Stock Chart Pattern - Indian Hotel (An Update)

The previous update of the stock chart pattern of Indian Hotel – better known as the Taj Group – was back in Apr ‘10. In Jan ‘10, the stock price had reacted from 110, which was the 50% Fibonacci retracement level of the bear market fall from 180 to 35. The correction took the stock below its rising 100 day EMA.

A double-bottom at 85 in Feb ‘10 was followed by a resumption of the up move, with some high volume spikes in Mar ‘10. However, technical headwinds led me to make the following comments:

‘If it can move above 110, it is likely to face resistance at 120 - the May '08 high. The 61.8% Fibonacci retracement level of the bear market fall is at 125… Those investors who heeded my advice to enter the stock at 65-66 and are still holding, can book partial profits if the stock hesitates near the 110-125 band. Long-term investors can keep a stop-loss at 100 and stay long.’

Knowledge and interpretation of technical analysis can be really helpful, and the bar chart pattern of Indian Hotels for the period Jan ‘10 to Feb ‘11 is a clear example:

Note that the stock rose smartly to test the resistance from the 110 level in Apr ‘10. Five days in a row, it breached the 110 level on intra-day basis but failed to close above it. A quick drop to the rising 20 day EMA was followed by another failed test of the 110 level. This time the price dropped to the rising 50 day EMA, where it received good support.

An upward break out on good volumes took the stock up to a new high of 118 on May 14 ‘10. But it turned out to be a bearish ‘reversal day’. The stock dropped back into the trading band between 85 – 110 without testing the May ‘08 high of 120. That was the trigger for investors to book partial profits, because the stock failed to breach the resistance zone between 110 – 125.

On May 26 ‘10, the stock price closed at 99 – below the 100 day EMA, and the stop-loss level of 100. Investors should have sold their balance holdings at this point. Till the middle of Nov ‘10, the stock traded sideways between the rising 200 day EMA and the 110 level. After the 200 day EMA was breached in Nov ‘10, the ‘death cross’ (marked by the blue oval) in Dec ‘10 confirmed a bear market.

A rally took the stock above all four EMAs in Jan ‘11, but the respite for the bulls was brief. Once the correction resumed, the stock fell sharply below the support level of 85. The subsequent pullback found resistance from the 85 level, and shows how support levels tend to become resistance levels after a breach.

The technical indicators are looking bearish. The MACD is below the signal line in negative territory. The ROC is also negative, but has moved above its 10 day MA. The RSI is at the edge of its oversold zone. The slow stochastic has emerged from its oversold zone, but doesn’t seem to be going anywhere.

Fundamentally, there hasn’t been too much change. Q3 results were a bit disappointing, but not entirely unexpected. The re-branding exercise has been completed. The Taj at Mumbai has resumed full operations after renovations following the terror attack. Expansions are on track, but will require additional funding. The huge debt is a concern.

Bottomline? The stock chart pattern of Indian Hotel is in a bear market. There is good support at 70, and below that, at 55. A bounce up on good volumes from those levels can be good entry points. This company is the crown jewel of the hotel industry, well-managed and in a class of its own - but is strictly for long-term investors.

Should investors join the ‘Bollinger Bands’ wagon?

Bollinger Bands are a technical analysis tool, developed about 30 years ago by John Bollinger. Before we get into the nitty-gritty of what these bands are and why investors might find them to be a useful tool, a few words about a statistical concept called ‘standard deviation’.

Standard deviation, in layman’s language, means the amount by which a series of measurements vary from the average value of the measurements. Let us say, we are measuring each day’s maximum temperature, and the figures for 5 days are 24, 25, 25, 26, 30. That gives an average value of (24+25+25+26+30)/5 = 26. The absolute variations from the average are –2, –1, –1, 0, 4 respectively for the 5 days. A series of arithmetical manipulations are done on these variation data (squaring, adding, averaging and taking the square root of the average) to arrive at the standard deviation.

Investors need not be math wizards to understand and apply the Bollinger Bands tool - thanks to readily available charting software. But it is always good to know the concept behind the tool. So, what are Bollinger Bands?

It is a technical tool to measure the volatility in prices of a stock or commodity. It consists of a band with three lines. The one in the middle is a 20 period simple moving average (SMA) of the price. The two other lines – one 2 standard deviations above and the other 2 standard deviations below the 20 period SMA – complete the band.

Volatility is measured by standard deviation. As volatility increases, the Bollinger Bands automatically widen. When volatility decreases, the bands contract. Since standard deviation is calculated using a 20 day SMA, a 20 day SMA is also used as the middle line in the daily price charts.

The 20 day SMA with the upper and lower bands 2 standard deviations away is the most commonly used set-up in Bollinger Bands. But other combinations can also be used, depending on price volatility and investment styles. Standard deviation values are higher for stocks (or commodities) trading at higher prices than those trading at lower prices. A higher value of standard deviation doesn’t necessarily mean higher volatility.

Now let us take a look at Bollinger Bands drawn on the 1 year bar chart pattern of Tata Steel:

How do we interpret Bollinger Bands? They do not give ‘buy’ or ‘sell’ indications by themselves, but are used together with other technical indicators to confirm a ‘buy’ or ‘sell’ decision. A contraction of the bands can be used as an early indication of a price rise. Note the contractions in Jun ‘10, Aug ‘10 and Nov ‘10, which were followed by sharp up moves.

If prices keep touching the upper band on a regular basis, it is a sign of ‘overbought’ conditions, usually followed by a correction. Sep ‘10 and Dec ‘10 show such overbought conditions. If prices keep touching the lower band regularly, it is a sign of ‘oversold’ situation, usually followed by a rally. May ‘10 and Jun ‘10 are examples of oversold situation.

Note that the RSI and slow stochastic also confirmed the overbought and oversold conditions on the stock chart. Charts can remain overbought or oversold for long periods. So, selling when the price touches the upper band or buying when price touches the lower band may not be a good idea. A useful strategy when the chart is overbought is to maintain the 20 day SMA (middle line) as a trailing stop-loss. (If you have read my eBook, you will know what a trailing stop-loss is used for. If you haven’t read my eBook yet, why not? It is FREE.)

Some times the price moves above the upper band, or below the lower band. That doesn’t mean that these are sell or buy signals. It gives an indication of relatively higher or lower prices. Note that in Feb ‘11, the stock reached a lower bottom (below the lower band) while the RSI made a higher bottom. This positive divergence gave a ‘buy’ signal.

In Jun ‘10, the stock also reached a lower bottom, but failed to even touch the lower band. This was an early sign of a possible trend reversal. A ‘buy’ signal was generated because the RSI made a higher bottom.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Feb 18, ‘11

S&P 500 Index Chart

There is not much to add from last week’s post about the S&P 500 chart. The index has continued its steady rise away from the 50 day EMA, which in turn is rising away from the 200 day EMA.

The technical indicators look very bullish. The MACD is above its signal line, and both are rising in positive territory. The slow stochastic remains well inside the overbought territory. The RSI has moved up sharply into the overbought zone.

The S&P 500 index chart looks overbought and ripe for a correction. But the way every dip is being used by the bulls to buy, any correction may be a short one. The economy shows signs of slow growth. Likewise for inflation. Interest rates remain negligible. There doesn’t seem to be any chance of the bears coming out of their hibernation.

Maintain trailing stop-losses and enjoy the ride.

FTSE 100 Index Chart

The FTSE 100 chart has failed in several recent attempts at moving above the 6100 level. That is no reason for bears to feel excited. The index has formed a bullish ‘ascending triangle’ pattern (flat top, rising bottoms) during Feb ‘11. The likely break out is upwards, with a target of close to 6400. The upward break out should be accompanied by a significant increase in volumes – otherwise the break out may turn out to be ‘false’.

The technical indicators are bullish. The MACD is above the signal line and rising in positive territory. The slow stochastic is rising inside its overbought zone. The RSI is moving up towards its overbought zone. Looks like the FTSE 100 will soon reach greater heights.

The news is not so good for public sector employees who have lost their jobs due to the financial tightening. Private sector companies are not particularly keen to hire them.

Bottomline? The chart patterns of the S&P 500 and FTSE 100 indices are in strong bull markets. Money is moving out of emerging markets into the US and European markets. That is fuelling the bull rally. Stay invested with trailing stop-losses.

Stock Index Chart Patterns - BSE Sectoral Indices, Feb 18, '11

My previous analysis of the chart patterns of the BSE Sectoral indices was back in Dec ‘10. Many of the indices were correcting along with the Sensex. Some had started their down moves even earlier. The IT index had touched a new peak.

Warren Buffet had said that only when the tide goes out do we find out who has been swimming naked. Nothing like a good correction to find out which indices still have their clothes on. The Sensex has been in a down trend for more than 3 months – and the losers are clearly getting separated from the winners.

BSE Auto Index

The BSE Auto index succumbed to the selling pressure, and dropped below the 200 day EMA to 8154 on Feb 9 ‘11 – wiping out all the gains made since Jun ‘10. The recent upward bounce found strong resistance from the 200 day EMA. The 50 day EMA is sliding, but remains above the long-term moving average – giving the bulls some hope. The RSI is pointing to a resumption of the down move. The sector is a ‘hold’.

BSE Bankex

The BSE Bankex also dropped below the 200 day EMA to a low of 11353, erasing the gains made since Jul ‘10. A spirited upward bounce has taken the index above its 200 day EMA. The RSI is above the 50% level and the slow stochastic is in the overbought zone. The 20 day EMA has started rising, and may support the index if the correction resumes. The sector is a ‘buy on dips’.

BSE Capital Goods Index

The BSE Capital Goods index has suffered a serious setback. It briefly fell below the year-long support level of 12990, and is struggling to stay above it. The ‘death cross’ (50 day EMA falling below the 200 day EMA), marked by the blue oval, confirmed a bear market 3 weeks back. The RSI is suggesting lower levels. The sector is a clear ‘avoid’. 

BSE Consumer Durables Index

The BSE Consumer Durables index is behaving much like the Bankex – falling below the 200 day EMA, but bouncing up above it. But the technical indicators are weaker. The slow stochastic is above the 50% level, and touched a slightly higher top while the index made a lower top. But the RSI has turned down before reaching its 50% level. Hold.

BSE FMCG Index

The BSE FMCG index made a bearish triple top pattern. The sector is under margin pressure because of higher commodity prices. The good news is that the minimum down side target of the triple top has been met when the index fell below the 200 day EMA. The upward bounce from the long-term support level of 3160 has found resistance from the 200 day EMA. Both the RSI and slow stochastic have emerged from their oversold zones. But both reached lower bottoms than the ones touched in Jul ‘10 when the support level of 3160 was tested earlier. Hold.

BSE Healthcare Index

The BSE Healthcare index touched a new high in Jan ‘11. The subsequent correction was swift. The index dropped below the 200 day EMA to the support level of 5800. The upward bounce is desperately trying to move above the 200 day EMA. The technical indicators are looking weak. Both the RSI and slow stochastic are below their 50% levels.

BSE IT Index

The BSE IT index also touched a peak in Jan ‘11. However, the subsequent correction stopped well short of the rising 200 day EMA – keeping the bull market intact. The RSI and slow stochastic are both below their 50% levels – hinting at a test of support from the 6050 level or even the 200 day EMA. With the US and European economies showing signs of recovery, the IT sector should continue to perform well. Buy the dips.

BSE Metal Index

The BSE Metal index is trading sideways but has weakened considerably in the last 2 months. The index is trading below the 200 day EMA and the ‘death cross’ seems imminent. The slow stochastic is above the 50% level but the RSI has reversed directions after touching its 50% level. Hold.

BSE Oil & Gas Index

The BSE Oil & Gas index is showing the effects of the prolonged price interventions by the government in an effort at inflation control. The ‘death cross’ and the fall to the long-term support level of 9000 is an indication that the worst isn’t over. The slow stochastic is above but the RSI is below their 50% levels. Both have started to move down. Avoid the sector.

BSE Power Index

The BSE Power index is in a clear bear market with no sign of recovery. The recent upward bounce after a steep fall has been resisted by the falling 20 day EMA. Sell.

BSE Realty Index

The BSE Realty index is the clear winner of the ‘wooden spoon’ (a consolation prize given to the last place finisher in sporting events – particularly golf). This is not a contrarian play. Sell.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Feb 18, ‘11

In last week’s analysis, I had expected a pull back rally based on the ‘reversal day’ pattern on both the Sensex and Nifty charts on Fri. Feb 11 ‘11. The following comments may be worth repeating:

‘An upward bounce is likely, but may find resistance from the first support zone and the falling 20 day EMA. In case the Sensex manages to move up further, the 200 day EMA will be a tougher resistance to overcome.’

BSE Sensex Index Chart

As if on cue, the Sensex started a pull back rally that found resistance from the falling 20 day EMA on Tue. Feb 15 ‘11 and Wed. Feb 16 ‘11; moved up further to the top edge of the support zone at 18500 on Thu. Feb 17 ‘11; and, in today’s (Feb 18 ‘11) trading, crossed above the support zone intra-day, found strong resistance from the 200 day EMA and fell back within the support zone.

Technically, the support zone was not breached. The Sensex failed to close above it. More worrisome for the bulls is the formation of another ‘reversal day’ pattern (higher high, lower close) on the chart, backed by good volumes. The short pull back rally seems over. What next?

There could be a bit of consolidation within the support zone before the down move starts in earnest. The MACD has crossed above its signal line, but remains negative. The ROC is above its 10 day MA, and is trying to stay in positive territory. The RSI has turned down after reaching the 50% level. The slow stochastic is touching the edge of its overbought zone.

The ROC, RSI and slow stochastic have reached higher tops while the Sensex made a lower top. The positive divergences may enthuse the bulls. The ‘death cross’ has also been averted for the time being. But this is probably a better time to sell or stay away. A test of the 17500 level, and even of the previous low around 16000, are well within the realms of possibilities.

NSE Nifty 50 Index Chart

An interesting picture emerges by including the OBV indicator instead of the MACD in the Nifty 50 chart. The correction in the Nifty 50 began after the index hit its peak of 6338 in Nov ‘10. But the OBV hit its peak in Oct ‘10, and has since been making a pattern of lower tops and bottoms – a sign of distribution. Even during the Dec ‘10 rally, the Nifty 50 made a higher top but the OBV made a lower one. A clear sign of smart money moving out.

The FIIs will continue to book profits and redeploy in their home markets, as well as other emerging markets where valuations look more reasonable. There are signs of inflation in the US and in Europe. That means the economic recovery is beginning to gain momentum. As long as the valuation gap remains, the FIIs won’t resume buying in a big way.

Inflation has started to moderate in India – partly due to the base effect. The monetary tightening by the RBI is also cooling things down. Investors should not have high hopes from the budget. Q4 results of India Inc. may show a reduction in profit margins. Till interest rates flatten out and start going down, buying stocks may not be a smart move.

Bottomline? The corrections in the chart patterns of the BSE Sensex and NSE Nifty 50 indices continue. Periodic rallies will only encourage the bears to sell more. Playing a waiting game could provide better value buys over the next few months.

Become a better investor by learning how to swim

There is an old English idiom: Birds of a feather flock together. But the stock market is populated by strange birds that care two hoots about English. They prefer to follow the laws of physics – particularly the one that states: likes repel and unlikes attract.

So we have a variety of investors who are polar opposites – bulls and bears, active investors and passive investors, long-term investors and short-term traders, growth investors and value investors, those who trade on margin money and those who invest their savings, investors who try to make money and investors who try to build wealth. And all these opposites get attracted to the same market place, and think that their ideas are the best!

But the two types of investors that really matter – and needless to say that they are also polar opposites – are those who know what they are doing and those who don’t. The old pros and the babes in the woods. The ‘smart money’ and retail. It is not a level playing field. The scales are heavily weighted in favour of those who know what they are doing.

It is a chicken and egg situation for the new investor. How can you learn to swim if you are afraid to get into the water? But if you jump in before learning to swim, you might drown. Is there a way out? Fortunately, there is.

I learned to swim by myself by thrashing around near the bank of a pond. A lot of water got inside my lungs, nose and ears – and it wasn’t a pleasant experience at all. But I persisted and learned to do the ‘dog paddle’.

Eventually, I had to seek help from an expert swimmer – to learn proper swimming strokes and breathing techniques. I am not a pro, but consider myself an expert swimmer. Still, I’m very wary of diving into a fast-flowing river or a rough sea – because I don’t have sufficient experience of swimming under those adverse conditions.

Will you jump into the sea without any fear if you find yourself facing a barrage of 10 feet high waves? If yes, will you also be able to fend off a shark attack? The stock market is like a rough sea. The sharks are the old pros out to feed on young fish like you. Why become some one’s dinner?

Start learning to swim at the shallow end of the pool by investing in a bank recurring deposit and an index fund. After you have built up a corpus, take the help of an expert swimmer to understand financial planning and asset allocation, fundamental analysis and technical analysis. Only then should you venture out to sea.

A Tale of Two Charts – Voltas and Punj Lloyd

Why write about these two charts? They are like chalk and cheese. One a boring stalwart from the house of Tata that doesn’t get a passing glance from small investors. The other a darling of the previous bull market that was hailed as the ‘next L&T’, and found a place in the portfolio of many small investors.

Back on Mar 24 ‘10, I had posted an update on the stock chart pattern of Voltas Ltd. The stock had touched a high of 190 in Jan ‘10, only to correct down to the long-term support zone between 145-150 before moving up to 177. The technical indicators were looking bullish, but valuations were a bit stretched. This is what I had recommended to my readers:

‘Existing holders can place a stop-loss at 150 and remain long. New entrants can use any dips to the 150 level to enter... Those who are stuck in debt-ridden, operating cash flow negative stocks, like Punj Lloyd, can make a switch.’

That last sentence motivated me to compare the two charts, when I decided it was time to write another update on the stock chart pattern of Voltas Ltd. Here are the one year bar chart patterns of Voltas and Punj Lloyd.

Voltas

The closing price of Voltas on Mar 23 ‘10 – marked with the blue arrow – was 177.60. The stock was in the middle of its bull rally. After testing the support from its rising 200 day EMA in May ‘10 – when it dropped to an intra-day low of 157 – the stock continued its bullish pattern of higher tops and higher bottoms. It finally reached a high of 262.50 in Nov ‘10, falling short of its high of 267 touched in Dec ‘07.

The first leg of the correction found support above the rising 100 day EMA. The stock moved up to test its previous high, fell just short at 260 and formed a bearish double top pattern that gave a signal to book profits. The subsequent correction has been exacerbated by the not-so-great Q3 results (profits were lower both on YoY and QoQ basis).

The stock dropped to an intra-day low of 159 on Feb 9 ‘11 – close to its May ‘10 low of 157 - correcting almost 40% from its Nov ‘10 peak. The ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by a blue oval) confirms a bear market. Note that the pullback rally of the past few sessions has found resistance from the falling 20 day EMA.

All four technical indicators are bearish. The stock may fall to its support zone of 145-150. If the support doesn’t hold, a drop to 100 is possible. Voltas remains a good stock fundamentally, and lower levels mentioned could be good entry points.

If any investor had listened to my advice and switched from Punj Lloyd, but failed to book profit in Nov ‘10 or Dec ‘10, today’s (Feb 16 ‘11) closing price of 177.20 means he has still not made a loss. What if some one had hung on to Punj Lloyd or, horror of horrors, bought more thinking that the down side was limited? See for yourself.

Punj Lloyd

The stock’s bull rally had peaked out at 276 in Oct ‘09. Within the space of the next 8 trading sessions, the stock dropped below its 200 day EMA after the bad news of its UK project delays and resulting penalty hit the markets. The stock was already five months into a bear market. Its closing price on Mar 23 ‘10 – marked with the blue arrow – was 177.35, prompting me to recommend the switch to Voltas.

Punj Lloyd continued in its bear market, making lower tops and lower bottoms – except for a brief attempt at revival during Sep and Oct ‘10. The bears snuffed out all bullish hopes before the stock could touch its falling 200 day EMA from below. Disastrous Q3 results (a loss at the net level) caused heavy selling.

The stock has fallen 73% from its Oct ‘09 peak, and can fall much lower. The huge debt burden coupled with severely negative cash flows from operations is a killer cocktail. If you are still invested in this stock, ask yourself: Why?

Bottomline? Comparing the stock chart patterns of Voltas Ltd and Punj Lloyd exemplifies Benjamin Graham’s statement: In the short-term the market acts like a voting machine, but in the long-term it is a weighing machine.