Stock Chart Pattern - JK Lakshmi Cement (An Update)

The prior update to the analysis of the stock chart pattern of JK Lakshmi Cement was posted 10 months back. The stock had touched a post-split high of 85 in Jan ‘10 followed by a quick drop to the support level of 64. The upward bounce from the support reached a high of 81 in Mar ‘10. Failure to test the previous high was the first warning of a trend change.

It is quite interesting to look back after some time to check what had been advised earlier:

‘…all may not be well with the cement sector. If you hold the stock, get out at the earliest. A drop below 64 can take the stock to 58. On a break below 58, it can go to 48 and 34. New entrants should wait for the correction to play out.’

The one year bar chart pattern of JK Lakshmi Cement below shows that my advice was spot-on:

Though the stock was seeking support from the 64 level back in May ‘10, it had already slipped below its 200 day EMA, and the technical indicators were very bearish. That is why I had advised investors to sell. By the 3rd week of May ‘10, the stock dropped into the support zone between 58-64 and traded sideways till end-Jun ‘10. The ‘death cross’ (marked by the blue oval) on Jun 24 ‘10 confirmed a bear market.

Note that while the stock was drifting down below the 200 day EMA during May-Jun ‘10, all the four technical indicators were moving up, making higher tops and higher bottoms. The positive divergences were signalling a possible rally.

On Jul 1 ‘10, the stock had a sharp move above the support zone and the entangled 50 day and 200 day EMAs – but soon drifted down to the 64 level. On Jul 19 ‘10, another sharp up move on a volume spike took the stock above its entangled 50 day and 200 day EMAs – but it turned out to be a well-laid trap for the bulls.

This time, the stock swiftly dropped below the 64 level and reached the lower edge of the support zone at 58. By end-Jul ‘10, the 50 day EMA finally dropped below the 200 day EMA though it remained close to the long-term average till Nov ‘10, as the stock price oscillated around the 64 level.

On Nov 18 ‘10, the stock closed below the 58 level, and after a few days of struggle to hang on, dropped swiftly down to the next lower target of 48. A sharp upward bounce found resistance from the 58 level – clearly demonstrating how broken support levels turn into resistance levels.

A brief rally in Dec ‘10 took the stock above its falling 50 day EMA and there were two closes above the 58 level in early Jan ‘11. But the stock price failed to test the falling 200 day EMA, and the subsequent down move broke the support of the 48 level and reached a new low of 40.50 on Feb 11 ‘11.

Not surprisingly, the upward bounce found resistance from the 48 level. The stock is likely to test its recent low and move down further to the next target of 34. Note that though the stock made a new low, the ROC reached a higher low and the RSI didn’t move lower. The positive divergences can lead to a rally that may take the stock price above the 48 level.

But bulls shouldn’t get too excited. The technical indicators are hinting at only a mild rally. The MACD is above the signal line, and both are moving up – but both remain in negative territory. The ROC is also negative, and below its 10 day MA. The RSI failed to reach its overbought zone and is dropping to the 50% level. The slow stochastic touched its overbought zone, only to turn back and fall below the 50% level.

Bottomline? The stock chart pattern of JK Lakshmi Cement doesn’t appear to have found a bottom yet. Q3 results were disastrous – a 10% drop in top line on a YoY basis but a whopping 90% shrinkage of the bottom line. Avoid for now, but keep it on the watch list.

How much longer will the Sensex trade within a range?

That may be the question on the mind of many investors, as the Sensex has been trading between 17300 and 18700 for the past 5 weeks. The short answer is: I have no idea. It could be six weeks or six months. Buyers and sellers seem evenly matched. The post-budget rally appears to have come to an end.

What could be the triggers for the Sensex to move up?

1. The RBI may not increase interest rates on Mar 17. Since inflation remains a concern, another 25 basis points rate hike is being expected by market players. Ms K Morparia of JP Morgan said in a recent TV interview that she won’t be surprised by three more rate hikes of 25 basis points each. Not increasing the interest rate will be taken as a positive by the market.

2. Q4 results will hit the market in another 5 weeks or so. With higher commodity prices and higher interest rates, profitability of India Inc. is widely expected to take a hit. If results are flat, even if not better on a QoQ basis, markets may interpret that as a positive.

3. India is still dependent on good monsoons. Agricultural production gets a boost. That helps the rural economy to grow, and has a cascading effect on the economy as a whole. Signs of a good monsoon may shake the market out of its current gloomy sentiment.

What could be the triggers for the Sensex to go down?

1. Despite several rounds of interest rate hikes by the RBI, inflation continues be in double digits. Government spokespersons have run out of excuses. More rate hikes could bring the growth momentum to a screeching halt.

2. The unrest in North Africa and the Middle East has sent oil prices shooting up into three figures. Economic growth and high oil prices are a disastrous combination for stock markets. If oil prices remain high, India’s fiscal deficit and inflation may spin beyond control. As it is, artificially depressed kerosene and diesel prices is causing havoc to the finances of the oil companies. The real inflation rate is much higher than the published figure.

3. The FIIs have pulled out about $2 Billion from the Indian markets in 2011. This amount is less than 10% of what they invested in 2010. Still the Sensex lost 18% from its Nov ‘10 peak. The relative valuations of the US and Europe markets are cheaper. If the FIIs continue with their selling and pull out another $2 Billion, the Sensex could test its May ‘10 low of 16000.

Looks like the sideways consolidation in the Sensex may continue for a while longer. As I have mentioned several times before, investors should not get too bogged down by Sensex movements. When the market is unexciting and boring, it may be a good time to take a vacation and catch up on your reading. If you have already read books by Graham, Lynch, Fisher, Pring – read them again. You will understand many things that you missed when you read those authors for the first time.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Mar 04, ‘11

S&P 500 Index Chart

The S&P 500 index consolidated within a 30 point range last week, before closing almost flat on a weekly basis. The index went down towards the lower edge of the Bollinger Band on Wed. Mar 2 ‘11 before recovering a bit. The band has narrowed, which could lead to an up move this week.

The technical indicators are giving mixed signals, which is often the case during consolidation periods. The MACD is still positive, but remains below its falling signal line. The RSI has dipped below the 50% level, after a failed effort to move above it. The slow stochastic has risen above the 50% level. The 50 day and 200 day EMAs are both rising with the index above them. The bull market is alive and well.

The jobs report was mixed. Unemployment rate has dropped below 9%, but there seems to be very little growth in private sector jobs. Retail figures aren’t too encouraging. Most worrying is the rise in oil prices due to the unrest in North Africa and the Middle East. As per a recent article, the most dangerous periods for equity markets are typically periods of strong economic activity combined with rapidly rising oil prices. Emerging markets are already facing the music. Will the S&P 500 follow suit?

FTSE 100 Index Chart

As expected in last week’s analysis, the FTSE 100 continued its sideways consolidation as it oscillated about its 50 day EMA. The lower edge of the Bollinger Band was pierced by the intra-day low on Wed. Mar 2 ‘11. The index may try to move up this week.

The technical indicators are not favouring the bulls. The MACD is negative, and below its falling signal line. The RSI is below the 50% level. The slow stochastic has moved up from the edge of its oversold zone, but remains below the 50% level. The 200 day EMA is still rising, so the long-term trend is bullish. Remain invested; watch for a break out of the trading range between 5800 – 6100 before deciding on the next course of action.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices are trying to recover from a correction induced by the oil price shock. The bull rallies have lasted for two years. It may be prudent to be cautious and book some profits. Maintain stop-losses to preserve profits.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Mar 04, ‘11

In last week’s post, the possibility of a post-budget rally was mentioned. It was more of a relief rally, since the budget didn’t turn out to be either negative or positive. The FIIs were net buyers for a few days. Short-covering added fuel to the rally. Is it time for the bears to retreat? Far from it.

BSE Sensex Index Chart

Bulls will be happy that the Sensex managed to close above the 20 day EMA, and breached the entangled 50 day and 200 day EMAs on intra-day basis on Fri. Mar 4 ‘11. It also reached a slightly higher top. The rally managed to keep the ‘death cross’ (50 day EMA dropping below the 200 day EMA) at bay.

Bears will point out that the upper edge of the Bollinger Band had been touched, Friday’s bearish ‘reversal day’ pattern (higher high, lower close), resistance from the 50 day and 200 day EMAs and failure to close above the support zone.

The Sensex has been trading within a range of 17300 and 18700 for 5 weeks, and is poised at an interesting cross road. Technically, the resistance from the 18500 level and the 200 day EMA has not yet been broken. Further consolidation within the trading range is likely. Watch for support from the lower edge of the Bollinger Band and the bottom of the trading range at 17300.

The technical indicators are giving mixed signals – not unusual during consolidations. The MACD is above its signal line and rising, but is still in negative territory. The ROC failed to move above its 10 day MA, reached a lower top and has slipped back into negative zone. The RSI turned down before it could reach the overbought zone. The slow stochastic is at the edge of its overbought zone.

NSE Nifty 50 Index Chart

The trading range of the Nifty 50 for the past 5 weeks has been between 5200 and 5600. The index faced strong resistance from the upper end of the trading range and the combined 50 day and 200 day EMAs, before closing just below the 5550 level. The technical indicators are giving mixed signals, which means that the consolidation within the trading range may last a while longer.

The budget uncertainty is out of the way. That was the probable cause of the relief rally. Whether the fiscal deficit can be kept below the 5% level is a moot point. The UPA government doesn’t seem to be trying too hard to curtail expenditure. The one-time cash inflows from the 3G auction won’t be repeated. The unrest in North Africa and the Middle East has sent oil prices soaring, and that certainly isn’t good news for the deficit.

Inflation is still high and the RBI may have little choice but to raise interest rates again. Already higher interest rates have increased the cost of doing business and begun to affect the profitability of India Inc. Till the fixed deposit rates in banks start going down, the stock markets may remain in a range. The short-term hedge fund types have started pulling out of India. The long-term FIIs and pension fund types have kept faith in India’s growth story.

Bottomline? The chart patterns of the BSE Sensex and Nifty 50 indices are consolidating within trading ranges. If the unrest in the Middle East doesn’t get resolved soon, high oil prices will stall India’s growth, and there is likely to be another leg downwards for both indices. The long-term and medium-term trend is down, but technically this is still a bull market correction. Stay invested.

Why Indian investors should look at Emerging Market ETF charts

Indian investors have been worried about why the FIIs are pulling out of emerging markets and redeploying in developed markets. Some say that the relative valuation difference between emerging markets and developed markets is the real cause. Others are of the opinion that this is not a flight of capital but routine profit booking. There is another school of thought: the turmoil in North Africa and the Middle East has pushed up oil prices and made emerging markets riskier.

There is no doubt that FII selling in emerging markets has affected the Indian stock market indices. The series of scams – be it the inflated costs for the Commonwealth Games, or the telecom 2G spectrum allocation, or the various scams involving real estate development – seems to have shaken the confidence of the FIIs. The rising inflation rate, leading to a steady rise in interest rates, has increased the cost of doing business.

When and how will this situation get turned around? Politicians, government officials and the real estate mafia are not going to turn into honest and law abiding citizens overnight. Nor can inflation be curtailed by pressing a button. Who knows where the Middle East turmoil will be heading? In other words, the uncertainty overhang can not be wished away. And stock markets hate uncertainty.

Is the current fall in the Sensex and Nifty 50 a good buying opportunity? Will prices become even more attractive if one waits? How can an ordinary small investor decide what to do in uncertain circumstances? When fundamental analysis can’t provide clear answers, one has to look elsewhere.

Given below are the one year closing charts (in blue) of two Emerging Market ETFs traded in the US market – the iShares MSCI Emerging Index ETF (EEM) and the Vanguard MSCI Emerging Markets ETF (VWO). Superimposed on the two charts are the BSE Sensex chart (in green) and the S&P 500 chart (in red):

Since both the EEM and VWO ETFs track the MSCI index, their chart patterns are similar. The BSE Sensex was the clear outperformer during the period Jun – Nov ‘10. EEM and VWO ETFs caught up and outperformed the Sensex during Jan – Feb ‘11, even as they corrected down. Percentage profit booking in the Indian indices exceeded the selling in the MSCI emerging markets index.

During Feb ‘11, the S&P 500 has been the outperformer, but the gaps between the S&P 500 and the two emerging market ETFs are reducing. It is interesting to observe that the recent rallies in EEM, VWO and the Sensex have coincided with profit booking in the S&P 500.

Indian investors would do well to track the EEM and VWO ETFs for signs of FII investments returning back to emerging markets. Without FII buying support, the Indian markets are not going to move up any time soon.

Stock Chart Pattern - Dhanalakshmi Bank (An Update)

The stock chart pattern of Dhanalakshmi Bank had been consolidating sideways for 6 months within a rectangular band between 123 and 155 back in Apr ‘10, after making a bearish double-top at 178. The target of the double-top was met when the stock price fell to 130. By falling to 123, the stock retraced 39% of its spectacular rally from the low of 37 in Mar ‘09 to the high of 178.

The retracement was less than the Fibonacci level of 50%. The stock also found support from the rising 200 day EMA during the sideways consolidation. That led me to conclude that the bull market was intact, and the likely break out from the rectangular consolidation would be upwards. I had advised investors to buy only on a high-volume break out above 155.

Time to take another look at the bar chart pattern of Dhanalakshmi Bank. It is a text-book example of different technical chart patterns – consolidation, break out, divergence, support/resistance levels.

The sideways consolidation continued till early Jun ‘10 – the stock using support from the rising 50 day EMA, and testing the 155 level a few times. The inevitable happened on Jun 4 ‘10 – the stock broke above 155 on a volume spike, pulled back, consolidated sideways for a few days, and rose above its previous top of 178 on another volume spike on Jun 22 ‘10.

For the next 4 months, the stock made a series of higher tops and higher bottoms till it reached a new high of 212.50 on Oct 28 ‘10. Unfortunately for the bulls, it formed a bearish ‘reversal day’ pattern (higher top, lower close). Note that the MACD, ROC and RSI reached lower tops and the slow stochastic made a flat top while the stock touched a new high (marked by blue arrows).

The combined negative divergences hinted at a correction, which took the stock below its 200 day EMA to the 155 level in Nov ‘10. The pullback found resistance from the 200 day EMA, and the stock dropped like a stone to the 123 level in Dec ‘10. It is quite interesting how long-term support-resistance levels come into play in stock charts.

The ‘death cross’ (marked by blue oval) on Dec 16 ‘10 confirmed the bear market. On Jan 7 ‘11, the stock price broke below the support level of 123 and dropped to a low of 94 on Jan 31 ‘11. The correction from the peak of 212.50 was a huge 56% – and, in 3 months, retraced more than 67% of the entire bull rally of 20 months from 37 to 212.50. If the 94 level, which is another long-term support/resistance level, is broken the stock can drop to 74 or even lower.

The technical indicators have been making higher tops and bottoms of late. The MACD is above its signal line, but is still in negative territory. The ROC is below its 10 day MA and just inside the negative zone. The RSI touched its overbought zone, and dropped back but is above the 50% level. The slow stochastic briefly entered the overbought zone, but has dropped below the 50% level.

The bulls are attempting a revival. But things are not looking very bright. Even if resistance from the falling 50 day EMA can be overcome, the consolidation zone between 123 and 155 is likely to provide formidable resistance. The new management tried to expand too fast and finances and performance have been stretched.

The stock chart shows why investing in small-cap stocks is so risky, and why it is always a good idea to maintain a trailing stop-loss to protect profits. Ability to read technical signals provide adequate opportunities for entry and exit.

Bottomline? The stock chart pattern of Dhanalakshmi Bank is in the firm grip of bears. If you are still holding, sell on the next rise. This is not the time to be contrarian. Enter only after studying Q4 results. Yes Bank remains my preferred choice in the small-cap private bank space.

Why is the stock market so excited about an unexciting budget?

These are the irreverent views of a non-economist. Take them with a pinch of salt.

It isn’t bad, so it must be good

There was a lot of uncertainty surrounding the budget this year. Rising inflation was not contained even after several interest rate hikes by the RBI. Higher interest rates were beginning to slow down Indian Inc’s growth momentum. Some tough tax measures were expected from the Finance Minister (FM). None came. The markets heaved a collective sigh of relief.

Shorts got trapped

The four months long correction in the stock markets had turned sentiments negative. All attempts at pullback rallies were getting sold into. The FIIs were selling heavily and redeploying in their home markets. Several experienced players were shorting the market. The unexpected surge in the indices on Budget Day was mainly due to short covering.

Auto sector gets an indirect boost 

A 2% excise duty cut was offered to auto makers a couple of years back as part of the economic stimulus. A roll back was discounted by the market. The FM left the excise duty unchanged. Feb ‘11 auto sales numbers have shown decent growth. Auto stocks soared on this twin good news.

Smart move from ITC

An increase in excise duty for cigarettes and other tobacco-related products was widely expected. In anticipation, ITC had increased the prices of some of its most popular brands prior to the budget. No such increase was announced by the FM. Don’t expect your pack of smokes to get cheaper. ITC’s bottom line will be a direct beneficiary.

Not so great for Mukesh Ambani

By transferring his shareholding in Reliance to a clutch of Limited Liability Partnership (LLP) companies, Mukesh Ambani ‘legally’ avoided paying income and other taxes (such as dividend distribution tax). LLPs have been brought under the purview of 18.5% MAT. Bad luck for big brother – he has to now pay taxes like a mere mortal! If only he had known earlier, he may not have built the ostentatious eyesore he calls home.

Reduced surcharge on corporate taxes

This would reduce cash outflows, and is a definite positive. Hopefully, the extra cash will get channeled into expansion activities and help to increase GDP growth. Investors may get rewarded with higher dividends.

Tax benefits for senior citizens

By reducing the qualifying age for a senior citizen from 65 to 60, several lakh tax payers will be able to avail higher tax exemptions. Some of the extra tax savings are likely to find their way into MFs and equity.

Does all this justify a 600 point rise in the Sensex today? Is the correction over? Should investors start buying again? Answers to these questions will become clearer over the next few days – now that the uncertainty about budget proposals are behind us.

Don’t let relief cloud reality. There has been little change in the global or local situations. Uprisings continue in the Middle East. Higher oil prices will further stoke the fire of inflation. Get set for another interest rate hike. FIIs were net sellers on Budget Day. The Sensex and Nifty are near strong resistance zones.

Stick to your asset allocation, and don’t get swayed by short-term index moves.