S&P 500 index chart
The following comments appeared in last week's post on the daily bar chart pattern of S&P 500: "All three EMAs are falling, and the index is trading below them in bear territory. The Jan 20 low of 1812 is likely to be tested."
The Jan 20 low of 1812 was tested on Thur. Feb 11 - as the index touched a new 52 week intra-day low of 1810 - but technically not breached because of the 3% 'whipsaw' rule.
On Fri. Feb 12, the index bounced up to close at 1865 - losing just 15 points on a weekly closing basis. Asian markets are in a bull grip at the time of writing this post. If S&P 500 continues to rally with good volume support and crosses above its Feb 1 top of 1947, a 'double bottom' reversal pattern will get technically confirmed.
All three daily technical indicators have corrected oversold conditions, and are showing positive divergences by touching higher bottoms while the index dropped slightly lower.
Is the correction over? It may be too early to call. But a sharp rally is quite possible.
On longer term weekly chart (not shown), the index bounced up after testing support from its 200 week EMA for the second time in 4 weeks, but closed well below its falling 20 week and 50 week EMAs. The long-term bull market is still intact, but may not remain so for long. Weekly technical indicators are in bearish zones and showing downward momentum.
FTSE 100 index chart
The following comments appeared in last week's post on the daily bar chart pattern of FTSE 100: "...the index has dropped below the 5750 level and looks ready to test and breach its Jan 20 low of 5640."
On Thu. Feb 11, the index dropped well below 5640 and touched a new 52 week intra-day low of 5499.50, before bouncing up to close at 5537. Technically, 5640 was not breached because of the 3% 'whipsaw' rule.
If you think this is technical hair-splitting - a breach of a previous low should be considered a breach - then you may not be able to take advantage of the 3% 'whipsaw' rule.
I'm not saying the index can't fall lower. But positive divergences visible on all three daily technical indicators - which failed to touch new lows with the index - can trigger a sharp rally that squeezes out shorts.
On longer term weekly chart (not shown), the index touched and closed at 3 year intra-week and closing lows. The 50 week EMA has just slipped below the 200 week EMA. Weekly technical indicators are in bearish zones, but showing positive divergences by failing to touch new lows with the index.
FIIs were heavy net sellers of equity worth more than Rs 3000 Crores last week, as per provisional figures. DIIs were net buyers of equity worth Rs 2050 Crores - not enough to prevent vertical plunges on Sensex and Nifty charts.
Retail (CPI) inflation inched up to 5.69% in Jan '16 from 5.61% in Dec '15, due to higher food prices. The Jan '15 number was 5.19%. Rising inflation may prevent any further interest rate cuts by RBI.
The IIP number for Dec '15 was -1.3%. It was the second month of contraction. In Nov '15 IIP was -3.4%. In Q3, IIP was 1.5% vs. 4.8% in Q2. However, for the 9 months period from Apr to Dec '15, IIP was 3.1% against 2.6% for the same period in 2014.
Auto sales slipped marginally (-0.72%) in Jan '16 on a YoY basis after 14 straight months of growth. The good news is robust double-digit growth in CV sales.
BSE Sensex chart pattern
The daily bar chart pattern of Sensex dropped vertically like a falling knife, as it sliced through known support levels to touch a 21 months low of 22600 on Friday, Feb 12. The unfilled 'gap' formed back in May '14 in the euphoria of NDA's election victory was filled easily.
Daily technical indicators are inside their oversold zones. However all three are showing positive divergences by not falling lower with the index.
Though an index can stay oversold for long periods during bear phases, a technical bounce may be imminent. The index formed a 'reversal day' pattern (lower low, slightly higher close) with strong volume support (not shown on chart).
Sensex closed the week more than 3000 points below its 200 day EMA. Such a huge drop below the 200 day EMA in a short span of time is unsustainable.
In candlestick parlance, Friday's trading formed a 'hammer' pattern, which usually has bullish implications when formed at the end of a down trend. Next week's trading will indicate whether bulls will be in a mood to fight back.
The index dropped below its 200 week EMA (not shown) for the first time since Aug '13, but managed to close within the 3% 'whipsaw' limit. The long-term bull market is now under threat.
NSE Nifty 50 chart pattern
The weekly bar chart pattern of Nifty 50 collapsed on heavy selling by FIIs, touching its lowest level since May '14 and breaching the 200 week EMA for the first time since Aug '13.
A close below the 200 week EMA is considered very bearish. But a single week's breach should not cause panic. Faint bullish hopes were kept alive as the index closed the week within the 3% 'whipsaw' limit below its 200 week EMA.
Weekly technical indicators are looking oversold and showing downward momentum. If the index fails to bounce up within the next 2-3 trading weeks, much lower levels may be on the cards.
How much lower? Check the previous post on Nifty. Likely lower support levels have been mentioned there.
Bottomline? Chart patterns of Sensex and Nifty have closed below their respective 200 week EMAs. Long-term bull markets are now under real threat. This is not the time to panic and sell off. Stick to your investment plans. Bottom fishing should be attempted in a very gradual manner - if at all.
"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.
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How to Reallocate your Assets
Net selling in equities by FIIs this week has crossed Rs 1500 Crores. On Tue. Feb 9, DIIs joined the selling bandwagon, but they were net buyers on Mon. Feb 8. and Wed. Feb 10. Total DII net buying was Rs 300 Crores.
Falling oil prices, a poor IIP number from Germany, disappointing Q3 results from India Inc. have combined to scare away bulls.
India's GDP grew at 7.3% during Oct-Dec 2015, compared to 7.7% during Jul-Sep '15, but many economists are unable to correlate the numbers with the situation on the ground.
The daily closing chart of Nifty 50 dropped to a new 52 weeks low of 7216 today. The 200 day EMA has formed a 'rounding top' reversal pattern. Daily technical indicators are in bearish zones and showing downward momentum.
All three EMAs are falling and Nifty is trading below them. On a closing basis, the index is 19.8% below its Mar '15 closing high of 8996. A 20% fall from a top is technically considered a confirmation of a bear market.
That may just be of academic interest. The way FIIs are selling, it seems no low is low enough!
There is one tiny sliver of silver lining on the looming dark bearish clouds. All three technical indicators touched higher bottoms while the index dropped lower. The positive divergences can lead to a technical bounce.
How low can Nifty fall? Let us look at a longer term weekly chart:
An important point to note is that Nifty is still trading above its 200 week EMA, which is currently at 7096. A convincing breach of the 200 week EMA will negate the long-term bull market.
Just above that is the 7120 level - which is the 50% Fibonacci retracement of the entire rise from the Aug '13 low to the Mar '15 top.
Bear phases often find support near the 50% Fibonacci retracement level - since most technical traders know about such levels.
Between 7020 and 7067 is an unfilled 'gap' that was created on the daily bar chart (on May 13 '14 - on euphoria about Modi-led NDA victory in the general election). Such gaps often provide support.
The 100 point zone between 7020 and 7120 may become a good support zone. Below that, support levels are at 6840, 6360 and 6160. Remember that support (and resistance) levels are approximate and rarely exact.
Weekly technical indicators are looking a bit oversold, which can lead to a technical bounce. Bears (i.e. FIIs) will probably use it to sell again.
The advantage is clearly with the bears.
WTI Crude chart
The daily bar chart pattern of WTI Crude oil crossed above the falling 20 day EMA with strong volume support and touched an intra-day high of 35 on Jan 29.
The falling 50 day EMA proved to be a strong resistance. Oil's price has dropped below its three EMAs, but is trying to find a bottom at the 30 level.
Daily technical indicators are not holding out much hope for bulls. MACD has started to turn down towards its rising signal line in negative zone. RSI faced resistance from its 50% level and is moving down. Slow stochastic reached the edge of its overbought zone, but has since dropped below its 50% level.
According to the latest forecast by IEA, global oil demand growth will ease back considerably in 2016.
On longer term weekly chart (not shown), oil’s price is trading well below its three weekly EMAs in a long-term bear market. Weekly technical indicators have corrected oversold conditions, but remain in bearish zones.
Brent Crude chart
The daily bar chart pattern of Brent Crude oil is once again trading at a premium to WTI Crude, thanks to a bear market rally with good volume support during the second half of Jan '16.
The rally stalled as the falling 50 day EMA proved to be a tough hurdle. Oil's price is consolidating sideways within a small 'triangle' pattern, and trying to find a bottom at 32.
Daily technical indicators are turning bearish. MACD failed to enter positive zone. RSI has slipped below its 50% level. Slow stochastic formed a small 'double top' reversal pattern inside its overbought zone, and started to move down.
With OPEC countries failing to agree on a production cutback, and Iran's production ready to hit the market after lifting of economic sanctions, oil's price is likely to remain depressed due to an already oversupplied market.
On longer term weekly chart (not shown), oil's price is trading well below its three weekly EMAs in a long-term bear market. Weekly technical indicators are inside bearish zones after correcting oversold conditions.
S&P 500 index chart
The daily bar chart pattern of S&P 500 had touched a 52 week low of 1812 on Jan 20 '16, but bounced up sharply above its 20 day EMA to touch an intra-day high of 1947 on Mon. Feb 1.
The 135 points rally - due to a combination of short covering and value buying - was enough to lure bears out of the shadows. Readers were warned about the possibility in last week's post.
The index dropped, and stayed, below the 20 day EMA for the rest of the week and closed at 1880, losing 3% on a weekly closing basis.
Daily technical indicators are looking bearish. MACD is turning down towards its rising signal line in negative zone. RSI faced strong resistance from its 50% level and is moving down. Slow stochastic has dropped from its overbought zone.
All three EMAs are falling, and the index is trading below them in bear territory. The Jan 20 low of 1812 is likely to be tested.
On longer term weekly chart (not shown), the index closed above its rising 200 week EMA, but well below its falling 20 week and 50 week EMAs. The long-term bull market is still intact, but may not remain so for long. Weekly technical indicators are in bearish zones.
FTSE 100 index chart
The daily bar chart pattern of FTSE 100 briefly crossed above the 6100 level intra-day on Feb 1 '16, and managed to close just above its falling 50 day EMA for the second day in a row.
Bears snuffed out flickering bullish hopes the very next day. The index dropped, and stayed, below its 20 day EMA for the rest of the week - losing almost 3.9% on a weekly closing basis.
At the time of writing this post, the index has dropped below the 5750 level and looks ready to test and breach its Jan 20 low of 5640.
Daily technical indicators are in bearish zones and showing downward momentum. MACD has just crossed below its signal line in negative zone. RSI and Slow stochastic are falling below their respective 50% levels.
On longer term weekly chart (not shown), the index closed well below its three weekly EMAs in a bear market. The 50 week EMA is about to cross below the 200 week EMA and technically confirm a long-term bear market. Weekly technical indicators are in bearish zones.
The previous post was written more than 5 years ago after the company's stock suffered a big sell-off following reports that top officials were involved in a major bribe-for-loan scam.
Several officials alleged to be involved in the scam, including the CEO and a number of PSU bank executives, were arrested. CBI conducted raids in six cities to uncover incriminating documents.
Time is a great healer and public memory is short. One look at the 2 years daily closing chart of LIC Housing Finance will prove the veracity of the two proverbs.
After forming a small 'double bottom' pattern at 157 (for the Rs 2 face value stock) during Aug-Sep '13, the stock embarked on a strong bull rally that touched a closing high of 523.60 in Aug '15 - gaining more than 230% in less than 2 years.
Along the way, the stock faced a couple of decent corrections that were preceded by all four daily technical indicators showing negative divergences by touching lower tops (marked by blue arrows) while the stock moved higher.
From Aug '15 onward, the stock has been consolidating sideways within a 'pennant' (i.e. narrow triangle) pattern, from which a break out can occur in either direction.
Despite trading below its three EMAs in bear territory, the stock is in a long-term bull market because the 200 day EMA is still rising. However, the chart will turn bearish if the stock breaks down below the 'pennant'.
Daily technical indicators are in bearish zones, but showing some weak signs of turning around. ROC and RSI are showing positive divergences by not falling lower with the stock price.
The stock is about 15% below its Aug '15 top, and can be accumulated slowly. Alternatively, wait for a convincing break out above the 'pennant' to enter.
