Dow Jones (DJIA) index chart pattern - Nov 27, '09

The Dow Jones (DJIA) made another attempt to climb away from the important 10360 level, mentioned last week as the barrier to cross for the bull rally to sustain. In a holiday-shortened week, the Dow twice moved above the 10500 level, but Friday's profit booking brought the index down below the 10360 level. It finally closed marginally lower for the week.
The 6 months bar chart pattern of the Dow Jones (DJIA) index isn't looking that different from a week back:-

The bull rally on lower volumes continues as the bulls have managed to brush aside all efforts by the bears to bring the index down. All three EMAs are still moving up and the index is above them.

The technical indicators are looking slightly weaker. The slow stochastic is in the overbought zone, where the %K has moved slightly below the %D. The RSI moved down after touching the overbought zone. The MFI is above the 50% level but moving down. The MACD has moved down a bit and is touching the signal line.

So is it time for the bears to throw in the towel? As per this article, market sentiments are turning overly bullish, which could provide just the contrarian opportunity that the bears could try and exploit. Fundamentals are yet to catch up with a market that has been driven upwards by a flood of liquidity and dollar carry-trade.

Bottomline? The Dow Jones (DJIA) index chart pattern is maintaining the bullish sequence of higher tops and bottoms. Ride the rally, but keep booking partial profits.

(Note: At the time of writing this post, the Dow is marginally up but still below the 10360 level.)

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - Nov 27, '09

FTSE 100 index chart

Last week's analysis of the FTSE 100, CAC 40 and DAX index chart patterns was concluded with the following comments:-

'The technical indicators in the European indices are favouring the bears. The bull rally is under real threat.'

The FTSE 100 chart made a valiant attempt to go past the previous top of 5397. Four days in a row, it came within handshaking distance but failed to move higher.

The Dubai loan re-scheduling news tilted the scales towards the bears. The index once again closed the week marginally lower and below the 5300 level. Friday's sharp drop below the 50 day EMA was followed by a rapid recovery back up to the 20 day EMA. That, and the rising 200 day EMA should give the bull's some encouragement.

The technical indicators may belie their hopes. The volumes on down days continue to be higher. The RSI and MFI have both dropped to their 50% levels and show negative divergence. The slow stochastic has dropped from the overbought zone after entering it earlier in the week. The MACD has slipped below the signal line and also shows negative divergence.

DAX index chart

The DAX index chart actually managed to close 22 points higher for the week, but failed to get past even its Nov 18 high of 5843. The Dubai effect caused almost identical price action to that of the FTSE 100 on the last two days of the week - sharp falls on higher volumes.

The slow stochastic has dropped from the overbought zone. The RSI is headed down to the 50% level. The MFI is at its 50% level. The MACD is barely above the signal line. For the bull rally to sustain, the German index needs to cross its Oct 20 '09 high of 5888 soon.

CAC 40 index chart

The bears seem to have mauled the CAC 40 index chart the worst. A bearish lower-top-lower-bottom pattern has formed. The French index dropped close to the 200 day EMA and closed marginally lower for the week, just below the 50 day EMA.

The slow stochastic has dropped to the 50% level. The RSI has slipped below its 50% level, while the MFI is barely clinging on. The MACD has moved into the negative zone and below the signal line.

Bottomline? The European indices are under bear attack. Watch out for the lows made in the first week of Nov '09. If those levels get violated, the indices will fall deeper. Book profits.

BSE Sensex Index Chart Pattern - Nov 27, '09

In last week's analysis of the BSE Sensex index chart pattern, I had mentioned some concerns about the continuation of the bull rally, even as the technical indicators were looking bullish. These included:-

• low volumes that indicated lack of follow-up buying
• slowing momentum near the 17000 level
• double-whammy of settlement day in India and the Thanksgiving holiday in the USA that could lead to FII selling

All of the above contributed to the sharp correction on higher volumes on Thursday and Friday (Nov 26 and 27 '09). But the real trigger for the world-wide selling was the Dubai World loan repayment re-scheduling. A classic case of the 'butterfly effect'!

The question is: Will the FIIs continue with their profit booking due to end-of-year considerations, or will they use this dip to start buying? Let us have a look at the 6 months bar chart pattern of the BSE Sensex index to find the answer:-

Observe the volume bars in Jun '09 and Jul '09, and compare them with those of Oct '09 (when the Sensex made a new high of 17493) and Nov '09 (the high last week was 17290 on Wed, Nov 25 '09). Bull markets can't sustain on low volumes.

Remember that the BSE Sensex index had broken downwards from a bearish 'rising wedge' formation in Oct '09. A pull-back attempt in Nov '09 failed to reach the previous high, and provided an excellent opportunity to sell. FIIs and smart investors did exactly that by using the Dubai fiasco as an excuse.

The correction dropped the index below the 50 day EMA but short covering ensured a close above the medium-term average. For the week, the BSE Sensex closed 390 points (2.3%) lower. The 200 day EMA is still moving up and the Sensex is more than 1100 points above it, so the bull market remains in tact.

The technical indicators have turned a lot weaker. The RSI has fallen from its overbought zone. So has the slow stochastic. The MFI has dropped to the 50% level. The MACD is falling but remains positive and just above the signal line.

Bottomline? The BSE Sensex index chart pattern looks poised for a deeper correction. Watch out for the previous low of 15331. If that gets broken, the index may fall to the Jul '09 low of 13220. Likely support will be at the 200 day EMA. Those levels will provide good opportunities to re-enter.

Stock Index Chart Patterns - Shanghai Composite, Hang Seng, Taiwan TSEC - Nov 27, '09

Shanghai Composite index chart

Another clear instance of how relying totally on technical analysis can be hazardous to your wealth! Last week, the technical indicators of the Shanghai Composite index chart was looking very bullish, and the only question was when it would go past the previous high of 3478.

Out of nowhere, the bears attacked viciously, as a 'reversal day' pattern on Tue, Nov 24 '09 brought the renewed bull rally to a quick halt. An attempt at a recovery the next day proved short-lived. The bears used the news of the Dubai loan default to take the index below the 20 day EMA. The week ended with the index dropping down to the 50 day EMA.

The technical indicators turned around quickly from strongly bullish to bearish. The RSI dropped steeply from the overbought zone. So did the slow stochastic. The ROC has slipped into the negative zone. The MACD has started to fall and dropped below the signal line.

Hang Seng index chart

When the big brother sneezes, the younger brother and cousin catch a cold - or so it seems from the chart pattern of the Hang Seng index. Actually, the Hong Kong index started to correct in the previous week after making a new high of 23100 on Nov 18 '09.

The fall on Thur, Nov 26 '09 had taken the index below the 20 day EMA and today's near 5% drop meant the index closed below the 50 day EMA for the first time since July '09. Will the Hang Seng be able to bounce up from the support of the 50 day EMA, as it has done several times during this bull rally?

The technical indicators don't seem to suggest that. The slow stochastic is moving down towards the 50% level. The MACD is falling and has gone below the signal line. The ROC has dropped into the negative zone. The RSI showed negative divergence by failing to make a new high and is moving sideways above the 50% level.

Taiwan (TSEC) index chart

The Taiwan (TSEC) index was looking quite bullish as it recovered from a drop below the 50 day EMA to make a new high of 7875 on Nov 17 '09. A brief correction down to the 20 day EMA was followed by another up move. Today's near 250 points (3.2%) drop once again forced a close below the 50 day EMA.

As long as the index remains well above the rising 200 day EMA, there is no threat to the bull market. The technical indicators are looking less bearish than the two mainland indices.

The RSI is just below the overbought zone. The ROC is falling but remains in the positive zone. The slow stochastic has fallen less sharply from the overbought zone. The MACD is positive and above the signal line, but note the negative divergence as it failed to make a new high.

Bottomline? The Asian indices suffered from FII selling. I had hinted about the possibility last week. The Dubai loan default news was used as a trigger for the selling, but not entirely without reason. HSBC bank is reported to have a big exposure in Dubai. All three indices are near their 50 day EMAs. An upward bounce could be on the cards next week. Adopt a wait-and-watch policy.

Stock Chart Pattern - Reliance Capital Ltd. (An Update)

When I looked at the stock chart pattern of Reliance Capital Ltd in Apr '09, it seemed to be lagging the BSE Sensex chart, but was recovering well from the bear market mauling. It was expected that the stock could hit the 600 mark in the short term.

The stock did hit the 600 mark in early May '09, where it struggled for a few sessions before the euphoria following the surprisingly positive election results propelled the stock past the 1000 mark.

Let us take a look at the one year bar chart pattern of Reliance Capital Ltd to assess whether it is a 'buy' or a 'sell' or a 'hold':-

The stock could not sustain above the 1000 mark for long. It was too steep a rise in too short a time. The correction in Jul '09 took the stock below its 50 day EMA, but it found support at the top of the 'gap' between 600 and 700.

A sharp jump took the stock near the 1000 mark, after which a sideways consolidation followed, with the 1000 level acting as a strong resistance. The Oct '09 correction took the stock below the 50 day and 200 day EMA, but for the second time the stock found support at the 700 level.

To assess the likely direction of the chart pattern, let us look at the technical indicators. The 50 day EMA has remained above the rising 200 day EMA, and the stock price is above both EMAs. So the bull rally is under no immediate threat.

The MACD has just inched into the positive zone and is above the signal line, which is mildly bullish. The slow stochastic has slipped below the 50% level with the %K below the %D, which is bearish. The OBV is moving sideways, indicating that the bulls and bears are evenly matched.

Bottomline? The stock chart pattern of Reliance Capital Ltd shows that the inconclusive battle between the bulls and bears is continuing, and may remain unresolved for some more time. Existing holders can stay invested with a stop-loss at 680. New entrants should await a convincing cross above the 1050 mark. Traders can play the 700-1000 range.

How to generate income and build wealth

It is important for all investors to clearly understand the difference between income generation and wealth building. Confusions arise since both income and wealth are classified in terms of money: Mukesh Ambani is a multi-billionaire; my nephew works for a multinational company where his CTC (cost to company) is Rs 15 lakhs per year.

Having a substantial income - whether from salary or business - doesn't necessarily make a person wealthy. Why? Because building wealth is a well thought out process that needs to be followed with intelligence and discipline.

Many young investors think that the stock market is a place where one can get rich (read: wealthy) quickly without spending too much effort. All you need is some luck and a few good tips. Every one has a cousin or a friend that has made a killing in the stock market.

Most older investors shy away from the stock markets. They look upon it almost as a vice den, where unscrupulous people take part in nefarious activities which are much worse than gambling in a casino. They all have a colleague or relative that has been reduced to penury by losing all his savings in the market.

Both views are extreme and do not help in building wealth. The younger group find their thrills in the stock market - where they lose as much as they gain, and look down upon bank fixed deposits and post office monthly income schemes as boring and old fashioned. The older group stick to risk-free fixed income streams that get eaten away by taxes and inflation. Neither end up being wealthy.

To build wealth over the long term, a system that combines these extreme views needs to be developed. The simplest and most effective way is to have an asset allocation plan. A certain portion has to be allocated to equity shares to hedge against inflation and taxes. One also needs to allocate a substantial portion to fixed income avenues, that can generate a regular stream of income to supplement the salary or business income.

Think of income as a cash inflow that is spent on bills, home and car monthly installments, eating out, watching movies, buying stuff at malls. If one manages to save something after all these 'important' expenditure, only that saving can contribute towards building wealth.

So one needs to have a plan that works backwards. First of all, have a goal about the amount of money you will require at different stages of your life. Your marriage, children's schooling, aged parents' medical expenditure, family holidays, your old age retirement requirements.

Then calculate how much you need to save every month to invest it as per your asset allocation plan to achieve your various financial goals. This amount - it need not be an exact figure as a rough estimate would suffice - should be taken out of your pay check or business income every month before you begin your monthly expenditures.

This may sound like an easy plan to implement, but believe me, it isn't. It would mean a lot of sacrifices - both small and large. A simple 'thali' dinner instead of one at a fancy restaurant; a DVD watched at home instead of a family outing at the multiplex; a holiday in Goa or Puri instead of at Malaysia or Mauritius; buying a 5 years old car instead of a spanking new one from the showroom.

At the end of the day, it is your mindset and prioritisation that will determine whether you have 'enough' money and can retire a wealthy person.

Related post

How to reallocate your assets

Dow Jones (DJIA) index chart pattern - Nov 20, '09

Last week I had mentioned the level of 10360 in the Dow Jones (DJIA) index chart pattern as the barrier that needed to be crossed convincingly for the bull rally to continue.

The technical indicators were favouring the bulls and they took full advantage to take the Dow above the 50% Fibonacci retracement level of the entire bear market fall. The bulls look unstoppable now.

Let us have a look at the 6 months bar chart pattern of the Dow Jones (DJIA) index and check if the bears have been routed completely:-

A sharp jump by the index on Mon, Nov 16 '09 led to three consecutive closes above the 10400 level. But the up move on low volumes - which has been a feature of this bull rally - could not sustain.

The bears managed a token fight back by pulling the Dow below the crucial 10360 level on the last two days of the week. The index still managed to close about 48 points higher for the week.

All three EMAs are moving up. The sequence of higher tops and bottoms continue. The periodic bear attacks have only strengthened the resolve of the bulls. The technical indicators are continuing to support them.

The RSI has moved up and is about to enter the overbought zone. The MFI is above the 50% level and moving sideways. The slow stochastic has dipped a bit but remains in the overbought zone. The MACD is positive and above its signal line.

The state of the economy remains a concern. Unemployment is still in double digits. Insider buying picked up but insider selling far outweighs the buying, as per this article. The capital adequacy ratio of most banks are far from adequate, mentions this article.

Bottomline? The Dow Jones (DJIA) index chart pattern continues to climb a wall of worries. That is the sign of a bull market. Bears can hope that the lack of follow-up buying (i.e. low volumes) and insider selling will lead to a healthy correction soon. Partial profit booking recommended.