Many analysts try to convey the impression that technical analysis is an esoteric practice not meant for investors at large. The more jargon one uses, the more it helps to obfuscate the uninitiated.
Contrary to its name, there is nothing 'technical' about technical analysis. So, what is it?
A graphical representation of stock prices (or index level) over time leads to certain well-identified price patterns that reveal the underlying supply and demand for the stocks (or index).
But aren't graphs used in mathematics and physics and chemistry? In other words, graphs equals science equals technical, right? That is the mistake that many investors make (probably because they had a bad science teacher in school).
Observing and identifying price patterns as they are forming, and using a few tools/indicators that help to suggest likely changes in the patterns (i.e. the underlying supply and demand) is all that is involved in technical analysis.
May be that's a bit over-simplified. Understanding which combination of tools to use, and identifying which patterns are more reliable in helping to estimate future price changes require lots of practice and real-world experience.
In other words, technical analysis is quite simple but not easy. That should not deter an investor from learning the basics and applying the learning in actual trading and investing.
Fundamental analysis involves detailed study of Annual Reports, the economy, sectoral growth, competitive environment, management competence and integrity to identify which company stocks are investment-worthy.
Just because a stock is investment-worthy doesn't mean it has to be bought at the current price. This is where technical analysis can help. If the price pattern shows supply is exceeding demand, the stock's price may be getting ready for a fall.
If the supply and demand seems equally matched, the stock price may meander sideways for weeks or months. Only when demand exceeds supply can a stock's price start moving up.
A problem faced by many small investors - who have taken the brave step to venture into studying price patterns - is which technical tools/indicators to use when and how.
The KISS principle works well. The fewer indicators you can use to get reliable results the better. Three or four indicators taken together can be adequate.
In the following investopedia.com article, the top 7 technical tools - from the hundreds that have been developed over the years - have been listed. Try them out:
https://www.investopedia.com/slide-show/tools-of-the-trade/
During the first three days of trading this week, FIIs were net sellers of equity worth Rs 28 Billion while DIIs were net buyers of equity worth Rs 7.3 Billion, as per provisional figures.
Their roles had reversed during the first two days when FIIs were net buyers of equity worth Rs 10.4 Billion while DIIs were net sellers of equity worth Rs 23.1 Billion.
One year after demonetisation of Rs 1000 and Rs 500 notes by the Modi government, the benefits and demerits of the experiment are being assessed. Reduction of corruption, terror financing and currency in circulation have been some of the benefits.
More than 2% drop in India's GDP growth, loss of 1.5 million jobs in the unorganised sector and severe stress in the rural economy leading to Rs 880 Billion worth of farm loan waiver have been major demerits.
Only time will tell whether longer term economic gains will outweigh the near-term pain.
The daily bar chart pattern of Nifty touched a new high of 10490 on Mon. Nov 6, but formed a small 'reversal day' bar (higher high, slightly lower close) that often marks an intermediate top.
Heavy selling by DIIs on Tue. and FIIs on Wed. sent the index plummeting 200 points to seek support from its 20 day EMA. A combination of rising oil prices, falling Rupee and several IPOs seems to have taken the sheen off the secondary market.
Daily technical indicators have corrected overbought conditions, and are showing downward momentum in bullish zones. Some more correction is possible.
The index had rallied 802 points from its Sep 28 low of 9688. A 38.2% Fibonacci retracement of the entire rally will drop the index to 10184. A 50% Fibonacci retracement could see the index touch 10089.
Since an index doesn't understand arithmetic and technical levels are rarely precise, a reasonable estimate is that Nifty may find support from the zone between 10100 & 10200.
The 50 day EMA is near the lower end of the support zone, and should provide additional support. What if the index falls below 10100? Strong support can be expected from the long-term 'support-resistance' level of 9700.
Nifty's TTM P/E has slipped down to 26.37 - still much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has risen almost vertically from its overbought zone to enter neutral zone, hinting at some more correction.
Sharp corrections - like the ones in Aug '17 and Sep '17 - are typical of bull markets and can be used for adding to existing positions. Choose fundamentally sound stocks that have faced corrections after declaring Q2 (Sep '17) results that disappointed the market.
WTI Crude Oil chart
The following comments were made in the previous post on the daily bar chart pattern of WTI Crude Oil: "A likely move above 52.86 will restore the bullish pattern of 'higher tops, higher bottoms' from the Jun '17 low of 42. Oil's price may test its Apr '17 top of 54."
Oil's price sought support from its rising 20 day EMA before soaring past the Sep 28 top of 52.86 to close just below 54 on Oct 27.
After a brief sideways consolidation between 54 & 55, oil's price rose sharply past 57 to touch a 52 week high on Nov 6 '17.
All three EMAs are rising, and oil's price is trading above them in a bull market. However, bulls may have run a bit ahead of themselves.
Daily technical indicators are looking quite overbought. Slow stochastic is showing negative divergence by failing to touch a new high with oil's price. A pullback towards 55 is a possibility.
On longer term weekly chart (not shown), oil's price closed well above its 20 week and 50 week EMAs but is facing resistance from its sliding 200 week EMA. Weekly MACD is rising above its signal line in bullish zone. RSI and Slow stochastic are looking overbought.
Brent Crude Oil chart
The following comments appeared in the previous post on the daily bar chart pattern of Brent Crude Oil: "A likely move above 59 will restore the bullish pattern of 'higher tops, higher bottoms' from the Jun '17 low of 44. Oil's price may face resistance from a long-term unfilled weekly downward 'gap' between 60 & 61 (formed back in Jun '15)."
Oil's price moved smartly past 59 on Oct 27, only to consolidate sideways between 60 & 61 for the next four trading sessions. On Nov 3, oil's price broke out upwards to close just above 62. On Nov 6, it touched a new 52 week high, and closed above 64.
All three EMAs are rising, and oil's price is trading above them in a bull market. A crackdown on corrupt officials by the Saudi crown prince may have triggered the sudden surge in oil's price.
Technical indicators are looking overbought. Slow stochastic is showing negative divergence by touching a lower top while oil's price rose higher. A pullback towards the zone between 61 & 62 is likely.
On longer term weekly chart (not shown), oil's price closed above its sliding 200 week EMA for the first time in more than 3 years. Weekly technical indicators are showing upward momentum but looking overbought. A correction or consolidation may be around the corner.
S&P 500 index chart pattern
The daily bar chart pattern of S&P 500 rose to touch a new high of 2588 on Fri. Nov 3. All three EMAs are rising, and the index is trading above them in a bull market.
Bulls used a brief intra-day drop to the 20 day EMA on Oct 25 '17 to buy. They have successfully used the 'buy the dips' strategy for the past couple of months.
The trading pattern from Oct 23 onwards has formed a bearish 'rising wedge' pattern - from which a downward breakout is likely.
Daily technical indicators are looking overbought, and showing negative divergences by touching lower tops while the index touched a new high.
The combination of a bearish pattern at an index top and negative divergences on technical indicators should be treated with caution. A quick 2-3% correction - like the one that occurred in Aug '17 - is a possibility.
On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are looking overbought, and can trigger a correction.
FTSE 100 index chart pattern
The daily bar chart pattern of FTSE 100 dropped sharply below its 20 day EMA and the (purple) down trend line on Oct 25 '17, but bounced up after finding good support from its 50 day EMA.
The index touched an intra-day high of 7581 on Fri. Nov 3, and is trading above its three EMAs in a bull market. However, it continues to struggle to close convincingly above its Aug 8 top of 7552.
Daily technical indicators are looking bullish, but showing negative divergences by touching lower tops while the index touched a higher top. Some correction or consolidation can follow.
On longer term weekly chart (not shown), the index closed above its three weekly EMAs in a long-term bull market. Weekly RSI and Slow stochastic are moving sideways. Weekly MACD is rising above its signal line in bullish zone. The entire trading from Apr '17 onwards may be forming a bullish 'ascending triangle' pattern.
For the month of Oct '17, FIIs were net sellers of equity worth Rs 78.3 Billion while DIIs were net buyers of equity worth Rs 100.9 Billion, as per provisional figures.
During the first three trading days in Nov '17, both FIIs and DIIs were net sellers of equity - worth Rs 76.2 Billion and Rs 10.9 Billion respectively. Interestingly, FIIs were net buyers of equity on Nov 1 & 2 but were net sellers worth a huge Rs 96.9 Billion on Nov 3.
Nikkei India Manufacturing PMI slipped to 50.3 in Oct '17 from 51.2 in Sep '17, indicating stagnation in the growth of India's manufacturing sector. The Services PMI rose to 51.7 in Oct '17 - its highest level since Jun '17 - from 50.7 in Sep '17, due to higher demand despite price pressures.
BSE Sensex index chart pattern
Heavy selling by FIIs on Fri. Nov 3 failed to deter bulls. The daily bar chart pattern of Sensex rose to touch new intra-day (33734) and closing (33686) highs. All three EMAs are rising, and the index is trading above them in a bull market.
Daily technical indicators are inside their respective overbought zones. MACD touched a new high, but ROC, RSI and Slow stochastic are showing negative divergences by failing to touch new highs.
An index can remain technically overbought for long periods. However, negative divergences in three of the four indicators should be treated as a warning sign. A pullback towards the top of the sideways consolidation channel is a possibility.
Q2 (Sep '17) results of India Inc. declared so far have been as per analysts' expectations. Earnings growth remains tepid. The stock market appears to be betting on a pickup in earnings from Q3 (Dec '17) onwards due to a low base effect.
Stay invested, maintain a trailing stop-loss for long positions, and ride the bull wave.
NSE Nifty index chart pattern
The weekly bar chart pattern of Nifty touched new intra-week (10462) and closing (10452) highs, and continues to trade above its rising weekly EMAs in a long-term bull market.
Weekly MACD, ROC and Slow stochastic are in their respective overbought zones. RSI is moving sideways in bullish zone. All four are showing negative divergences by failing to touch new highs with the index.
Nifty's TTM P/E has moved up to 26.87 - well above its long-term average. The breadth indicator NSE TRIN (not shown) has plunged deep inside its overbought zone, and may trigger a correction.
A Morgan Stanley analyst has proffered a view that the index may appear overvalued from the high P/E ratio but is looking reasonably valued from the P/BV ratio. Such justifications of high index levels usually appear near market tops.
Experienced investors may remember the 'replacement cost' justification of Harshad Mehta before the 1992 crash and the 'gaining eyeballs' justification before the 2000 dot.com crash.
A market crash may or may not be in the offing. But investors should remain wary of an over-valued market, till earnings show definite signs of catching up.
Bottomline? Sensex and Nifty charts have risen to touch new highs again. Bulls are continuing to dominate. Avoid getting caught up in the euphoria. Use any corrections as adding opportunities.
Both DIIs and FIIs were net buyers of equity during F&O expiry week. DIIs were net buyers on 3 days and net sellers on 2 days. Their total net buying was worth Rs 2.8 Billion, as per provisional figures.
FIIs were net buyers worth Rs 11.8 Billion. On Wed. Oct 25, they bought equity worth a huge Rs 35.8 Billion - probably due to short-covering of PSU bank stocks - following the recapitalisation announcement by the Finance Minister. They were net sellers on the other 4 days.
Sensex gained 2.4% while Nifty gained 1.7% on weekly closing basis. Both indices touched new highs.
BSE Sensex index chart pattern
The daily bar chart pattern of Sensex had been consolidating sideways along the upper edge of the downward-sloping channel since an unconvincing upward breakout on Oct 16.
On Wed. Oct 25, Sensex broke out with an upward 'gap' above the narrow consolidation zone on the back of heavy FII buying, and rose to touch new intra-day (33287) and closing (33157) highs on Fri. Oct 27.
All three EMAs are rising, and the index is trading above them in a bull market. However, daily technical indicators are looking overbought, which can trigger a pullback towards the downward-sloping channel.
Note that ROC, RSI and Slow stochastic are not only showing negative divergences by failing to touch new highs with the index, but may also be forming bearish 'double top' reversal patterns inside their respective overbought zones.
The index recently completed a 10 weeks long sideways consolidation. So, there is no reason to expect a deep correction. The economy is in the process of recovery from the stresses caused by demonetisation and GST implementation.
Nevertheless, caution is advised near a market top. If you are ready to jump in due to a 'left-out' feeling - don't. The 'low-hanging fruits' have already been picked. Stock selection skills will separate the men from the boys.
If you have savings that need to be invested, follow your asset allocation plan and a gradual accumulation process rather than buying in a lump-sum.
NSE Nifty index chart pattern
The weekly bar chart pattern of Nifty touched new intra-week (10366) and closing (10323) highs, and continues to trade above its rising weekly EMAs in a long-term bull market.
Weekly technical indicators are in bullish zones, and looking a bit overbought. All four are showing negative divergences by failing to touch new highs with the index.
Nifty's TTM P/E has moved up to 26.67 - well above its long-term average. The breadth indicator NSE TRIN (not shown) is trying to move up inside its overbought zone, which can limit index upside.
Q2 (Sep '17) results of India Inc. declared so far have shown some top line growth, but bottom line growth is still weak. Without earnings growth, index valuation will remain high. That is one of the main reasons why FIIs have been selling Indian equity.
Bottomline? Sensex and Nifty charts have risen to touch new highs. Bulls are dominating. Any corrections should be welcomed as buying opportunities. This is not the time to be greedy or fearful. Be sensible.
(Note for blog visitors: I intend to take a brief break from a big city to a more tranquil place, where access to the Internet will be limited. My next blog post will be next week's Sensex and Nifty update.)
The Finance Minister's announcement yesterday about a recapitalisation scheme for PSU banks energised FIIs no end. Their net buying in equities touched a huge Rs 35.8 Billion today - completely overwhelming DII net selling in equities worth Rs 1.6 Billion.
Nifty formed a small upward 'gap' and touched a new intra-day high of 10341 before closing just below 10300. (Sensex - not shown - closed above 33000 for the first time ever.)
The government has collected over Rs 920 Billion as GST in Sep '17. The number of registered GST assesees have crossed 10 million but so far, less than half have paid taxes.
The daily bar chart pattern of Nifty touched lifetime intra-day and closing highs today as FIIs went on a buying spree - particularly in PSU banks.
Small investors would do well to avoid jumping on to the bull bandwagon now. Market breadth was negative today as declining stocks outnumbered advancing stocks.
Daily technical indicators are looking overbought. ROC (not shown), RSI and Slow stochastic are showing negative divergences by touching lower tops as the index rose higher.
The index formed a bearish 'hanging man'-like candlestick pattern today. The sharp volume surge today (not shown) may be a sign of 'buying climax'.
The index is trading well above its three rising EMAs in a bull market. A bull market is supposed to climb a wall of worries. Just because an index has touched a new high doesn't mean it can't go even higher. However, buying at a market top can be a ticket to disaster.
Nifty's TTM P/E has risen to 26.63 - much higher than its long-term average. Q2 (Sep '17) results of India Inc. declared so far are not showing much improvement over Q1 (Jun '17). That means index valuation will remain high till Q3 (Dec '17).
The breadth indicator NSE TRIN (not shown) has dropped like a stone inside its overbought zone, and may limit further index upside.
FII buying may have been triggered by short-covering in PSU banks. It remains to be seen if buying momentum is sustained on F&O expiry day tomorrow (Oct 26).
Booking partial profits, and getting rid of non-performers may be a very good idea.
