Friday, April 28, 2017

Technical updates – Thermax and Voltas

There has been considerable change in the fortunes of Thermax and Voltas since the previous technical update.

Slow economic growth and poor credit off-take had taken a toll on the capital goods sector. Just when things were beginning to look up, demonetisation of Rs 500 and Rs 1000 notes put a spanner in the works.

Notwithstanding strong protests and predictions of dire consequences by opposition parties, economic recovery from demonetisation has been surprisingly better than expected. The effect is clearly visible on the charts of Thermax and Voltas.

Thermax


The stock had hit a high of 1294 in Mar '15 but daily technical indicators formed various reversal patterns inside their overbought zones. That triggered a long bear phase that touched a low of 707 in May '16.

A technical bounce into bull territory was followed by formation of a 'double top' reversal pattern and a correction below all three EMAs. The stock touched a higher bottom of 742 in Jan '17 - forming a 'double bottom' reversal pattern that has propelled the stock back into bull territory.

Daily technical indicators are correcting overbought conditions. The dip can be used to add.

Voltas


After undergoing a strong corrective move from a high of 358 in Jun '15 to a low of 222 in Feb '16, the stock formed an 'inverse head and shoulder' like pattern that triggered a strong bull rally.

The stock rose to touch a high of 402 in Oct '16, but all four technical indicators touched lower tops. The combined negative divergences led to a sharp correction below all three EMAs to a low of 293.

Oversold technical indicators signalled the beginning of another strong rally that took the stock to a new high of 419 on Apr 20 '17.

The stock is in a strong bull grip despite periodic sharp corrections. Dips can be used to add.

Wednesday, April 26, 2017

Nifty chart: a midweek technical update (Apr 26 ‘17)

FIIs were net sellers of equity worth Rs 5.9 Billion during the first three days of trading in F&O expiry week. DIIs were net buyers of equity worth a huge Rs 29.9 Billion, as per provisional figures.

The combination of reduced selling by FIIs and increased buying by DIIs sent Nifty soaring to lifetime intra-day (9367) and closing (9352) highs. 

Q4 (Mar '17) results declared so far have been better than expectations. An appreciating Rupee will help reduce India's trade deficit.


The daily bar chart pattern of Nifty crossed above its previous (Apr 5) top of 9274 with good volume support, and closed above 9350 for the first time ever. The bearish 'head and shoulders' pattern that was developing on the chart has been negated.

(The Sensex closed above 30000 for the first time ever. The event was celebrated with exchange participants cutting a 30 kg cake.)

Investors should not get swayed by bullish euphoria. There are a few dark clouds on the horizon.

All three daily indicators are in bullish zones, but showing negative divergences by touching lower tops while the index rose higher. 

Nifty's TTM P/E has touched 23.75 - much above its long-term average. The breadth indicator NSE TRIN (not shown) is falling inside its overbought zone.

The index is trading above its three EMAs in a bull market. However, the distance between the index and its rising 200 day EMA is more than 700 points. That indicates overbought conditions (as per empirical observations).

The upside appears limited. Think about partial profit booking and re-balancing of asset allocation.

Tuesday, April 25, 2017

Gold and Silver charts: bulls fight back but bears refusing to give up

Gold chart pattern


The daily bar chart pattern of Gold bounced up sharply after receiving support from its rising 20 day EMA and crossed above the 1290 level to a 5 months high on Apr 17.

The 'golden cross' of the 50 day EMA above the 200 day EMA has technically confirmed a return to a bull market. Gold's price stopped just short of the 1300 level and closed lower to form a 'doji' candlestick pattern. 

Negative divergences visible on MACD and Slow stochastic - which failed to touch new highs with gold's price - triggered a correction that received good support from the 20 day EMA.

Daily technical indicators have corrected overbought conditions, and are showing downward momentum in bullish zones. Some more correction or consolidation is likely.

On longer term weekly chart (not shown), gold’s price is trading above its three weekly EMAs in bull territory. The 20 week and 50 week EMAs need to cross above the 200 week EMA if bulls are to regain control. Weekly technical indicators are in bullish zones but not showing any upward momentum.

Silver chart pattern


The daily bar chart pattern of Silver crossed above the 18.60 level intra-day on Apr 17 but failed to close convincingly above the resistance level of 18.50. That was a signal for bears to mount an attack. 

Silver's price corrected below its 20 day and 50 day EMAs, only to bounce up and close exactly at its 50 day EMA after receiving good support from its 200 day EMA.

Bulls will feel encouraged by a 'hammer' candlestick pattern that has formed at the end of the corrective move, and can trigger the next leg of the rally.

Daily technical indicators are looking bearish. MACD is falling below its signal line in positive zone. RSI has fallen below its 50% level. Slow stochastic has dropped to the edge of its oversold zone. 

On longer term weekly chart (not shown), silver’s price corrected down to its 50 week EMA after facing strong resistance from its sliding 200 week EMAWeekly MACD and RSI are in neutral zones. Slow stochastic has formed a 'double top' reversal pattern inside its overbought zone. 

Expect some consolidation or correction before silver's price can cross above its 200 week EMA into bull territory.

Monday, April 24, 2017

S&P 500 and FTSE 100 charts (Apr 21 '17): bears dominate but bulls try to fight back

S&P 500 index chart pattern


The (purple) down trend line continues to dominate the daily bar chart pattern of S&P 500. Another attempt at a rally faced resistance from the down trend line.

The index is trading well above its rising 200 day EMA in a bull market, and closed about 20 points higher for the week. The fact that the previous (Mar 27) low of 2322 has not been breached should encourage bulls.

Daily technical indicators are in bearish zones. MACD and RSI are not showing any upward momentum. Strong volumes on down days mean bears remain active.

Expect some more consolidation or correction below the down trend line before an upward break out can occur.  

On longer term weekly chart (not shown), the index closed above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators have corrected overbought conditions, but remain in bullish zones.

FTSE 100 index chart pattern


Note the following comments from last week's post on the daily bar chart pattern of FTSE 100: "... the index may break out either above or below the 'rectangle'. Since a 'rectangle' is often a continuation pattern, the logical break out is downwards."

After the long Easter break, the index succumbed to bear selling and dropped sharply below the 'rectangle' to 7150 on Tue. Apr 18. Over the next couple of days, the index dropped further to 7100. 

The possibility of a 130 points move from the breakout point was mentioned in an earlier post

At the time of writing this post, the index pulled back sharply to the lower edge of the 'rectangle' - only to face considerable resistance from the falling 20 day and 50 day EMAs. Such pullbacks offer selling opportunities to those who may have missed selling on the downward breakout on Apr 18.

Daily technical indicators are correcting oversold conditions but remain in bearish zones.

On longer term weekly chart (not shown), the index closed below its 20 week EMA for the first time in 5 months, but above its rising 50 week and 200 week EMAs in a long-term bull market. Weekly technical indicators are looking bearish and showing downward momentum.

Sunday, April 23, 2017

Sensex, Nifty charts (Apr 21, 2017): profit booking near lifetime highs stops bulls on their tracks

Net selling in equities by FIIs touched Rs 30 Billion, as global uncertainties and lacklustre corporate earnings cast a shadow over the market. DIIs were net buyers of equity worth Rs 24.9 Billion, as per provisional figures.

Q4 (Mar '17) results of HDFC Bank, IndusInd Bank and Yes Bank showed good bottomline growth but with rising NPAs and provisions. Credit growth has been at its lowest level in 60 years for the banking sector as a whole.

To counter visa restrictions being imposed by USA, UK, Australia, Singapore on Indian tech workers, the government is considering reimposing a ceiling on royalty payments to overseas principals by MNCs operating in India. 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex had formed an upward 'gap' on Mar 14 '17, but has failed to make much headway since then. 

The 'gap' has provided good support to the index so far; but the lower edge of the 'gap' may be turning into the 'neckline' of a 'head and shoulders' reversal pattern.

The 50 day EMA is just below the 'gap' zone, and can provide additional support if the index slips further.

Note that the right 'shoulder' of the 'head and shoulders' pattern hasn't formed yet - and may not form at all, if bulls manage to propel the index above the previous top of 30007 (touched on Apr 5).

However, the possibility of formation of a reversal pattern near an index top should be treated with respect and caution.

Daily technical indicators are looking bearish. MACD is falling below its signal line in bullish zone. ROC has dropped inside bearish zone but its downward momentum has stalled. RSI has slipped inside its bearish zone. Slow stochastic has entered its oversold zone.

There can be a technical bounce, but a resumption of the up move is unlikely in F&O expiry week. The index may rise to form the right 'shoulder' of the 'head and shoulders' pattern - providing short-term players an exit opportunity.

The index is trading well above its rising 200 day EMA in a bull market. If a 'head and shoulders' pattern does get formed and the index breaks down below it, the correction should end with a test of support from the 200 day EMA at worst.

Why? The 50% Fibonacci retracement level of the entire rally from the Dec 26 '16 low to the Apr 5 '17 top is at about 27880 - 20 points above the current level of the 200 day EMA. Bull market corrections often end near the 50% Fibonacci retracement level.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty failed to close above the psychological level of 9200 for the 6th week in a row. The index is trading above its two rising weekly EMAs in a bull market, with the upward 'gap' formed on Mar 14 '17 providing good support.

Three of the four weekly technical indicators - MACD, RSI, Slow stochastic - are inside their respective overbought zones, but have started to slide down. ROC has already slipped down from its overbought zone.

Nifty's TTM P/E remains above 23 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is hesitating near the lower edge of its neutral zone.

Some more correction, and a complete filling of the upward 'gap' are possibilities. The formation of a 'head and shoulders' reversal pattern is also a possibility.

In other words, waiting on the sidelines instead of rushing in to buy or sell may be a good idea.

Bottomline? Sensex and Nifty charts appear to be forming reversal patterns that may lead to deeper corrections. Both indices are overvalued. Unless earnings catch up with expectations, don't expect runaway rallies. Stay invested and continue your SIPs.  

Friday, April 21, 2017

Why a stop-loss is the difference between gambling and investing

Many small investors - particularly old timers - prefer to invest in 'safe' options. Like bank fixed deposits, tax free bonds, national savings certificates. They get a fixed rate of return - regardless of the state of the economy or volatility in the stock market. Plus, they rest assured that their principal amount will be returned intact on maturity.

For 'safe' investors, investing in stocks is nothing short of gambling. A company one invests in can go out of business. Even if they remain in business, they may make losses and not pay any dividends. In other words, there are no guarantees of any returns, plus there is a risk that the invested principal may get  depleted. (The same logic applies for equity mutual funds.)

In some ways, investing is gambling if you have no idea of what you are doing. If you buy a company's stock without doing adequate research about its background, competition, business outlook, management capabilities then the possibility of making any money through capital gains or dividends will be like betting on a cricket or football match. You will either win, or lose.

Since you have no control over the outcome of a sporting contest, you will lose your entire wagered capital if your team loses. You won't have much control over the performance of a company either - specially if you hold only 200 or 500 shares.

However, you may use a stop-loss - set 3% (or 8%) below your invested amount in a company's share. If a share's price falls more than 3% (or 8%), you can sell the share at a small loss and recover more than 90% of your invested capital.

This loss mitigation technique is the major difference between gambling and investing. One would think that most investors would be disciplined about setting stop-losses for each of their purchases, and sell when the stop-losses get hit.

Experience says otherwise. Setting a stop-loss (or a trailing stop-loss) is an art that few investors learn and even fewer investors practice. 

There is another important difference between gambling and investing: regular dividends. Only long-term investors benefit from it. If you do proper research before buying a stock and then hold on to it for 5 years or more, reinvesting the dividends that a company pays can add up to substantial returns.

In gambling, there are no dividend payments for betting over long periods. Since each bet usually has a short time limit, you either win or lose quickly. Then you place your next bet, with similar results.

You can read more here.

Wednesday, April 19, 2017

Nifty chart: a midweek technical update (Apr 19 ‘17)

FIIs were net sellers of equity worth Rs 18.5 Billion during the first three trading days this week. DIIs were net buyers of equity worth Rs 13.5 Billion, as per provisional figures.

Nifty is sliding down towards the 85 points upward 'gap' formed on Mar 14 '17. The 'gap' had provided good support twice - on Mar 22 and Mar 27.

India's WPI-based inflation fell to 5.7% in Mar '17 from a two-and-a-half years high of 6.5% in Feb '17, mainly due to a fall in mineral and fuel prices, while food prices continued to rise.



The daily bar chart pattern of Nifty is bearing the brunt of FII selling. The index has corrected below its 20 day EMA, but managed to close just above the 9100 level.

Nifty is 40 points above the 'gap' that had twice provided support earlier - and may do so again. The index is trading well above its rising 200 day EMA in a bull market

If the index finds support from the 'gap' and bounces up, it may proceed to form the 'right shoulder' of a 'head and shoulders' reversal pattern. Such a pattern - when formed at an index top - should be treated with extreme caution.

Note that the 'left shoulder' has already formed, and the 'head' formation is nearly complete, with a 'neckline' at about 9020. Completion of the pattern may cause a downward breakout towards 8800.

Can the index fall even further? Sure it can - specially if FIIs continue to sell. Will it? That will depend on how Q4 (Mar '17) results pan out. They haven't been that great thus far.

Daily technical indicators are looking bearish. MACD is falling below its signal line in positive zone. RSI is seeking support from its 50% level. Slow stochastic is poised to enter its oversold zone. 

All three indicators have dropped lower than their Mar 27 lows, while the index has touched a higher bottom. The negative divergences can cause some more correction.

Nifty's TTM P/E is still above 23 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has fallen towards the lower edge of its neutral zone.

Bull market corrections provide buying opportunities. However, the likely formation of a reversal pattern means it is better to be circumspect than brave.