Stock Index Chart Patterns: S&P 500 and FTSE 100 – Apr 08, 2016

S&P 500 index chart

The following comments appeared in last week's post on the daily bar chart pattern of S&P 500: "Daily technical indicators are in their overbought zones, and showing negative divergences by failing to touch new highs with the index. Some correction or consolidation can be expected."

As expected, the index corrected a bit during the first two days of the week and then consolidated sideways during the next three days. At the time of writing this post, the sideways consolidation continues.

The rising 20 day EMA provided good support. The 'golden cross' of the 50 day EMA above the 200 day EMA is about to restore technical control to bulls.

Daily technical indicators have corrected overbought conditions but remain in bullish zones. Note that the MACD signal line is forming a 'rounding top' pattern and Slow stochastic is on the verge of dropping below its 50% level. These are bearish signs in the near term.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs for the 5th week in a row. The index is trading 230 points above its rising 200 week EMA in a long-term bull market. Weekly technical indicators are in bullish zones.

FTSE 100 index chart

The daily bar chart pattern of FTSE 100 continued its sideways consolidation during the week. The rising 50 day EMA provided good support. At the time of writing this post, the index has slipped down after testing resistance from its 200 day EMA.

Note that each test of a resistance level makes it weaker and more susceptible to a breach. In other words, the index may break out above its 200 day EMA soon.

Daily technical indicators are in bullish zones. Slow stochastic is showing good upward momentum, but MACD and RSI are moving sideways. 

On longer term weekly chart (not shown), the index closed above its rising 20 week EMA, but is trading below its sliding 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are looking bullish.

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 08, 2016

FIIs were huge net buyers of equity during Mar '16 - allowing Sensex and Nifty to register sharp recoveries from their 52 week lows touched on Feb 29 '16. It is not a great surprise that they have been in profit booking mode in Apr '16.

During the first 6 trading days this month, FIIs have been net sellers of equity worth Rs 950 Crores. DIIs were also net sellers of equity worth Rs 700 Crores. Both Sensex and Nifty corrected more than 3% from their Mar 31 tops.

Auto sales showed decent growth during the financial year Apr 2015-Mar 2016. Four wheeler sales grew more than 7%. Two wheeler sales grew 3%. Most encouraging was the 11.5% growth in CV sales - showing clear sign of economic growth. 

BSE Sensex chart pattern

Negative divergences visible on technical indicators in the previous post on the daily bar chart pattern of Sensex had triggered the following warning: "Expect some correction or consolidation prior to Q4 results season."

After failing to overcome strong resistance from its 200 day EMA, the index has slipped below its 20 day EMA and is seeking support from its 50 day EMA inside the 'support-resistance zone' between 23840 and 24830.

Daily technical indicators are looking bearish. MACD has crossed below its signal line in positive zone. ROC has dropped inside negative zone below its falling 10 day MA. RSI is seeking support from its 50% level. Slow stochastic has plummeted to the edge of its oversold zone.

Some more correction or consolidation can't be ruled out, but bulls may fight back at any time. The index is trading below its 200 day EMA and the blue down trend line in bear territory. However, market sentiment is definitely more bullish than it was during Jan-Feb '16.

On longer-term weekly chart (not shown), Sensex closed below its 20 week and 50 week EMAs but more than 1000 points above its 200 week EMA in a long-term bull market. Weekly technical indicators are turning bearish.

NSE Nifty chart pattern

The weekly bar chart pattern of Nifty faced strong resistance from its sliding 50 week EMA and closed lower for the second week in a row. The index dropped below its 20 week EMA and tested support from the 'support-resistance zone' between 7240 and 7540 before closing just above it.

Weekly technical indicators are turning bearish and hinting at some more correction or consolidation. 

MACD is moving sideways above its signal line in negative zone. ROC is above its 10 week MA, but about to fall inside negative zone. RSI is sliding down below its 50% level. Slow stochastic is in bullish zone but starting to drift down.

The breadth indicator NSE TRIN is heading towards its oversold zone, but hasn't quite reached there yet.

Despite the correction during the week, Nifty has closed 430 points above its rising 200 week EMA (not shown) in a long-term bull market.

Bottomline? Chart patterns of Sensex and Nifty faced strong resistances from long-term moving averages, and dropped to seek support from 'support-resistance zones'. Some more correction or consolidation is possible. Stick to your asset allocation plans. Check forthcoming Q4 (Mar '16) results before jumping in to buy.

About Quality and Price in Stock Investing

Proponents of Efficient Market Theory (EMT) believe that it is impossible to 'beat the market' because prices of stocks (and other securities) discount all available information at any time due to the efficient dissemination of information in the stock market.

Most small investors would benefit by believing in EMT. Instead of losing their shirt trying to 'beat the market' by buying 'cheap' stocks in large quantities, they should just buy index funds or index ETFs from their monthly savings. The stock index will provide them long-term returns.

Hasn't Buffett become an investing legend by doing just the opposite? Isn't he the one who thinks that EMT is meant for academicians? Doesn't the stock market periodically mis-price stocks, allowing savvy investors to 'buy low and sell high'? Yes, to all three questions. 

You can get market-beating returns if you buy stocks of quality companies at fair prices, and sell them at a profit a few years later. But do you know which are 'quality companies' and what are 'fair prices' for their stocks?

Wikipedia provides the following definition of Quality Investing: "..an investment strategy based on a set of clearly defined fundamental criteria that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft (e.g. management credibility) and hard criteria (e.g. balance sheet stability)." 

In a recent article, Ben Johnson of Morningstar.com discussed 'The What, Why and How of Quality', where he makes the following remarks: "The importance of assessing the price paid for high-quality stocks cannot be understated. While quality matters, price arguably matters more."

Related Post

The Moneyball of Quality Investing

Nifty chart: a midweek update (Apr 06 '16)

The RBI Governor cut the repo rate by 25 bps (0.25%) to 6.5%. The move was widely expected and already discounted by the stock market, as per analysts. So, what was the reason for the big sell-off?

It was a classic case of 'sell on news' - led by FIIs. They were net sellers of equity worth Rs 800 Crores on Tue. Apr 5, and Rs 500 Crores today. Probably just routine profit booking after massive buying last month.

Adrian Mowat of JP Morgan Chase believes that measures to increase liquidity in the system by Dr Rajan - like increasing the reverse repo rate by 25 bps to 6%, cutting MSF by 75 bps to 7%, announcing OMO of Rs 15,000 Crores - will be game changers.  

In an earlier post on the 1 year closing chart pattern of Nifty, the importance of the 'support-resistance' level of 7550 was explained.

It is interesting to note how 7550 is continuing to play an important role. The index broke out above 7550, but pulled back - only to bounce up again.

It faced strong resistance from its sliding 200 day EMA and pulled back towards 7550 for a second time. The index is also receiving support from its 20 day EMA.

The two dips provided good opportunities to add/enter. Can Nifty fall some more? Sure it can, specially if FIIs continue to sell. Expect the 7550 level and the rising 50 day EMA to provide support on the downside.

Daily technical indicators have corrected overbought conditions and showing downward momentum, but remain in bullish zones. Since the beginning of Mar '16, bulls have been buying every dip - and may continue to do so.

Nifty is still trading below its 200 day EMA in bear territory. On longer-term weekly chart (not shown), the index has dropped to seek support from its 20 week EMA but closed almost 500 points above its 200 week EMA in a long-term bull market.

The near-term trigger for the market will be declaration of Q4 (Mar '16) results from next week. It is unlikely that India Inc. will show much improvement from Q3 (Dec '15) results.

Stock picking will take centre stage - so be careful about what you buy. If you are not sure, buy units of a good large-cap or balanced mutual fund with a proven track record.

A convincing move above 8000 will be the first indication that bulls are regaining control.

Gold and Silver charts: bears strike back

Gold chart pattern

The daily bar chart pattern of Gold had touched an intra-day high of 1288 on Mar 11 '16, but formed a 'reversal day' pattern (higher high, lower close) and entered a bearish pattern of 'lower tops and lower bottoms'. 

The rising 50 day EMA has provided good support so far - but may not be able to do so for long. However, the zone between 1190-1200 can provide stronger support.

Daily technical indicators are looking bearish. MACD is falling below its signal line, and is about to enter negative zone. RSI has slipped below its 50% level. Slow stochastic is poised to re-enter its oversold zone.

On longer term weekly chart (not shown), gold’s price has dropped below its 200 week EMA after a brief sojourn above it, but is trading above its 20 week and 50 week EMAs. Weekly technical indicators have corrected overbought conditions but remain in bullish zones.

Silver chart pattern

The following comments appeared in the previous post on the daily bar chart pattern of Silver: "...trading action during the past 5 weeks may have formed a bearish 'rising wedge' pattern, from which a downward breakout is likely."

A sharp downward breakout on Mar 23 '16 dropped silver's price to its 200 day EMA. After a brief upward bounce above its three EMAs into bull territory, silver's price has dropped back into bear territory.

The 'golden cross' of the 50 day EMA above the 200 day EMA, which would have technically confirmed a bull market, have been averted by bears.

Daily technical indicators are looking bearish, and showing downward momentum - hinting at a continuation of the correction from the Mar 18 top. 

On longer term weekly chart (not shown), silver’s price closed below its three weekly EMA in a long-term bear market. Weekly technical indicators are about to enter bearish zones. 

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Apr 01, 2016

S&P 500 index chart

The daily bar chart pattern of S&P 500 continued its rally from the Feb '16 low, and touched a 2016 high of 2075 on Fri. Apr 1. Bulls are sustaining the rally by buying on every dip. 

The 'golden cross' of the 50 day EMA above the 200 day EMA appears imminent. That will technically confirm a return to a bull market.

Daily technical indicators are in their overbought zones, and showing negative divergences by failing to touch new highs with the index.

Some correction or consolidation can be expected.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs for the 4th week in a row. The index is trading more than 240 points above its rising 200 week EMA in a long-term bull market. Weekly technical indicators are showing upward momentum.

FTSE 100 index chart

The daily bar chart pattern of FTSE 100 is struggling to overcome resistance from the 200 day EMA. The index traded sideways during the week, receiving good support from its rising 50 day EMA.

The index may be forming an 'ascending triangle' pattern, from which a likely upward break out can take the index past 6300.

Daily technical indicators are in bullish zones, but showing downward momentum. MACD is falling below its signal line in positive zone. RSI is seeking support from its 50% level. Slow stochastic is falling towards its 50% level.

On longer term weekly chart (not shown), the index closed above its rising 20 week EMA, but is trading below its 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are not showing much upward momentum.

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 01, 2016

Fiscal year 2015-16 was a big disappointment for long-term investors. After touching lifetime highs in Mar '15, both Sensex and Nifty entered down trends that are still in force - wiping out gains made during the previous fiscal year.

Both indices touched 52 week lows in Feb '16 before recovering strongly on the back of huge buying by FIIs during Mar '16. FIIs were net buyers of equity worth Rs 24200 Crores during the month, which was their highest net buying figure since Mar '14.

DIIs turned net sellers of equity (worth Rs 16900 Crores) for only the second time during the past 14 months. That prevented both indices from crossing above important long-term moving averages.

Auto sales during Mar '16 were encouraging. Maruti (15%), M&M (20%), Ford (44%) and Hero Moto (14%) showed double-digit YoY growth for the month. Hyundai grew 4%. Tata Motors grew only 1%, but their commercial vehicle sales grew 20%.

BSE Sensex chart pattern

The daily bar chart pattern of Sensex traded above its 20 day and 50 day EMAs for the 4th week in a row, and rose to touch an intra-day high of 25480 on Thu. Mar 31 but could not stay above the 25450 level for long.  

Bears were expected to put up a fight to defend the 200 day EMA, and they did. The index closed about 68 points lower for the week.

Despite heavy buying by FIIs during Mar '16, the index is trading below the blue down trend line and its 200 day EMA in bear territory.

Expect stronger bear activity if RBI maintains status quo on interest rates next week, because the stock market appears to have discounted a 25 bps (0.25%) cut in the repo rate.

Daily technical indicators are looking bullish but showing negative divergences by failing to touch new highs with the index. Expect some correction or consolidation prior to Q4 results season.

On longer term weekly chart (not shown), Sensex formed a weekly 'reversal bar' (higher high, lower close) but remains more than 1650 points above its rising 200 week EMA in a long-term bull market.

Weekly technical indicators are showing upward momentum, but MACD is still in negative zone and RSI is in neutral zone.

NSE Nifty chart pattern

The weekly bar chart pattern of Nifty closed marginally lower for the week after 4 straight weeks of gains. Effective Apr 1, addition of the Tata Motor DVR stock means that the index now has 51 stocks. 

Bears exerted strong resistance near the 50 week EMA. The index formed a weekly 'reversal bar' (higher high, lower close) but closed above its 20 week EMA and the 'support-resistance zone' between 7240 and 7540.

Weekly technical indicators are giving mixed signals. ROC and Slow stochastic are looking bullish. MACD is above its signal line, but in negative zone. RSI is facing resistance from its 50% level and sliding down.

RBI's policy announcement on Apr 5 and Q4 results to be declared from the following week may be keeping market players on tenterhooks. Expect some consolidation or correction.

Nifty closed almost 600 points above its rising 200 week EMA (not shown) in a long-term bull market. 

Bottomline? Chart patterns of Sensex and Nifty faced strong resistances from long-term moving averages. Some more correction or consolidation is likely.  Use any dips to enter fundamentally strong stocks. If stock picking is not your forte, buy balanced fund units. Long-term bull markets are recovering from year-long corrections, but bears are in no mood to give up yet.