Sunday musings: what small investors should learn from the fate of the barber who killed the monks

[“Probably no other work of Hindu literature has played so important a part in the literature of the world as the Sanskrit story collection called the Panchatantra.” – Franklin Edgerton, former Professor of Sanskrit and Comparative philology, Yale University.]

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The original Panchatantra was written some time during BC 100 and AD 500. A Pahlavi (Iranian) translation was made in the 6th century AD. An Arabic translation from the Pahlavi version in AD 750 became very popular in Arabic literature.

In the 11th century AD, the Arabic version was translated into Greek, Spanish and Hebrew versions. The Greek version was later translated into Italian, Latin and German versions. An English version was published in 1570.

Some claim that several of Aesop’s Fables were borrowed from the Panchatantra. Others claim the opposite – i.e. some of the Panchatantra stories have been borrowed from Aesop’s Fables. Whatever the actual origins, many of these old morality stories have relevance even today – like the story of the barber who killed the monks.

A wealthy merchant’s son had fallen upon hard times. He lived in his broken-down ancestral home with an old maid – who had nursed him during his childhood – as company. Every evening he would pray to God that his poverty be alleviated.

One night, he had a dream. Three monks woke him up to tell him that they would be visiting him the next day. They were actually the manifestations of three heaps of treasure stored away by forefathers of the merchant’s son.

The merchant’s son was to show no mercy and kill all three immediately – whereupon they would turn back into three heaps of money.

On waking up the next morning, he asked the old maid to clean the house properly and prepare the best meal possible from the meagre rations available. Some time later, a barber came to his home for the monthly trimming of his beard and nails.

Just when the barber had finished his trimming, the three monks of his dream walked in through the door. He killed all three at once and they immediately turned into three heaps of money.

From the piles of money, the merchant’s son gave a hefty amount to the barber as a bribe to keep him quiet. But the barber drew a hasty conclusion from what he had seen, and decided to kill three monks himself.

When three monks came begging to the barber’s house a few days later, the barber promptly killed them – but he got no treasure. The king’s guards came and arrested him and hanged him in public for his crime.

Moral of the story (for small investors in particular): Don’t get unduly influenced by stories of friends/relatives who have made a killing in the stock market in a short span of time. By trying to follow in their footsteps without adequate preparation, you may get killed instead.

You should not enter the stock market to make quick money. Stock market is a place where you can build wealth for the long-term. That will require patience, discipline, a plan and never forgetting what happened to the barber.

BSE Sensex and NSE Nifty 50 index chart patterns – May 29, 2015

There was good news for bears and bulls at the close of trading on May 29 ‘15. Incidentally, it was a combined daily (higher), weekly (lower) and monthly (higher) close.

Good news for bears: down trends from lifetime highs touched in Mar ‘15 (marked by blue down trend lines on Sensex and Nifty charts below) have not been reversed yet.

Good news for bulls: on monthly charts of Sensex and Nifty (not shown), ‘reversal bar’ patterns (lower low, higher close) have formed. That is an indication that the 3 months long corrections may be over.

As per provisional figures, FIIs were net sellers of equity worth Rs 4400 Crores during May ‘15 – though they were net buyers of Rs 2200 Crores on May 29. DIIs were net buyers of equity worth Rs 7500 Crores – though they were net sellers of Rs 2200 Crores on May 29.

Q4 (Mar ‘15) results continue to pour in. As expected, there have been more misses than hits. Big boys like TISCO, TELCO, M&M have been in the former category.

An interest rate cut of at least 25 bps is likely from RBI next week. A 50 bps cut will be a positive surprise. If RBI decides to wait and watch instead, bears will have a field day.

BSE Sensex index chart

The daily bar chart pattern of Sensex managed to close above its three daily EMAs in bull territory, after receiving support from the lower edge of the ‘support-resistance zone’.

The index has formed a bullish pattern of ‘higher tops and higher bottoms’ since touching a low of 26424 on May 7 ‘15, but closed lower on a weekly basis.

Failure to cross above the blue down trend line means that bears still have the upper hand.

Daily technical indicators are looking bullish, but their upward momentum is not strong. MACD is above its signal line, and poised to enter positive zone. ROC is in positive zone, but facing resistance from its 10 day MA. RSI is sliding down towards its 50% level. Slow stochastic has dropped from its overbought zone.

The index went through a decent 12% correction, and looks ready to resume its rally. Bears may not give up easily.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty faced strong resistance from its 20 week EMA, and closed about 25 points lower on a weekly basis. The blue down trend line is likely to provide strong resistance as well.

Weekly technical indicators have corrected oversold conditions, but haven’t turned bullish yet. MACD is below its falling signal line, and moving sideways above the ‘0’ line. ROC has crossed above its 10 week MA, but remains in negative zone. RSI is moving sideways below its 50% level. Slow stochastic is rising towards its 50% level.

The index may attempt to cross above the down trend line. Strong volumes on a down week is a sign that bears are in no mood to give up control just yet.

Bottomline? BSE Sensex and NSE Nifty charts are in the process of recovering from strong bear attacks but have so far failed to cross above their respective down trend lines. Add to existing portfolios if both indices cross convincingly above their down trend lines. Stay invested till then.

Pluses and minuses of Modi government’s first year - a guest post

The ground-swell of support for the likely installation of a Modi-led government was clearly visible in the stock market last year. The situation has changed quite a lot since then – and the current state of the stock market is a clear reflection of what might have been.

The expectations of ‘achhe din’ from citizens were too high. Change – particularly of the structural kind – doesn’t happen in a hurry. Several initiatives have set the tone of this government’s priorities. Much more needs to be done to get the economy back on the growth track.

The first year was a year of consolidation. Modi needed to comprehend the nuances of parliamentary democracy. In this month’s guest post, Nishit provides an assessment of the achievements and failures during the first year of Modi’s government.

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The Modi Government has completed a year in office and amidst all the hoopla let us try and examine whether it has achieved enough during the first year.

The biggest problem this government has faced is the burden of high expectations which they themselves created. India is a complex country and no Prime Minister can expect to solve all the problems in 1 year or maybe even 5 years. To put things into perspective, this 1 year should serve as a base on which Modi can build for the next 4 years.

The first year is the foundation, years 2 and 3 main building blocks and years 4 and 5 are when results should be visible on ground if Mr Modi expects to be re-elected.

The plus points of Year 1:

1. Foreign Diplomacy. Ironically what was expected to be the weakest link has turned out to be the strongest part of Modi’s initiatives. Modi has managed to network with who’s who of the International community and this may serve in good stead over the next 4 years. We are now linked to a global economy and it helps if our leaders have a personal rapport with the top leaders of other countries.
2. Social schemes like the Jan Dhana Yojana. The inclusive concept of everyone having a bank account can lead to much bigger things. The twin insurance schemes are the best thing that could happen to the poorer sections of the Indian population. Many people leave nothing for their families to survive on if they die suddenly. The 2 lakhs insurance will at least give such families some breathing space.
3. Swachh Bharat and similar slogans are needed for a basic reason; most places in India are pretty unhygienic. Such Initiatives do not need much investment but at the same time can be effective in creating awareness among people.
4. The Coal auction put in place a mechanism where coal is available for power plants. India does not need more power plants. It needs all the existing power plants to be optimally used. Reforming the State Distribution companies is the next step.
5. The Land Acquisition and GST bills are the next steps. These are the key steps for Year 2 for Mr Modi.

The negatives:

1. Intemperate statements made by whole lot of fringe elements - amongst them a few Ministers. When the time is to build bridges and walk the extra mile to assure the minorities, such statements help nobody.
2. Grandiose claims by some Ministers over road building and other initiatives by trying to claim credit for something which has not yet been achieved.
3. Needless tax issues created to hassle FIIs. Either the Government goes ahead by taxing these guys or it doesn’t. There is no point by creating a scare and then pulling back from the brink.

All in all a good beginning has been made. More effects should be seen in Year 2. People always have the option of voting out the present government in 4 years time.

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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. You can reach him at nish.stockid@gmail.com)

WTI and Brent Crude Oil charts: an update

WTI Crude chart

The daily bar chart pattern of WTI Crude has been consolidating sideways with a downward bias since touching a high of 62.50 on May 6 ‘15. It appears to be forming a ‘falling wedge’ pattern that has bullish implications.

Strong volumes on down days mean that bears are in no mood to give up without a fight. There is a possibility that the ‘falling wedge’ may turn out to be a ‘descending triangle’ – which is a bearish pattern. It may be prudent to wait for the pattern to play out over the next couple of weeks.

Daily technical indicators are giving mixed signals – which is often the case during periods of consolidation. MACD is moving sideways in positive zone, but is below its signal line. Note that the signal line has formed a bearish ‘rounding top’ pattern.

RSI bounced up from its 50% level, but is moving down. Slow stochastic has dropped below its 50% level, but moving up. Oil’s price is trading below its 200 day EMA in a bear market.

On longer term weekly chart (not shown), oil’s price has spent 6 weeks above its rising 20 week EMA, but is trading well below its falling 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are looking bullish, but giving mixed signals. MACD is showing good upward momentum in negative zone. RSI has just managed to move above its 50% level. Slow stochastic is inside its overbought zone, but is falling.

Brent Crude chart

The daily bar chart pattern of Brent Crude oil has been consolidating sideways within a ‘falling wedge’ pattern since touching a high of 69.50 on May 6 ‘15. The likely breakout from a ‘falling wedge’ is upwards.

Note that an upward breakout should be accompanied by a significant increase in volumes – otherwise the breakout may turn out to be a ‘false’ one. Strong volumes on down days show that bears remain active despite a strong rally from the Jan ‘15 low. Oil’s price may consolidate some more within the ‘wedge’.

Daily technical indicators are giving mixed signals – which sometimes happen during periods of consolidation. MACD is moving sideways in positive zone, but is below its signal line. Note that the signal line has formed a bearish ‘rounding top’ pattern.

RSI bounced up from its 50% level, but is moving down towards it. Slow stochastic has bounced up weakly from the edge of its oversold zone. Oil’s price is trading below its sliding 200 day EMA in a bear market.

On longer term weekly chart (not shown), oil’s price has spent 6 weeks above its rising 20 week EMA, but is trading well below its falling 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are giving mixed signals. MACD is showing good upward momentum in negative zone. RSI has slipped below its 50% level. Slow stochastic has dropped down from its overbought zone.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – May 22, 2015

S&P 500 Index Chart

The daily bar chart pattern of S&P 500  traded sideways within a narrow 15 points range during the week gone by. The index touched a new intra-day high of 2135 on Wed. May 20, but formed a small ‘reversal day’ bar pattern (higher high, lower close).

The next day it touched a slightly lower top, forming a small ‘double top’ reversal pattern and closed the week with a paltry 3 points gain. All three EMAs are rising and the index is trading above them in a long-term bull market.

But bearish indications abound. Volumes on Tue. and Wed. – both down days – were the highest during the week. The rally from the May 6 low of 2068 has been accompanied by sliding volumes. All three technical indicators are in bullish zones but showing negative divergences by failing to touch new highs with the index.

The bull market is climbing a wall of technical worries. Stay invested, but be prepared for a sharp correction at any time.

On longer term weekly chart (not shown), the index closed at a lifetime high above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but showing negative divergences by failing to touch new highs with the index.

FTSE 100 Index Chart

The daily bar chart pattern of FTSE 100 closed higher on all five days of the trading week – ending up well above the 7000 level and its three daily EMAs in bull territory, gaining 1% on a weekly basis.

The index has been trading within a ‘symmetrical triangle’ pattern since touching a lifetime high of 7123 on Apr 27 ‘15. An attempt at an upward breakout from the triangle on Fri. May 22 ended in failure due to lack of volume support.

Daily technical indicators are looking bullish. MACD has crossed above its falling signal line to enter positive zone. RSI has moved above its 50% level. Slow stochastic is rising towards its overbought zone.

Another attempt at an upward breakout from the triangle is likely.

On longer term weekly chart (not shown), the index is trading above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, and showing some upward momentum.

Sunday musings: Why Eklavya’s sacrifice should be a warning about trading in stock or index futures

The epic, Mahabharata, has many stories and incidents that reveal man’s inhumanity towards fellow humans. The well-known story of Eklavya’s sacrifice is a classic example.

For those not in the know, or have forgotten what they had heard from their grandmothers when they were small children, here is a quick recapitulation.

Eklavya was a low-caste hunter who had ambitions of becoming a warrior. So he sought to learn archery at Dronacharya’s martial arts ‘school’. Dronacharya was appointed by the king of Hastinapur to teach the Kaurava and Pandava princes.

The brahmin Dronacharya refused to teach the low-caste boy. The third Pandava, Arjuna, who was Dronacharya’s favourite pupil, shooed Eklavya away by saying that a low-caste person was not fit to learn along with high-caste princes.

Eklavya was disappointed but not disheartened. He built a clay model of Dronacharya and installed it in a forest clearing. He regularly practised archery in front of his model ‘guru’, and became an expert archer within a few months.

One day, a barking dog disturbed his practice. In a fit of pique, he shot a few arrows into the dog’s mouth. The dog wasn’t hurt too badly, but stopped barking. By chance, the Kaurava and Pandava princes were on a field trip in the same forest. Dronacharya and Arjuna came upon the dog with a mouthful of arrows.

Astonished by the sheer skill of the archer, they sought and found Eklavya practising. When asked who his teacher was, Eklavya pointed to Dronacharya’s clay model. Arjuna was very upset at finding an archer with better skills than him. Dronacharya was secretly happy but to pacify Arjuna, wanted Eklavya’s right thumb as ‘guru dakshina’ (teacher’s fees).

The young boy cut off his own thumb without hesitation. Dronacharya blessed him and said that Eklavya will still be a great archer – which he became by learning to shoot arrows with his forefinger and middle finger (much like modern archers do now).

Moral of the story? Entering into any venture may seem easy at the beginning. Skills can be learnt by perseverance and hard work. But future consequences often depend on the skills and mental acumen of competitors.

Does that mean avoiding any venture due to the fear of competition? Obviously not. But weighing possible future consequences and having an appropriate strategy before starting out can save you from financial disaster.

Most small investors lose their shirt in the F&O market because of their failure to weigh future consequences. Particularly in the futures market, the risk of making a huge loss far outweighs the easy margin entry and possibility of making some quick profits.

Remember that competitors in the F&O market are typically large institutional investors and HNIs with huge resources in terms of money, research and experience. They will beat you regardless of your skill levels.

Want to make money in the stock market the easy way? Read this post.

BSE Sensex and NSE Nifty 50 index chart patterns – May 22, 2015

Both FIIs and DIIs were net buyers of equity during the week – of about Rs 1800 Crores each. While DIIs were net buyers on all five trading days, FIIs did the bulk of their net buying on Mon. May 18, and were net sellers of small amounts on Tue. May 19 and Fri. May 22.

Sensex and Nifty continued with their recoveries, and closed higher for the 3rd week in a row. But both indices are technically still in down trends after touching lifetime highs on Mar 4 ‘15. Bulls have some work left before the indices can reverse their down trends.

One year of the Modi government has brought mixed reactions from India Inc. Some have appreciated the disappearance of power brokers and corruption. Others have lamented the lack of big-bang reforms. The MAT fiasco should never have occurred. Floor management in the Rajya Sabha could have been coordinated better for passing important bills.

BSE Sensex index chart

The daily bar chart pattern of Sensex managed to close above its three daily EMAs in bull territory after 5 weeks. The 20 day EMA has formed a bullish ‘rounding bottom’ pattern. The 50 day EMA has stopped falling. The 200 day EMA is about to start rising. These are all near term bullish signs.

However, the blue down trend line – connecting the Mar ‘15 and Apr ‘15 tops has not been breached yet. That means the down trend from the Mar 4 ‘15 top is still in force. Though all four technical indicators are looking bullish, two of them – ROC and RSI – are showing downward momentum.

Expect bears to put up a fight to defend the down trend line. If Sensex manages to convincingly cross above the down trend line, the upper edge of the ‘support-resistance zone’ (at 28800) may provide strong resistance.

What can cause the index to start another leg of the down trend? Two things. RBI governor may decide not to cut interest rates – against consensus estimate of analysts. The onset of monsoon may get delayed.

As of now, both those events appear unlikely. The scales are slightly tipped towards bulls.

NSE Nifty 50 index chart

The weekly bar chart pattern of Nifty crossed above its 20 week EMA intra-week and closed just above it after 5 weeks. Despite three straight higher weekly closes, the falling volume bars indicate that bulls have not regained control yet.

The blue down trend line connecting the Mar ‘15 and Apr ‘15 tops is at the same level as the upper edge of the ‘support-resistance zone’ (at 8630). Expect bears to put up a good fight to preserve the down trend.

Weekly technical indicators are showing signs of bullishness. MACD is moving sideways below its falling signal line in positive territory. ROC has just crossed above its 10 week MA in negative territory. RSI is rising slowly, but is below its 50% level. Slow stochastic has emerged from its oversold zone.

The index is recovering from a strong bear attack, but the recovery is far from complete.

Bottomline? BSE Sensex and NSE Nifty charts are gradually recovering from strong bear attacks but are facing resistances from their respective down trend lines. Expect the indices to consolidate within the ‘support-resistance zones’. An expected interest rate cut, and an early onset of monsoon can boost bullish sentiments. Stay invested.