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Friday, August 18, 2017

How Stock Market returns are affected by GDP growth and Inflation

"For stock market investors, annual growth in the GDP is vital. If overall economic output is declining or merely holding steady, most companies will not be able to increase their profits, which is the primary driver of stock performance.

However, too much GDP growth is also dangerous, as it will most likely come with an increase in inflation, which erodes stock market gains by making our money (and future corporate profits) less valuable."

In a recent article in investopedia.com, Ryan Barnes explains the importance of GDP and inflation for investors. Read the article here.

Wednesday, August 16, 2017

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

FIIs were net sellers of equity worth Rs 27.3 Billion on Mon. Aug 14 & Wed. Aug 16. The intervening Independence Day holiday on Aug 15 made no difference to their determination to book profits.

DIIs more than matched them. Their net buying in equities was worth Rs 29.6 Billion. Nifty recovered more than 200 points from last week's low, but is facing resistance from its 20 day EMA and the 9900 level.

Inflationary pressure is back after GST roll-out. CPI inflation rose to 2.36% in Jul '17 from the record low of 1.5% in Jun '17. WPI inflation doubled to 1.88% in Jul '17 against 0.9% in Jun '17.


The following comments were made in last week's update on the daily bar chart pattern of Nifty: "Some more correction is possible. Expect support from the 50 day EMA (at 9780), and stronger support from the 9700 level. A fall below 9700 seems unlikely as both FIIs and DIIs are buying."

The index received brief support from its 50 day EMA on Thu. Aug 10 and bounced up after getting much stronger support from the 'support-resistance' level of 9700 on Fri. Aug 11 - even though FIIs had turned sellers.

So, is the correction over? Technical indicators are hinting at some more upside.
Nifty's TTM P/E is at 25.28 - much higher than its long-term average, but that didn't prevent Nifty from moving higher during Jul '17. The breadth indicator NSE TRIN (not shown) is falling in its neutral zone (it usually moves in a direction opposite to the index).

MACD is below its signal line, but has stopped falling. RSI is in neutral zone, and showing upward momentum. Slow stochastic has emerged from its oversold zone. (The last time Slow stochastic emerged from its oversold zone was in end-Jun '17. A month-long rally had followed. Will the pattern repeat?)

The formation of a small 'diamond' pattern (which is like a head-and-shoulders pattern with a bent neckline) at the index top may prevent such a rally. The breakdown below the 'diamond' can lead to a deeper correction.

How will we know for sure? The index had corrected 452 points from its Aug 2 top of 10138. It has already retraced 48% of the fall (which is close to the 50% Fibonacci retracement level) by touching a high of 9904 today.

A 61.8% Fibonacci retracement will take Nifty to 9965. So, a convincing move above 9965 should send the bears packing, right? 

Here comes the catch about the 'diamond' pattern. The breakdown point from the 'diamond' is at about 10000 - which is likely to act as a resistance level to future up moves.

In other words, only a convincing index move above 10000 will negate the 'diamond' and bring bulls back to the fore. 

Remember that technical analysis is not a science. It only gives indications based on past investor behaviour following formation of different patterns. If FIIs decide to resume buying, the flood of liquidity can change all the analysis.

What should small investors do? Watch the 9700 and 10000 levels closely. A fall below 9700 will lead to a deeper correction. A move above 10000 should lead to new highs.

The index may just consolidate sideways between 9700 and 10000 for a while. May be till Diwali - by which time Q2 (Sep '17) results will give a better idea about the corporate health of India Inc.

Tuesday, August 15, 2017

Gold and Silver charts: bull rallies hit the pause button

Gold chart pattern


The following remarks appeared in the previous post on the daily bar chart pattern of Gold: "The pullback rally is probably on its last legs. Profit booking can begin at any time."

Gold's price rose to 1280.30 on Tue. Aug 1. Profit booking started from the next day. Gold's price dropped to its rising 20 day EMA on Tue. Aug 8.

The falling US Dollar index and nuclear war rhetoric from North Korea gave a boost to gold bulls. Gold's price bounced up to touch a slightly lower top of 1298.10 on Fri. Aug 11 - testing but failing to overcome the strong resistance level of 1300.

Daily technical indicators are in bullish zones, but looking overbought. RSI and Slow stochastic are showing negative divergences by failing to rise higher with gold's price.

The US Dollar index has subsequently risen to its highest level since Jul 27. Bears have taken the opportunity to sell. At the time of writing this post, gold futures are trading lower around 1281.

The resistance level of 1300 has been tested twice. A resistance (or support) level gets weakened by each subsequent test. Expect bears to defend the 1300 level strongly.

Any fall below the Jul 10 low of 1204 will be very bearish because it will turn the Apr, Jun and Aug '17 tops into a 'triple top' reversal pattern. So, the battle lines between bulls and bears are clearly drawn.

On longer term weekly chart (not shown), gold’s price closed above its three weekly EMAs in long-term bull territory. Weekly technical indicators are in bullish zones, but their upward momentum is reducing.

Silver chart pattern


The daily bar chart pattern of Silver appears to have formed a bullish 'inverse head and shoulders' pattern with a 'neckline' at 16.90.

Note that silver's price broke out above the 'neckline' and its 200 day EMA with good volume support - which technically validates the breakout .

However, silver's price has failed to rise higher after touching a high of 17.24 on Thu. Aug 10. Daily technical indicators are looking bullish, but Slow stochastic is showing negative divergence by touching a lower top while silver's price rose higher.

Bears are using the opportunity to sell. At the time of writing this post, silver futures are trading lower at 16.85 - below its 200 day EMA, and testing support from the 'neckline' at 16.90.

A deeper fall below its 20 day and 50 day EMAs will negate the 'inverse head and shoulders' pattern - giving back control of the chart to bears. Bulls may defend the 16.90 level to try and prevent a deeper fall.

On longer term weekly chart (not shown), silver’s price closed above its 20 week and 50 week EMAs, but below its 200 week EMA in a long-term bear marketWeekly MACD has crossed above its signal line in bearish zone. RSI is in neutral zone. Slow stochastic is rising towards its overbought zone and showing upward momentum.

Monday, August 14, 2017

S&P 500 and FTSE 100 charts (Aug 11 '17): bears strike as bulls get spooked by North Korea's war rhetoric

S&P 500 index chart pattern


The daily bar chart pattern of S&P 500 rose to a new high of 2491 on Tue. Aug 8 but closed lower than the previous day's close - forming a 'reversal day' bar that often marks an intermediate top.

War rhetoric from North Korea spooked bulls. Bears used the opportunity to attack. The index dropped sharply below its 20 day and 50 day EMAs, and easily breached the 'support zone' between 2450 and 2460.

The 'support zone' may turn into a 'resistance zone' for some time. (Regular readers were given adequate warning in last week's post - particularly the 'sell' signal given by MACD.)

Daily technical indicators are looking bearish and showing downward momentum. MACD is falling below its signal line in bullish zone. RSI has fallen into its bearish zone. Slow stochastic has entered its oversold zone.

On Fri. Aug 11, the index formed a 'doji' candlestick, which indicates indecision among bulls and bears that can potentially lead to a technical bounce towards the 'support/resistance zone'.

Some more correction or consolidation is possible. RSI and Slow stochastic are showing negative divergences by falling lower than their Jul '17 lows. 

Note that the index is trading well above its rising 200 day EMA in a bull market. Bulls may use any further dips to buy.

On longer term weekly chart (not shown), the index formed a large 'reversal week' bar (higher high, lower close), but closed above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are correcting overbought conditions and showing downward momentum, but remain in bullish zones.

FTSE 100 index chart pattern



The following comments from last week's post on the daily bar chart pattern of FTSE 100 are worth noting: "The breakout above the down trend line was not accompanied by any significant increase in volumes (not shown). That can lead to a pullback towards the down trend line before the index can rise to a new high."

The index rose to touch a lower top of 7552 on Tue. Aug 8. Bears struck the next day as war rhetoric from North Korea created concern in global stock markets. The index pulled back towards the down trend line on Wed. Aug 9 and then fell sharply down to the 'support/resistance level' of 7300.

Daily technical indicators are looking bearish and showing downward momentum. MACD has crossed below its signal line in bullish zone. RSI and Slow stochastic have fallen below their respective 50% levels.

Some more correction or consolidation around current levels is possible. Note that the index is trading above its rising 200 day EMA in a bull market. Also, all three technical indicators are showing positive divergences by touching higher bottoms than their Jul '17 lows. Expect some short covering by bears, which can lead to a technical bounce.

On longer term weekly chart (not shown), the index formed a large 'reversal week' bar (higher high, lower close), and closed below its 20 week EMA but is trading 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, August 13, 2017

Sensex, Nifty charts (Aug 11, 2017): bears use North Korea's war threats as an excuse to sell

FIIs were net buyers of equity on Tue. Aug 8 but net sellers on the other four days of the week. Their total net selling was worth Rs 26.2 Billion. DIIs were net buyers of equity on all five days - their total net buying was worth Rs 45 Billion.

However, bears ruled the roost - in global and local stock markets. Sensex lost more than 1100 points (3.4%) and Nifty lost more than 350 points (3.5%) on a weekly closing basis.

Three reasons can be cited for the sharp sell-off: (1) geopolitical tensions between US/North Korea and China/India; (2) SEBI restrictions on 331 'shell' companies; (3) disappointing Q1 (Jun '17) results.

BSE Sensex index chart pattern



The daily bar chart pattern of Sensex had already started correcting after touching a lifetime high of 32686 on Aug 2 (refer last week's post). 

Technically overbought conditions, negative divergences on three of the four technical indicators, and index valuation well above its long-term average had combined to trigger the correction.

FIIs got spooked by the heightened war rhetoric from USA and North Korea and decided to book profits in global markets.

The index has fallen below its 20 day and 50 day EMAs, but is trading above its rising 200 day EMA in a bull market. The overdue correction will improve the technical 'health' of the chart. 

Daily technical indicators are showing strong downward momentum and looking oversold. MACD is falling below its signal line and about to drop into bearish zone. ROC, RSI and Slow stochastic have entered their respective oversold zones.

The selling appears a bit overdone. A technical bounce can occur at any time. However, some more correction or consolidation can't be ruled out. 

If the index falls more, expect support from the zone between 29220 and 30040 (which happen to be the 50% and 38.2% Fibonacci retracement levels of the entire rally of 6932 points from the Dec 26 '16 low to the Aug 2 '17 top). Note that the 200 day EMA is inside the support zone between 29220-30040.

It is possible that a technical bounce from current level will face resistance from the falling 20 day or 50 day EMA, and the index will then correct towards the support zone.

So, don't be in a tearing hurry to buy. Let the correction play out.

NSE Nifty index chart pattern



The weekly bar chart pattern of Nifty corrected sharply during the week, but found support at the 9700 level (which had acted as a resistance level during Jun '17).

The index is trading above its two weekly EMAs in a bull market. So, dips can be used to add/buy.

Weekly technical indicators have started to correct overbought conditions, and are showing downward momentum in bullish zones. Some more correction or consolidation is likely. If the 9700 level gets breached, the rising 20 week EMA may provide support. 

Expect stronger support from the zone between 9015 and 9285 (which happen to be the 50% and 38.2% Fibonacci retracement levels of the entire rally of 2244 points from the low touched in the week ending Dec 30 '16 to the high touched in the week ending on Aug 4 '17). Note that the 50 week EMA is inside the support zone between 9015-9285.

Nifty's TTM P/E has come down to 24.8 - still much above its long-term average. The breadth indicator NSE TRIN (not shown) has moved up sharply inside its neutral zone, and is likely to limit index downside.

Bottomline? Along with global stock indices, Sensex and Nifty charts faced sharp corrections as FIIs got spooked by the war rhetoric of USA and North Korea. DIIs are continuing to buy, so the correction may not be too deep. This is a bull market correction, which means it is providing an opportunity to buy. Be selective.

Friday, August 11, 2017

Technical updates – Tata Chemicals and Tata Steel

The Tata Group hasn't been the quite the same after Ratan Tata decided to hang-up his boots. Cyrus Mistry ruffled feathers of the Tata Sons board, and his short tenure ended in litigation and acrimony. N. Chandrasekaran's tenure has started off more cautiously.

Low inflation and oil prices, and a stronger Rupee has helped keep India's current account deficit in control. Demonetisation and GST implementation led to a slowdown in growth. 

A slew of reforms introduced by the NDA government is likely to bring economic growth back on track from FY 2018-19. The stock market has been rallying in anticipation. The stock prices of Tata Chemicals and Tata Steel have benefitted from the rally.

Tata Chemicals


The stock price of Tata Chemicals touched a 2 yr low in Feb '16 and has been in an up trend since then. The 'golden cross' (of the 50 day EMA above the 200 day EMA) in May '16 technically confirmed a return to a bull market.

Note the consolidation within 'Rectangle 1' during Aug-Nov '16. A 'rectangle' is usually a continuation pattern - so the eventual breakout should have been upwards.

Negative divergences (marked by blue arrows) visible on all four technical indicators led to a breakdown below the 'rectangle'. However, the up trend resumed thereafter.

A breakdown below 'Rectangle 2' has now occurred - triggered by weak Q1 (Jun '17) results. Note that the stock had already corrected below its 20 day and 50 day EMAs following negative divergences visible on three of the four technical indicators. 

All four indicators are looking oversold. The up move is likely to resume after some consolidation around current levels.

Tata Steel


Tata Steel's stock was trading in a bear market below its falling 200 day EMA till
Feb '16. The 'golden cross' (of the 50 day EMA above the 200 day EMA) in Mar '16 technically confirmed a return to a bull market.

The stock price has tested support from, but not fallen below, its rising 200 day EMA since then. The company is gradually extricating itself from the leveraged mess created by its Corus acquisition back in 2008.

Daily technical indicators are looking overbought. The stock can correct some more. The dip is providing an adding opportunity. The stock may have 20-25% more upside left in the current rally.

Wednesday, August 9, 2017

Nifty chart: a midweek technical update (Aug 09 ‘17)

FIIs were net sellers of equity on Mon. & Wed., but their net buying on Tue. exceeded their net selling by Rs 5 Billion. DIIs were net buyers of equity on all three days - worth Rs 16.6 Billion.

Despite all the buying, Nifty corrected 245 points (2.4%) from its Aug 2 top of 10138 before managing to close just above the 9900 level.

After a strong bull rally in Jul '17, the index became technically overbought and was poised for a correction. SEBI's strictures on 331 'shell' companies provided just the trigger bears wanted.


The following remark was made in last week's update on the daily bar chart pattern of Nifty: "Aug '17 may well turn out to be a month of correction or consolidation." 

The index has dropped and closed below its 20 day EMA after 5 weeks, but is trading well above its rising 200 day EMA in a bull market.

Daily technical indicators are showing downward momentum after correcting overbought conditions. MACD is falling below its signal line in bullish zone. RSI and Slow stochastic have slipped into their respective bearish zones.

Nifty's TTM P/E has reduced a bit to 25.31, but remains much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is about to emerge from its overbought zone.

Some more correction is possible. Expect support from the 50 day EMA (at 9780), and stronger support from the 9700 level. A fall below 9700 seems unlikely as both FIIs and DIIs are buying.

Remain cautious. No need to jump into the market yet. Keep a watch on good mid-cap and small-cap stocks, which tend to correct more than the index during corrections. Some value-buys may become available.