Hang Seng Index Chart Pattern - May 01, '09

Last week's Hang Seng index chart pattern discussion ended with the following statement:-

'The index is back in the sideways consolidation range where it is likely to meander for a while.'

Meander is exactly what the Hang Seng did. In fact, the chart pattern for the entire month of April '09 shows a sideways consolidation with a slight upward bias within a band of 14000 to 16000.

A look at the 6 months bar chart pattern of the Hang Seng index will confirm my earlier assertions that the rally may be ending sooner than later:-

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

The 20 day and 50 day EMAs are both moving slowly upward. The 200 day EMA is flattening. The index is facing strong resistance at the long-term average but also getting supported by the short-term one. The volumes, which had shown a spurt in late Mar '09, have dropped somewhat.

The slow stochastics has slipped down from the overbought zone and is straddling the mid-point. Ditto for the ROC and RSI. The MACD is still above the zero line but is dropping and has fallen below the signal line.

The uptrend line connecting the daily bottoms since the Mar '09 low was broken 8 trading sessions back and the index has failed to attempt a meaningful 'pullback' to the uptrend line. The Hang Seng index and the technical indicators are saying: 'We are not out of the bear market yet.'

Compare the Hang Seng with the BSE Sensex index chart pattern discussed yesterday. In the 2 years weekly charts, the Hang Seng index is below the long-term downtrend line. It is also below its 200 day EMA. Whereas, the Sensex has broken above both these indicators - even if the break is not quite convincing yet.

Bottomline? I'm expecting - like everyone else who isn't convinced by the past 2 months' rally - a wave of selling in the near term. That will provide long-term investors with an entry point. Till then, don't be a bull or a bear - be patient, like an African python.

BSE Sensex Index Chart Pattern - Week ending May 1, 2009

Last week's BSE Sensex chart pattern discussion ended with the observation that selling pressure may set in before monthly settlement day. On another holiday-truncated week of trading, there was heavy selling on Tuesday, Apr 28, '09 with the Sensex dropping 370 points on high volumes.

But there was a strong bounce back the next day (settlement day), when the Sensex rose 400 points. In the process, the Sensex pierced through the long-term downtrend line drawn from the top made in Jan. 2008 through the tops made in May '08 and Sept '08. Have a look at the Sensex 2 years weekly candlestick chart pattern:-

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

As per trendline theory, once a trendline is penetrated, the previous trend is reversed. So one may infer that we are now in an uptrend and it is time to buy.

Now let us have a look at the 6 months bar chart pattern of the BSE Sensex:-

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

If you draw an uptrend line connecting the daily bottoms of the recent rally, you will see an upward sloping line which was broken on the downside by the three down days (Apr 20, 21, 22, '09) the week before. In last week's price action, the Sensex had a 'pullback' to this uptrend line but failed to go above it.

We have an interesting dichotomy here. A break of the long-term downtrend line, with a close above the 200 day EMA. This combination indicates the end of the bear market and the beginning of a bull market - like some experts have been saying. But a break of the short-term trendline followed by an aborted 'pullback' means an end of the recent uptrend.

Confusing, isn't it? No wonder technical analysis is often scoffed at! This makes technical analysis such an interesting challenge. Fundamental analysis is never this exciting - almost like a Hollywood thriller with everyone at the edge of their seats wondering what will happen next.

Let us analyse the 6 months chart. The Sensex has been moving in a sideways channel for the past 13 (unlucky for the superstitious?) days. In the process, it has started forming a 'rounding top' pattern which is bearish.

The 200 day EMA has been penetrated on 8 of those 13 days (Fibonacci enthusiasts will be delighted!), but the Sensex managed a close above the long-term average on only 4 days. The 200 day EMA has flattened but hasn't started rising yet.

Both the 20 day EMA and 50 day EMA are rising but remain below the 200 day EMA. Volumes have been OK at best. The slow stochastics is still in overbought zone. The MACD has stopped rising. But the ROC and RSI have started to drop off.

Bottomline? The BSE Sensex chart pattern shows that we are in a tantalising stage. My guess is that the recent rally might lead to some serious profit booking (finally!). If FIIs pull out because of continued weakness in Europe and USA, or the election results are unexpected, we may see a new lower bottom. However there is plenty of cash floating around - real and printed - that can prevent the market from falling too much. Either way, investors should stay on the sidelines for the next couple of weeks, and then start entering.

Debt mutual funds or Bank fixed deposits - which is better?

In a recent post, I had briefly mentioned that I prefer bank fixed deposits over debt mutual funds because of the assured returns. Reader Eswar joined issue with me, stating that he preferred debt mutual funds for the convenience of easy liquidity and on-line transactions.

Eswar's point of view made me take a closer look at debt mutual funds to assess the pros and cons vis-a-vis fixed deposits in banks.

Bank fixed deposits (FDs) are amounts kept for specific periods in a bank with a pre-fixed rate of return. The return varies on the time periods, and from bank to bank. Interest payments can be cumulative and paid at the time of maturity, or in monthly or quarterly installments. Many banks calculate the interest accrued on a quarterly basis - hence quarterly interest payment is preferable to monthly payment.

Debt mutual funds (often called income funds) invest more than 50% of their portfolio in corporate debentures, bonds, gilts, treasury bills, bank fixed deposits and commercial papers.  Dividends can be paid out quarterly or monthly (in certain schemes), or reinvested in additional units. The growth option works much like cumulative interest in fixed deposits.

There are four points of departure. Let us look at them one by one:-

1. Interest payments are assured and the principal amount is more secure for a bank FD. There is no assurance of dividend payments or protection of capital for debt mutual funds (MFs).

2. Bank interest is taxable in the hand of the depositor. Dividend payment on debt MFs are tax free in the hand of the depositor, but subject to a dividend distribution tax payment by the MF prior to disbursement of dividend.

3. As on date, bank FDs carry an interest rate of 8-8.25% (with an additional 0.5% interest for senior citizens). Medium term debt MFs have typically given a return of 7-9%. With the security of assured returns and principal protection, investing in bank FD should be a no-brainer at current interest rates. Things change when you calculate the real rate of return after tax.

Those who are in the lower tax brackets may get a slightly better post tax return in a bank FD. But if you are in the highest tax bracket, then debt MFs can provide slightly better post tax returns.

4, If an investor has a sudden requirement for liquidity, a bank FD can be 'broken' (i.e. terminated before the stipulated period) with a penalty of 1% interest. The effective interest will become 7-7.25% at current rates.

For debt MFs, there may be an exit load (of 1%) for redeeming the units prior to 6 months or 1 year from the date of allotment. In case of appreciation in unit NAV (net asset value) at the time of redemption, short term/long term capital gains tax will apply.

So, to answer the question, it depends entirely on the asset allocation plan and risk tolerance of individuals. For older, risk averse investors, bank FDs are still the investment of choice. Younger investors with higher risk tolerance may opt for debt MFs.

FTSE 100 Index Chart Pattern - Apr 29, 2009

It has been more than a month since I looked at the FTSE 100 index chart pattern. The index was looking weak compared to global indices and looked like forming a bearish 'rounding top' pattern that led me to infer that the up trend may be ending soon.

The global up-trend through Mar and Apr '09 has confounded a lot of experts, and just as the majority seemed to agree that it was a bear market rally that would end sooner than later, Mr Market thumbed its nose and proved everyone wrong by continuing to trundle up.

Let us look at the 6 months bar chart pattern of the FTSE 100 to see if it is trotting or cantering:-

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

After a spurt in early April '09 followed by a reaction, the FTSE 100 index has been moving in a sideways fashion with a slight upward bias. The 20 day and 50 day EMAs have become entangled, with the short term average ever so slightly above the medium term one.

The index is unable to move up fast - much like the Dow, and quite unlike the KOSPI or even the Hang Seng. Like the Dow, volumes are lower in Apr '09 than in Mar '09. The FTSE 100 is below its Jan '09 and Feb '09 tops, and well below the 200 day EMA. The bears are not giving up without a fight.

The slow stochastics has just moved into the overbought zone, indicating that the rally may have some more upside. The MACD is confirming that, with a gradual upward movement. However, the ROC and RSI are both making lower tops and moving sideways.

Bottomline? This rally should be utilised to lighten holdings - particularly in non-performing shares. Not a great time to enter. There will be better opportunities in the near future.

Stock Chart Pattern - Bharti Airtel

The stock chart pattern of Bharti Airtel will reveal why it is one of the favourite stocks of institutional and retail investors. Not only has the company provided innovative products and services, its rapid growth has provided huge capital appreciation to investors.

Today it has announced a maiden dividend and a 2:1 stock split. That should further consolidate its leadership position as the stock-to-own in the telecom services sector.

The 6 months closing chart pattern of Bharti Airtel shows that it has been outperforming the Sensex during the recent rally:-

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

Bharti had six straight closes above its 200 day EMA, while the Sensex continued to play hide-and-seek with its long-term average. The rise from the Mar '09 low has also been much sharper than that of the Sensex.

The 20 day EMA has moved well above the 50 day EMA and is likely to pierce the 200 day EMA from below. That will be the first confirmation that Bharti Airtel has entered a bull phase.

The slow stochastics is comfortably ensconced in the overbought zone and not showing any signs of moving out. The MACD and its signal line are both rising.  The RSI is about to enter the overbought zone. All good signs for the up move to continue.

But there are a few contra-indications. The ROC has turned down. Bharti's rise during the rally has been a bit too steep. Steep rallies tend to correct sharply as well. The biggest concern is the volume - or the lack of it. Such a rally should have been supported by a rapid rise in volumes. That hasn't happened - and is a negative sign.

Bottomline? An existing holder can keep riding the rally or book partial profits. Potential investors in Bharti Airtel should keep observing the chart pattern for a decent correction and then enter.

Will the H1/L1 US visa restrictions 'news' affect the IT sector?

A couple of months back, I had written a post about how to use financial news. Four categories of 'news' were discussed - good, great, bad and worse. Some suggestions about how to deal with such news were given.

What if there is a fifth category? Some item that appears in the pink papers or business channels as 'news' and causes some turmoil in the stock markets - but later turns out to be a misinterpretation? It wasn't really 'news'?

It is difficult to take any action till you receive further clarifications. Or, you may have an 'insider' in the industry or sector who can separate the wheat form the chaff and go to the core issue to advise you.

The recent 'news' about the H1/L1 visa restrictions for temporary non-immigrant workers in the USA is a case in point. The business channels went to town about it, asking leading members of the IT industry how these restrictions will affect their top lines and bottom lines.

Some retail investors dumped Infosys, TCS and other IT stocks. Some even stated that the leading IT sector stocks had become 'fundamentally weak'. The 'smart money' lapped up the stocks.

Any one who has spent a few years in the IT industry and has worked in the USA would take such 'news' in their stride. Because (s)he would know that similar 'news' keeps popping up every so often only to dissolve without a trace.

Why? Because the visa restriction 'news' was only a proposal by a couple of senators - pandering to the popular misconception that most of USA's unemployment problems have been caused by jobs being outsourced to India.

It takes a very long while - some times, forever - for such restrictive proposals to become a law. The proposal needs to be tabled and passed in the US Congress and the Senate. There will be a strong Indian-American lobby that will be working against it.

Even if the proposal gets through both houses, it is likely that there will be several amendments made to the original draft proposal. Each amendment will take its own sweet time to go through.

The US President has to sign the revised proposal to turn it into a 'law'. He has the authority to turn it down, or - you guessed it - seek more amendments. Many such proposals never get to become a law. Even if it does, most of the severe restrictions are likely to get diluted.

At the end of it all, should the visa restrictions become a law, it will not take effect retrospectively. Meaning, existing H1/L1 visa holders will not be affected. Only new visa applications made after the law comes into effect will face the restrictions.

Who might get affected the most in the IT sector? It will be the small body-shoppers whose business model is to hire out programmers to different US companies.

Also affected will be large US IT companies like Microsoft, Oracle, Cisco who employ significant numbers of H1/L1 software personnel from India. They will face difficulty in finding new employees from the US job market. So they will probably be lobbying the US government to veto such a restrictive proposal.

Infosys, TCS, Wipro have globally dispersed businesses, with a large portion of the work done 'offshore' in India. They will be inconvenienced, but the effect on their top line and bottom line will be very little.

Dow Jones (DJIA) Index Chart Pattern - Apr 24, '09

There has not been any significant change in the Dow Jones index chart pattern from the previous week. But a closer look at the technical indicators will confirm a sea change in investor perceptions.

The DJIA 6 months closing chart pattern will reveal the differences:-

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

Two weeks back, I had commented that the DJIA seemed to be treading water around the 8000 level. It has continued to do that throughout the month of Apr '09. If you look at the closing tops since the global rally began in Mar '09, you may be able to perceive that the index is beginning to form a bearish 'rounding top' pattern.

The volumes in Apr '09 are lower than that in Mar '09, when the rally was in its initial stages. The 20 day EMA has crossed above the 50 day EMA but has not been able to pull away from it. The slowing of the upward momentum is quite visible.

Both the short and medium term averages as well as the Dow are well below the 200 day EMA. So we are still in a bear market.

But take a look at the slow stochastics. It has dived down from the over-bought region, confirming that the rally is coming to an end soon. The MACD has started falling and is about to go below its signal line. The ROC and RSI are moving in opposite directions near their midpoints. The 'smart money' seems to be moving out.

As Haresh Soneji of CNBC-TV18 wrote in his weekly article, the fund managers (like Bolton of Fidelity and Mobias of Templeton) are calling a new bull market; the economists, like Stiglitz, Krugman, Roubini are calling it a bear market rally. I'm on the side of the economists because they have no vested interests in a bear or a bull market.

Bottomline? Time to book profits - or hold on to your cash a while longer. Better opportunities to buy will be round the corner.