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Monday, May 31, 2010

Dow Jones (DJIA) Index Chart Pattern - May 28, '10

Dow_May2810

The Dow Jones (DJIA) index chart pattern lost nearly 8% in the month of May '10 - its worst performance in May since 1962! From the Apr 26 '10 intra-day peak of 11309 to the May 25 '10 intra-day low of 9756, the Dow has lost more than 1500 points (13.7%) in one month.

Does that put the Dow in a bear market? Not yet. A 20% correction technically qualifies as a bear market. At Friday's close of 10137, the Dow is more than a 1000 points away. Another factor favouring the bulls is that the close of 9974 on May 26 '10 was higher than the Feb 8 '10 close of 9908. So much for the good news.

Now the bad news. The May 25 '10 intra-day low of 9756 went below the May 6 '10 'fat finger' crash low of 9787 (which was lower than the Feb 5 '10 intra-day low of 9822). That is the lowest point that the Dow has reached since moving up after touching 9647 on Nov 2 '09 almost 7 months back.

Is the correction over, or will the Dow fall more, and into a bear market? That is a million dollar question. Let us consider the possibilities.

The pullback in the earlier part of the month faced resistance from the falling 50 day and 20 day EMAs and dropped steeply below the 200 day EMA. Subsequent efforts by the bulls at pullbacks have been resisted by the 200 day EMA.

The 20 day EMA is well below the 50 day EMA, and both moving averages are dropping down. A bear market will get confirmed when first the 20 day EMA and then the 50 day EMA cross below the 200 day EMA.

The technical indicators are looking less bearish. The slow stochastic and the MFI bounced off their oversold zones. The MACD has started to rise in negative territory but is still below the signal line. The RSI has moved up towards the 50% level.

Will the bulls recharge their batteries during the long Memorial Day holiday weekend and launch another pullback effort next week? Possibly, but the bears seem to be pressing sales at every rise in the Dow. In case the Dow manages to move above the 200 day EMA, resistance can be expected from the falling 20 day and 50 day EMAs.

The economic news from Europe is still grim, with Fitch downgrading Spain's sovereign debt rating. Spain's GDP is almost 5 times greater than Greece's or Portugal's. Any further adverse news could cause another round of global selling.

The PIIGS are caught between a rock and a hard place. Their profligacy in borrowing has caused the current problems. Any austerity measures adopted to improve their finances would lead to slower economic growth - which the markets will not like.

The US economy is like the proverbial monkey trying to clamber up a greased pole. Government stimulus has created new jobs. But continued lay-offs in the private sector has reduced the total additions. Consumer confidence is increasing, but where is the money to buy? No wonder unsold homes are increasing and home prices are decreasing.

Even if a double-dip recession appears remote, the economy will require a much longer period to get back on track. The 14 months long bull rally was overdone, and it is time to pay the piper.

Bottomline? The chart pattern of the Dow Jones (DJIA) index shows that all attempts by the bulls at pullbacks are being used as selling opportunities by the bears - a sign of weakness. Stay on the sidelines, but start preparing your 'buy' lists for Mr Market's forthcoming summer sale.

Sunday, May 30, 2010

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - May 28, '10

FTSE 100 index chart

FTSE_May2810

The FTSE 100 index chart pattern ended an eventful week by closing 125 points higher on a weekly basis, keeping the flickering bullish hopes alive. But what happened during the week should be a cause for concern.

The index fell to a new low of 4898 on an intra-day basis on Tuesday, and closed the day at 4941 - its first close below the 5000 level in 8 months. The close below the Feb '10 low of 5033 was not technically convincing. Note that the 3% lee-way level below 5033 is 4882.

That allowed the bulls to mount a swift buying attack on decent volumes that took the index up to the level of the merged 20 day and 200 day EMAs, as well as to the down trend line joining the lower tops. Expectedly, there was stiff resistance and the FTSE 100 closed the week at 5188.

The technical indicators have improved. All four are moving up. The slow stochastic and MFI are a bit below their 50% levels. The RSI has managed to reach the 50% level. The MACD has started to rise in the negative zone but is still below the signal line.

With the Greece problem temporarily resolved, the bulls were beginning to regain confidence. The news from Spain poured cold water on their new found enthusiasm. The odds are favouring a resumption of the down move - may be after a period of consolidation.

DAX index chart

DAX_May2810

The DAX index chart pattern formed the expected bearish 'lower top - lower bottom' pattern, dropping to 5608 on Tuesday and closed below the 200 day EMA at 5670. The bulls mounted a counter attack that took the index above the 200 day EMA and up to the flattened 20 day EMA.

More importantly, the Feb '10 low of 5433 wasn't breached. The falling 50 day EMA at 6000 and the May '10 top of 6277 will be the barriers to up moves.

The technical indicators are beginning to indicate short-term bullishness. The MACD is rising in negative territory but is still below the signal line. The RSI has edged above the 50% level. The MFI has moved up to the 50% level. The slow stochastic has also started to move up but is below the 50% level.

CAC 40 index chart

CAC_May2810

The CAC 40 chart pattern is now in a technically confirmed bear market because the 50 day EMA has moved below the 200 day EMA and the index is below all three EMAs.

The fight back by the bulls, after making a new low of 3288 on Tuesday, could not take the index up to the falling 20 day EMA. The index made an intra-day high of 3553 on Friday - just 7 points higher than the Feb '10 low of 3546 - before closing about 80 points higher on a weekly basis at 3515.

The slow stochastic and MFI are both moving up, but remain below their 50% levels. The RSI has moved up to the 50% level. The MACD is negative, but has risen to touch the signal line.

Bottomline? The chart pattern of the European indices moved up last week - probably due to short covering plus some investment buying. Bears are likely to use such up moves to sell. Investors should remain patient and on the sidelines.

Saturday, May 29, 2010

BSE Sensex Index Chart Pattern - May 28, '10

In last Saturday's analysis of the BSE Sensex index chart pattern, I had made some observations that may need repetition - specially for those investors who are left perplexed by the sudden upward spurt:

'Unless the index closes below 15900 it will not be considered a trend-deciding break technically.'

'First comes the level of 16000 - which is a 20% correction of the rise from 8000 (Mar '09) to 18000 (Apr '10). Note that it also corresponds with the level of the 50 week EMA, and multiple tops made in Aug '09. Expect the bulls to put up some sort of a fight there.'

Let us take a look at the closing chart pattern of the BSE Sensex index which has some support-resistance levels marked:

SENSEX_May2810

On Tuesday, May 25 '10, the Sensex made an intra-day low of 15960, but managed to close just above the 16000 level at 16022. Technically, the bulls were able to prevent a trend reversal since the index neither closed below 15900 nor decisively below the 50 week EMA.

I should have mentioned another important significance of the 16000 level. It happens to be the 61.8% Fibonacci retracement level of the entire bear market fall from 21200 to 7700. (A cross above the 61.8% Fibonacci retracement level is the final confirmation of a trend change from a bear market to a bull market.)

The strong fight back by the bulls was, therefore, not unexpected. The Sensex effortlessly pierced the 200 day EMA as well as the longer-term support-resistance level of 16700 from below. Bears failed to defend those levels vigorously. That was unexpected.

A combination of short-covering and buying by DIIs - who were net buyers all week - helped the bull cause. The FIIs were net sellers through the week, except on Friday. The index is at the level of the 20 day EMA (not shown in the chart above).

The 50 day MA and the down trend line that formed the bearish descending triangle pattern are both at around 17300. The zone between 17300-17400 should provide stronger resistance to a further up move. In case resistance from 17400 is overcome, a test of the previous high at 18000 is quite possible.

The action in global indices will have an effect on the Sensex chart pattern in the coming week. The European indices ended flat on Friday. The Dow lost more than 120 points and closed lower on a weekly basis. The so-so volumes (Tuesday's down-day volumes were higher than the volumes on the up days that followed) are a sign that the bullishness in the Sensex may be ending soon.

The technical indicators are giving somewhat mixed signals. The slow stochastic has moved above the 50% level. It had done so earlier in the month and in April, but changed directions quickly. The MACD has moved up to touch the signal line, but remains in negative territory. The RSI faced resistance at its 50% level.

Bottomline? The chart pattern of the BSE Sensex index has bounced up sharply from a long-term support level. Don't expect that the Eurozone problems and the associated uncertainty have been priced in already. The index may just consolidate in the broader band between 16000 and 17400 for a while. Be stock specific and buy only if the valuations are compelling.

Friday, May 28, 2010

Stock Index Chart Patterns - Shanghai Composite, Taiwan TSEC, Hang Seng - May 28, '10

Shanghai Composite index chart

ShanghaiComp_May2810

The 3 months closing chart pattern of the Shanghai Composite index shows a brave fight back by the bulls. The index closed 73 points higher on a weekly basis at 2656 - just above the Sept '09 low of 2640. The down trend line connecting the lower tops of April and May '10 was pierced from below. That is good news for the bulls. Further up side in the near-term - to the falling 50 day EMA or even the 200 day EMA - can be expected.

Now the bad news. All three EMAs are falling with the index below them. Today's intra-day high of 2686 faced resistance from the 20 day EMA. So the Shanghai Composite remains in a bear market.

The technical indicators have strengthened since last week. The slow stochastic has emerged from the oversold zone but is below the 50% level. The MACD is deep in negative territory but has moved above the signal line. The ROC has edged into the positive zone. The RSI is below the 50% level but moving up.

Any upward move may face resistance in the 2800-3000 band and is likely to be used by the bears to sell.

Hang Seng index chart

HangSeng_May2810

A 335 points up move today pierced the down trend line and took the Hang Seng to a 220 points higher weekly close at 19767. Just like in the Shanghai Composite index, the falling 20 day EMA put paid to further bullish hopes by resisting the up move.

Despite the strong effort by the bulls to regain lost glory, the 50 day EMA moved below the 200 day EMA providing the final confirmation of the bear market. All three EMAs are now moving down with the index below them.

The technical indicators are hinting at near-term strength. The slow stochastic is about to emerge from the oversold zone. The MACD has stopped falling though it remains below the signal line. The RSI is below the 50% level but rising. Only the ROC is looking weak.

Taiwan (TSEC) index chart

TSEC_May2810

The Taiwan TSEC index chart is also in a bear market. The double-top bearish pattern in April '10 led to a sharp fall. The recent low of 7032 (on Tuesday, May 25 '10) dropped below the Feb '10 low of 7173 - forming a longer-term bearish 'lower top - lower bottom' pattern.

Today's up move faced resistance from the down trend line connecting the Apr and May lower tops. The 20 day EMA has fallen below the 200 day EMA and the 50 day EMA may do so soon.

The technical indicators show mild strength. The slow stochastic is about to move out of the oversold zone. The MACD has stopped falling. The ROC is in negative territory but trying to rise. The RSI bounced off the oversold zone but is below the 50% level.

Bottomline? The chart patterns of the Chinese indices are showing near-term strength but longer-term weakness. Any rise to the falling 20 day and 50 day EMAs can be used for selling by bears. Investors can wait for some signs of stability before entering.

Thursday, May 27, 2010

The 7 Steps to Success in Stock Market Investments

Before readers get all excited, I have a disclaimer. The 7 Steps to Success is a sure-fire, fail-safe method for making money in the stock market over the long-term. What it isn't is a short-cut to success. There aren't any short-cuts to success.

To achieve success in any endeavour - be it in the field of education, or sports, or any profession - requires discipline, an ability to concentrate on the important issues, diligence, hard work, persistence and patience.

The stock market is no exception - contrary to what most investors may think before they jump in feet first and lose their shirts. I have been there and done that, and learned the hard way.

Without much further ado, here are the 7 Steps to Success in Stock Market investments:-

Step 1: Develop a reading habit. Business magazines, pink papers and books on investments. Not every one likes to read - particularly if the language is other than one's mother tongue. For success in the stock market, you don't need to know everything. But you need to know where to go to find the answers. Before investing a single Rupee, read 'One Up on Wall Street' by Peter Lynch.

Step 2: Learn how to read an Annual Report. The most important starting point should be the Cash Flow Statement, followed by the Balance Sheet and the Notes on Accounts. The real information is usually hidden there. Most investors take a cursory glance at the Director's Report, may be the Management Discussion and Analysis, and the Profit and Loss statement to check the dividend amount.

Step 3: Refresh your knowledge about grade school arithmetic. If percentages, ratios, graphs, the concept of compound interest and pages full of numbers scare you witless, you won't be much good at stock investing. Since you learned most of the stuff in school, you can and should be able to re-learn the stuff.

Step 4: Make an honest assessment of your financial situation and risk tolerance. Every investor has different requirements. If you are already bent over with the weight of EMIs and credit card debt, the worst thing you can do is try to make some quick money in the stock market. You will get into a deeper hole. Put the 'can't afford to lose' portion of your savings in fixed deposits, PPF, NSC, Post Office MIS schemes.

Step 5: Prepare an asset allocation plan, and stick to it. Within the equity portion of the allocation, maintain 75-90% in a core portfolio of fundamentally strong large-cap stocks/funds. The balance 10-25% can be in a satellite portfolio of mid and small-cap stocks/funds. (If you don't know how to allocate your assets, you probably haven't read my eBook. It is FREE and you can get it by sending me an email request.)

Step 6: Once you have built a good portfolio, monitor it once a week at most. Just as a sapling won't grow faster into a tree if you stare at it every day, neither will your portfolio. Enterprise and activity may be a requirement in other fields, but they are a detriment to investment success. Learn how to be actively passive - if you can pardon the oxymoron.

Step 7: Warren Buffett revealed an investment success secret - 'Be greedy when others are fearful, and fearful when others are greedy'. He is an acknowledged master, and I am his unknown follower. But here is another investment success secret - 'Cut your losses quickly and let your profits grow slowly'. You can do that by learning to set a stop-loss and a trailing stop-loss respectively. (The concepts are explained in my FREE eBook.)

Wednesday, May 26, 2010

Stock Chart Pattern - Marico Ltd (An Update)

When I analysed the stock chart pattern of Marico Ltd in end-July '09, it had risen from a low of 47 to a high of 92 and was showing signs of being overbought. Brokerages were giving 'buy' calls but I expected a correction.

A growing, fundamentally strong FMCG company like Marico Ltd is just the kind of company that small investors should consider investing in - particularly during uncertain times. But one should always exercise caution near a chart top.

It is time to have a re-look at the one year bar chart pattern of Marico Ltd:

Marico_May2610 

The stock corrected from 92 down to 78, where it received support from the rising 50 day MA. Now 14 points don't seem like much of a correction, does it? But for a Re 1/- face value stock that isn't a measly amount. In fact, it was a 31% retracement of the rise from the bear market low of 47 to 92, and a 15% correction from the high of 92.

The technical health of the stock got restored, and it rose steadily for the next 3 months to hit a new high of 113 in Nov '09. Thereafter, the stock got into a sideways consolidation phase that lasted almost 5 months.

A second bottom at 96 in late Feb '10 saw the stock moving up smartly, ending with a sharp upward breakout from the consolidation zone. The stock touched a high of 122 on Apr 5 '10 - but on low volumes. All three technical indicators made lower tops - indicating negative divergences.

The bears took the opportunity to go on the offensive. The stock hit a low of 105 earlier this month, then rallied to 118 before dropping to 100 in quick time. A bearish 'lower top - lower bottom' pattern has formed.

The stock is trading at an EPS of 28, which is higher than ITC's EPS of 25. Support levels at 96, 92, 87 and 78 have been marked on the chart. The 92-96 zone should provide strong support. The band between 78 and 87 could be a better entry opportunity.

The MACD is getting deeper into negative territory. The slow stochastic has entered the oversold zone. The RSI is showing positive divergence, by making a higher bottom as the stock made a lower one.

Bottomline? The stock chart pattern of Marico Ltd is hinting at more weakness. Prices neither rise nor fall in one go. So a bit of up move and consolidation can be expected. Further down side is indicated by the down day volume spikes, which are a sign of distribution.

Tuesday, May 25, 2010

Some questions and answers about Standard Chartered's IDR issue - plus a few comments on the Sensex

What is an IDR?

Indian Depository Receipt (IDR) is a security instrument. The underlying security is the equity shares of an overseas company. IDRs are denominated in Indian Rupees and issued in dematerialised form. IDRs will be listed and traded on the Indian Stock market just like equity shares of Indian companies.

What is the necessity of an IDR?

Overseas companies are not allowed to list their equity shares in India as per current rules. IDR is a method by which Indian investors can invest in an overseas company's equity shares in Indian Rupees. It helps investors to get a share of the global businesses of overseas companies.

So far, American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) were issued by Indian companies like Infosys, Wipro, ICICI Bank to overseas investors. ADRs and GDRs are listed in overseas stock exchanges in their respective currencies.

Can't Indian investors invest directly in global stock exchanges?

They certainly can, up to a limit of US $200,000. Investors will need to open overseas bank accounts, dematerialised accounts, comply with overseas rules and regulations, and contend with foreign exchange fluctuations. IDRs allow an investment in India in Rupees with the limit that an individual IDR holder can't hold more than 5% of the IDRs issued.

What are the entities involved in an IDR issue?

Issuer company (Standard Chartered) - incorporated and listed overseas.

Domestic Depository, an Indian entity appointed by the Issuer Company and registered with SEBI, will issue IDRs to investors.

Overseas Custodian, an overseas entity appointed by the Domestic Depository, will hold equity shares issued to it by the Issuer Company on behalf of the Domestic Depository.

Registrar and Transfer Agent, an Indian entity provides services to IDR holders, the Issuer Company and the Domestic Depository. They will keep a record of the IDRs and handle investor grievances.

What will be the benefits for IDR holders?

They will enjoy the same benefits on a proportionate basis as share holders of the Issuer Company overseas, including voting, entitlement to dividends, rights and bonus issues, subdivision and consolidation of the underlying shares - subject to the laws in India.

Should small investors apply for this IDR issue?

It depends on each investor. The major plus point is the opportunity to invest in a large, well-managed, profitable foreign bank that makes most of its profits from Asia, Africa and the Middle-East with no exposure to sovereign debt. The offer is at a valuation that appears reasonably attractive as compared to Indian private sector banks.

There are two negatives. IDRs will not attract Securities Transaction Tax (STT) and therefore, will be subject to both short and long-term capital gains tax. Dividends received will also be taxable.

(Note: Ten IDRs will represent one share of the bank. A 5% discount to the discovered price will be offered to retail investors. The information source is Standard Chartered's pamphlet on IDR. If you have more questions, feel free to ask.)

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A few comments on today's Sensex movements:

Both the 200 day EMA and the 50 week EMA were broken on a closing basis. These moving averages are used in technical analysis as long-term trend deciders. Intra-day, the index moved below the 16000 level but short-covering ensured a close above 16000. A close below 15900 will be the proverbial last nail in the coffin.

It is possible that we may see a bounce upwards from the current level. At least a sideways consolidation between 16000 and 16700 can be expected before bulls capitulate.

But the velocity of the down move on increasing volumes, and the global sell-off may shatter any bullish hopes. Watch out for the next lower levels marked on the one year Sensex chart last Saturday.

A close below 15300 will open the door to a much bigger correction. With most global indices slipping into bear markets, the Sensex may be forced to follow suit in spite of the improving economic conditions.

Monday, May 24, 2010

Stock Index Chart Patterns - Dow Jones (DJIA) and Bovespa (Brazil), May 21, '10

Dow Jones (DJIA) index chart

Dow_May2110

In last week's analysis of the Dow Jones (DJIA) index chart pattern, I had observed a 'reversal day' followed by a 'distribution day', and concluded that the bulls didn't have much hope (of a recovery) in the near term.

An effort at a pullback on Tuesday, Mar 18 '10 was nipped in the bud by the falling 20 day and 50 day EMA, which had merged briefly. The bears attacked with renewed vigour on increasing volumes on Wednesday and Thursday, and pushed the Dow below the 200 day EMA.

Friday's intra-day low of 9861 was less than 100 points above the May 6 '10 ('fat finger' crash day) low of 9787. A sharp pullback on reduced volumes stopped short of the 200 day EMA but ensured that the Dow remained above the psychological 10000 level. Note that the 20 day EMA has dropped below the 50 day EMA but it is still 400 points above the 200 day EMA.

Bulls may try to stem the rot by grasping at these straws. The technical indicators are signalling that any rallies may be short-lived and used as a selling opportunity. The slow stochastic and RSI are both below their 50% levels and moving down. The MACD is below the signal line and falling quickly in negative territory. The MFI had a small bounce off the oversold zone.

The bulls are getting weaker with each passing day after a heady 13 months long rally. Indicators of economic activity like Copper prices, Baltic Dry Shipping index, Dow Jones Transportation index are all hovering near or below their 200 day Moving Averages. That means the economic recovery may be a chimera.

Bovespa (Brazil) index chart

Bovespa_May2110

The Brazil Bovespa index chart pattern was a picture of bullishness back in Jan '10. The index had just made a new high of 71068, even as the MACD, RSI and MFI were all indicating negative divergence.

The index corrected by more than 9700 points (13.5%), fell to a low of 61341 in Feb '10, received support near the 200 day EMA and started a fresh rally that peaked higher at 71989 on Apr 9 '10.

Note that both the RSI and MFI made lower tops as the index rose to a new high. This time the bears attacked with much more determination. The intra-day low of Feb '10 was broken on May 6 '10, when the Bovespa fell in sympathy with the Dow - down to 60774.

Last week's high volume bear onslaught kept the index below the 200 day EMA throughout the week, with Thursday's low of 57634 a good 5% below the May 6 '10 low. Friday's sharp 2000 points pullback took the Bovespa above the psychological 60000 level - but short of the May 6 '10 low of 60774.

The technical indicators are quite bearish, in spite of Friday's big pullback. The 20 day EMA has slipped below the 200 day EMA. The slow stochastic is attempting to emerge out of the oversold zone. The MACD is sinking deeper into negative territory. The RSI is at the edge of its oversold zone. The MFI has bounced off the oversold zone.

The bulls look like a prize fighter who has taken too many punches - all glassy-eyed and wobbly-kneed - awaiting the knock-out blow.

Bottomline? The chart patterns of the Dow and Bovespa indices have entered bear markets - much like indices around the globe. Remember that money is made in bear markets by selling on rises and buying back on dips. Long-term investors can hang on to their good portfolio stocks and accumulate more on sharp falls. This is not the time for bottom-fishing.

Sunday, May 23, 2010

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - May 21, '10

FTSE 100 index chart

FTSE_May2110

In last week's analysis of the FTSE 100 index chart pattern, I had mentioned the possibility of the index breaching the support of the 200 day EMA once again. After closing exactly on the long-term moving average on Monday, the FTSE 100 managed a close marginally higher on Tuesday.

The bulls wilted in the face of an immediate bear attack. Higher volume selling first breached the 200 day EMA on Wednesday, and even the psychological 5000 level was broken intra-day on Friday. The index closed above the Feb '10 low of 5033, but lost 200 points on a weekly basis.

With the 20 day EMA falling quickly and resisting any pullback efforts, the Feb '10 low may not be able to provide strong support. A convincing close below it is necessary to extinguish the dwindling flicker of bullish hope.

The technical indicators are all looking bearish. The slow stochastic has dropped back into the oversold zone. The MACD is below the signal line and resumed its dive into deeper negative territory. The RSI and MFI are both below their 50% levels and heading downwards.

DAX index chart

DAX_May2110

The German DAX index chart is a good example of what happens when the authorities interfere with market dynamics because it seems to be good politics. The impressive recovery in the chart came to a shuddering halt as investors voted with their feet against the ban on naked short-selling.

The DAX made a lower top, quickly fell to the 200 day EMA and came within handshaking distance of breaching the low of 5655 made on May 7 '10. That would have formed a bearish 'lower top - lower bottom' pattern. Will it happen next week?

The technical indicators are suggesting as much. The MACD has gone beneath the signal line in negative territory. The RSI and MFI have faced resistance at the 50% level and are dropping down. The slow stochastic has also moved below the 50% level.

CAC 40 index chart

CAC_May2110

In last week's analysis of the CAC 40 index chart pattern, I had observed as follows:

'The 20 day EMA is about to drop below the 200 day EMA. The longer-term moving average has started to turn down. Both are very bearish indications.'

Even the 50 day EMA seems ready to drop below the 200 day EMA, which will complete the technical requirement for a bear market - in case any one had any doubts! Friday's intra-day low of 3342 breached the May 7 '10 intra-day low of 3350.

The MACD is below the signal line and resumed its down trend. The MFI and slow stochastic are on the verge of entering their oversold zones. The RSI is below the 50% level and moving down. Looks like the bulls have thrown in the towel.

Bottomline? The chart patterns of the European indices are showing the effects of the sovereign debt problems that have been swept under the carpet but not resolved. The stock market dislikes uncertainty. Unless the economic fundamentals show signs of improving, this could be a long summer of discontent. Stay in cash. Time for cherry-picking may not be too far away.

Saturday, May 22, 2010

BSE Sensex Index Chart Pattern - May 21, '10

A late afternoon surge upwards on Friday, which was a combination of short covering before the weekend and buying by DIIs, saved the BSE Sensex index chart pattern from total collapse, at least technically.

To find out why, we will first take a look at the 3 years weekly bar chart pattern of the BSE Sensex index:

SENSEX_May2110_3yrs

Note that the 50 week EMA (which I had discussed last Tuesday) has supported the Sensex fall. Some analysts like to look at the 200 day MA as a trend decider. That was broken intra-day on Monday followed by a close below it on the last 3 days of the week.

I prefer to look at the 200 day EMA, which gives a little more weightage to the more recent index levels. That was broken on intra-day basis on Friday though the index hasn't yet closed below it. Unless the index closes below 15900 (including the 3% whipsaw lee-way) it will not be considered a trend-deciding break technically.

The FIIs continue to sell in a big way - as they seem to be doing in all emerging markets. The recently concluded telecom 3G auction has brought in much more money than the Government expected. That should ease the fiscal deficit situation to a considerable extent.

The DIIs continue to buy, which is stemming a sharper fall. More and more PSUs are lining up to hit the market with FPOs and IPOs. The latest name being bandied about is Shipping Corporation. The question is: how long will the DII buying be able to stop the Sensex from slipping into a bear market?

Let us now look at the 1 year bar chart pattern of the BSE Sensex index, where I've once again marked some important support levels:

SENSEX_May2110_1yr

First comes the level of 16000 - which is a 20% correction of the rise from 8000 (Mar '09) to 18000 (Apr '10). Note that it also corresponds with the level of the 50 week EMA, and multiple tops made in Aug '09. Expect the bulls to put up some sort of a fight there.

In case the bears overwhelm them at 16000, the next support level is at 15650 - the previous low touched in Feb '10. There were tops made in Jun '09 at that level as well, and previous tops tend to provide support.

Below that is 15330 - where the Sensex made a low in Oct '09. That is more than a 1000 points away, so the bulls have a bit of breathing space. Observant readers may notice a small gap area created in Aug '09, which has not yet been filled and can act as a support.

Of course, the real gap of any consequence is much further down at 13200. If the higher levels marked get broken, then the Sensex may just decide to go down to fill the bigger gap. That has a low-probability as of now.

Even if the Sensex drops down that far, it is unlikely to do so in one go. There will be periods of buying - but up moves will face resistance from the downtrend line marked on the chart, and the falling 50 day MA.

The technical indicators are looking bearish. The MACD is below the signal line and sliding down in negative territory. The slow stochastic has re-entered the oversold zone. The RSI is bouncing around at the edge of the oversold zone.

Bottomline? The BSE Sensex index chart pattern is caught in the midst of a global correction in stock markets, in spite of improving fundamentals. Don't get too bogged down with Sensex levels. This is the time to start preparing your buy lists. There are always opportunities in individual stocks.

Friday, May 21, 2010

Stock Index Chart Patterns - Shanghai Composite, Jakarta Composite, Hang Seng - May 21, '10

Shanghai Composite index chart

ShanghaiComp_May2110

Last week, I had mentioned that the Shanghai Composite index chart pattern was trying to stay above the last level of support - the Sep '09 low of 2640 - which it managed to do on a closing basis through the week. But the technical indicators were not holding out much hope for the bulls.

The 2640 level was broken on the very first day of the week, and the index closed lower at 2560. As is usual in such cases, the support level immediately turned into a resistance level. The Shanghai Composite failed to move above the 2640 level even on an intra-day basis during the rest of the week.

The technical indicators continue to be very bearish, as the Shanghai Composite continues to fall in a downward channel well below the falling 20 day EMA. All three EMAs are now falling together with the index below them - a typical bear market scenario.

The slow stochastic has been inside the oversold zone for more than 3 weeks, and is showing no inclination to venture out. The MACD is below the signal line and continues to fall in negative territory. The ROC is well inside negative territory and moving sideways. The RSI has just inched above the oversold zone, but not really going anywhere.

If the bulls don't fight back soon, the Shanghai Composite may test Oct '08 bear market lows - and drag the rest of the global indices down with it.

Hang Seng index chart

HangSeng_May2110

The Hang Seng index chart pattern is looking slightly better off than the Shanghai Composite, but looks can be deceiving. Thursday's intra-day low of 19276 was nearly 150 points lower than the previous low of 19423 touched more than 3 months back.

The index closed the week at 19546, but the breach of the previous low should set alarm bells ringing for the bulls. Now we have a longer-term 'lower top - lower bottom' bearish pattern on the chart. The psychological 20000 level, which provided good support to the Hang Seng in the previous week, has turned into a resistance level.

The falling 50 day EMA should go below the 200 day EMA next week. That will technically signal the beginning of the bear market. Or, should I say, the revival of the bear market.

The slow stochastic is in the oversold zone. The MACD is below the signal line and slipping deeper into the depths. The ROC is well inside negative territory. The RSI is below the 50% level but has not yet entered the oversold zone.

Jakarta Composite index chart

Jakarta_May2110

Five weeks ago, the Jakarta Composite index chart pattern was resembling a fighter jet that had just taken off, rapidly climbing with its nose tilted up. But the ROC and RSI were showing negative divergences that led me to state: 'The negative divergence is likely to take its toll soon.'

The index dipped a bit to take support from the rising 20 day EMA on Apr 19 '10 and then soared even higher to hit the 2996 mark on May 4 '10. That is when its engines stalled. A sharp 3 day correction took it well below the 50 day EMA.

The expected pullback effort by the bulls faced strong resistance from the falling 20 day EMA. The fall resumed this week and started intensifying on rising volumes - a bad omen for the bulls.

The index closed the week at 2623 - not very far above the still rising 200 day EMA. A bearish 'lower top - lower bottom' pattern has formed on the chart. The technical indicators are hinting at a break below the 200 day EMA, which would be the first sign of a bear market.

The slow stochastic is about to enter the oversold zone. The MACD has dipped into negative territory and is below the signal line. The ROC is falling in the negative zone. The RSI is below the 50% level and moving down.

Bottomline? The chart patterns of the Asian indices show that the bulls are on the mat and the count has reached 8. The downward momentum is increasing. The time is not yet ripe for bottom fishing. Conserve cash, or may be, buy some gold.

Thursday, May 20, 2010

The Sensex has fallen 1500 points - is it time to buy?

The Sensex had hit its recent peak of 18048 on Apr 7 '10. It has since lost more than 1500 points in 6 weeks. That may sound like a big drop, but in percentage terms it is a 15% retracement of its 13 months long rise from 8000 to 18000.

What happened during the two previous corrections in Oct-Nov '09 and Jan-Feb '10? Let us look at them one by one.

The Sensex hit a high of 17493 on Oct 17 '09, followed by a sharp correction down to 15331 on Nov 3 '09. A drop of 2162 points in just over 2 weeks, that retraced 23% of the rise from 8000 to 17493.

It was a sharp fall, and the recovery was quick - which is typical chart pattern behaviour in bull markets. The next higher top of 17790 was made on Jan 6 '10 - within 3 months of the earlier top.

This time, the correction down to 15652 on Feb 8 '10 lasted more than a month. The drop of 2138 points retraced 22% of the rise from 8000 to 17790. The rise from the low of 15652 to the peak of 18048 took exactly 3 months.

A correction of around 20% is considered quite normal in a bull market. It helps to rectify overbought positions and brings in new money into the stock market at more attractive valuations.

If we try to seek a pattern - it is a human tendency to seek patterns where none may exist! - then we can conclude that this time around, the Sensex may also fall at least 2100 points and correct about 22%.

That means, we are looking at a probable downside target of 15800-15900. In last Tuesday's post, I had indicated that the index may receive good support from the 50 week EMA at 16000.

Since technical analysis is not a science, we work with approximate levels and not exact levels. We have a cluster of likely support levels here - 15652, (or let us say, 15700) which was the previous low; 15800-15900 as per our recent correction pattern; and 16000, where the 50 week EMA is.

The Sensex is still a good 500-800 points away, so while you may be ready to jump in, just a little patience may give you the chance to enter at lower levels. If you are one of those investors who missed the earlier rally from Mar '09 and was feeling left out, any level close to 16000 can be used to enter good stocks (preferably large cap).

The ongoing correction has lasted 6 weeks already and may continue for some more time. There is every possibility that we may see even lower levels, as mentioned in this post.

How will you know? Track the 50 day EMA and see if it is coming close to moving below the 200 day EMA. Breaking below the previous lows at 15652 and 15331 would be other indications.

At times like these, Mr Market plays a game of testing the investor's patience and will power. There is an old saying: the early bird catches the worm. The corollary to that proverb is: the early worm gets caught!

Wednesday, May 19, 2010

Stock Chart Pattern - Bharat Bijlee (An Update)

My previous look at the stock chart pattern of Bharat Bijlee was an example of what can happen to fundamentally strong small-cap stocks during a bear market.

The stock got hammered down from a high of 3950 (Jan '08) to a low of 301 (Mar '09) - a huge fall of 92%. Small or mid-cap stocks have a tough time recovering from such massive falls. The stock rose sharply by almost 240% to 1015 in Jun '09, but managed to retrace less than 20% of its fall.

Thereafter, the stock went into a correction mode and had reached 785 after dropping to a low of 680 (a 47% retracement of the rise from the bottom of 301 - close to the 50% Fibonacci retracement level).

I had expected the correction to last a while longer based on the technical indicators and had suggested an entry for patient investors with a possible upward target of 1500 in one year. (The reason for that target? It is a 33% retracement of the bear market fall. Goes to show that arithmetic alone does not ensure stock market success!)

The stock moved down to 733 in Aug '09, forming a bullish ascending triangle pattern. An upward break out on decent volumes seemed to get the up move back on track.

Let us take a look at the 1 year bar chart pattern of Bharat Bijlee to check how the stock has fared in the past 10 months and what is the likelihood of its hitting the price target any time soon:

Bharat Bijlee_May1910

After reaching 1090 in Oct '09, the stock fell back to the support level at 880 and moved sideways for 2 months. A huge volume spurt (a block deal?) in early Jan '10 pushed the stock up to its high of 1170 - which retraced about 24% of its entire bear market fall.

Looks like end-of-story for the bull rally in the stock, as it has started to make lower tops with a flat bottom at 880. That has formed a bearish descending triangle pattern, from which the stock is expected to break downward to at least the 700 level, if not more.

The technical indicators are not holding out much hope for the bulls. The MACD is below the signal line and about to enter negative territory. The RSI is hesitating at the edge of the oversold zone, waiting for a push to go in. The slow stochastic is already inside the oversold zone.

Bottomline? The stock chart pattern of Bharat Bijlee shows that the bulls are on the mat and about to be counted out. Existing holders should get out now, or at best, hold with a strict stop-loss at 880. New entrants should avoid the stock.

Tuesday, May 18, 2010

More support zones for the BSE Sensex chart

In last Saturday's post, I had marked the 16700 and 17400 levels on the daily chart of the BSE Sensex. That is the band within which the index may spend some time before deciding the next direction, which is likely to be down.

The 16700 level has been breached twice already on intra-day basis, but the Sensex is yet to close below it. The bulls are defending the level well so far.

On the weekly Sensex chart, I had marked longer-term support levels at 15700, and the gap area between 13200 and 12300. Does that mean that if 15700 is breached that the Sensex will fall by 2500 points down to 13200?

The answer is a definite 'may be'. Some more longer-term support-resistance levels were marked on the Sensex chart in a post on May 6 '10. Investors would do well to make a note of those index levels as possible buy/sell areas.

But there are some other important levels also - particularly the 50 week EMA (roughly corresponding to the 200 day EMA on a daily chart) drawn on the BSE Sensex weekly chart below:

SENSEX_18m_weekly_May1810

Why is the 50 week EMA important? It is used in technical analysis as a trend decider - above it is a bull market and below it is a bear market. Note that the 50 week EMA is still rising with the index above it and is currently at the 16000 level. It should provide very good support and bears will need to work hard before the Sensex can fall below to the 15700 level.

Some readers have asked how likely is it that the Sensex will fall to some of the other levels mentioned. The answer lies in previous bull market corrections - and we haven't had a proper bull market correction since the rally began.

The rally started from the 8000 level in Mar '09 and hit its high at 18048 in Apr '10. A total rise of 10000 points. A typical bull market correction corrects about 20% of the entire rise. That gives a 2000 points drop from the peak - which coincides with the 50 week EMA at 16000! That means the 16000 level may get tested soon but may not be breached that easily.

What about lower levels - how likely are they? Now we need to look at Fibonacci retracement levels - of 38.2% and 50% - of the bull rally. A 38.2% retracement means a level of 14200 (= 18000-3820), which coincides with a longer-term support-resistance level mentioned in the post of May 6 '10.

A 50% Fibonacci retracement will drop the Sensex inside the gap area at 13000. Can the Sensex fall even lower? I'm afraid the answer is 'yes'. Upto a 61.8% Fibonacci retracement is allowed in technical analysis without violating the bull market - which means a level of 11800 that will completely fill the gap area in the Sensex.

Please remember that gap areas in chart patterns eventually get filled. The probability of a drop below 12000 may be low - but it is not an impossibility. I would much rather have the gap filled sooner, rather than later - after the Sensex goes higher to 30000!

Investors need to monitor the trading pattern of the FIIs - they have been net sellers this month, and may continue to pull out if the dollar stays strong. Also keep an eye on fundamentally good stocks that are showing resilience while the Sensex falters. Those will be the ones to pick when the tide turns.

Monday, May 17, 2010

Dow Jones (DJIA) Index Chart Pattern - May 14, '10

The following comments, made in last week's analysis of the Dow Jones (DJIA) index chart pattern, may be worth repeating:

'With global indices on a pull back mode today, the Dow can be expected to follow suit. Any up move is likely to face resistance from the falling 50 day and 20 day EMAs, and can be used to book profits.'

One glance at last week's trading pattern in the 3 months closing chart of the Dow Jones (DJIA) index will reveal why I'm beating my own drum:

Dow_May1410

The sharp pullback on Monday on decent volumes took the index up to the falling 20 day EMA intra-day, but it faced resistance and fell lower to close below the 50 day EMA. On Tuesday, the pattern was repeated - resistance from the 20 day EMA intra-day followed by a close below the 50 day EMA - but on lower volumes.

On Wednesday, the Dow managed to move above the 20 day EMA and even closed a shade above the short-term moving average - on still lower volumes. That marked the end of the pullback, as there was little follow-up buying by investors.

Thursday's pattern was a typical 'reversal day' - a slightly higher high and a much lower close below the 50 day EMA, indicating that the bulls were on the ropes. Friday was a down day on much higher volumes - another 'distribution day' as the bears took charge. Bulls may be encouraged by the fact that the Dow gained 240 points on a weekly basis.

What is the road ahead? The technical indicators have started to weaken again. The MACD is below the signal line and dropping in negative territory. The slow stochastic moved above the 50% level, but seems ready to switch directions. The RSI is treading water below the 50% level. The MFI is going downhill below the 50% level.

Bulls are unlikely to give up in a hurry after such a long global rally. They will fight back periodically as long as the Dow remains above the 200 day EMA. A weakening euro currency does not augur well for growth of the global economy, as exports to the Eurozone will become more expensive.

Bottomline? The chart pattern of the Dow Jones (DJIA) index does not hold out much hope for the bulls in the near term. Get ready for a long summer where the bears are likely to dominate. Investors should take profits off the table and go for a vacation.

Sunday, May 16, 2010

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - May 14, '10

FTSE 100 index chart

FTSE_May1410

Last week, I had concluded the analysis of the FTSE 100 index chart pattern with this comment:

'Any upward bounce can be used to sell.'

A strong pullback in global indices led the FTSE 100 to vault above the 200 day EMA and hit the 5400 mark on good volumes. But the bulls ran out of steam soon after.

A brief spurt on the lowest volumes of the week saw the index close above the 5400 level on Thursday. By Friday, the bears were back in business, as the FTSE 100 dropped down to the 200 day EMA for support and closed below the 5300 level. (Friday's trade not updated on chart.) The index gained 140 points for the week.

The technical indicators perked up briefly, but are looking bearish again. The 20 day EMA is below the 50 day EMA and both are sliding down, with the index below them. Support from the 200 day EMA may be breached again soon.

The slow stochastic bounced up from the oversold zone but is about to  move down again. The MACD rose a bit in negative territory but is below the signal line. Both the RSI and MFI moved up after touching their oversold zones, but remain below their 50% levels.

DAX index chart

DAX_May1410 

The German DAX index chart pattern displayed the strength of its economy by spurting sharply upwards - making bullish higher tops and bottoms on the first four days of the week. It sailed smoothly past the 50 day and 20 day EMAs from below, but on decreasing volumes.

Looks like my expectation of a breach of the 200 day EMA will need to wait for a while. Friday's profit booking on good volumes pushed the DAX below the 6100 level where it received support from the 20 day EMA. The index gained a strong 730 points for the week.

The technical indicators are reflecting the bullishness. All three EMAs are moving up again. The MACD is barely negative and touching the signal line. The RSI is slightly below the 50% level. The slow stochastic has moved above its 50% level. Only the MFI is showing the effects of the low volumes by moving down before reaching its mid-point.

CAC 40 index chart

CAC_May1410

The CAC 40 index chart pattern has not been able to fend off the bear attack despite a heroic effort by the bulls that saw the index rise by a whopping 9.5% on Monday. But the index failed to close above the 200 day EMA throughout the week.

On Wednesday and Thursday, the index did move above the 200 day EMA on intra-day basis, and gained almost 5% on a weekly basis. But it was a case of too little too late.

The 20 day EMA is about to drop below the 200 day EMA. The longer-term moving average has started to turn down. Both are very bearish indications.

The slow stochastic, RSI and MFI all made unsuccessful efforts to reach their 50% levels, and have turned downwards. The MACD rose a bit in negative territory but failed to move above the signal line.

Bottomline? The DAX index chart pattern is exhibiting some resilience and managed to stave off the bears. The FTSE 100 chart pattern is at a very crucial support and looking weak. The CAC 40 chart pattern has reverted to the bear market. Till the Eurozone debt problems are resolved satisfactorily, the indices will remain under bear pressure. Move to cash or gold may be advisable.

Saturday, May 15, 2010

BSE Sensex Index Chart Pattern - May 14, '10

The BSE Sensex index chart pattern spent yet another volatile week, with Monday's sharp pullback of 560 points taking many investors by surprise. The index ended the week below the psychological 17000 level but managed to close 225 points higher on a weekly basis.

That was the good news (for the bulls). Now the bad news. A close look at last week's index movements on the 6 months bar chart pattern of the BSE Sensex index will provide the clues:

SENSEX_May1410

Monday's sharp up move was resisted by the 50 day MA and stopped short of the longer-term support-resistance level of 17400. On Tuesday and Thursday, the Sensex again attempted to move higher (hitting highs of 17379 and 17389) - and faced resistance both times from the 50 day MA and the 17400 level.

Isn't it amazing how the 17400 level has acted as resistance and support time and again? Observant readers will notice a smaller descending triangle pattern that formed in Jan '10 from which the downward break was sharp and steep - down to the 15700 level. The recovery by the bulls was equally quick.

This time around, the descending triangle took a week longer to form, but the fall hasn't been as dramatic. The range between 16700 and 17400 is acting as a consolidation zone. Note the confluence of the 50 day MA, the 17400 level and the down trend line which will try to resist any up moves.

The Sensex may consolidate in this range for a few more days before  deciding its next move. The greater probability is a break below 16700 down towards 15700. The technical indicators have turned weaker and bearish.

The MACD is below the signal line and has resumed its down move in negative territory. The RSI faced resistance near its 50% level and has dropped down towards the oversold zone. Likewise, the slow stochastic has started to slip after reaching its 50% level.

For a different perspective, let us also take a look at the weekly bar chart pattern of the entire bull rally from Mar '09 of the BSE Sensex index:

SENSEX_bullrally_weekly_May1410 

Note that all technical indicators have been calculated on a weekly basis, and are not looking that bearish. The MACD is positive but has just dipped below the signal line. The RSI is trying to rise up towards its overbought zone. The %K line of the slow stochastic has bounced up from the 50% level and about to cross above the %D line - which will be a bullish sign.

Most importantly, the index is above the 50 week MA (equivalent to the 200 day MA on daily charts). That means the long-term bull market is still going strong. A drop below the 50 week MA will be the first real sign of weakness. The 15700 level should provide strong support to a further fall.

In case of a sell-off by the FIIs (who have been net sellers in May '10 so far), the Sensex can drop down to the post-election gap area between 12300 and 13200. An unlikely possibility at this stage. A convincing close below the 15700 level should be a signal to start selectively buying into fundamentally strong shares.

The Q4 results announced so far have not provided any significant positive surprises. The reform and PSU divestment processes are like action replays in slow motion. Early arrival of the monsoon may not provide much upward impetus.

Bottomline? The chart pattern of the BSE Sensex index is exhibiting weakness in the shorter-term. Use any up moves to book part profits. A summer sale of stocks with special monsoon discounts may be round the corner. Stay invested in fundamentally good stocks.

Friday, May 14, 2010

Stock Index Chart Patterns - Shanghai Composite, Korea KOSPI, Hang Seng - May 14, '10

Shanghai Composite index chart

ShanghaiComp_May1410

In last week's analysis of the Shanghai Composite index chart pattern, it was clear that the bears had taken over complete control. The last point of likely support was the Sep '09 low of 2640.

That level was breached on intra-day basis on Tuesday and Wednesday, but the index managed to close above 2640 on all 5 days of trading. That will be a small consolation for the bulls. The technical indicators are not providing much hope for them.

All the three EMAs are falling together with the index well below them. The slow stochastic and RSI are both inside their oversold zones. The MACD is negative and below the signal line, but has stopped falling. The ROC is negative but trying to move up.

The Shanghai Composite index has fallen for a month without respite. One can expect an effort at a pullback by the bulls. Any rise is likely to face resistance from the falling 20 day and 50 day EMAs, and will provide selling opportunities.

Hang Seng index chart

HangSeng_May1410

The Hang Seng index chart pattern remained below the 200 day EMA, but moved above the psychological 20000 level. The Feb '10 low of 19423 wasn't tested either. The bulls are not completely out of the bout yet. But their weakness is evident from the lower volumes on up days.

The technical indicators are trying to recover from an extremely bearish state. The 20 day EMA is below the falling 50 day EMA but hasn't dropped below the 200 day EMA. The slow stochastic and RSI are emerging from their oversold zones. The MACD is below the signal line, but starting to rise in negative territory. The ROC is also negative but rising.

The Hang Seng index is facing resistance from the 200 day EMA. Till it can move and stay above the longer-term moving average, bullish hopes will be belied. Shorts can be opened on a convincing break below 19423 (Feb '10 low).

KOSPI (Korea) index chart

Kospi_May1410

The KOSPI Korea index chart pattern bounced up nicely after receiving support from the 200 day EMA and managed to end the week exactly on the 50 day EMA. But bulls haven't been able to garner enough buying support - volumes were lower on up days and higher on down days.

The Feb '10 lows were not tested during the short correction. The technical indicators are a lot less bearish than the two Chinese indices. The falling 20 day EMA has stayed above the 50 day EMA, which in turn is well above the 200 day EMA.

The slow stochastic has given a bullish cross below the 50% level. The RSI is also below the 50% level but heading down, which is a negative divergence. The MACD is negative and below the signal line, but has started rising. The ROC is also negative but rising.

Don't short this market as long as the support from the 200 day EMA holds.

Bottomline? The Shanghai Composite index chart has reverted back to a bear market after a prolonged rally. The Hang Seng index chart has not yet followed the Shanghai Composite into a bear market, but may do so soon. The Korea KOSPI index chart is still in a bull rally. But with outflow of FII money having started from the Chinese and Indian stock markets, Korea may not remain immune for long. Time to watch from the sidelines.

Thursday, May 13, 2010

Gold at a new high - should you buy, sell or hold?

In my previous analysis of the 1 year gold chart pattern, I had mentioned the following possibility:

'The sideways consolidation in a band between 1050 and 1150 has continued for almost 4 months. It would seem we are overdue for an upward breakout soon.'

A look at the longer-term 5 years gold chart pattern had presented a different view - the possibility of a much longer period of consolidation that could include a break below the 200 SMA and support from the previous top.

No such thing happened. Just goes to show that chart patterns don't always repeat. Another reason why reliance on technical analysis alone can prove costly. One has to look at the fundamentals also before deciding on buy-sell decisions.

The sovereign debt problems of Greece (and Spain, Portugal, Italy) caused a lot of uncertainty and loss of euro's exchange value against several currencies. That led to a flight to safety as fund managers and investors made a bee-line for the yellow metal.

Let us now look at the 1 year gold chart pattern

Gold_May2010

The gold chart took support at its previous top at 1050 in Feb '10 after correcting from the top of 1212. It proceeded to make a bullish rounding-bottom pattern from which it smoothly sailed above the 14 day SMA, and the consolidation zone between 1050-1150.

After a brief pullback down towards the 14 day SMA, the gold chart pattern saw a sharp rise past the previous high of 1212. A 3% whipsaw lee-way means the gold chart needs to close above 1250 for the breakout to be technically valid.

That seems just a matter of time. Look at the 200 day SMA. It hasn't been tested even once during the past 12 months, and is showing no signs of slowing its upward momentum.

Existing holders should stay invested with trailing stop-losses. New entrants can wait for a dip towards the previous top of 1212 to buy. But it is advisable to be cautious near 52 week highs.

Bear in mind that gold is unlikely to provide huge investment gains. Note the impressive-looking rise on the gold chart from 980 (May '09) to 1212 (Dec '09). The gain was less than 25%.

The total gain in the past 12 months? A shade under 35%. Not bad at all - but pales in comparison to the gains likely from any decent mid-cap stock. But an investment in gold is definitely less risky.

Wednesday, May 12, 2010

Stock Chart Pattern - JK Lakshmi Cement (An Update)

My previous analysis of the stock chart pattern of JK Lakshmi Cement was back in July '09. In Dec '09, the stock was split in a 1:2 ratio. So price levels discussed earlier needs to be divided by 2 for comparison with the current chart.

The stock chart had made a nice rounding bottom bullish pattern and gained an impressive 230% in 3 months from a low of 17.50 (then 35) in Mar '09 to 58 (then 116) in Jun '09. The stock was in the midst of a sideways consolidation, with contradictory signals emanating from the technical indicators.

The cement sector is not my favourite - a typical cyclical commodity sector with too many players, leading to low margins. What I liked about JK Lakshmi Cement was its strong balance sheet and commitment towards cost reduction through backward integration. I had suggested that investors could buy the stock on a break-out above 58 (then 116).

Let us take a look at the 1 year bar chart pattern of JK Lakshmi Cement to find out how the stock has fared in the last 10 months:

JKLakshmi Cement_May1210

The sideways consolidation in Jun-Jul '09 lasted about 6 weeks followed by a high volume break-out that took the stock to 64. Thereafter, the stock consolidated sideways again, with the 64 level providing good support. Occasional upward spikes on high volumes gradually took the stock higher till it hit 74 on Oct 1 '09.

A three months long consolidation followed, during which the stock fell below the 64 level. That became a resistance level for a month, till the stock moved up again. Following the stock split, there was a sharp up move on good volumes and the stock hit a high of 85 on Jan 19 '10 before running out of breath.

Note that the initial sharp gain of 230% (17.50 to 58) took only 3 months. The next leg, from 58 to 85 - a gain of 46.5% - took 7 months. Overall, the stock gained 385% from its Mar '09 low -  outperforming the Sensex by a big margin.

The correction from Jan '10 coincided with the overall Sensex correction, but as is often the case with small-cap stocks, it started to underperform the Sensex on the way down. After dropping quickly to 63, it bounced up again but failed to test the previous top.

A sideways consolidation on diminishing volumes continued for 3 months. The stock eventually broke down below the consolidation zone and is now desperately seeking support from the long-term support-resistance level of 64.

The chart pattern shows several notable examples of technical analysis theory. The first one concerns break-outs and break-downs from consolidation zones. Break-outs require high volume support. Break-downs do not.

Next, a consolidation pattern is usually a continuation pattern. That means the trend before entering the consolidation pattern continues. From Jun '09 till Dec '09, all the consolidation patterns ended with an upward break-out on good volumes.

The trend before the consolidation pattern from Feb-Apr '10 was sharply downwards. The break-down from the pattern was therefore logical.

Third, and this is important for investors, bull phases tend to last a lot longer than bear phases. Note that the time taken for the stock to move up from 64 to 85 was almost 6 months (Jul 21 '09 to Jan 19 '10). All the gains got wiped out in the drop from 85 to 63 in just 8 trading sessions.

Such a sharp correction is usually followed by an equally sharp pullback, that provides a good selling opportunity. Very few investors can pick the exact tops or bottoms.

All the technical indicators have turned extremely bearish. The MACD is falling in negative territory. Both the RSI and slow stochastic are deep inside their oversold zones. The stock is below its 200 day EMA (currently at 67 - not shown in chart).

Bottomline? The stock chart pattern of JK Lakshmi Cement shows that all may not be well with the cement sector. If you hold the stock, get out at the earliest. A drop below 64 can take the stock to 58. On a break below 58, it can go to 48 and 34. New entrants should wait for the correction to play out.

Tuesday, May 11, 2010

Is the Sensex correction over already or, are the bears just getting warmed up?

In last Tuesday's analysis of the downward break out of the BSE Sensex index from a bearish descending triangle formation, I had made the following observations:

  1. The twin combination of a descending triangle at a market top and good volumes on the downward break out from the triangle suggests more correction ahead.
  2. Any pull back in the next few days is likely to face resistance from the pierced 50 day EMA and the 17400 level, as bears will use the pull back to sell.
  3. If you had not booked any profits in the hope of higher Sensex targets, the likely pull back may be a good time to take some money off the table.

I am not in the prophecy business. If you have been through enough bull and bear market cycles, you start to get a feel of how Mr Market is going to behave at critical market levels. And some times Mr Market humours you by doing exactly what you expect.

A look at the 1 year closing chart pattern of the BSE Sensex index shows an almost text book example of a descending triangle break out followed by a pull back:

SENSEX_pullback_May1110

The downward correction continued for the rest of last week, closing at 16769 on Friday (May 7 '10) for a near 800 points (4.5%) lower close on a weekly basis. Some times, an overbought market waits for a trigger - any trigger - to start falling. This time it just happened to be Greece.

Monday's (May 10 '10) sharp pull back should have come as no surprise to readers of this blog. Hope at least some of you used the opportunity to book profits (or get rid of non-performers). Despite the huge 560 points move, the Sensex faced resistance from the 50 day MA (which was just below the 17400 level).

Bears resorted to selling today - again no real surprises there. A longer-term support line at 16700 has been drawn. It is possible that the Sensex may spend some time between 16700 and 17400 before deciding its next move. Any upward rallies will have another resistance point - the downward sloping trend line of the descending triangle.

The technical indicators are still bearish, which means the correction is not over yet. The MACD is negative and below the signal line. The RSI tried to move up to the 50% level but failed and turned down. The %K line of the slow stochastic edged above the 50% level, only to drop below.

Technically, the long-term bull market is in tact and will remain so as long as the two previous lows of Feb '10 and Nov '09 (in the 15300-15700 band) hold.

In seven trading sessions in May '10 so far, the FIIs have been net sellers to the tune of nearly Rs 4000 Crores. The DIIs have net bought a bit more than Rs 1200 Crores while retail investors have net bought worth Rs 540 Crores. Now you know the real reason for the Sensex correction!

Monday, May 10, 2010

Dow Jones (DJIA) Index Chart Pattern - May 7, '10

The chart pattern of the Dow Jones (DJIA) index spent a violently volatile week - just the kind of index gyrations that scare the wits out of small investors and make them press the panic button.

So what really happened on Thursday? What caused the sudden 1000 point drop? Every one has an explanation. Algorithmic trading gone haywire. Glitch in the system. A fat finger punched a wrong key. Panic selling by investors.

Of all the attempted explanations, the most entertaining one was this story. In the old days, when they sent a program trading order to sell a basket of stocks, the old dot-matrix printer behind them would loudly whir to life and print up a confirmation that the basket went. One day, trying to sell a basket, they got no confirmation. Silence. So they hit the button again. And again... and again... Until finally someone shouted - "THE PRINTER IS OUT OF PAPER," as they watched the market fall under the cascade of sell orders that had just been sent.

The sudden fall should not have come as a great surprise - though the extent of the huge fall within a few minutes was surprising. I have been warning about negative divergences in the technical indicators, and high-volume sell-off days that indicated distribution.

Let us have a look at the 6 months bar chart pattern of the Dow Jones (DJIA) index to check whether the worst of the selling is over or if there is more down side in the offing:

Dow_May0710

The most important point to observe is that two high-volume down days (Thursday and Friday) could not push the index to close below the 200 day EMA, even though on an intra-day basis it pierced the long-term moving average and breached the Feb '10 low.

Technically, the bull market remains in tact. The Dow needs to close convincingly below the 200 day EMA and the Feb '10 lows to confirm a change of trend. But this was a strong warning to curb the bullish mood.

With global indices on a pull back mode today, the Dow can be expected to follow suit. Any up move is likely to face resistance from the falling 50 day and 20 day EMAs, and can be used to book profits.

The slow stochastic and the RSI are both below their 50% levels. The MFI is resting at the 50% level. The MACD has turned negative. Note that the RSI and MFI has been making lower tops and bottoms since mid-March '10 as the Dow went on to make new highs.

Bottomline? The chart pattern of the Dow Jones index is indicating that the long bull rally is coming to an end. The tremors caused by the Eurozone sovereign debt problems may be strong enough to bring down an economy propped up with printed money. Conserve cash and stay on the wings. 

Sunday, May 9, 2010

Stock Index Chart Patterns - FTSE 100, CAC 40, DAX - May 7, '10

FTSE 100 index chart

FTSE_May0710

In last week's analysis of the FTSE 100 index chart pattern, I rang the warning bell by making the following statements:

  1. The bull juggernaut is now running on an empty tank.
  2. The technical indicators are all bearish.
  3. A further fall next week can take the index down towards the 200 day EMA.

The FTSE 100 succumbed to a global sell-off and not only fell below the 200 day EMA but also below the psychological 5200 level (chart has not been updated with Friday's trade). The index closed at 5123 on strong volumes, and lost 430 points (7.7%) on a weekly basis.

Bulls may think they still have a chance to recover, since the FTSE 100 index stopped short of going below the Feb '10 low of 5061. But the sharp drop on strong volumes is an indication that the worst isn't over.

One look at the technical indicators should scuttle all bullish hopes. All three EMAs are moving down with the index below them. The slow stochastic, RSI and MFI have all entered their oversold zones. The MACD is falling rapidly in negative territory and is well below the signal line.

Shorts can be opened on a fall below the Feb '10 low of 5061, but with appropriate stop-losses. Watch for supports at 4950 (Aug '09 top) and 4550 (Jun '09 top) if 5061 gets broken. Any upward bounce can be used to sell.

DAX index chart

DAX_May0710

The German economy is the strongest in the Euro-zone. That doesn't mean the DAX index chart did not face a bear hammering. In spite of a sharp fall on increasing volumes during the week, the index did manage to get support from the 200 day EMA.

The technical indicators are looking quite bearish. The 20 day and 50 day EMAs are falling with the index below them. The slow stochastic is in the oversold zone. The MFI is at the edge of the oversold zone. The RSI is below the 50% level. The MACD is below the signal line and has entered the negative region.

The DAX index has lost 420 points (6.9%) on a weekly basis and is likely to drop below the 200 day EMA next week, and then go down to test the Feb '10 lows.

CAC 40 index chart

CAC_May0710

The chart pattern of the CAC 40 index is the worst off among the three. It closed the week at 3393 - 425 points (11.1%) lower on a weekly basis on increasing volumes. In the process, it fell below the 200 day EMA, the psychological 3400 level and - most important of all - below the Feb '10 low of 3546.

All three EMAs are falling with the index below them. The 20 day EMA is on the verge of crossing below the 200 day EMA. Once the 50 day EMA follows suit, the bear market in the CAC 40 index will be confirmed.

The slow stochastic is well inside the oversold zone. The RSI and MFI are about to enter their oversold zones. The MACD is below the signal line, and falling in negative territory.

Bottomline? The chart patterns of the European indices are in strong bear grips. Ten weeks of steady gains have disappeared in two weeks of selling. That is the nature of bull and bear cycles. Remember that you make money by selling in a bear market and buying in a bull market. That means any pull backs should be used to sell.

Saturday, May 8, 2010

Stock Index Chart Patterns - BSE Sectoral Indices, May 7, '10

This week, I have already analysed a shorter-term BSE Sensex chart pattern on Tuesday, and a longer-term one on Thursday - which readers seemed to find useful under the current market conditions.

Instead of writing about the BSE Sensex chart pattern again, I am going to follow an old saying - a picture is worth a thousand words - and post a bunch of one year bar chart patterns of various BSE Sectoral indices.

If you prefer words to chart patterns, you may skip today's post. Those who like to look at chart patterns (hopefully some readers fall into this category because of this blog's contents), this post could give pointers to sectors you may want to look at, and sectors to avoid.

Enough words. Time for the pictures (I mean chart patterns).

BSE Auto Index

The BSE Auto index had been outperforming the Sensex during the up move, and has fallen just below the 50 day MA during the recent correction. RSI at 50%.

BSE BANKEX

The BSE Bankex has also enjoyed a great run, having made a new high in end-Apr '10, and is currently seeking support from the 50 day MA. RSI also at 50%.

BSE Capital Goods Index

The BSE Capital Goods index is tracking the Sensex on the way down. It has formed a bearish triple-top. RSI at 30%.

BSE Consumer Durables Index

The BSE Consumer Durables index is looking bullish and is above the 50 day MA. The RSI is just below the 50% level.

BSE FMCG Index

The BSE FMCG index has just dropped below the 50 day MA and the RSI is a little below the 50% level. But it has made a bearish double-top pattern.

BSE Healthcare Index

The BSE Healthcare index is above the 50 day MA and has formed a saucer-like bullish pattern. RSI is just above the 50% level. No wonder they call this sector 'defensive'.

BSE IT Index

The BSE IT index is dropping fast after making a bearish double-top, but the downward target has almost been met. RSI has entered the oversold region. A likely pull back candidate?

BSE Metal Index

The BSE Metal index has really taken it on the chin, plummeting after a bearish double-top. RSI well inside oversold zone.

BSE Oil & Gas Index

The BSE Oil & Gas index has been decimated by government inaction on the pricing front. An attempted pull back has been resisted by the 50 day MA. RSI has emerged from the oversold zone but remains below the 50% level.

BSE Power Index

The BSE Power index is tracking the Sensex on the way down, and about to form a lower top-lower bottom bearish pattern. RSI at 30%.

BSE PSU

Looks like the BSE PSU index has been in a bear market since making a top in Jan '10. All attempts at an up move have been thwarted by the falling 50 day MA. RSI is above the 50% level but heading down.

BSE Realty Index

The BSE Realty index has been in a bear market since the top made in Oct '09 - moving in a downward sloping channel. RSI is just above the 30% level.

BSE Mid-Cap

The BSE Mid-cap index has out-performed the Sensex on the way up and is seeking support from the 50 day MA. RSI is below the 50% level.

BSE Small-Cap

The BSE Small-cap index has also outperformed the Sensex and getting support from the 50 day MA. RSI is below the 50% level.

Note: Please remember that mid-caps and small-caps tend to fall more than the Sensex during bear phases.