Hang Seng Index Chart Pattern - Jun 5, '09

Last week's analysis of the Hang Seng index chart pattern was concluded with some cautionary statements - maintain trailing stop losses and book partial profits.

The sudden up-tick in volumes in the previous week had made me a little wary. The Hang Seng index did close higher than the previous week - but consolidated sideways with three up days and two down days, on progressively diminishing volumes.

The 3 months bar chart pattern of the Hang Seng index clearly shows this consolidation:-

 

The 200 day EMA has started moving up and the 50 day EMA has just touched it. The medium-term average is poised to move above the longer-term one to provide the final confirmation of a bull market.

Some experts have been calling this a 'cyclical bull market' within a longer term bear market. Others opine that this is the beginning of a secular bull market. Whatever be the prognosis, the fact remains that the trend is bullish. We should always make friends with the trend.

The slow stochastic has remained in the overbought zone and is showing no inclination of moving down. The MACD is positive and above its signal line. The RSI has moved up while the Hang Seng moved sideways. But this positive divergence is counteracted by the ROC, which has moved down.

A friend who is a big shot in an investment bank in Singapore made an interesting comment. He said the Hang Seng index doesn't have a mind of its own. It watches what happens in China and India, and tries to follow suit. Point to ponder!

Bottomline? The rally looks like it wants to continue next week as well. Avoid fresh buying and keep taking profits, or, maintain strict stop-losses and enjoy the ride.

BSE Sensex Index Chart Pattern - Jun 05, '09

This week's BSE Sensex index chart pattern reminded me of an old Bob Dylan song that was popularised by The Byrds in the 1960s. A line from the song says: "Pack up your money, pick up your tent, you ain't going nowhere."

The Sensex had made a high of 14931 on May 19, '09 on strong volumes (the day after history was created by the Sensex chart when it hit two upper circuits and the stock market closed for the day after a few minutes of trading). On Jun 5, '09 the Sensex chart made a new high of 15257 - barely 2% higher after 3 weeks of trading on volumes that were quite a bit lower.

May be it is time to pick up your money and pack up your tent (Dylan had a tendency to deliberately mix his metaphors) because the Sensex "ain't going nowhere."

We will take a look at the 2 years weekly bar chart pattern of the BSE Sensex index to highlight a couple of possible bearish pattern formations:-

The big gap created on Monday, May 18, '09 still remains unfilled. For three weeks in a row, the Sensex hasn't even come close to even partially filling the gap. The island-like formation on the weekly chart pattern has been circled.

Any trading below the gap will indicate an 'island reversal'. Such a formation is not very common, but if it happens, it is very bearish and signals a trend change.

Now take a look at the 3 months period from Oct '07 to Jan '08 - when the previous bull market had peaked. The slow stochastic had remained overbought all through those 3 months before suddenly breaking downwards.

Compare it with the past 2 months. The slow stochastic has been overbought right through, even though the Sensex index is 6000 points below the Jan '08 high. The slow stochastic can remain overbought for a while longer, but it is better to take some profits early than make a loss later.

There are other concerns as well. The RSI is highly overbought and is much higher than what it was during the 3 months bull market period from Oct '07 to Jan '08. The ROC is also much higher and looking overbought.

The MACD is lower than what it was during the bull market. But have a look at the divergence between the MACD and its signal line. It is much higher now than what it was earlier.

Bull markets are known to climb a 'wall of worry'. The question is - how high is the wall? The strong bullish sentiment in the stock market would indicate that the wall isn't very high.

The upward movements in mid-caps and small-caps are making me a trifle suspicious that a nice bull-trap has been set. Just a hunch.

Bottomline? The technical indicators on the long-term chart pattern of the BSE Sensex index are suggesting caution. This is not the time to jump in with both feet. The risk-averse can start booking partial-profits. Others can maintain strict trailing stop-losses and continue the bull ride.

How to pick Stocks for Investment - Part III

In this mini series on how one should pick stocks for investment, I had previously provided some general guidelines in the first part, followed by a discussion of the top-down method of stock selection in the second part.

The bottom-up method of selecting stocks for investment is by far the most time consuming and difficult, particularly for people who don't like to play around with numbers.

Why is the bottom-up method of stock picking difficult? Because you have to sift through thousands of listed stocks to narrow down to the hundred odd companies that meet the basic criteria of being truly investment worthy.

After doing that, you will need to check the fundamentals of each and every one of those short-listed companies to separate the wheat from the chaff. Now you know why brokerages and financial institutions maintain expensive research departments!

One way to cut short the time and effort is to combine the top-down method with the bottom-up method. In other words, first select the handful of sectors that you have some knowledge about. Then limit your stock picking to only those few sectors. That would be by far the safest option for picking stocks for your core portfolio.

There can be no better guide for selecting good stocks than the biggest 'guru' of them all - Benjamin Graham. I learned all about stock picking from his book, 'The Intelligent Investor'. Till date, I use the guidelines suggested by him - with suitable modifications for the Indian environment.

'No risk - no gain' is an old saying. The bottom-up method is the only one for choosing the smaller and somewhat riskier bets for your 'mad money' portfolio. Here are Graham's guidelines for stock picking for the conservative investor, suitably modified:-

1. Adequate size. Market capitalisation, i.e. current share price multiplied by the total number of shares issued and subscribed, should be at least Rs 100 Crores.

2. Strong Financial condition. Current assets should be twice current liabilities, and long-term debt should not exceed working capital.

3. Earnings Stability. Positive earnings per share (EPS) for each of the past 5 (preferably 10) years.

4. Earnings Growth. At least 50% cumulative growth in EPS for the past 10 (preferably 5) years.

5. Dividend record. Consistent dividend payment for the past 5 (preferably 10) years.

6. Moderate P/E ratio. Current share price divided by the average EPS for the past 3 years should not exceed 15.

7. Moderate P/BV ratio. Current share price divided by the book value per share should not exceed 1.5.

Graham also suggested that the result of multiplying the P/E ratio by the P/BV ratio should not exceed 22.5 - for cases where either the P/E ratio is higher than 15 and the P/BV ratio is lower than 1.5, or, the P/E ratio is lower than 15 and the P/BV ratio is higher than 1.5.

So there you have it. This is no secret recipe for untold riches. Stocks picked using these guidelines may not perform as expected. Stocks which do not meet many of the above criteria can fly through the roof. That is the nature of the beast.

During bear markets, you may find most of the listed stocks meeting the above criteria. In bull markets, only tiny caps may meet the guidelines. The in-between stage - like now - is a great time to start your research work for identifying strong stocks for the next up move of the bull run. It will happen after the inevitable correction to the 3 months long rally.

A good starting point is to buy a copy of Capital Market magazine, or visit www.moneycontrol.com for checking out the database of companies, and apply criteria numbered 1, 6 and 7 above to prepare a preliminary short-list. Check whether the short-listed companies have positive cash-flows from operations for at least 4 of the last 5 years.

The ones that make the grade can then be run through the guidelines mentioned in 2, 3, 4 and 5 above. You will finally have a 'buy list' that you can start tracking.

Oh! I almost forgot to mention the corollary to the earlier saying. It is 'no pain - no gain'. For readers who do choose to suffer the pain, there will be a guaranteed gain. I will technically analyse your choice of the 5 top picks from your list and give you approximate buy and sell targets. Absolutely FoC (free of charge).

Now, that can be a ticket to decent money-making, if not untold riches!

Related posts:

Market cycles and Sectors

Which sectors should you invest in?

FTSE 100 Index Chart Pattern - Jun 4, 2009

The tussle between the bulls and bears continued with the FTSE 100 index chart pattern in a sideways consolidation. The overhead resistance is being provided by the 4500 level. The FTSE managed a couple of closes above its 200 day EMA and then moved down to seek support from the 20 day EMA.

The UK economy is not showing any great signs of revival. Gordon Brown appears to be losing his grip over his party and the government. These signs are not conducive for the trend change to a bull market.

In a recent interview, Stephen Roach, Head of Morgan Stanley Asia said that the current global stock market rally is not based on fundamentals. The huge stimulus and domestic consumption in the economies of China and India may not be sufficient to pull global economies out of the rut.

The stock markets of both China and India have entered bull phases. But the 3 months bar chart patten of the FTSE 100 index shows that the UK markets are yet to follow suit, with both the short-term and medium term EMAs still below the 200 day EMA:-

 

The slow stochastic bounced up from the 50% level and tried to move up to the overbought zone. It failed in its efforts and is dropping down towards the 50% level again.

Both the ROC and RSI are at their mid-points. The MACD is in positive zone but below its signal line. The only difference from the previous week's chart pattern is the uptick in volumes over the last couple of trading sessions.

Bottomline? The FTSE 100 index chart pattern is yet to make a decisive move above its 200 day EMA. It needs to stay above the long-term moving average for 10-12 sessions continuously for the trend to change from bear to bull. Till then, the strategy for investors should be to book some profits on every rise in the market.

Stock Chart Pattern - Cummins India

Yesterday I had analysed the stock chart pattern of IRB Infrastructure purely from a technical point of view because of the interesting double-bottom formation. I had very little idea of the fundamentals of the company and would not contemplate purchasing the stock because it belongs to a sector that I'm sceptical about.

No such doubts about Cummins India. It is just the kind of stock I like to hold for long term. A market leader in the manufacture of diesel engines of different sizes and used in different industries. A strong overseas collaborator which is also a client. Regular dividends. Good operating cash flows. Steady growth. Low debt. Low risk.

Stalwart stocks like Cummins India won't bring you overnight riches. Neither should you lock it up in a vault and forget about it. The way to benefit from such stocks is to be on the alert for the occasional longer term trading opportunities.

The 1 year bar chart pattern of Cummins India has a couple of notable formations:-

The chart pattern above shows a single bottom in a 'V' shape. Note that the bottom was formed on Mar 9, '09 - the day most world indices formed their bottoms. Both the fall to the bottom, and the subsequent rise, have been gradual and not as sharp as most other stocks.

From the bottom of Rs 148 the stock moved up to Rs 231 in 2 months for a decent gain of 56%. After a short consolidation came a volatile spurt on May 19, '09 - the day after the markets were shut due to extreme volatility after the election results.

The stock chart pattern of Cummins India then entered an interesting consolidation pattern called a 'symmetrical triangle'. The main criteria for such a formation - lower tops and higher bottoms with at least two tops and two bottoms touching the sides of the triangle - have been met.

Triangles can be quite fickle - with three possible options. The most likely one is an upward breakout that will be a continuation of the previous up move. The breakout must be on significantly higher volumes. If the breakout happens on low volumes, then it could be a 'false breakout' - termed an 'end run', with the stock eventually moving downwards.

There can be a downward breakout on low volumes - though a triangle is generally not a reversal pattern. Sometimes such downward breakouts can be 'false' on higher volumes, with the stock subsequently moving up. It is then termed a 'shakeout', i.e. a ploy by strong players to get rid of weaker hands (viz. retail investors) so that they can get back into the stock at lower rates.

The third option is the chart pattern meandering sideways on low volumes and eventually moving out of the triangle near its apex. This option, though possible, seems unlikely because of the increased volume during the triangle formation. This is rather unusual, and indicates possible accumulation.

The breakout - either upward or downward - should happen while the chart pattern is anywhere between half and three-quarters of the distance between the base of the triangle and its apex. The stock chart pattern of Cummins India is in that region now, so we can expect a breakout over the next few days.

The technical indicators are beginning to weaken - not unusual during a triangle formation. The slow stochastic and RSI have slipped down from overbought zones. The MACD is positive but has moved below its signal line. The ROC has dropped close to the mid-point.

Bottomline? Cummins India is a solid long-term portfolio stock, but it has moved up quite a bit from its recent bottom. In any case, one should wait for the breakout from the triangle to initiate action. Should the stock chart pattern break upwards, the next resistance is likely at Rs 350. On a downward breakout, support will be at Rs 230.

Stock Chart Pattern - IRB Infrastructure

Before discussing the stock chart pattern of IRB Infrastructure, I have to make a confession. Normally, I would not analyse a stock about which I have no idea whatsoever. More so, because it is in the engineering and construction sector which is notoriously opaque in its accounting practices.

Yesterday, I read this article in the Business Standard about IRB Infrastructure and was intrigued enough to take a peek at the stock chart pattern. What I saw was so fascinating, that I could not pass up the opportunity of sharing it with my readers.

Without further ado, let us take a look at the 1 year bar chart pattern of IRB Infrastructure:-

What you see above is a classic double-bottom formation. The first bottom was formed at Rs 65 on Dec 2, '08. The second - slightly higher - bottom was formed at Rs 77 on Mar 27, '09. Almost a 4 months gap between the two bottoms. This long gap ensures the solidity of the bottom formation.

In between, the stock price rose all the way to Rs 147 on Dec 30, '08 and then gradually drifted down on low volumes. Note how the volume rose significantly as the stock price moved up from the second bottom - in absolute copybook fashion.

The stock is currently facing resistance near the previous top of Rs 147. A correction down to its 20 day EMA - which has just crept above the 200 day EMA - can be expected before the next rise.

The slow stochastic and RSI are in overbought zones. The MACD is positive but made a lower top. Likewise for the ROC. The technical indicators are also hinting about a correction.

Double-bottoms provide price target indications. The distance from the lower bottom of 65 to the top of 147 gives a Rs 82 difference. The minimum upside can be (147+82=) 229. That would take it close to the high of 222 made on Apr 29, '08 and gives a potential 60% upside from the current market price of Rs 143.

Bottomline? Price target mentioned is based purely on the stock chart pattern of IRB Infrastructure. I haven't checked the fundamentals at all. Any one planning to invest should cross-check the Business Standard article with company annual report and SEBI EDIFAR site for veracity of the figures mentioned.

Dow Jones (DJIA) Index Chart Pattern - May 29, '09

Like a person who has downed a few too many at the local watering hole, the Dow Jones (DJIA) index chart pattern has been stumbling along in no particular direction, seeking frequent support from nearby lamp posts (read, the 20 day EMA).

A look at the 3 months closing chart pattern of the DJIA shows how the index has been desperately clinging on to its short-term moving average. As if it is afraid that if it falls down, it may not be able to get up again.

 

(Please right-click on the image; open it in a new tab or window for a better view.)

Compare the Dow Jones index chart pattern above with the Hang Seng chart pattern analysed on Sun. May 31, '09. Notice how the Hang Seng has been using its 20 day EMA like a trampoline to jump higher and higher, way above its flattened 200 day EMA.

The long-term average of the Dow Jones index is still moving down. In today's trade so far, the DJIA is trying to make a dash towards its 'home' (viz. the 200 day EMA). Let us see if it finally makes it or falls flat on its face.

The slow stochastic fell below the 50% level and is attempting to get back above it. The MACD is in positive zone but below its signal line. The ROC is at its mid-point '0' line. The RSI is also at its 50% level.

The volume had dropped last week, but Friday's up move was on slightly higher volume. All the technical indicators are also showing a slight upward bias. Things may change if the extent of damage to the economy by the impending GM bankruptcy dawns on market participants.

Bottomline? Enjoy the ride while it lasts. A lot of fundamentally weak stocks have moved up. Book profits in them. Keep strict trailing stop losses for your core holdings.