Possible Nifty retracement levels

First the bad news. FIIs were net sellers of equity worth a huge Rs 127 Billion during the previous five trading sessions (Jan 22, 25, 27-29). That is the main reason for Nifty shedding 1150 points (7.8%) from its Jan 21 lifetime top (of 14753.5) to close just below its 50 day EMA.

Now the good news. Despite the sharp correction, the index is trading well above its rising 200 day EMA. That means the bull market is alive and kicking.

So, is this index dip a good time to buy? That would depend on an investor's risk tolerance and investment time horizon. The best time to buy is when you have money to spare. 

While timing the market is always difficult, it helps not to buy near market tops. Experienced investors have the patience to wait months (sometimes even years) for better buying opportunities.

For those not so experienced, having some idea of index (or stock) retracement levels can help to decide about entry points. 

Typically, Fibonacci retracement levels of 38.2% and 50% seem to work on technical charts. What are these levels for Nifty?

Let us make a couple of assumptions. The first assumption is that the index is correcting the gains made from its Sep '20 low (of 10790). A 38.2% retracement gives a figure of around 13250; a 50% retracement means about 12800. By touching a low of 13600 on Fri. Jan 29, Nifty has almost retraced 38.2%.

Note that the index has penetrated the lower Bollinger Band. Also, the Slow stochastic indicator is well inside its oversold zone. So, a technical bounce is very much within the realm of possibilities. 

Question is: Will the likely bounce rise to a new high, or get terminated at the 20 day SMA (middle Bollinger Band, marked by green dotted line)? In the latter case, the correction may resume and the index can drop to lower levels.

That leads us to our second assumption - that Nifty is actually in the process of correcting all gains made since its Mar '20 low (of 7511). A 38.2% retracement gives a figure of around 12000; a 50% retracement can drop the index to 11150.

That leaves the door open for a test of support from the 200 day EMA - currently at 12200. What if the 200 day EMA is breached and the index does fall to 11150 (however unlikely it may seem now)?

Then we may need to reassess the sustainability of the current bull phase. The annual budget on Feb 1 can have some short-term effect on the market. Long-term, it is profitability and earnings growth of India Inc. that will decide the winners and losers.

Sticking to large-cap market leaders won't hurt.

The Raging Bull Market Is Over: So, What's Next?

The stock market is in the midst of several major shifts, and investors should begin to reposition their portfolios appropriately, according to a recent report from the U.S. equity and quantitative strategy team at Bank of America Merrill Lynch (BofAML). 

"The 20-year long risky stock premium has finally been wiped out," is how their report leads off, continuing, "investors should pay for safety and be compensated for risk, but the opposite has been the case for 20 [years]." 

Given their observation that "the gap has finally closed," this has major ramifications for investors going forward. The table below summarizes five big market trends that BofAML sees as being underway right now.

Read more at:
https://www.investopedia.com/news/raging-bull-market-over-so-whats-next/

S&P 500 and FTSE 100 charts (Aug 17, 2018): bulls on top but bears continue to fight

S&P 500 index chart pattern

The following comments were made in last week's post on the daily bar chart pattern of S&P 500: "Some more correction or consolidation is likely. Expect the support/resistance zone between 2780 and 2800 to provide good support on the downside."

On Wed. Aug 15, the index dropped sharply below its 20 day EMA but bounced up after receiving good support from the 'support/resistance zone' between 2780 and 2800. The index closed below its 20 day EMA at its lowest level in 2 weeks.

The index rallied during the next two days and managed to briefly move above the downward 'gap' formed back in Jan 30 before closing at the upper edge of the 'gap'.

All three EMAs are rising, and the index is trading above them in a bull market. A convincing move above the Aug 7 top of 2863 should take the index to a new lifetime high after almost 7 months.

Daily technical indicators are in bullish zones and showing some upward momentum. MACD has stopped falling below its signal line. RSI has bounced up after receiving support from its 50% level. Slow stochastic has moved above its 50% level after briefly falling below it. 

Falling volumes on Thu. and Fri. (Aug 16 and 17) are a sign of tiring bulls. Bears may try to put up a last-ditch fight to prevent the index from rising to a new high. But their cause seems lost.

On longer term weekly chart (not shown), the index closed above its three rising weekly EMAs in a long-term bull market. Weekly MACD and Slow stochastic are inside their respective overbought zones. RSI is rising towards its overbought zone. 

FTSE 100 index chart pattern

After touching a lifetime high of 7903.50 on May 22 '18, the daily bar chart pattern of FTSE 100 has been consolidating sideways within a downward-sloping channel. 

On Wed. Aug 15, the index dropped below its 200 day EMA but bounced up to close above 7550 on Fri. Aug 17 - losing 1.4% on a weekly closing basis. 

Daily technical indicators are in bearish zones. MACD is falling below its signal line. RSI has slipped below its 50% level and showing downward momentum. Stochastic has bounced up from the edge of its oversold zone.

Some more correction/consolidation within the downward-sloping channel is likely.

On longer term weekly chart (not shown), the index closed below its 20 week EMA but above its 50 week and 200 week EMAs in a long-term bull market. Weekly MACD is sliding down below its signal line in bullish zone. RSI is falling in bullish zone. Slow stochastic has fallen below its 50% level.

Are you a bull or a bear? Why not both?

Most small investors thrive in bull markets. They feel comfortable by buying low and selling high. The adventurous buy high and sell higher. The sophisticated buy more on small corrections to support levels. They make the trend their friend.

All their best laid plans go haywire when bears attack. Panic sets in as portfolio values go crashing. Stock prices fall below 'buy' prices. Some book losses and get out, promising never to come back again.

Others make a bad problem worse. They start 'averaging down' - buying more at lower prices. When the stock shows no sign of recovering, they lose heart and book huge losses.

What happened to making the trend a friend? The analytical side of the brain gets scrambled when money is rapidly going down the drain. The only thought is 'take the money and run'.

The smart ones - they become that way after losing money in bear markets - know that you can be a bull AND a bear depending on the trend. 'Buy the dips' when the trend is up. 'Sell on rise' when the trend is down.

The 'buy the dips' is the easier strategy to follow. No wonder small investors prefer it. You keep buying as a stock's price moves up. No selling is involved - till you decide to book profits when upward target is met.

'Sell on rise' is harder, and requires practice to succeed. For every sell, you need to buy back at a lower price. And then repeat the process - till the correction ends. Deciding when to buy back requires skill.

Studying long-term technical chart patterns to identify support and resistance levels can prove invaluable for identifying entry and exit points. 

Sometimes stocks get into consolidation phases that can last months. What to do then? If the consolidation range is reasonably wide - say, 40-50 points instead of 10-15 points - draw a line through the middle of the range. 'Buy the dips' below the mid-point, 'sell on rise' above the mid-point.

For longer term investors, it is better to be a crocodile or a python (both have a lot of patience) instead of a bull or a bear during consolidation phases. Just wait patiently for a price breakout in either direction.

Nifty chart: a midweek technical update (May 17 ‘17)

Both FIIs and DIIs were net buyers of equity - worth Rs 3.6 Billion and Rs 1.5 Billion respectively - during the first three days of trading this week. Nifty rose to close above the 9500 mark for the first time ever.

Interestingly, FIIs turned net sellers today after two days of net buying while DIIs were net buyers today after two days of net selling. Reminds me of an African proverb: When two elephants fight the grass gets trampled. 

India's exports grew nearly 20% in Apr '17, but imports grew 49% due to a sharp jump in gold and oil imports. As a result, the trade deficit grew to a 29-months high of US $13.2 Billion against $4.8 Billion in Apr '16.

Strong FII buying propelled the daily bar chart pattern of Nifty to a close above the 9500 level for the first time ever on Tue. May 16. Though the index touched new intra-day and closing highs today, it was on the back of DII buying as FIIs were in profit-booking mode.

All three daily technical indicators are looking overbought. The index is trading above its three rising EMAs in a bull market, but the distance between the index and its 200 day EMA is in excess of 800 points - which is another sign of overbought conditions.

Nifty's TTM P/E has crossed above 24 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has dropped back inside its overbought zone after attempting to emerge from it.

An index can remain overbought for long periods. That doesn't mean it will be a one-way rise to new highs every day. 

If FIIs continue to book profits, a sharp correction can follow. Such a correction, if and when it occurs, will improve the technical 'health' of the chart and provide an entry opportunity.

Till then, stay invested with a trailing stop-loss and enjoy the bull ride.

Technical updates – Sanghvi Movers and Sintex Industries

In the previous technical update on Sanghvi Movers and Sintex Industries, both stocks were recovering after long corrective moves.

The technical structure of the charts haven't changed much. Both stocks are once again in recovery mode after strong bear attacks.

However, in the intervening period, both stocks rose to touch new highs, and are trading at much higher levels than three years ago after re-entering bull territories.

Sanghvi Movers

After closing at a high of 396.70 in Aug '15, the stock corrected all the way down to 197.70 in Dec '16 - a huge 50% correction from its top.

It has since managed to rally above its three EMAs into bull territory, but remains below the blue down trend line and the 'support-resistance' level of 282.

The 'golden cross' of the 50 day EM above the 200 day EMA that technically confirms a return to a bull market is still awaited.

Daily technical indicators are correcting overbought conditions. A pullback towards the 200 day EMA is likely. That will be a good buying opportunity.

Sintex Ind

The stock also corrected nearly 50% from its top of 132.20 touched in Mar '15, but is back in bull territory above its three EMAs after forming multiple bottoms around 70-72. 

The 'golden cross' (marked by light blue oval) of the 50 day EMA above the 200 day EMA has technically confirmed a return to a bull market.

Daily technical indicators have corrected overbought conditions and showing downward momentum. MACD has formed a 'rounding top' reversal pattern in bullish zone. ROC, RSI and Slow stochastic have slipped into bearish zones.

The stock is seeking support from its 20 day EMA, but may correct down to 104. That will provide an entry opportunity.

S&P 500 and FTSE 100 charts (Feb 24 '17): consolidating before the next surge

S&P 500 index chart pattern

The daily bar chart pattern of S&P 500 quickly jumped above the 2360 hurdle on Tue. Feb 21, but failed to make further progress during the rest of a holiday-shortened week.

All three EMAs are rising, and the index is trading above them in a bull market. 

Daily technical indicators are well inside their overbought zones. Though an index can remain overbought for long periods, technically a correction is overdue.

The index seems to be rising on the back of a strong US Dollar and hopes of an economic stimulus by the Trump administration.

On longer term weekly chart (not shown), the index closed at a new lifetime high of 2367, and is trading well above its three rising weekly EMAs in a long-term bull market. All three weekly technical indicators are inside their overbought zones - hinting at a correction.

FTSE 100 index chart pattern

The daily bar chart pattern of FTSE 100 touched 7329.56 - a new high for the month - on Mon. Feb 20, but failed to sustain above the 7300 level.

On Fri. Feb 24, the index corrected sharply below its 20 day EMA and the 7200 level before bouncing up to close at its 20 day EMA - losing about 0.8% on a weekly closing basis.

An overbought Slow stochastic may have triggered the brief correction (refer last week's post).

Daily technical indicators are in bullish zones but showing downward momentum. Some more correction or consolidation is possible. 

The index appears to be consolidating within a large 'symmetrical triangle' since touching a lifetime high of 7354 on Jan 16 '17. A breakout from the triangle can occur in either direction.

On longer term weekly chart (not shown), the index has closed well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones but looking a bit overbought.

S&P 500 and FTSE 100 charts (Feb 17 '17): bulls firmly in the saddle

S&P 500 index chart pattern

The daily bar chart pattern of S&P 500 is continuing with its gravity-defying act. After soaring past the 2300 level - where it had faced some resistance - the index has paused to catch its breath at 2350.

All three EMAs are rising, and the index is trading above them in a bull market. Bulls are using the slightest of dips to buy. However, the widening distance between the index and its 200 day EMA is a red flag.

Daily technical indicators are well inside their overbought zones. A similar occurrence two months back had triggered a 2% correction. 

On longer term weekly chart (not shown), the index closed at a new lifetime high of 2351, and is trading well above its three weekly EMAs in a long-term bull market. All three weekly technical indicators are inside their overbought zones.

FTSE 100 index chart pattern

The daily bar chart pattern of FTSE 100 shook off a strong bear attack and climbed 200 points in two weeks. It is facing some resistance at the 7300 level.

Daily technical indicators are in bullish zones, but not showing much upward momentum. Slow stochastic is inside its overbought zone, and can trigger a correction.

Expect bulls to buy any dip. The index should cross above its previous top (7354 touched on Jan 16 '17) in the near future. 

On longer term weekly chart (not shown), the index has closed well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones but looking overbought.

Is Selling Short riskier than Going Long?

'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.

S&P 500 and FTSE 100 charts (Dec 09 '16): bulls rule once again

S&P 500 index chart pattern

The following were the concluding comments in last week's post on the daily bar chart pattern of S&P 500: "Some more correction to test support from the rising 20 day EMA can't be ruled out. However, the index should resume its up move soon."

There was no further correction as the index resumed its up move immediately after receiving support from the 2190 level. On Fri. Dec 9, the index rose to touch a new lifetime high of 2260.

All three EMAs are rising, and the index is trading well above them in a bull market. However, all three daily technical indicators are inside their overbought zones. Another corrective move may be in the offing.

On longer term weekly chart (not shown), the index closed at a new lifetime high - well above its three weekly EMAs in a long-term bull market for the 40th week in a row. All three indicators are in bullish zones but showing negative divergences by failing to touch new highs with the index. Expect some correction or consolidation.

FTSE 100 index chart pattern

The daily bar chart pattern of FTSE 100 shows a spirited fight back by bulls just when bears were on the verge of gaining control. ECB's decision to extend its Quantitative Easing programme till Dec '17 gave a strong impetus to bulls.

The index bounced up strongly after receiving support from the 6700 level and broke out above the down trend line that was dominating the chart for the past two months.

At the time of writing this post, a pullback towards the down trend line is under way. If you missed buying on the break out above the down trend line, the pullback is providing another buying opportunity.

All three daily technical indicators are looking bullish. Slow stochastic is well inside its overbought zone - and may have triggered the pullback.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs in a long-term bull market for the 24th week in a row. Weekly MACD and RSI are in bullish zones. Slow stochastic is still in bearish zone, but is rising towards its 50% level.

BSE Sensex and NSE Nifty charts (Sep 02, 2016): bulls regain control

Bulls regained control during the week's trading as FIIs and DIIs combined forces. Their total net buying in equities was worth Rs 3250 Crores, as per provisional figures. 

DII's bought shares worth nearly Rs 1800 Crores; FIIs bought shares worth a little more than Rs 1450 Crores. Both Sensex and Nifty gained around 2.7% on a weekly closing basis, but are near long-term resistance levels. 

In a bit of relief for the NDA government after lower than expected Q1 (Jun '16) GDP number, the Nikkei India Manufacturing PMI rose to a 13 months high of 52.6 in Aug '16 - against 51.8 In Jul '16. A figure above 50 indicates growth.

Passenger vehicle and two-wheeler sales grew in strong double digits during Aug '16, thanks to a good monsoon and dealer stocking in expectation of good festive season sales. 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex bounced up sharply on Tue. Aug 30 after receiving strong support from the 27600 level and the rising 50 day EMA. For the rest of the week, the index gradually moved up to touch a new 52 week high of 28582 on Fri. Sep 2.

Despite buying support from FIIs and DIIs, the index traded within the 'support-resistance zone' between 27600 and 28600 for the 8th week. 

As and when the index moves above the 28600 level - which it surely will if FIIs and DIIs continue to buy - some resistance can be expected from the 29100 level.

The 'rounding top' pattern mentioned in last week's post did not get technical confirmation as Sensex didn't fall below 27600, and has been negated by the index moving up to touch a new high.

However, bears are not completely out of the game yet. Note that all four daily technical indicators are showing negative divergences by touching lower tops (marked by blue arrows) as the index climbed higher.

All three EMAs are rising, and the index is trading above them in a bull market. The strategy should be to buy on dips.

The lack of euphoria among investors - even as Sensex is a hop-skip-jump away from its lifetime high - is an indication that the index will move even higher. 

But it may be more of a gradual rather than a sharp up move - as selling often ensues near a previous top. 

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty rose to touch a 16 months high of 8824 with good volume support - negating the bearish 'rounding top' pattern mentioned in last week's post.

A convincing cross above the resistance level of 8850 should take the index to a new lifetime high.

Weekly technical indicators are inside their overbought zones, with ROC showing upward momentum and the other three moving sideways.

Remember that an index can remain overbought for long periods during a bull market. However, some profit booking can be expected as the index approaches its previous top of 9119 (touched in Mar '15). 

Nifty's TTM P/E is quite high at 24.15. The breadth indicator NSE TRIN (not shown) is inside its overbought zone. A correction can occur at any time.

Bottomline? Bulls have regained control of Sensex and Nifty charts. Index valuations on a TTM basis remain expensive - giving bears some hope. Stay invested, but refrain from placing large bets.

Nifty chart: a midweek technical update (Jul 27 '16)

FIIs have been on a buying frenzy during F&O expiry week. Their net buying in equities crossed Rs 1950 Crores in 3 days, as per provisional figures. DIIs were net sellers of equity worth Rs 640 Crores.

Nifty broke out upwards from a consolidation range on Mon. Jul 25, and touched a new 52 week high of 8665 today - but closed 50 points lower due to lack of follow-up buying. 

In a strong message to moneybags who try to buy their way out of trouble, a special court has sentenced MD Pradeep Rathi and CEO Udit Rathi of Rathi Steel and Power to 3 year jail terms for illegal allocation of a coal block in Chhatisgarh.

The daily bar chart pattern of Nifty broke out from a 120 points trading range (8475-8595) on Mon. Jul 25 but hasn't made any upward progress since then on a closing basis.

All three EMAs are rising together, and Nifty is trading above them in a bull market. Daily technical indicators are showing negative divergences by failing to touch new highs with the index, and looking overbought.

Breadth indicator NSE TRIN (not shown) remains inside its overbought zone, and can trigger a correction at any time. 

Something else that is concerning many analysts is Nifty's high valuation (TTM P/E ratio is 23.63 and 1 year forward P/E ratio is 18.53). 

Q1 (Jun '16) results declared so far have not shown much improvement in top lines or bottom lines of India Inc. With earnings  growth remaining weak, downside risk for the index is increasing by the day.

Bull markets often climb a 'wall of worries'. Is that the situation now? What should small investors do in such a situation? 

Here is a 4-step strategy:

1. Do not panic and sell, or jump in feet first
2. Stick to your asset allocation plan (if you have one) and continue your SIPs
3. Trim off non-performers in your portfolio 
4. Stay invested with trailing stop-losses

If you are feeling jittery and/or, not sure about how to implement step 4 - book partial profits and hold on to your cash to fight another day.

If you are not sure how to implement step 3, send me an email or post your question in the 'Comments' link. I'll be glad to help out.

S&P 500 and FTSE 100 charts (Jul 22 '16): consolidating after sharp rallies

S&P 500 index chart

Negative divergences and overbought conditions of technical indicators in last week's post on the daily bar chart pattern of S&P 500 had hinted at a pause in the bull rally.

The index consolidated within a narrow range last week - touching a low of 2159 on Tue. July 19 and a new high of 2176 the following day - gaining just 8 points on a weekly closing basis.

All three EMAs are rising, and the index is trading well above them in a bull market. MACD and Slow stochastic moved sideways inside their overbought zones. RSI did likewise, just below its overbought zone.

Some more consolidation - or a correction - is likely. Booking part profits may be a good idea. 

On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market for the 20th week in a row. Weekly technical indicators are looking overbought.

FTSE 100 index chart

The daily bar chart pattern of FTSE 100 consolidated sideways during the week, but closed with a weekly gain of about 1%. 

All three EMAs are rising, and the index is trading above them in a bull market. However, the rally from the Jun '16 low has been a bit too steep. A correction or some more consolidation will improve the technical 'health' of the chart.

All three daily technical indicator moved sideways with the index - MACD and Slow stochastic remained well inside their respective overbought zones; RSI was just below its overbought zone. 

On longer term weekly chart (not shown), the index closed more than 400 points above its three weekly EMAs in a long-term bull market for the 4th week in a row. All three EMAs are converging, which usually precedes a sharp move. Weekly technical indicators are looking quite overbought and hinting at a correction or consolidation.

Why you Shouldn't Sell after a Stock Market Crash

Many small investors buy unknown 'cheap' stocks near stock market peaks. When the eventual crash comes, they are left holding their dud stocks because there are simply no buyers for these at lower prices.

Eventually, the stocks are sold off near the stock market bottom as investors try to salvage whatever they can. This phenomenon gets repeated in every bull-bear cycle.

Why does this keep happening? Because small investors get lured into the market by all the media hype during a bull phase. They expect to make quick gains without doing any homework about how the stock market functions and how to choose stocks based on fundamental and/or technical analysis.

They end up choosing stocks with weak fundamentals that appear relatively 'cheap' and are flying high due to mindless buying during later stages of a bull phase.

Is there a simple solution to the problem? Yes. Instead of buying first and then getting into trouble, seek guidance from a market veteran before buying.

It also helps to plan beforehand. That means taking stock of your present and likely future financial commitments, having the discipline to save first and spend later, and investing your monthly/quarterly savings according to an asset allocation plan.

What if you have done all that and still get caught unawares by a sudden market crash? It is very difficult not to panic when you see your hard-earned money going down the drain almost daily.

If you have done your planning properly and chosen good stocks from fundamental and technical points of view - don't sell in a panic.

A bear market is almost always followed by a bull market. Sometimes a long period of consolidation may precede the next bull phase. You have to learn to take such situations in your stride.

Your asset allocation plan will guide your decision making at every stage of a bull-bear cycle. Just have the patience and discipline to rely on it.

What if you are one of those unfortunates who bought 10000 shares of Suzlon at 25 on an impulse - only to watch the stock price drop to 13? Well, you have just learned four (rather expensive) important lessons:

1. Never buy a junk stock - even if you do, buy 50 or 100 shares to test the waters but never in bulk
2. Never buy on impulse - always do your due diligence before buying
3. Always maintain a stop-loss when you buy - it will save you from a big loss
4. You could have asked me before buying; a simple email would have saved you a lot of pain.

Here is a link to an article in investorpedia.com that gives 3 reasons for not selling after a market downturn.

Have you been caught swimming naked?

"Only when the tide goes out do you discover who has been swimming naked" - Warren Buffett

What did Buffett really mean? During bull markets, almost all stocks - the good, the not-so-good and the downright rubbish - tend to move up. Everyone seems to be elated because the value of their portfolios are moving up with leaps and bounds.

So, you really won't know how resilient your portfolio is to a strong down turn. When selling becomes relentless - like it is happening in the market now - almost all stocks tend to lose ground. But the good lose less. The rubbish collapse in a heap.

Many small investors are in a panic. Panic affects rational decision making. The irrepressible urge is to exit at any price. That only adds to the selling pressure.

And so the cycle repeats. A bull market is followed by a bear market, which is followed by another bull market and then again a bear market. Investors buy stocks without proper analysis at high prices during bull markets, and then dump them at huge losses during bear market sell-offs.

Is there no respite from this cycle? The answer is: No, because it is the inherent nature of markets. What should small investors do?

The short answer is: Learn and practice. In other words, learn all you can about how the stock market works. Then enter gradually.

Not the other way around. Most small investors jump into the market first and then try to learn why they lost money. A typical query in one of the business TV channels today: "I bought 1000 shares of Suzlon at 25; now it is down to 13. Should I hold or sell?"

Smart investors learn to prepare a financial plan and an asset allocation plan before entering the market. But they are in a minority. Many have been in the market for years and fail to comprehend why their portfolios are not generating returns to beat inflation and bank fixed deposit rates.

A good financial plan and an asset allocation plan based on an investor's risk tolerance act as guides to investing in a systematic way for generating long term returns. It is a process that is methodical but boring. If you are having fun with your stock investments/trading, you are probably not making any money.

The two plans put your investment decisions almost on auto-pilot. Your monthly savings are invested regularly according to your plans. During bull periods, your equity component will become overweight. Once it goes beyond your pre-set limit, you automatically book partial profits and reinvest the proceeds in other asset classes like fixed income, gold, cash.

During bear market sell-offs, there will be no need to panic. Your equity component will become underweight, and the other asset classes in your portfolio will become proportionately overweight. Once your equity component falls below your pre-set limit, re-balance your portfolio by liquidating part of your fixed income, gold and cash holdings to buy equity.

It is not rocket science - but requires discipline and patience. If your motivation to enter the stock market is to make some quick profits so you can buy a Royal Enfield or the latest mobile phone from Apple, the result will be a hat-trick of no's: no Royal Enfield, no iPhone and no money.

So, dear investor, you really have two choices. You either learn from those who have long experience in the market, or you will learn by losing money. The ball is in your court.

Related Post

How to Reallocate your Assets

Will Modi kickstart reforms to reverse the bearish market sentiment? - a guest post

Global stock markets have seen one of the most bearish January trading in history. Some experts are calling it a 2008-like bear market.

Bull markets are supposed to climb a wall of worries. The big worries in 2015 were a possible exit of Greece from the Eurozone, tensions in Ukraine and an interest rate hike by the US Fed.

Those worries have been absorbed by the market. This year's worries are a shrinking Chinese economy, continued turmoil in the Middle East and plummeting oil prices.

In this month's guest post, Nishit opines that falling oil prices will be a boon for the Indian economy, and passing of the GST Bill will boost bullish sentiments in the stock market.

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The New Year has begun with a massive fall across global stock markets. It is the China fear factor which is causing investors to take out money and flee. The information about China is nothing new. All this has been known for quite some time. Most selloffs need some trigger and then it becomes self sustaining.

India is well placed due to low crude oil prices. The year 2016 has to be the year of major reform. Major reform means passage of the GST bill in the budget session. If the GST bill goes through then it will be a major sentiment booster for the folks who pour money into Indian markets.

Every bull market has corrections and this is no different. 2016 is also the year of elections in various states where BJP does not have major influence, viz. Tamil Nadu, West Bengal, Kerala and Assam. Whatever they gain out there is a bonus.

The real electoral test for BJP comes in Uttar Pradesh in 2017. This is the last budget where major reform is expected, post this it will be just building on what has been initiated.

The money being pulled out is not India specific but all across the globe. Global risk trade is off and the money will seek safe pastures like US bonds or US markets.

Modi has initiated several reforms in the Power sector, Telecom sector, and subsidies that will benefit India in the long term. There is a game changer which every Prime Minister needs; for Modi it is the GST bill. Modi has aligned the smaller parties isolating the Congress. Now, it is only a question of playing his cards right.

Tax reform is what India needs as major portion of the population does not pay taxes. Increasing service tax is one way of plugging the tax gaps.

Politically, with the Dalit student suicide and various untoward incidents, the Modi Government is being cornered by opposition parties. Elections are won on sentiments and 2016 is the make or break year for Modi.

The current dip is a buying opportunity. It does not take much time for sentiment to turn and the markets to rise again. Even if the markets go in for a longer term correction, good companies will continue to thrive.

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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)

Stock Chart Pattern - Balrampur Chini (An Update)

Sugar stocks are not really my cup of tea - though I do add a spoonful of sugar to my evening cuppa. 

The sugar business is cyclical and weather dependent. To make matters worse, policies and prices are subject to frequent interference by the government.

That makes the business unpredictable, and I stay far away from it. But a young, risk-taking trader interested in making quick gains may find sugar stocks attractive.

The 2 years closing chart pattern of Balarampur Chini clearly reflects the cyclical nature of the sugar business. How cyclical? A look at the net profit figures of the past 5 years should suffice.

For year ending Mar '11 and Mar '13, net profit crossed Rs 160 Crores. For year ending Mar '12 and Mar '14, net profit was Rs 6.6 Crores and Rs 3.6 Crores respectively. For year ending Mar '15, there was a net loss of Rs 58 Crores.

Debt/Equity ratio is 1.43. High interest expenses continue to affect the bottom line. In other words, fundamentals do not warrant long-term investment.

But have a look at the returns that a trader could have made. From a low of 36.80 touched on Jan 31 '14 to a high of 85.15 touched on Jun 23 '14, the stock gave 130% return in less than 6 months.

A 15 months long bear phase followed (marked by the blue down trend line). The stock dropped to a closing low of 38.90 on Jun 16 '15 - giving up almost all its gain in one year, but providing good trading opportunities.

After forming a 'double bottom' reversal pattern (marked B1 and B2), the stock price embarked on another bull rally, touching a 2 years high of 87.85 on Jan 13 '16 - giving 120% return in less than 5 months from the low of 39.60 (B2) touched on Aug 31 '15.

The stock is trading well above its rising 200 day EMA in a bull market, but such a sharp rally is unsustainable. 

All four daily technical indicators are looking overbought and a couple of them are showing negative divergences by failing to touch new highs with the stock price.

Get ready for another stomach-churning roller coaster ride. Like I said, not really my cup of tea.

Nifty chart: a midweek update (Jan 06 ‘16)

Global stock markets are perfect examples of the proverb: "Misfortune never comes alone." First it was the Chinese economic slowdown and the Saudi-Iran tussle that sent markets crashing on Mon. Jan 4 '16.

Today came twin shocks of Chinese Yuan devaluation and testing of a hydrogen bomb by North Korea. Jittery markets slipped further.

FIIs have been net sellers of equity worth Rs 1000 Crores during the first four trading days in Jan '16. Net buying in equity by DIIs of a paltry Rs 300 Crores was not enough to stop Nifty's fall of 220 points.

The long-term closing chart pattern of Nifty 50 may be forming a 'rounding top' reversal pattern that is more clearly visible on the 200 day EMA. Such a pattern will get completed if the index falls convincingly below the long-term support level of 7550.

The index is in the process of retracing the entire rise of 3672 points from the Aug '13 closing low of 5285 to the Mar '15 top of 8957. A 38.2% Fibonacci retracement gives a level of 7555 - which coincides almost exactly with the closing low of 7559 touched in Sep '15 and the long-term support level of 7550.

Daily technical indicators are looking bearish and showing downward momentum. That means this week's correction isn't over yet.

There is a very good chance that bulls will strongly defend the 7550 level. But what if FII selling continues and 7550 is breached? How low can Nifty fall?

Here are some possibilities:

• a 50% Fibonacci retracement can take the index down to 7120
• two support/resistance levels are marked by dotted lines at 6840 and 6360
• downward target of the 'rounding top' pattern is 6160

Before you rush towards the exit gate, please remember that Nifty is trading in a long-term bull market - as it is trading well above its rising 200 week EMA (not shown on chart). Nifty should find a floor somewhere between 7550 and 7120 - in case 7550 does get breached on a closing basis.

The corrective move during the past 10 months is a bull market correction that will enable the index to improve its technical 'health' and enable it to rise to new highs.

When? That's a million dollar question. I'm not a betting person, but if I were I would place a bet on "sometime after Sep '16".

Last, but definitely not the least, a BIG thank you to blog follower Karthik Raghavan Ravi for pointing out the 'rounding top' pattern on the long-term chart of Nifty. 

(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. Paid subscriptions are being offered till Jan 21, 2016.)

Stock Chart Pattern - Infosys Ltd. (An update)

Bobby Hebb wrote the song 'Sunny' within 48 hours of a double tragedy on Nov 22, 1963. That was the day popular and charismatic US President John Kennedy was assassinated - and Bobby's elder brother was stabbed to death outside a Nashville nightclub.

What does that have to do with the chart pattern of Infosys? Well, Infosys also suffered a double tragedy - due to their disastrous policy of rotating the company's leadership among the original promoters.

As mentioned in the previous update, the two promoter-CEOs that followed Narayanamurthy and Nilekani neither had the dynamism nor the leadership skills required for a company with global aspirations.

With the induction of a professional manager with leadership experience in a global company (SAP), Infosys is ready to sing the following line from the song: "Now the dark days are gone, and the bright days are here". 

Should they? Let us see what the chart foretells.

The closing chart pattern of Infosys Ltd. touched a low of 553 in Apr '13 (adjusted for two subsequent 1:1 bonus offerings - marked by blue bells - in Dec '14 and Jun '15). 

The stock formed a 'double top' reversal pattern at around 950 (in Jan '14 and Mar '14). Negative divergences in three of the four technical indicators (marked by blue arrows) led to a correction within a 'falling wedge' pattern with bullish implications.

An upward breakout from the wedge started a fresh leg of the bull rally that culminated with another 'double top' reversal pattern at around 1180 (in Aug '15 and Oct '15). 

Once again, negative divergences in three of the four technical indicators (marked by blue arrows) led to a correction below the three daily EMAs, but the stock formed a small 'double bottom' reversal pattern and bounced up.

Daily technical indicators are in bullish zones, but giving mixed signals. The stock price has been consolidating sideways within a large 'rectangle' pattern between 960 and 1180 (i.e. 220 points) for the past 14 months.

Rectangles are usually 'continuation' patterns, with price target implications. An expected upward breakout can take the stock to a target of 1400 (= 1180 + 220).

But a 'rectangle' can also be a 'reversal' pattern - in which case, the downward target will be 740 (= 960 - 220). 

Since the stock is trading in a bull market (above its three EMAs), one can use the 'consolidation' to accumulate with a stop-loss at 1020.

[Wishing all blog visitors, blog followers, blog subscribers, twitter followers and newsletter subscribers a very happy and prosperous 2016.] 

Stock Chart Pattern - Indian Hotel (An Update)

Fundamentally, the company is still struggling to come out of the woods. Mistimed acquisitions - overseas and in India - at the height of the previous bull market had left the company with a huge debt burden.

A global economic downturn followed by the terrorist attack in Mumbai severely curtailed visits by foreign tourists, and put paid to any near term chance of a revival. Overcapacity in the Indian market didn't help matters.

The lower-end Ginger brand hasn't been successful. A change at the helm and efforts to restructure and consolidate operations seem to be slowly bearing fruit.

Technically, the daily bar chart pattern of Indian Hotel shows that the worst may be getting over. The stock had touched a low of 37.55 on Aug 6 '13. The subsequent rally took the stock to a high of 127.25 on Dec 5 '14 - a huge gain of 240% in 16 months.

The stock touched slightly lower tops of 126.85 on Jan 2 '15 and 126.95 on Feb 5 '15 - forming a 'triple top' reversal pattern in the process. A 7 months long correction ensued, and the stock slid below its three EMAs into bear territory.

The stock price touched a low of 80.75 on Sep 7 '15 - testing the long-term support-resistance level of 80 - and retracing 51% of its entire rise from the low of Aug '13 to the high of Dec '14. Since a 50% Fibonacci retracement often marks the end of a bear phase, it was no surprise that the stock has been on an up trend for the past three months.

By convincingly crossing above its three EMAs with a volume surge on Dec 2 '15, the stock has re-entered bull territory. The 'golden cross' of the 50 day EMA above the 200 day EMA has technically confirmed a bull market.

Three of the four daily technical indicators - MACD, RSI, Slow stochastic - are looking overbought. ROC has corrected sharply from its overbought zone. The stock is undergoing a sideways consolidation - after which it may move up to touch a new high.

This may be a good time to start accumulating the stock.