Selecting a company for investing is not a trivial task. Many small investors get into trouble because they buy a stock without doing adequate homework.
A stock may be in the news as a potential multibagger, or may be approaching its 25th or 50th year of existence or has a reputation of distributing large dividends.
Those may be good reasons for someone to buy the stock in the hope of making some quick gains. But for building wealth for the long-term, more detailed analysis is necessary to determine a company's staying power.
Ratio analysis is a good way to differentiate a company from its peers and competitors. But there are so many ratios to analyse - where should you start?
The state of financial health of a company is one of the first things you should evaluate. If the financial foundation is strong, many other shortcomings can be overridden.
Solvency ratios - like debt/equity and interest coverage - indicate the ability of a company to meet its long-term financial commitments.
Liquidity ratios - like current ratio and quick ratio - indicate how well a company can meet its short-term financial obligations.
To learn more about solvency and liquidity ratios - how to calculate and evaluate them - visit the following links at investopedia.com:
Link 1
Link 2
After Monday's holiday, FIIs continued their buying in equities. Their net buying crossed Rs 1200 Crores on Tuesday and Wednesday, as per provisional figures. In a reversal of roles, DIIs have turned bears. Their net selling exceeded Rs 2150 Crores.
The salaried middle-class heaved a sigh of relief as the Finance Minister withdrew his budget proposal of taxing 60% of EPF savings made after Apr. 1, 2016. The Finance Bill will need to be amended accordingly.
Oil's price has been rising on speculation that major producers may agree to a cut in production. Meanwhile, Vijay Mallya has flown the coop as banks tried to pressurise him to honour his personal guarantees against huge loans taken by the now-defunct Kingfisher Airlines.
After touching a 52 week intra-day low of 6826 on Feb 29 '16, Nifty rallied sharply above its 20 day EMA, the 'support/resistance' level of 7240 and its 50 day EMA - gaining more than 700 points (10.3%).
All three daily technical indicators touched higher bottoms (marked by blue arrows) while the index dropped lower. The combined positive divergences had provided a technical trigger for the rally.
The possibility of the index facing resistance from the next 'support/resistance' level of 7540 was mentioned in last week's update.
What will Nifty do next? In the past 2 days, DII selling has exceeded FII buying. Slow stochastic is well inside its overbought zone. The TRIN market breadth indicator (not shown) has entered its overbought zone for the first time since the third week of Dec '16.
A correction towards 7240 may be just around the corner. The dip will be a good buying opportunity.
Some experts are suggesting that the index may fall below 7240 and test its Feb 29 low. That seems unlikely - unless there is a sudden global sell-off for some reason.
A third possibility is Nifty overcoming the resistance from the 7540 level and moving up to 7700, which is the next 'support/resistance' zone.
Can the index move even higher? Sure it can. But there is a limit to how far short-covering can propel this rally.
Eventually, fundamentals need to be conducive for the bull market to resume in earnest - such as, an interest rate cut by RBI in Apr '16 and better Q4 results from India Inc.
Till then, use every opportunity to get rid of any dud stocks from your portfolio, and switch to fundamentally stronger ones.
Gold chart pattern
The following comments were made in the previous post on the daily bar chart pattern of Gold: "All three daily technical indicators are looking extremely overbought, which can lead to a price pullback towards the 1180 - 1200 zone. Bulls may take the opportunity to buy again."
Note that gold's price dropped inside the zone between 1180 - 1200 as expected, successfully tested support from the previous top of Oct '15, and then entered a sideways consolidation within a 'symmetrical triangle' pattern, from which an upward breakout occurred on Mar 3 '16.
The next day, gold's price touched a 52 week high of 1280 with a huge volume spurt, only to pullback towards the top of the triangle before bouncing up.
Earlier, gold's price had formed a 4 months long 'rounding bottom' reversal pattern - clearly visible on the 50 day EMA. The subsequent 'golden cross' of the 50 day EMA above the 200 day EMA (marked by blue oval) technically confirmed a return to a bull market after almost 4.5 years.
All three daily EMAs are rising, and gold's price is trading above them. Is it time for bears to throw in the towel and beat a quiet retreat? Probably not so quiet - because of several bearish technical signals.
First, volumes during the upward breakout from the triangle should have been significantly higher to technically confirm the breakout - but wasn't. Second, gold's price and its 20 day EMA have risen too steeply above the 200 day EMA. Such steep climbs are often unsustainable.
Third, all three daily technical indicators, after correcting overbought conditions, failed to touch new highs with gold's price. The combined negative divergences can lead to a correction, or even an 'end run' below the 'symmetrical triangle'.
On longer term weekly chart (not shown), gold’s price has closed above its 200 week EMA for the first time in nearly 3 years. Weekly technical indicators are looking overbought, and hinting at a possible correction. Any dip may be used as a buying opportunity by bulls.
Silver chart pattern
The following comments were made in the previous post on the daily bar chart pattern of Silver: "All three daily technical indicators are inside their overbought zones. A pullback towards - and a likely drop below - the 200 day EMA is on the cards."
Silver's price dropped below all three EMAs, but bounced up sharply into bull territory and appears to have formed a bullish 'cup and handle' pattern. The pattern is more clearly visible on the 20 day EMA.
A convincing rally past the 16 level will technically confirm the 'cup and handle' pattern.
Daily technical indicators corrected overbought conditions and are in bullish zones. The 'golden cross' of the 50 day EMA above the 200 day EMA, which will technically confirm a return to a bull market, is awaited.
On longer term weekly chart (not shown), silver’s price closed above its 20 week and 50 week EMAs but well below its falling 200 week EMA, and remains in a long-term bear market. Weekly technical indicators are in bullish zones, but not showing much upward momentum.
S&P 500 index chart
After closing below the 50 day EMA on the first day of the week, the daily bar chart pattern of S&P 500 resumed its rally and crossed briefly above its 200 day EMA for the first time in more than 2 months on Fri. Mar 4.
Late profit booking ensured that the index closed exactly at its 200 day EMA - with a gain of 2.7% on a weekly closing basis.
Is the correction over? It appears so - though a convincing move above the 200 day EMA is required for a technical confirmation.
Daily technical indicators are in bullish zones, with MACD continuing to rise above its signal line in positive zone and RSI gradually moving up towards its overbought zone.
Slow stochastic is well inside its overbought zone, and hinting at a pullback by the index towards its rising 20 day and 50 day EMAs.
If the index finds support around 1960 and bounces up, it will be a good buying opportunity.
On longer term weekly chart (not shown), the index crossed above its 20 week EMA but is facing resistance from its 50 week EMA. The index closed 180 points above its rising 200 week EMA in a long-term bull market. Weekly technical indicators are turning bullish and showing good upward momentum.
FTSE 100 index chart
The daily bar chart pattern of FTSE 100 shook off a mid-week bear attack and closed at its highest level in 2016, with a 1.7% gain on a weekly closing basis.
However, the index fell 50 points short of testing resistance from its 200 day EMA, and remains in bear territory.
Two of the three daily technical indicators - MACD and Slow stochastic - are looking overbought, and hinting at a possible correction or consolidation. RSI is moving sideways above its 50% level.
A likely pullback and subsequent bounce up from the 6050 level can be a buying opportunity.
On longer term weekly chart (not shown), the index closed above its 20 week EMA but more than 100 points below its sliding 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are looking bullish and showing good upward momentum, but MACD is still in negative zone.
The Finance Minister stuck to the fiscal deficit target of 3.5% of GDP, and maintained status quo on long-term capital gains tax on equity holdings in his budget proposals.
FIIs were reassured - despite lack of clarity on retrospective taxation - and have turned buyers. During the first 4 days of Mar '16, their net buying in equities crossed Rs 5900 Crores, as per provisional figures. DIIs were net sellers of equity worth Rs 2400 Crores.
India's manufacturing PMI (Purchase Manager's Index) was 51.1% in Feb '16 - the same as in Jan '16. A number above 50% indicates growth. However, services PMI dropped to a 3 months low of 51.4% in Feb '16. It was 54.3% in Jan '16 - a 19 months high.
RBI relaxed capital adequacy requirements of banks by allowing 45% of readily-saleable property value and foreign currency translation reserves to be included in Tier - I capital calculations. This has come as a big relief for PSU banks struggling with huge NPAs.
BSE Sensex chart pattern
The daily bar chart pattern of Sensex touched a new 52 week low of 22495 on budget day (Feb 29 '16) but recovered to close just above the 23000 level. It rallied during the next 3 days as FIIs suddenly turned bulls.
The index easily crossed above its 20 day EMA, the support/resistance level of 23840 and its 50 day EMA before facing resistance from the next support/resistance level of 24830.
All four daily technical indicators touched higher bottoms (marked by blue arrows) while the index dropped to a new low. The combined positive divergences was a technical trigger for the rally.
Is the year-long correction finally over? It may be a bit early to call. The index is still trading below its falling 200 day EMA and the blue downtrend line, and technically remains in a bear market. Things can change quickly if FIIs continue to buy.
What is Sensex likely to do next? Shorts have been covered and there are no immediate positive triggers for the market. RBI has hinted at a possible interest rate cut in April '16.
Till then, expect some consolidation in the zone between 23840 and 24830. A possible move can be a test of support from the 23840 level before the index tries to overcome resistance from the 24830 level. In that case, an 'inverse head and shoulders' reversal pattern will form.
Sensex can also breach the support at 23840 and re-test its Feb 29 low - but that seems a low probability event as of now. A third possibility is a continuation of the current rally past 24830, in which case the next resistance level will be 26300.
On longer term weekly chart (not shown) the index has closed 1100 points above its 200 week EMA, keeping the long-term bull market alive. If you missed buying on the rally, use any dips to add. Otherwise, stick to your asset allocation plan.
NSE Nifty 50 chart pattern
The weekly bar chart pattern of Nifty has formed a large 'reversal bar' on strong volumes, hinting that the year-long correction from the Mar '15 top is coming to an end.
The index needs to overcome overhead resistances from the support/resistance level of 7540, its falling 20 week and 50 week EMAs and the blue downtrend line before bulls can regain control of the chart.
Weekly technical indicators have recovered from oversold conditions and are showing good upward momentum, but remain in bearish zones.
On weekly closing chart (not shown), Nifty has formed a 'double bottom' reversal pattern and bounced up to close nearly 400 points above its 200 week EMA.
Bottomline? Chart patterns of Sensex and Nifty have bounced up to close well above their respective 200 week EMAs. The threat to long-term bull markets has been averted. With FIIs turning buyers, bullish sentiment is back in the market. Don't get caught up in the euphoria. Be patient, and stick to your investment plans.
The previous post was written more than 3 years ago, when the Rs 2 face value stock had soared past the Rs 500 mark. It subsequently corrected with the broader market and closed at a low of 374 in Aug '13.
A spectacular bull rally followed. After crossing above the 800 level with a strong volume surge, all four technical indicators entered their overbought zones.
The stock entered an 8 months long sideways consolidation within a 'rectangle' pattern, from which a sharp upward break out propelled the stock above the 1000 level.
The daily closing chart of Cummins India formed a small 'double top' reversal pattern during Aug '15 - gaining more than 200% from its Aug '13 low, but all four technical indicators again showed overbought conditions.
The stock entered a 7 months long down trend (marked by blue down trend line) that is still continuing. The 'death cross' of the 50 day EMA below the 200 day EMA technically confirmed a bear market.
After closing at a 52 week low of 809.50 on Feb 29 '16 - correcting 32% from its Aug '15 'double top' - the stock had a 'V' shaped recovery that is facing twin resistances from its falling 20 day EMA and the 880 level.
In one of those strange coincidences that often occur in price charts, the 880 level happens to be the mid-point of the 'rectangle' within which the stock consolidated from Nov '14 to Jul '15 and acted as a 'support/resistance' level.
Daily technical indicators have corrected oversold conditions but haven't quite turned bullish yet.
The company is a shining example of the PM's "Make in India" campaign. It not only makes in India to sell in India, it also designs and makes in India for selling in Africa, Europe, Middle East and Mexico.
Slow down in exports - particularly to Europe and Middle East - has hurt both top and bottom lines. But the company is one of the best in the Capital Goods sector - zero debt, excellent reserves, strong cash flows and a regular dividend payer.
A dip towards 830 or a convincing move above 880 can be used to add.
During Feb '16, FIIs were net sellers of equity worth Rs 12500 Crores. DIIs were net buyers of equity worth Rs 10500 Crores. Nifty touched a new 52 week low of 6826 on the last day of the month and closed with a 7.6% loss for the month.
Budget proposals did not appear to be market-friendly despite only a token 0.5% increase in Service tax, and a less-then-expected increase in excise duty on cigarettes. Corporate tax was not reduced. The tax on EPF withdrawal came as a major shock to the salaried class.
Just when everyone expected the index to collapse, Nifty did the unexpected and jumped 550 points from its Feb 29 low. What happened? Have a look at the chart and analysis below to find out.
The following comments from last Sunday's post on Sensex and Nifty charts may be worth repeating:
"The door remains open for bears to push the index down to a new 52 week low, if the budget doesn't contain any market-friendly proposals."
"...if 6869 gets breached after the budget announcements, Nifty is likely to find strong support in the zone between 6647 and 6869."
"There are very little expectations from the budget on Feb 29 - which may turn out to be a contraindicator for a market rally."
The daily bar chart pattern of Nifty 50 did touch a new 52 week intra-day low on budget day, found support at 6826 and then rallied strongly. After crossing above its 20 day EMA on Mar 1 '16, the index faced resistance from the long-term support/resistance level of 7240.
That resistance was easily overcome with an upward 'gap' with good volume support today. The resistance level is likely to turn into a support level once more. The falling 50 day EMA is now providing resistance.
Is the worst over for the index? It would appear so from FII activity. They were net buyers of equity worth a huge Rs 4350 Crores on Mar 1 & 2. DIIs turned net sellers of equity worth Rs 1430 Crores, as per provisional figures. FIIs were reassured by the FM's decision of sticking to the fiscal deficit target of 3.5% of GDP.
Note that all three daily technical indicators touched higher bottoms while Nifty dropped to a new low (marked by blue arrows). The combined positive divergences was a technical trigger for the rally.
On the daily closing chart (not shown), Nifty has formed a 'double bottom' reversal pattern, and should continue to rally.
There is also a possibility that Nifty faces resistance from the next 'support/resistance' level of 7540, pulls back towards 7240, and then resumes its uptrend. That will provide a good buying opportunity.
In case 7240 gets breached again, Nifty may test its Feb 29 low - but such a possibility appears slim, and can only be triggered by some cataclysmic global event.
After a long time, shorts have been squeezed out. Time to start activating your 'buy list'.
Not quite 'acche din' yet - but getting there.
