Wednesday, August 24, 2016

Nifty chart: a midweek technical update (Aug 24 '16)

Quietly, FIIs have turned net sellers of equity this week - though their net selling in three days was only worth Rs 340 Crores. DIIs were net buyers on Monday and today (worth Rs 180 Crores), but were net sellers of equity (worth Rs 450 Crores) on Tue. Aug 23.

So, if both FIIs and DIIs were net sellers, who have been buying? In a clear case of history repeating itself, retail investors are getting sucked into the stock market at exactly the wrong time - again! 

With no fresh bullish triggers for the market - at least till the 7th Pay Commission awards start showing up as credit entries in the bank accounts of government employees - the much awaited correction may be around the corner.


The daily bar chart pattern of Nifty has been consolidating sideways within a 'symmetrical triangle' pattern since the beginning of the month.

Triangles are unreliable patterns because a break out can occur in either direction. Since the index is trading well above its rising 200 day EMA in a bull market, the expected break out should be upwards.

However, as pointed out last week, the index may be in the process of forming a bearish 'rounding top' pattern. The pattern will be confirmed if the index drops below 8500.

FIIs have been buying on every dip - till this week. If they continue to sell, the index can drop down to fill the 54 points 'gap' (between 8353 and 8407) formed on Jul 11 '16.

Whether the 'gap' gets filled partly or fully, the index should resume its up move thereafter. So, do not sell in a panic. No one knows if the correction will occur or not.

But no harm in being prepared for it. If the correction does happen, use it to add to existing holdings - or even make fresh entries. 

Daily technical indicators are in bullish zones but looking bearish. MACD and Slow stochastic are showing downward momentum. RSI is moving sideways.

Nifty's TTM P/E has inched up to 23.78 - well above its long-term average. The breadth indicator NSE TRIN is inside its overbought zone.

An index can remain overbought for long periods, and hoping for a correction doesn't trigger one. But with FIIs selling for the first time this month, downside risk has increased.

No need to stop your monthly SIPs, but refrain from making huge bets for short-term gains. 

Tuesday, August 23, 2016

WTI and Brent Crude Oil charts: end of short-squeeze rallies?

WTI Crude Oil chart


The 'V' shaped rally on the daily chart pattern of WTI Crude Oil surged past the 49 level before correcting and closing below 47.50. 

Shorts got squeezed after OPEC's announcement of a meeting in end-Sept. '16 to discuss a possible output freeze. Going by recent experience, OPEC members are unlikely to agree on any cut in output.

Technically, there are bullish and bearish signals on the chart. Both the 20 day and 50 day EMAs have formed bullish 'rounding bottom' patterns. The 50 day EMA has moved up without crossing below the 200 day EMA, keeping the bull rally intact.

However, oil's price has corrected after touching a lower top, and daily technical indicators are in the process of correcting overbought conditions.

A pullback towards the 200 day EMA is likely. 

A convincing move above 52 is required to vanquish the bears. That may be a tough ask with more US rigs coming back into production and shale oil fracking beginning to pick up.

On longer term weekly chart (not shown), oil's price is trading above its 20 week and 50 week EMAs but well below its sliding 200 week EMA in a long-term bear market. Weekly technical indicators are in bullish zones, but MACD and RSI are not showing much upward momentum.

Brent Crude Oil chart


The daily bar chart pattern of Brent Crude Oil rallied past the 51 level but formed a small 'reversal day' pattern (higher high, lower close) on Fri. Aug 19 and corrected down to the 49 level.

Bulls managed to prevent the 'death cross' of the 50 day EMA below the 200 day EMA. All three EMAs are rising again, and oil's price is trading above them in bull territory. 

Daily technical indicators are in the process of correcting overbought conditions. A pullback towards the 200 day EMA is a possibility. A convincing move above the 53 level is needed before bulls can regain control of the chart.

On longer term weekly chart (not shown), oil's price is trading above its 20 week and 50 week EMAs but well below its falling 200 week EMA in a long-term bear market. Weekly technical indicators are in bullish zones, but only Slow stochastic is showing upward momentum.

Monday, August 22, 2016

S&P 500 and FTSE 100 charts (Aug 19 '16): post-Brexit bull rallies take a pause

S&P 500 index chart pattern


The daily bar chart pattern of S&P 500 continued with its previous week's sideways consolidation - touching a new high of 2194 on Mon. Aug 15 and a low of 2168 on Wed. Aug 17 before closing flat for the week.

The rising 20 day EMA provided good support and the index closed above its three EMAs in a bull market, but formed another 'doji' candlestick pattern that indicates indecision among bulls and bears.

All three daily technical indicators are in bullish zones, but showing negative divergences by failing to touch new highs with the index. Some more consolidation or a correction is likely.

On longer term weekly chart (not shown), the index closed well above its three rising weekly EMAs in a long-term bull market for the 24th week in a row, but has formed a 'doji' candlestick pattern that may trigger a correction. Weekly technical indicators are still looking overbought.

FTSE 100 index chart pattern


The concluding comment in last week's post on the daily bar chart pattern of FTSE 100 was: "Weekly technical indicators are looking quite overbought, which can trigger a correction at any time."

The index touched a new 52 week high of 6955 on Mon. Aug 15 but slipped into a correction and closed almost 100 points lower. On a weekly closing basis, the index lost 57 points (0.85%).

Daily technical indicators have corrected overbought conditions, and are showing downward momentum. The index may correct some more. Expect some downside support from the zone between 6750-6780.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs in a long-term bull market for the 8th week in a row, but has formed a 'reversal' bar (higher high, lower close). Weekly technical indicators are still overbought. Some more correction is possible.

Saturday, August 20, 2016

BSE Sensex and NSE Nifty charts (Aug 19, 2016): bulls and bears locked in a stalemate

Neither bulls nor bears were able to gain much advantage during a holiday-shortened trading week. FIIs were net buyers of equity worth Rs 1250 Crores, as per provisional figures. DIIs were net sellers of equity worth a little more than Rs 100 Crores.

On a weekly closing basis, Sensex lost 75 points - a point more than what it had gained in the previous week. Nifty lost 5 points, closing lower for the second week in a row.

Chances of a US interest rate hike pushed the Dollar higher and the Rupee lower. Oil prices rose on speculation of a production freeze by OPEC. Without any immediate bullish triggers, market players chose to book profits.

BSE Sensex index chart pattern


The following comments were made in last week's post on the daily bar chart pattern of Sensex: "Some more consolidation or correction is likely. With FIIs buying on every dip, the Sensex may not face a deep correction."

The index consolidated in a narrow range within the 'support-resistance zone' between 27600 and 28600. The 20 day EMA provided good downside support. The up trend from the Feb 29 '16 low is intact.

Three of the daily technical indicators - MACD, ROC, Slow stochastic - are in bullish zones, but not showing any upward momentum. RSI is straddling its 50% level.

The longer the index consolidates, the sharper will be the eventual breakout. In a bull market, such consolidations usually precede an upward breakout.

However, the macroeconomic picture has not improved. Inflation is rising again. Manufacturing output is weak. Q1 (Jun '16) earnings were nothing to write home about.

The 7th Pay Commission awards will get implemented from next month. That may provide some fillip to consumer-related stocks.

NSE Nifty index chart pattern


The weekly bar chart pattern of Nifty closed just above the resistance level of 8650 after trading within a 100 point range. The index formed a 'doji' candlestick that indicates indecision among bulls and bears.

The index may be forming a small 'rounding top' reversal pattern that can trigger a correction. A move above the previous week's top of 8728 will negate the pattern.

Three of the weekly technical indicators - MACD, RSI, Slow stochastic - are moving sideways well inside their overbought zones. ROC is also moving sideways below its 10 week MA just inside its overbought zone.

Nifty's TTM P/E remains high at 23.7. The breadth indicator NSE TRIN (not shown) has dropped inside its overbought zone.

An index can remain overbought for long periods. No need to worry about a big crash as FIIs are buying all dips. Stay invested, but with a stop-loss as the downside risk appears higher.

Bottomline? Sensex and Nifty charts show that bulls and bears are locked in a stalemate. Index valuations on a TTM basis are expensive, increasing downside risk. If you wish to enter now, your bottom-up stock picking skills will be tested.

Friday, August 19, 2016

Is stock investing risky?

To be able to answer that question, one has to understand the meaning of risk. The problem is: there is no clear cut definition of risk, or the best way to measure risk.

Volatility is often considered a measure of risk - particularly by inexperienced investors. But seasoned traders thrive on volatility and make most of their money from it.

One often thinks of a bank fixed deposit as 'safe'. Why? Because there is very little chance of losing your principal amount. 

Compared to a bank fixed deposit, stocks seem more 'risky'. Why? Because during a bear phase the price of a stock can fall below the price at which it was bought.

Many small investors fall into the trap of such a simplified view of risk and choose the 'safe' option. What they fail to realise is that safety also comes at a price.

Returns from fixed deposits are taxable and subject to fluctuations in interest rates. A 3 years deposit earning 8% interest may seem like a good safe return, but the real rate of return is only 2% if inflation is 6%.

There are a couple of ways that risk can be reduced when investing in stocks. The first is by diversification: (i) across market capitalisation, i.e. investing in a mix of large-cap, mid-cap and small-cap stocks; and (ii) across sectors, i.e. buying stocks from auto, pharma, FMCG, financials, etc.

The second is by portfolio diversification through investment in different asset classes, like stocks, funds, fixed income, gold.

Another way to reduce the riskiness of stock investing is by learning the basics of technical analysis. 

While fundamental analysis is a must in understanding the financial robustness and competitive advantage of a company, technical analysis provides signals of when to buy, when to sell and when to sit tight.

Plus, the concept of a 'stop-loss' allows an investor to exit with a smaller loss when a stock's price is tumbling down.

If you are not adept at picking stocks, you can still invest in stocks and diversify your portfolio by buying units of different mutual funds.

By choosing the 'dividend option' in a fund, risk is reduced because the periodic dividend payments act as partial profit booking and freeing up some cash that can be utilised elsewhere.

So, the answer to the question is: No - provided you know what you are doing.

To learn more about risk, here is an interesting article from investopedia.com.

Wednesday, August 17, 2016

Nifty chart: a midweek technical update (Aug 17 '16)

WPI inflation rose for the 4th straight month to a 23 month high of 3.55% in Jul '16 against 1.62% in Jun '16. In Jul '15, the index was -4%. WPI had hit a peak of 3.74% in Aug '14. Prices of potatoes, pulses, vegetables, sugar and fruits showed strong double-digit growth.

RBI Governor's decision to keep interest rates unchanged due to inflation concerns turned out to be correct. Rise in food inflation is due partly to a lower base effect, and is expected to come down due to ample rainfall. So far, about 93% of the country has received normal to excess rainfall.

After Independence Day holiday on Mon. Aug 15, activity has been slightly muted. Net buying in equities by FIIs was less than Rs 700 Crores. DIIs were net sellers of equity worth about Rs 200 Crores. Nifty drifted sideways with a slight downward bias.


The daily bar chart pattern of Nifty has been consolidating sideways within a small 'symmetrical triangle' pattern after touching a 52 week high of 8728 on Aug 9, and continues to trade above its three EMAs in a bull market.

FIIs have been buying on every dip to prevent a deeper correction. The 20 day EMA has provided very good downside support during the first half of the month. Will it continue to do so? 

Nifty may be in the process of forming a 'rounding top' reversal pattern, which will be technically confirmed only if the index falls below 8500. A deeper fall may not happen due to reasons mentioned in last week's post.

Daily technical indicators are in bullish zones, but giving contradictory signals. MACD and RSI are showing downward momentum and negative divergences by touching lower bottoms, while Slow stochastic is showing upward momentum.

Nifty's TTM P/E ratio is at 23.58 - well above its long-term average. The breadth indicator NSE TRIN (not shown) has slipped inside its overbought zone despite two days of index correction. 

Downside risk remains high, but excess global liquidity and FII appetite for Indian stocks is keeping the stock market in the firm grip of bulls. 

The index has rallied for more than 5 months without a significant correction. However, expecting a correction doesn't cause one. It may happen two days later, or only after Nifty touches a new high.

But happen it will. No need to panic and sell off. Be prepared with a 'buy list' to take advantage of any sharp correction. Also keep a 'profit booking list' ready should the index rise to a new high.

Either way, you will make money.

Tuesday, August 16, 2016

Gold and Silver charts: consolidating after sharp post-BrExit rallies

Gold chart pattern


The following comments were made in the previous post on the daily bar chart pattern of Gold: "Volumes are a bit of a concern. They need to pick up for the rally to sustain. Otherwise, gold's price can see some consolidation." 

Volumes failed to pick up - except on two down days (Aug 5 & 12) - leading to a sideways consolidation that received good support from the 20 day EMA.

Note that gold's price fell short of touching a new 52 week high and appears to be forming a 'triangle' pattern, from which a break out can occur in either direction.

Daily technical indicators are in bullish zones but giving conflicting signals, which often happens during periods of consolidation. MACD is falling below its signal line. RSI has bounced up from its 50% level. Slow stochastic is falling towards its 50% level.

A drop towards the 50 day EMA is a possibility before gold's price can move higher.

On longer term weekly chart (not shown), gold’s price closed above its three weekly EMAs in long-term bull territory for the 10th week in a row. The 'golden cross' of the 50 week EMA above the 200 week EMA, which will signal a return to a long-term bull market, is awaited. Weekly technical indicators have started correcting overbought conditions.

Silver chart pattern


The following comments were made in the previous post on the daily bar chart pattern of Silver"Can silver's price face a correction? Sliding volumes during the past 4 days seem to suggest as much." 

Note that silver's price touched a lower top and dropped below its 20 day EMA, but bounced up after receiving good support from the 19.50 level only to fall below its 20 day EMA once more.

The price pattern appears to be forming a large 'symmetrical triangle' from which a break out can occur in either direction.

Daily technical indicators are looking a bit bearish. MACD is rapidly falling below its signal line in positive zone. RSI is hanging on to its 50% level. Slow stochastic is falling towards its oversold zone.

A test of support from the 50 day EMA is a possibility before silver's price can move higher.

On longer term weekly chart (not shown), silver’s price closed above its 200 week EMA in long-term bull territory for the 7th week in a row. Weekly technical indicators have started correcting overbought conditions.