The first trading week of the year saw no respite from selling by FIIs. Their net selling in equities touched Rs 19 Billion, as per provisional figures. DIIs were net buyers of equity worth Rs 16.2 Billion. Both Sensex and Nifty managed to eke out small gains (of 0.5% and 0.7% respectively).
India's GDP growth in fiscal 2016-17 is expected to slow down to 7.1% from 7.6% a year ago. But the forecast is based on data available till Oct '16. Experts are predicting a much slower growth of 6.3-6.4% once the full effect of demonetisation of high-value bank notes is taken into account.
BSE Sensex index chart pattern
The daily bar chart pattern of Sensex almost extricated itself from the four months long bear grip. Why almost?
Have a close look at the last two trading bars (highlighted by light blue circle). The index broke out above the blue down trend line on Thu. Jan 5, and closed above its three EMAs in bull territory. Bears asserted themselves on Fri. Jan 6.
The index rose higher and touched the 27000 level intra-day, but pulled back to the top of the down trend line and closed below its 200 day EMA - forming a 'reversal day' bar (higher high, lower close), which often marks an intermediate top.
Daily technical indicators are looking bullish. MACD is rising above its signal line and entered positive territory after more than three months. RSI has crossed above its 50% level. ROC is facing resistance from the edge of its overbought zone. Slow stochastic is turning down after entering its overbought zone.
The index may consolidate or correct a bit before resuming its up move. Q3 (Dec '16) results of TCS and Infosys will be announced next week - which may be a bellwether for the market.
The index crossed above its intermediate top of 26804 - technically confirming a 'double bottom' reversal pattern. Unless FIIs resume buying, do not expect a runaway rally.
NSE Nifty index chart pattern
The weekly bar chart pattern of Nifty managed to cross above its intermediate top of 8275 intra-week, but faced strong resistance from its 20 week EMA and the 8300 level.
The index closed lower (at its 50 week EMA). Technically, the 'double bottom' reversal pattern has not yet been confirmed. The blue down trend line is still in force.
All four weekly technical indicators are showing upward momentum, but remain in bearish zones. Bears may put up a fight to defend the down trend line.
Nifty's TTM P/E remains high near 22. The breadth indicator NSE TRIN (not shown) is in neutral zone, but falling rapidly towards its overbought zone. Any further up move may fizzle out quickly.
Bottomline? Sensex and Nifty charts show that bulls have made good progress, but bears are in no mood to relent just yet. FII buying support is essential for any sustained rally. Await Q3 (Dec '16) results before taking any major buy/sell decisions.
(Note: Don’t worry about index fluctuations! Learn how to choose fundamentally strong mid-cap and small-cap stocks. Become a paid subscriber of my Monthly Investment Newsletter. A limited number of new subscriptions are being offered till Jan. 21, 2017. Enrollments have started. Contact me for details: mobugobu@yahoo.com.)
'Selling Short' is a strategy when you are feeling bearish. You expect that the stock market as a whole, or a specific stock you may or may not hold, will be falling lower. So, you decide to sell first - and try to buy later at a lower price.
Shorting usually means selling some thing that you do not already own. You obviously can't own the index. But you can buy/sell an index in the F&O segment or buy/sell an index ETF.
How can you 'short sell' a stock that you don't own? By borrowing the stock - either from a friend, or from your broker. You may need to pay a 'margin' amount for doing this.
'Going long' is the opposite of 'selling short'. You are feeling bullish, and expect the stock market or a specific stock will be rising higher. So, you decide to buy first with the expectation of selling at a higher price in future.
Most small investors take the 'going long' route. It is an easier concept to understand and implement. But it works best when a stock or an index is in a bull market.
A stock or an index doesn't move up in a straight line. There are periods when there is an up move, followed by periods of correction. Such corrections provide opportunities for adding more. The tactic is called 'buying the dip'.
'Selling short' works best when a stock or index is in a bear market. Every fall in a stock or index is followed by periods of correction when there is a price rise. Such corrections provide opportunities for selling more. The tactic is called 'sell on rise'.
Now that you know all about 'selling short' and 'going long', which strategy should you follow? It should depend on the strategy with less risk. So, which is the less riskier strategy? This can be explained with examples.
Let us say you buy a stock at Rs 50. The price rises to Rs 70 and then corrects to Rs 60. You 'buy the dip'. The price rises to Rs 90 and then corrects to Rs 80. You 'buy the dip' again. This time the stock price touches Rs 100 and you decide to book profit.
But making money in the stock market is never that easy. What if the stocks price drops to Rs 40 after you bought it at Rs 50. Will you 'buy the dip' by 'averaging down' or sell the stock at a loss?
Many small investors lose a lot of money when they 'average down' by buying a stock as it falls. Theoretically, the stock's price can fall to zero, and you can lose your entire investment.
A better strategy when a stock or an index is falling is to 'sell short'. But there is a problem here. What if you ' short sell' the stock at Rs 50, expecting it to go down, but it rises to Rs 60? Your friend or broker - who loaned the stock to you - may want the stock back.
You have two choices. Buy back the stock at Rs 60 and bear the loss of Rs 10 per stock. Or, you can keep your short position 'open' by paying an interest (called 'margin') and hoping that the price will eventually fall.
But the price keeps on rising, till you are forced to buy back at a much higher price and sustain a considerable loss. Theoretically, the stock price can rise to infinity, which means your loss can be infinite.
That may not happen in real life, but it isn't impossible for a Rs 50 stock to rise to Rs 500 (a 'ten bagger'). By 'going long' on a Rs 50 stock, you can lose Rs 50 at most (unless you 'average down' - in which case you can lose a lot more). By 'selling short' a Rs 50 stock, you can lose Rs 450 if the stock rises to Rs 500!
By applying a proper stop-loss to what you buy or sell, you can limit how much you can lose on a particular transaction. However, the fact remains that 'selling short' involves a greater risk than 'going long'.
(In a bear market, a less risky strategy is to 'short' a stock you already own. That means no borrowing and no paying of 'margin' money. Say, you decide to sell Tata Motors at Rs 500 - hoping to buy it back at a lower price. But the price moves up to Rs 550. You don't lose any money because you already owned the stock. But you do lose the opportunity of making an extra Rs 50.)
Read this article in investopedia.com to learn more.
Activities were muted during the first three trading days of the year. FII net selling in equities was worth Rs 15.6 Billion, as per provisional figures. DIIs were net buyers of equity worth Rs 10.1 Billion.
The Nikkei/Markit Services PMI was almost unchanged at 46.8 in Dec '16 against 46.7 in Nov '16. The Manufacturing PMI fell to 49.6 in Dec '16 against 52.3 in Nov '16 - as demonetisation of Rs 500 and Rs 1000 bank notes took its toll.
The composite PMI (including services and manufacturing) fell to a three years low of 47.6 in Dec '16 against 49.1 in Nov '16. (A number below 50 indicates contraction.)
Domestic auto sales in Dec '16 were a mixed bag. Maruti, Hyundai, M&M showed 4-8% fall in sales (compared with sales in Dec '15). Renault and Toyota showed sales growth of 9% and 29%.
The daily bar chart pattern of Nifty had bounced up after touching a slightly lower bottom on Dec 26 '16. Note that MACD and RSI touched higher bottoms. The positive divergences triggered a technical bounce.
Has the index formed a 'double bottom' reversal pattern? Technical confirmation is still awaited. The index needs to cross convincingly above the intermediate top (of 8275, touched on Dec 9) between the two bottoms.
The index has been facing strong resistance from its falling 50 day EMA during the first three trading days of Jan '17. Looming overhead are likely resistances from the 200 day EMA and the down trend line.
The zone between 8200 and 8300 is a long-term resistance zone. Both the 50 day and 200 day EMAs are within the resistance zone. Bulls will need to work real hard if the index has to move above 8300.
Daily technical indicators are not holding out much hope for bulls. MACD is rising above its signal line, but remains in negative zone. RSI is moving sideways in neutral zone, and not showing any upward momentum. Slow stochastic has entered its overbought zone, but its upward momentum has stalled.
Nifty's TTM P/E is hovering near the 22 mark - well above its long-term average. The breadth indicator NSE TRIN (not shown) seems stuck in neutral zone. The index appears to be running on a treadmill as it awaits Q3 (Dec '16) results.
Nifty needs to make a strong move above 8300 or below 7900 to break its current state of ennui. The dominant down trend line and the 'death cross' (marked by brown oval) of the 50 day EMA below the 200 day EMA means the bears are in control of the chart.
(Note: If you already have a stock portfolio, and are looking to add good quality mid-cap and small-cap stocks, subscribe to my Monthly Investment Newsletter. A limited number of paid subscriptions are being offered till Jan 21, 2017.)
Gold chart pattern
The following comments were made in the previous post on the daily bar chart pattern of Gold: "Daily technical indicators have been in oversold zones for more than a month, and showing positive divergences by not falling lower with gold's price. Don't expect a trend reversal any time soon, as bears are selling on every rise."
Gold's price found some support at 1130, followed by a technical bounce that took gold's price just above its 20 day EMA on Dec 29.
However, after moving briefly above the 1160 level on the last trading day of the year, gold's price formed a 'reversal day' bar (higher high, lower close) that often marks an intermediate top.
Daily technical indicators are giving mixed signals. MACD is rising above its signal line, but remains in negative zone. Slow stochastic has climbed above its 50% level. RSI failed to reach its 50% level and has turned down.
With the US Dollar remaining strong, bears are likely to ensure that gold's price stays subdued.
On longer term weekly chart (not shown), all three weekly EMAs are falling, and gold’s price has closed well below them in a long-term bear market. Weekly technical indicators are looking bearish and oversold.
Silver chart pattern
The daily bar chart pattern of Silver bounced up after receiving support from the 15.75 level, but faced strong resistance from its falling 20 day EMA.
On Dec 30, a 'reversal day' bar (higher high, lower close) put paid to any bullish hopes.
Daily technical indicators are in bearish zones and not showing any upward momentum. Lower levels are likely.
On longer term weekly chart (not shown), silver’s price closed well below its three weekly EMAs in a long-term bear market. Weekly technical indicators are looking bearish and oversold.
S&P 500 index chart pattern
The following comments from last week's post on the daily bar chart pattern of S&P 500 may be noted: "... the index should breakout upwards from the triangle. However, triangles tend to be unreliable patterns. A breakout can also occur downwards ..."
The index broke out upwards from the small symmetrical triangle on Dec 27, but with low volume support. Upward breakouts should be accompanied by a significant increase in volumes to be technically valid.
An 'end-run' like sharp downward move followed. After receiving brief support from the 20 day EMA on Dec 29, the index dropped to close below the 2240 level. During 2016, the index gained about 195 points (9.5%).
Daily technical indicators are looking bearish after correcting overbought conditions. MACD is falling below its signal line in positive zone - after forming a 'rounding top' reversal pattern. RSI is seeking support from its 50% level.
Slow stochastic has dropped inside its oversold zone. Some more correction towards the rising 50 day EMA is likely.
On longer term weekly chart (not shown), the index closed well above its three weekly EMAs in a long-term bull market for the 43rd week in a row. All three weekly technical indicators are in the process of correcting overbought conditions.
FTSE 100 index chart pattern
After forming a 'double bottom' reversal pattern during Nov '16, the daily bar chart pattern of FTSE 100 rallied during Dec '16 as if there will be no tomorrow.
In a holiday-curtailed trading week marked by low volumes (not shown), the index rose to touch and close at a new lifetime high - gaining 900 points (>14%) during 2016.
The index is trading above its three rising EMAs in a bull market, but has formed a narrow 'rising wedge' pattern from which a downward breakout is the most logical outcome.
All three daily technical indicators are inside their respective overbought zones - warning about a correction.
On longer term weekly chart (not shown), the index closed well above its three weekly EMAs in a long-term bull market for the 27th week in a row. Weekly technical indicators are looking overbought and showing negative divergences by failing to touch new highs with the index.
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, 2017. A limited number of subscriptions are being offered to blog visitors, blog followers, blog subscribers and twitter followers – on a first-come first-served basis – to enable me to provide personalised attention and guidance to each subscriber.
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The newsletter has completed 84 issues, with its share of hits and misses. The stock market touched a 52 weeks high in Sep, 2016 but the subsequent correction meant Sensex gained less than 2% and Nifty gained only 3% for the year.
Many mid-cap and small-cap stocks made excellent gains - which made stock selection difficult as finding value became a challenge. The 4 months long correction since Sep '16 brought down most selected stocks from their peaks – affecting year-end performance. It is gratifying that subscribers have still kept faith in my stock picking abilities.
Those who have been regularly following my blog posts over the past few years already know what kind of stocks to select, and what type of stocks to avoid. The guiding principle is to choose well-managed, financially prudent companies that generate cash from operations, have low debt, give steady (rather than spectacular) returns and have growth prospects.
Non-subscribers may be interested to know how the recommended 18 mid-cap and small-cap stocks have fared during the past 18 months. Without revealing the names of the stocks (it won’t be fair to my subscribers to do so), here is a brief summary of performance as on Dec 30, ‘16:
- 9 stocks have gained more than 25%, of which 4 have gained between 25-50%; 3 have gained between 50-100%; 1 has gained 105%; 1 has gained nearly 200%
- Of the balance 9 stocks, 2 have gained between 10-25%, 1 has gained between 0-9% and 6 have lost 2-18%
- All 18 stocks had touched higher levels after my recommendations
That may not seem all that great, but remember that the market has been in a down trend for the past 4 months - thanks to FII selling. So, let me provide a different perspective on the above performance:
By blindly investing (not recommended) Rs 20,000 in each of the 18 stocks and holding on till Dec 30 ‘16, a subscriber would be sitting on gains of close to Rs 123,000 (34.1%) – comfortably outperforming the Sensex (-4.3%), Nifty (-2.3%), BSE Mid-cap index (12.6%), and BSE Small-cap index (8.3%).
What is important to understand is that none of these stocks were ‘cheap’ – fundamentally strong stocks rarely are - and some had already run up a lot when they were recommended.
If you wish to add fundamentally strong mid-cap and small-cap stocks with growth potential to your portfolio, why wait? Just subscribe to my Monthly Investment newsletter. Send me an email (at mobugobu@yahoo.com) soon – subscriptions will close on Jan 21, 2017.
For the third month in a row, FIIs were net sellers of equity. Their total sales crossed Rs 113 Billion during Dec '16. DIIs were net buyers of equity worth Rs 91 Billion, but their net buying exceeded FII net selling during the last week of the year.
That allowed both Sensex and Nifty charts to regain some lost ground, and form what are looking like 'double bottom' reversal patterns. On a monthly basis, Sensex closed only about 0.1% lower and Nifty closed about 0.5% lower.
The NDA government has plugged another loop-hole for 'black money' creation by 'round tripping through hawala' by amending its Double Taxation Avoidance Agreement (DTAA) with Singapore.
BSE Sensex index chart pattern
The daily bar chart pattern of Sensex bounced up after touching a slightly higher bottom of 25754 on Dec 26 and crossed above its falling 20 day EMA, but failed to overcome resistance from its falling 50 day EMA.
Has the index formed a 'double bottom' reversal pattern? The 5 weeks gap between the Nov 21 and Dec 26 bottoms indicates a 'yes'. But the lower volumes (not shown) on Dec 26 says 'no'.
The index needs to convincingly cross above its intermediate top of 26804 - touched on Dec 9 - to technically confirm the 'double bottom'.
Daily technical indicators are turning bullish. MACD has crossed above its signal line in negative zone. ROC and RSI are in neutral zones, but showing a bit of upward momentum. Slow stochastic is rising above its 50% level.
FII activity is typically on a low key during the Christmas-New Year period. That has helped bulls. However, the zone between 26700 and 26900 has multiple resistances, viz. the falling 50 day EMA, the blue down trend line and the 200 day EMA.
In case the index is able to cross above the resistance zone - it will be a bullish trigger. If you have been waiting for much lower levels to enter, your chance may have come and gone.
Timing exit/entry at exact tops and bottoms is always difficult. Regular and systematic investing with a long time frame works better for most investors.
NSE Nifty index chart pattern
The weekly bar chart pattern of Nifty touched a lower bottom of 7894 in the week ending on Dec 30 '16, but bounced up sharply. Note that volumes were lower during the formation of the second (lower) bottom. But that may be attributed to lower FII activity during the year-end.
To technically confirm a 'double bottom' reversal pattern, the index needs to cross convincingly above its intermediate top of 8275 touched in the week ending on Dec 9.
Weekly technical indicators are in the process of correcting oversold conditions. ROC and Slow stochastic are showing positive divergences by not falling lower with the index.
There are multiple overhead resistances (between 8250 and 8400) that the index needs to overcome; viz. 50 week EMA, 8300 level, 20 week EMA and the blue down trend line. Expect bears to strongly defend the resistance zone.
Nifty's TTM P/E stayed below 22 throughout the month - varying between 21.16 and 21.93. Breadth indicator NSE TRIN (not shown) is falling in neutral zone - hinting at some more upside.
A strong bull rally is unlikely. With the US Dollar remaining strong against emerging market currencies, FIIs may resume selling in the New Year.
Bottomline? Sensex and Nifty charts show that bears still have the advantage, but bulls have managed to stand their ground. Without FII buying support, any sustained rally will be difficult. Wait for Q3 (Dec '16) results before taking any major buy/sell decisions.
