Nifty and Defty charts: a mid-week update

Nifty chart

After a bullish high volume ‘gap up’ break out last Friday (Jun 29 ‘12) above the 200 day EMA and the support-resistance level of 5175, Nifty has made laboured upward progress this week. Volumes have been quite good, so why the slow progress?

Two reasons. Note that three of the four technical indicators – ROC, RSI, slow stochastic – have touched lower tops as the Nifty has moved higher. Negative divergences have acted as a brake, and may cause a pullback towards the 5175 level. While FIIs have been net buyers, DIIs have been net sellers. That has also acted as a brake.

The 20 day EMA has moved up to touch the 200 day EMA. A cross above will be a short-term positive. The 50 day EMA is forming a bullish rounding-bottom pattern. A ‘golden cross’ above the 200 day EMA will technically confirm a return to a bull market. For bulls to regain complete control, Nifty has to move above its Feb ‘12 top of 5630.

Technical indicators are bullish. MACD is rising above its signal line in positive territory. ROC is positive and above its 10 day MA. Both RSI and slow stochastic are in their overbought zones. Any pullback will be an entry opportunity.

Defty chart

The one year bar chart pattern of Defty (Nifty measured in US Dollars) is showing a stronger up move than the Nifty. How come? Because the Indian Rupee has gained against the US Dollar over the past few days, thanks partly to FII buying.

Why are FIIs buying? They are probably relieved that the fear of a Eurozone break-up has proved unfounded. Plus, the positive statements coming out of the Finance Ministry after the change of guard has improved market sentiments.

Technical indicators have turned bullish. MACD is rising above its signal line in positive territory. ROC has moved up sharply above its 10 day MA. But such a sharp move usually heralds a correction. RSI and slow stochastic are inside their overbought levels. A test of the falling 200 day EMA is likely.

Remember that the Defty is technically in a bear market, as it is trading below its falling 200 day EMA. Both the 20 day and 50 day EMAs are also trading below the 200 day EMA. Some profit booking can be expected at any time.

If the positive statements from the Finance Ministry do not turn into concrete action soon, FIIs may lose their patience and go elsewhere. Stock markets in countries like Turkey and Phillippines have outperformed India in the first six months.

Stick to the best stocks in the large-cap space for now. The time for mid-cap and small-cap stocks has not arrived yet.

WTI and Brent Crude Oil charts: bear market rallies

WTI Crude chart

WTI Crude oil’s daily bar chart pattern tested its Aug ‘11 low of 76 and then bounced up above its falling 20 day EMA on a volume spurt. Note that WTI Crude oil and its 20 day EMA are both trading well below the 200 day EMA. Such a sharp fall in price is invariably followed by a counter-trend rally.

Can the rally continue a while longer? Positive divergences in all three technical indicators – which touched higher bottoms as oil’s price fell lower – are conducive to a rally. But crude oil is in a bear market – so the rally is a selling rather than a buying opportunity.

Technical indicators have corrected oversold conditions, but haven’t turned bullish yet. MACD is rising above its signal line, but remains negative. RSI has climbed up to its 50% level, but hasn’t crossed into bullish zone. Slow stochastic has moved vertically above its 50% level and is heading towards its overbought zone.

Beware of bears. They may spring a bull trap any time.

Brent Crude chart

The concluding comments two weeks back about Brent Crude oil’s weekly closing chart pattern were: “If Brent Crude’s price drops to 90 before the next meeting in Dec ‘12, another OPEC meeting may be scheduled to reduce output. Unless a ‘black swan’ event occurs, a drop below 90 looks unlikely in the near term.”

Almost on cue, Brent Crude’s price dropped below its 200 week EMA, but bounced back sharply before it could fall to the 90 level. The chart clearly shows a double-top reversal pattern which has a downside target of 80. But OPEC members will do their level best to keep oil’s price above 90.

Technical indicators are bearish, but showing signs of turning around. MACD is still falling below its signal line in negative territory, but the histogram has started rising. RSI has emerged from its oversold zone. Slow stochastic is trying to climb out of its oversold zone.

Expect the counter-trend rally to face resistance from the 103 level, which is the ‘valley’ point between the double tops at 126 (touched in Apr ‘11 and Mar ‘12). Above 103, resistances can be expected from oil’s falling 20 week and 50 week EMAs.

Bears may start selling if Brent Crude oil’s price crosses the 100 level.

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Jun 29, ‘12

S&P 500 Index Chart

The S&P 500 index daily closing chart pattern received good support from its 200 day EMA during the past week, before jumping up on strong volumes on Fri. Jun 29 ‘12. The outcome of the Eurozone summit was taken as a positive by market players. Let us see if the buying euphoria lasts more than a couple of days.

The index managed to close just above the important support-resistance level of 1360 for the week, but the breach of 1360 has not been a convincing one. At the time of writing this post, the index was trading just at the 1360 level. Technically, the index remains in a bull market, as it is trading above all three EMAs and the 200 day EMA is rising.

Technical indicators are looking bullish. MACD is above its signal line in positive territory. RSI is above its 50% level. Slow stochastic is just below its overbought zone. Is it time to buy?

Note that S&P 500 index has touched a higher top to form a bullish pattern of higher tops and higher bottoms from its Jun 4 ‘12 low of 1267. But RSI touched a flat top and slow stochastic touched a lower top. Negative divergences may stall the month-long rally. Buy only on a convincing move above 1360.

FTSE 100 Index Chart

The daily closing chart pattern of the FTSE 100 index dropped below all three EMAs during the past week, but bounced up smartly from the 5450 level. Another test of the falling 200 day EMA is likely. A breach of the 200 day EMA and a close above the Jun 20 ‘12 top of 5622 will form a bullish pattern of higher tops and higher bottoms.

Technical indicators are looking bullish. MACD is above its signal line in positive territory. Both RSI and slow stochastic have crossed above their 50% levels. Note that FTSE 100 index is technically in a down trend in a bear market. The current rally should be used to sell and not to buy.

Manufacturing activity is contracting in Germany, France, Italy and the UK. A break-up of the Eurozone may be off the table, but Europe is in a recession and the sovereign debt problems are far from being resolved. Alan Greenspan aptly compared Europe’s problems to a leaking boat in a recent TV interview: “It’s like a leaking boat in which we keep bailing it out and we’re very pleased with ourselves that we’d be able to keep bailing it out. The problem is we haven’t fixed the holes yet.”

Bottomline? The chart pattern of the S&P 500 index shows that bulls have managed to keep the bears at bay. The FTSE 100 index is still in bear country, but bulls are trying to engineer a counter-trend rally. Investors should wait for clear bullish trends to emerge. Cash conservation ought to be the prudent strategy.

Announcing re-opening of paid subscriptions to Monthly Investment Newsletter

I am pleased to announce the re-opening of paid subscriptions to my monthly investment newsletter for a 3 weeks period from July 1-21, 2012. A limited number of subscriptions will be offered – strictly on a first-come first-served basis to enable personalised attention and guidance to each subscriber. Special offers await the first 12 subscribers.

If you are interested in subscribing, please send an email to: mobugobu@yahoo.com at the earliest for details. Your email address will be kept confidential.

The newsletter has completed 30 issues. Stock picking in the past 12 months was a challenge because stock indices turned volatile and sentiments were negative. Small-cap and mid-cap stocks bore the brunt of bear selling, with some trading at or near their 2008 lows.

All the stocks recommended in the newsletter in the previous 12 months belonged to the small-cap and mid-cap categories (except one large-cap pick). A couple of stocks have already given substantial returns. Some haven’t performed well, with a few currently trading at or slightly below their recommended prices. However, each and every stock moved higher after my newsletter recommendation.

In a 2-3 years time frame for which the stocks were recommended, I expect most stocks to provide significant returns to subscribers through capital appreciation and dividends. I can claim that with reasonable confidence because stocks are chosen on the basis of strong fundamentals; plus, subscribers receive monthly technical updates to identify entry and exit points.

If you require help in selecting good stocks in uncertain times, all you need to do is subscribe to my Monthly Investment Newsletter. Send me an email (at mobugobu@yahoo.com) soon – subscriptions will close on July 21, 2012.

BSE Sensex and NSE Nifty 50 index chart patterns – Jun 29, 2012

BSE Sensex index chart

Stock market sentiments took a turn for the better during the past week. PM taking charge of the Finance Ministry has been well-accepted by the market – in the hope that some much-needed reform measures may follow. The noises emanating from the various economic advisers and experts have also been positive. One needs to await action on the ground before jumping in to buy.

Participants at the Eurozone summit last week agreed to use emergency funds for sovereign debt purchase and provide funds directly to debt-laden banks – thereby cutting procedural hassles and taking a step forward towards solving the debt crisis. A landmark first step towards a European banking union was also taken. Global stock markets celebrated the news with gusto.

The 2 years weekly closing chart of the Sensex has comfortably moved above its 20 week and 50 week EMAs and the blue down trend line. A ‘golden cross’ of the 20 week EMA above the 50 week EMA will technically confirm a bull market. The Sensex needs to move past its Feb ‘12 closing high to form a bullish pattern of higher bottoms and higher tops.

Weekly technical indicators are turning bullish. MACD has crossed above its signal line, and seems ready to enter positive territory. ROC has risen above its 10 week MA to touch the ‘0’ line. RSI has moved up to its 50% level. Slow stochastic has climbed sharply above its 50% level.

The stage has been set for a return to a bull market – but expect one that may grind upwards slowly.

NSE Nifty 50 index chart

Morgan Stanley’s upgrade of Indian equity and strengthening of the Indian Rupee against the US Dollar helped local market sentiments. Rise in oil price was a bit of a dampener.

Nifty’s one year bar chart pattern shows a ‘gap up’ break out above its 200 day EMA. ‘Gap up’ break outs are very bullish, specially if accompanied by good volume support. So, is it time to crack open the ‘bubbly’?

Not yet. Upward break outs are often followed by pullbacks. That may be a better entry opportunity. Note that three of the four technical indicators – ROC, RSI, Slow stochastic – touched lower tops as the Nifty rose higher. The negative divergences could cause a pullback or even a correction.

However, technical analysis can go out the door on a flood of FII liquidity. FIIs bought heavily on Fri. Jun 29 ‘12. If they continue their buying spree in the coming week, Nifty may shoot past its Feb ‘12 top and technically confirm a bull market.

Technical indicators are looking bullish. MACD is rising above its signal line in positive territory. ROC bounced up from the ‘0’ line, and is about to cross its 10 day MA in positive territory. RSI and slow stochastic are at the edges of their overbought zones. Any pullback or correction is likely to be brief.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices have crossed above important resistances into bull territories. Whether they will remain in bull territories for long will depend on follow up buying from FIIs and retail investors. Enter slowly in good large cap stocks, and maintain suitable stop-loss levels to avoid getting caught in a bull trap.

Notes from the USA (Jun 2012) - a guest post

Ever since the sub-prime crisis brought the US economy down to its knees 5 years ago, the equilibrium in the global economy got badly disturbed. Growth in China and India kept the global economic engine under control for a while, but once the sovereign debt contagion spread across the Eurozone, things have once again taken a turn for the worse. Stop-gap measures through quantitative easing and debt bail-outs have prevented a global economic collapse for the time being, but underlying problems are yet to be solved.

In this month’s guest post, KKP quotes from an IMF paper about prudent levels of debt-to-GDP ratios that different countries should maintain for long-term sustainability of their economic growth.

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Economic Prosperity based on GDP and Managing Debt

America used to be thought of as the land of opportunity, and we had a lot of debate lately on when US may lose this status. The fact that we are debating means that there is more agreement than disagreement. US constituents worked hard to create the popularly called “American dream of opportunity”, but today, that dream is becoming a dream that we see early in the morning (the one that comes true eventually)!

USA can become a land of opportunity but it cannot become one with the current state of the economy, jobs, politics, educational programs, government spending, and divergences of the top, middle and lower classes. So why do you think that US has got itself into this situation in the first place? To understand that, we have to get into the topic for this month: Gross Domestic Product and Debt Levels.

We had a ton of debate on gross domestic production measures, total ownership of debt by government and maintaining a healthy profile of a country. Well today, a lot of these values and absolutes are being challenged. So, what are the proposed prudential limits on public-debt-to-GDP ratios, and how important is its role for a bright future (of any country)? Based on work put out by an IMF study, a debt-to-GDP ratio of 60% is quite often noted as a prudential limit for developed countries. This simply suggests that crossing this limit will threaten fiscal sustainability/stability, as we are experiencing now in the USA. For developing and emerging economies, 40% is the suggested debt-to-GDP ratio that should not be breached on a long-term basis. Again, this is being challenged by many of the PIIGS and look where that has brought us with those countries (they have their hand out).

It is really a question about how a government, whether in a developed or a developing nation can sustain high debt levels (with respect to their internal production, a.k.a. GDP), and maintain a threat-free environment to economic growth in most sectors of the economy. Fiscal policy in any country has to ensure that its macro-economic model allows for the slow and upward slope of the business cycle, while sustaining an ability to pay for the debt within reasonable rate structures (bond yields); all of it without a major compromise on the underlying strength of the currency. If any of the three angles of the triangle are violated, there is a negative effect on the stock market, and the economic boom expected by its constituents, shaking the confidence of the society (business and personal).

The big question is if the 60% and 40% figures are optimal, sustainable and still works for the ensuing decade. Currently, we see a lot of countries violating these levels grossly, with no realistic target to improve its situation in any major way to return back to these levels recommended by the IMF. In fact, in my opinion, there are countries learning how to ‘challenge’ that thinking and create a domino of patch-work that will band-aid the problem, without resolving the root-cause. Let us look at the current levels of debt/GDP for a few countries:

Prudence from the IMF paper dictates that countries target a debt level well below the limit on the grounds that getting towards the upper end will challenge the stability and also the solvency of a given country. We are experiencing this about Greece, and we had a lot of debate on various Indian Forums about solvency of USA in a similar manner. In reality two key factors affecting solvency are the response of primary balance (i.e. budget balance net of interest payments on the underlying debt) to increases in debt level and the possibility of adverse shocks to the economic system. As we have seen for Greece, it is assumed that when debt gets very large, it may be difficult to generate a primary balance (positive number) that is sufficient to ensure sustainability of the economy; the shock from which pushes a country beyond their debt limits. The underlying debt needs to be sold at unbelievable yields to attract risk-funds (who will give up their precious cash to buy the bonds of a country that may dissolve!). Hence, the advice is to remain well below the limit for the sake of prudence (liquidity levels, rollover risks and also future growth). Liquidity is not an issue for domestic debt as it can always be paid off by printing money, a sovereign right which households or firms do not have, and a practice that the US is teaching the rest of the world by putting its stamp of approval on its own practices.

On a side note, inflation necessarily does not result from doing so initially, but when the growth engine gets in gear, the amount of money in circulation from all the printing, availability of credit to businesses and individuals, and of course, the open money supply available, will totally wreak havoc to the nation’s future. Currency takes a dive and buying power get diminished (Zimbabwe is the poster child).

These are macro events, and do not topple the next dominos within weeks or months, and yet, when the Titanic does turn (in 1-2-3 years), it will finally face the boulder of inflation with a depreciated currency, which the US will not be able to avoid without some dramatic side-effects. Every country, however small or big, is a Titanic by itself. We all have to watch over our investments to ensure that we are not facing the zero to negative percentage returns as is the case for Japan for the last decade, which has grossly violated the prudent practice of being under the 60% marker (graphic above shows that they are at 200%+).

India has a long way to go, but it will face these times when it really gets into gear to ensure that its infrastructure, government/business practices and of course, the growth model produces high organic-growth with significant government borrowing behind it. Let us continue to watch for it and ensure our portfolios stay in check to ensure double digit positive returns to our portfolios in a low single digit inflation environment (with a stable currency)……..Is that a lot to ask?

Please post your views….

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Should small investors follow in the steps of well-known market players?

Many small investors believe that stock market investing is a zero-sum game. Some one buys and some one else sells. If a stock or index goes up after the transaction, the buyer wins and the seller loses. If the stock or index goes down, the buyer loses and the seller wins. Pretty simple, right?

Not quite. The commonly-held belief that ‘for every buyer there is a seller’ may be grammatically correct, but reality is entirely different. Here is an example: Today, the market was agog with the news that HSBC had sold major chunks of its holdings in Axis Bank and Yes Bank. Several hundred thousand shares changed hands.

Was there a single buyer who came forth to buy all the shares of Axis Bank and Yes Bank? No. How do I know that? From the price action. Axis Bank dropped 2.75% and Yes Bank dropped 2.25% after the news hit the market. There were several buyers for the Yes Bank offering. Fewer buyers for the Axis Bank offering.

Against one seller in both bank stocks, there were several buyers. If both stocks continue to fall in tomorrow’s trade, there will be one winner and several losers. A negative-sum game. If both stocks rise tomorrow, there will be one loser and several winners. A positive sum game. It is important to understand this – because it leads to the answer of the question.

Axis Bank and Yes Bank are well regarded and managed private sector banks. Buying their stocks and facing a temporary loss at current market price may not be a big deal because both companies are likely to perform well in future. Chances of making up the loss and moving into profit are high.

Now, replace HSBC in the above example by your favourite market player – RJ, RD, NK, etc. Imagine one of them is holding a large chunk of shares in companies like Bilcare, Delta Magnets, Bartronics. He first lets it be known that he has entered these companies. That attracts the attention of small investors. Then he keeps the market primed with all kinds of positive news – great acquisitions, fantastic prospects, brilliant technology tie-ups.

Small investors get sucked in, because every one loves to ride the gravy train. When the market price of the stock gets pumped up to a sufficiently high level, the selling begins. It’s a hugely negative-sum game. Only one winner, and thousands of losers.

If you want to be on the winning side in the stock market game, you have to work hard. Analyse companies fundamentally and technically, read newspapers and business magazines to keep updated on local and global economic issues, and trust your judgement but not your intuition.

Most important of all, do not try to follow in the footsteps of well-known market players. They are in the market to make money – from people like you and me.

That was the long answer. The short answer is: NO!