FIIs were net sellers of equity worth Rs 1000 Crores last week, as per provisional figures. DIIs were also net sellers of equity during the first three days, but turned net buyers on the last two days. Their net buying for the week was Rs 230 Crores.
Both Sensex and Nifty recovered a bit after touching higher bottoms. However, both indices lost about 1% each on a weekly closing basis.
RBI Governor's hawkish tone - even as he kept interest rates unchanged, poor Q3 (Dec '15) earnings of some large companies, sliding oil prices, worries about a 'hard landing' in China contributed to the bearish sentiment in the market.
Huge over-subscription for the Teamlease IPO is an indication that there is enough investible surplus with investors.
BSE Sensex chart pattern
The daily bar chart pattern of Sensex made a valiant attempt to move convincingly above its 20 day EMA and the support-resistance level of 24830. Bears were in no mood to relent.
Note that the 24830 level had provided good support to the index back in Sep '15 and Dec '15 (marked by green up arrows). The support was breached in Jan '16 and is now acting as a resistance level (marked by red down arrow).
The index has dropped back inside the support zone between 24830 and 23840. Though the index touched a higher bottom, it is facing resistance from its 20 day EMA.
The down trend from the Mar '15 lifetime high of 30025 has now completed 11 months. Sensex is trading below its three EMAs in bear territory.
Daily technical indicators are showing bullish signs. MACD is moving above its rising signal line in negative zone. ROC has bounced up into positive zone after receiving support from its rising 10 day MA. RSI has crossed above its 50% level. Slow stochastic has slipped below its 50% level, but trying to turn up.
The index may be forming some sort of a reversal pattern - but it will take some more time for the pattern to become clear. The long-term bull market is intact as Sensex is trading more than 1000 points above its 200 week EMA.
NSE Nifty 50 chart pattern
The weekly bar chart pattern of Nifty tried to move above the support-resistance level of 7540 intra-week, but heavy selling after the RBI Governor announced status quo on interest rates pushed the index down into the support zone between 7240 and 7540.
A possibility of the index consolidating within the support zone till the budget on Feb 29 was indicated in a previous post.
Nifty is trading below its blue down trend line and its two weekly EMAs in bear territory. The 50 week EMA is forming a bearish 'rounding top' pattern. Any breach of the 7240 level can quickly drop the index to 7120.
Weekly technical indicators are in bearish zones and giving mixed signals. MACD and ROC are showing weak downward momentum, whereas RSI and Slow stochastic are showing equally weak upward momentum.
Bottomline? Chart patterns of Sensex and Nifty may be in the process of forming some sort of reversal patterns. Long-term bull markets are still intact, as both indices are trading above their rising 200 week EMAs (not shown). This is not the time to be aggressive as a buyer or seller. Just stick to your investment plans. If that means sitting out for a while - so be it.
You are a small investor reasonably active in the market. Using cricketing metaphors, you have 'hit a few sixes' with your selected stocks. You have also 'got out for a duck' a few times.
Your portfolio is full of mid-cap and small-cap growth stocks - in the hope that some of them will turn into multibaggers. But you are not sure which ones are too risky and should be sold.
Ask yourself some of these questions:
1) A stock you bought rose 10% quickly, but has since slipped down 20% on some adverse news. What will you do?
2) A stock falls 10% just after you buy it, but you keep holding it to get back your 'buy price'. It falls another 5%. Will you hold on, or buy more, or sell?
3) A stock takes off like a rocket as soon as you buy it, rising 60% in 3 months. Do you take part profit, or sell off, or buy more at the next dip?
4) A stock gives you 150% returns in 1 year, and then corrects 30%. Will you book profit, or buy more?
These are common questions faced by many small investors. How you answer these questions - not to me, but to yourself - will determine how successful you can be as an investor.
In other words, you should have a strategy on how you will deal with risky stocks in different market situations.
Your strategy should be clearly written down in a notebook or diary with bullet points, and referred to on a regular basis. Otherwise, you will be prone to repeat the same mistakes over and over again.
Need help in figuring out risky stocks that should be avoided? You don't need to go far. Here is a link to an article from investopedia.com that will guide you:
4 Things That Make a Stock a Risky Bet
FIIs were net buyers of equity worth Rs 250 Crores on Feb 1 '16, but turned net sellers worth Rs 470 Crores on the next two days, as per provisional figures. DIIs were net sellers worth Rs 1000 Crores during the first three days of the month.
RBI Governor maintained interest rate status quo - as was the consensus expectation. Even then, Nifty faced strong selling post the announcement on Tue. Feb 2. The budget on Feb 29 will be the next trigger for the market.
Auto sales in Jan '16 were mixed. Maruti and Hyundai showed slight increase in domestic car sales, but exports slumped. M&M grew domestic and export sales. Tata Motors' M&HCV sales grew, but car sales fell. Eicher has a winner with the fast growing Royal Enfield, but Hero Moto showed only a marginal increase in 2-wheeler sales.
The following comment appeared in the previous post on Nifty: "... pullback to the 7540 level may be used as a selling opportunity by bears."
Nifty crossed above its falling 20 day EMA to touch an intra-day high of 7600 on Feb 1, but dropped to the 7540 level before closing slightly above the support level.
The index dropped well below its 20 day EMA and the 7540 level on Feb 2 due to combined FII and DII selling after the RBI interest rate announcement.
There was no sudden change in domestic or global economies. Probably the market was hoping for a cut in interest rate, or just looking for an excuse to sell.
Daily technical indicators are looking bearish. MACD is falling towards its signal line in negative zone. ROC has dropped sharply into its negative zone. RSI faced strong resistance from its 50% level, and is moving down. Slow stochastic dropped down after facing resistance from the edge of its overbought zone.
So, what can happen next? The index is likely to test its Jan 20 low of 7240. Will it bounce up with strong volumes? Seems unlikely, considering the way both FIIs and DIIs are selling.
What happens if the index falls below 7240? It will drop towards the 7120 level (which is the 50% Fibonacci retracement level of the entire rise of 3672 points from the Aug '13 closing low of 5285 to the Mar '15 top of 8957).
Another possibility is that the index consolidates within a 300 points range between 7540 and 7240 till the budget on Feb 29.
Which of the three options will Nifty choose? Your guess is as good as mine. Just stick to your asset allocation plan and invest your monthly savings accordingly.
The index is still trading above its rising 200 week EMA (not shown), which means the long-term bull market is intact.
Almost forgot to mention that the NSE TRIN - a market breadth indicator (not shown) - has ventured into extremely oversold region. A sharp technical bounce can occur at any time.
Gold chart pattern
A two months long bear market rally on the daily bar chart pattern of gold, triggered by sell-off in global stock markets and plummeting oil prices, may be coming to an end.
Gold's price have gained more than 5% during Jan '16 after forming a bullish 'rounding bottom' pattern - more clearly visible on the 50 day EMA. But some technical signals are flashing a bearish warning light.
The sliding 200 day EMA is providing resistance to the rally. Volumes are tapering off. Technical indicators are looking overbought. Slow stochastic has formed a 'double top' reversal pattern inside overbought zone, and showing negative divergence by touching a lower top.
Global stock markets are still bearish, which can help sustain the rally in gold's price for a day or two more - may be to 1140 or so. If you managed to enter at lower levels, profit booking may be contemplated.
On longer term weekly chart (not shown), gold’s price crossed above its 20 week EMA, but is trading below its 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are turning bullish.
Silver chart pattern
The daily bar chart pattern of silver rallied past its 50 day EMA after nearly three months, but failed to cross above the Dec '15 top of 14.60 and slipped down.
Silver's price gained almost 4% during Jan '16, but is trading well below its falling 200 day EMA in bear territory.
Daily technical indicators are in bullish zones. However, MACD and RSI are not showing much upward momentum. Slow stochastic has dropped from its overbought zone.
On longer term weekly chart (not shown), silver’s price failed to overcome resistance from its falling 20 week EMA, and is trading below its three weekly EMAs in a long-term bear market. Weekly technical indicators are in bearish zones, but showing slight upward momentum.
S&P 500 index chart
The daily bar chart pattern of S&P 500 had touched a 52 week low of 1812 on Jan 20 '16, but bounced up after forming a bullish 'hammer' candlestick pattern, supported by strong volumes, to close above the 1900 level.
The index consolidated sideways within a 35 points range for the first four days of the week. On Fri. Jan 29 '16, it spurted on strong volume support above its falling 20 day EMA for the first time during Jan '16, and closed with a 1.7% weekly gain.
Daily technical indicators are turning bullish. MACD has crossed above its signal line in negative zone. RSI has moved up to its 50% level. Slow stochastic has climbed above its 50% level.
The index is trading well below its falling 50 day and 200 day EMAs in bear territory. Bears are lurking round the corner, ready to pounce at any time.
On longer term weekly chart (not shown), the index closed more than 120 points above its still rising 200 week EMA, but below its falling 20 week and 50 week EMAs. The long-term bull market is still intact. Weekly technical indicators are turning bullish but remain in bearish zones.
FTSE 100 index chart
The following remark appeared in last week's post on the daily bar chart pattern of FTSE 100: "Expect bears to pounce if the technical bounce from oversold conditions tries to turn into another bear market rally."
After facing some resistance from the falling 20 day EMA, the index rallied on good volume support to rise above its 20 day and 50 day EMAs and close the week with a gain of 3.1%.
At the time of writing this post, bears are trying to dominate again. The index has dropped below its 50 day EMA, and is trading more than 300 points below its falling 200 day EMA in a bear market.
Daily technical indicators are looking bullish, but their upward momentum is stalling. MACD is rising above its signal line in negative zone. RSI has crossed above its 50% level. Slow stochastic has entered its overbought zone.
On longer term weekly chart (not shown), the index closed below its three weekly EMAs in a bear market. The imminent 'death cross' of the 50 week EMA below the 200 week EMA is going to technically confirm a long-term bear market. Weekly technical indicators are in bearish zones.
After touching lifetime highs in early Mar '15, both Sensex and Nifty entered down trends that are now completing 11 months. FIIs have been in selling mode, not because India's economy is in a down turn. Quite the contrary.
Slowdown in China, turmoil in Middle East, oversupplied oil market, a gradually rising interest rate regime in the USA have turned FIIs cautious and heading for safety. That means exiting Emerging Markets and returning to their home markets.
Many Middle East sovereign funds have started withdrawing from India as well, as low oil prices have begun to hurt and have depleted their investing surpluses.
Domestic investors have shown greater maturity by continuing their fund SIPs and buying the dips. Mutual funds have been buying equities, but haven't been able to prevent the downward slide in Sensex and Nifty.
Many small investors are in a quandary: Is this a bull market correction, or is it a bear market? Should we buy the dips or sell the rallies? The answers to those questions is another question: What difference does it make?
Unless you are investing in index futures or index ETFs, the state of the market should not be of much concern. For a long-term investor, your financial and asset allocation plans should guide your investment decisions.
However, for the curious, here are some thumb-rules.
A pullback is a short counter-trend move that falls about 5% from a recent top, or rises 5% from a recent bottom. Often, a pullback occurs to a previous breached support or breached resistance level.
In a bull phase, a pullback provides a buying opportunity to those who missed buying when the previous resistance level was breached. In a bear phase, a pullback is a selling opportunity for those who could not or did not sell when the previous support level was breached.
A correction is a counter-trend move that falls 10% from a recent top, or rises 10% from a recent bottom. There is no way of knowing before hand if or when a pullback will turn into a correction.
A correction in a bull phase is quite common, and should be anticipated and used as an adding opportunity by long-term investors. Short-term traders make money by selling the rallies during a correction.
A bear market corrects 20% from a market top. Again, it is very difficult to know in advance if a correction in a bull market will turn into a bear market or not. Usually, some fundamental change in the economy or global concerns trigger a bear market.
When does a bear market end? It often takes 2 or 3 months for a reversal pattern to form on price charts. Ability to identify such pattern formation can help investors to take early long positions.
The 5%-10%-20% numbers are guidelines for those who can't or don't follow technical analysis. To really understand the underlying technical status of the market, one needs to learn about long-term EMAs, support-resistance levels and Fibonacci retracement levels.
Related Post
About Nifty Fibonacci retracement levels
Stock markets worldwide reacted bullishly to economic stimulus announcements by ECB and China and a cut in interest rate (to -0.1%) by Japan.
All is not well on the economic front, as India's GDP growth rates for FY14 was revised down to 6.6% from 6.9% and for FY15 to 7.2% from 7.3%.
As per provisional figures, FIIs were net sellers of equity worth Rs 14350 Crores in Jan '16. The figure exceeded their combined sales in Nov '15 and Dec '15. DIIs were net buyers of equity worth Rs 12900 Crores.
A combination of short covering and value buying at lower levels ensured that both Sensex and Nifty made weekly gains for the first time in Jan '16.
BSE Sensex chart pattern
The daily bar chart pattern of Sensex, which had twice received support from the 24830 level (in Sep '15 and Dec '15 - marked by green arrows), breached the support level and dropped to a low of 23840 last week - correcting more than 20% from the Mar '15 top of 30025.
The index formed a small 'double bottom' pattern and pulled back to the 24830 level (marked by red arrow). The likelihood of a counter-trend move and resistance from the 24830 level were explained in last week's post.
Daily technical indicators are turning bullish. MACD has crossed above its signal line in negative
zone. ROC has entered positive zone. RSI has moved up to its 50% level. Slow
stochastic has climbed above its 50% level.
Bears (read FIIs) are still dominating in the near term, and will continue to do so as long as the index trades below it falling 200 day EMA and the blue down trend line.
However, the long-term bull market is intact because Sensex is trading more than 1300 points above its 200 week EMA.
If the pullback to the 24830 level is used as a selling opportunity by bears, the index will fall into 'attractive valuation' zone.
NSE Nifty 50 chart pattern
The weekly bar chart pattern of Nifty had received good support from the 7540 level in Sep '15 and Dec '15 (marked by green arrows). The support level got broken and the index dropped to an intra-week low of 7241 in the week ending on Jan 22 '16 - correcting more than 20% from its Mar '15 peak of 9119.
A 20% correction from an index top is often considered a confirmation of a bear market by technical analysts. So, last week's pullback to the 7540 level may be used as a selling opportunity by bears.
Bulls may point to the weekly bar of the previous week, which formed a 'dragonfly doji' candlestick pattern. The pattern has bullish implications when formed at the bottom of an intermediate down move.
Weekly technical indicators are looking bearish, but showing faint signs of
reversal. MACD below its signal line in negative zone but stopped falling. ROC
is facing resistance from its 10 week MA at the edge of its oversold zone. RSI has bounced up weakly from the edge of its oversold zone. Slow stochastic is trying to emerge
from its oversold zone.
Bulls need to muster a lot of buying support if they wish to turn the pullback into a full-fledged rally.
Bottomline? Chart patterns of Sensex and Nifty have pulled back to previous support levels. Bears may use the opportunity to sell. Long-term bull markets are still intact, as both indices are trading above their rising 200 week EMAs (not shown), and near long-term P/E averages, which make them fairly valued.
