stronger year than the current year. Overall, the IT stocks are dependent on the US and European economies which are slowly recovering back to normalcy. So, the core business of the IT companies which is the main driver for growth is doing just fine.

Now, a strengthening rupee is just an excuse for booking profits. If no strong Government comes at the centre then expect the markets to tank and the rupee to trade in the 66-68 band.

Let us look at the valuations right now. Infosys trades at a P/E of 19 and TCS at 23. None of these stocks are frightfully expensive if one looks at their growth prospects.

If one were to look at Indian IT, I would not look beyond TCS, Infosys and HCL Tech at the moment. These 3 stocks capture the essence of Indian IT.

What happens if Narendra Modi wins? The rupee may appreciate further but the Government would not let it appreciate beyond a point as exports would get hit.

TCS and other IT stocks would act as a hedge for the portfolio as also an investment option. With a 3 year horizon, they look a pretty solid bet.

IT stocks are not dependent on Government policies, have operating margins of 25-30%, have strong brand names. They cancel out most of the negatives which hang over the Indian markets right now.

There are many players listed on the stock market in IT but Infosys, TCS and HCL Tech represent the best bets. TCS from sheer size and scale, HCL Tech for its strength in the Infrastructure management space, and Infosys with the wild card of Narayanmurthy cleaning up the house.

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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.)

WTI and Brent Crude Oil charts: an update

WTI Crude chart

In the previous post, the daily bar chart pattern of WTI Crude oil was expected to correct due to negative divergences visible on the technical indicators. Oil’s price dropped and closed below its 200 day EMA accompanied by a volume spurt on Mar 12 ‘14.

After spending a couple of days in bear territory, oil’s price gradually moved up above its 200 day EMA. But the rally has been far from convincing because volumes have been sliding with stronger volumes on down days. Oil’s price is in the process of forming a bearish ‘rising wedge’ pattern from which the likely break out is downwards.

Technical indicators are looking bearish. MACD has dropped into negative territory below its falling signal line, but trying to turn around. RSI is just below its 50% level. Slow stochastic has emerged from its oversold zone.

On longer-term weekly chart (not shown), oil is trading above all three weekly EMAs but technical indicators are turning bearish. A drop below its recent low of 97.50 can take oil’s price down to 93.

Brent Crude chart

The following comments in the previous post on the 6 months daily bar chart pattern of Brent Crude oil are repeated here: “All three EMAs have converged together and oil’s price is trading below them. There could be a quick drop towards 104.”

Oil’s price dropped down to 105.50 before recovering a little. Since touching a high of 112 at the beginning of the month, a bearish pattern of lower tops and lower bottoms has formed. All three EMAs are falling and oil’s price is trading below them in a bear market.

Daily technical indicators are in bearish zones. MACD has stopped falling, but remains below its falling signal line in negative territory. RSI is below its 50% level. Slow stochastic has emerged from its oversold zone.

On longer-term weekly chart (not shown), oil is trading above its 200 week EMA but technical indicators have turned bearish. A drop below its recent low of 105.50 can take oil’s price down to 103.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 21, ‘14

S&P 500 Index Chart

The daily bar chart pattern of S&P 500 recovered quickly from its previous week’s corrective move below its 20 day EMA. It rose to touch a new intra-day high on Mar 21 ‘14 that was marginally higher than its previous high touched on Mar 7 ‘14, but formed a ‘reversal day’ pattern with a big spurt in volumes.

All three technical indicators are in bullish zones, but showing negative divergences by touching lower tops. A consolidation or corrective move is likely. Has the index formed a ‘double top’ reversal pattern? Technically, the answer is ‘no’. Why?

First, the volume. The formation of the second top should be on lower volumes. Second, on a closing basis, the second top was much lower. Third, the index has not yet dropped below the ‘valley’ between the two tops. At the time of writing this post, the index is trading just a point higher.

All three EMAs are rising and the index is trading above them. The long-term bull market keeps charging ahead.

FTSE 100 Index Chart

The following remarks were made in last week’s analysis of the daily bar chart pattern of FTSE 100: “The index may pullback towards its 200 day EMA in an effort to return to bull territory. The dip is an adding opportunity.”

The index pulled back and crossed above its 200 day EMA and the 6600 level but could not remain in bull territory for long. It closed below its 200 day EMA for the second straight week but gained about 30 points.

Daily technical indicators are bearish, but beginning to correct oversold conditions. MACD is still falling below its signal line in negative territory, and is just above the edge of its oversold zone. RSI has bounced up from the edge of its oversold zone. Slow stochastic is trying to emerge from its oversold zone.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 indices are still in the midst of bull market corrections. S&P 500 is recovering from a sharp bear attack and is trading near its lifetime high. FTSE 100 is struggling to get out of a strong bear grip, but appears to have formed a higher bottom at about 6500. Stay invested.

Sunday musings: ask questions first and shoot later

In the American ‘Wild West’, shooting first and asking questions later was simply a survival strategy. If you didn’t shoot first, you were probably going to end up dead. That mentality prevails even today. The invasion of Iraq by the US is a classic example.

Politicians are adept at shooting off with their mouths first – particularly during election campaigns. If an opponent is seen as a potential threat, slander and muckraking begins straightaway. One can always apologise later, but the stigma often sticks. Narendra Modi will never escape the spectre of the Godhra riots. Arvind Kejriwal is the butt of jokes for being too honest.

The proverb has two connotations – to act boldly, or, to act without weighing the consequences. When a group of peaceful protesters suddenly morph into a vicious stone-throwing mob, ‘weighing the consequences’ could lead to the situation getting completely out of hand. Shooting first – with rubber bullets or water cannons – may be the only choice.

Inexperienced investors – and sometimes even seasoned ones – often fall through the crack between the two meanings. Quickly buying or selling a stock because it has suddenly spurted or crashed is considered bold behaviour. Justifications are then provided or sought to prove that it was a smart move.

A recent example has been the stock price of KSB Pumps. After consolidating in the range of 180-240 for 18 months, the stock broke out to 280, pulled back to 240 and then in a sudden price spurt rose past 340. Investment forums are now full of chatter about why this is a great stock to buy. One contrarian(?) investor confidently stated that he had sold at 280 because the stock was overvalued.

In the world of investments, a survival strategy is to ask questions first and shoot later. Too often investors get into trouble by buying a stock or shorting an index at exactly the wrong time. Probably they don’t want to ‘miss the bus’ – not realising that a little patience would enable them to catch the next bus.