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Wednesday, November 28, 2012

Notes from the USA – a guest post

President Obama’s re-election race, which was widely expected to be a closely fought one, ended up being a no-contest. May be hurricane ‘Sandy’, and the President’s response to it, helped his cause. May be the electronic media overhyped the closeness of the race to gather more eyeballs. Whatever may be the reason, the uncertainty of who will be the next President is over.

Stock markets in US and Europe were expected to celebrate the re-election because of the ‘known Devil’ syndrome. Instead they have fallen into a deep funk. Why? It is partly due to the ‘sell-on-news’ strategy adopted by traders. But also because of the impending US ‘Fiscal Cliff’.

Not sure what the US ‘Fiscal Cliff’ is? KKP’s guest post explains the importance of the ‘Fiscal Cliff’, and why all investors should remain cautious till that enormous cliff is negotiated.

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Is Humpty Ready to Roll Down from the Enormous US ‘Fiscal Cliff’?

Christmas lights are on, and Christmas carols are being played in stores……the mood is very festive and people are in a shopping mood thinking about the gifts they want to buy for their loved ones, extended family and friends. While all of this is going on in the minds of the consumer, the Congress and Senate have four weeks until Christmas and their leaders and the president are expecting a deal to be sealed before then. Optimists are shooting for a framework which sets future debt-reduction targets, with detailed tax and spending changes to be approved next year but possibly some initial savings enacted immediately. Absent action by lawmakers and President Barack Obama, roughly $600 billion in tax increases and spending cuts will start to hit households and companies in early January.

The United States is on course to slash its budget deficit nearly in half next year. Closing the gap that quickly is precisely what the Washingtonians refer to as going over a ‘fiscal cliff’. Dropping the deficits is good news on the other side of the cliff, but will guarantee triggering a recession which is where we would see the world economies (humpty) being pushed down the hill from the cliff!!!!! The sign is as clear as the one below, but what is being done about it today? Politicians who are already well-off themselves, and have a job and pension for life, are just talking about it…

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Obama and top lawmakers are working hard to push Congress and Senate to produce an agreement that takes a serious bite out of the government's growing $16 trillion pile of debt and puts it on a true downward trajectory. Although like previous times, they might not reach any conclusions initially. If so, it might just get us to an accord heading off massive tax increases and spending cuts that begin to bite in January - that's the massive ‘fiscal cliff’ that everyone is talking/worried about. It is a series of cuts designed in the Bush era (prior to Obama’s election) that happens to have an ending date of Dec 31st, 2012. Unless re-enacted, these cuts expire and take a big bite from consumers and businesses. But at the same time, a huge amount of revenue is added to the budget if the Bush tax cuts expire. That would reduce the deficit significantly. The same goes for the cuts in domestic spending, including defense, that are part of the ‘fiscal cliff’. Those cuts would also substantially trim projected deficits for years to come, and this is what some of the politicians are drooling about!

“The U.S. fiscal cliff is deeper than advertised,” said PIMCO’s Gross, whose firm oversees $1.9 trillion, in a tweet. “It’s a Grand Canyon. Washington will defer entitlement cuts and raise revenues only marginally.”

O’Neill, chairman of Goldman Sachs Asset Management, warned clients in a note that market momentum was quickly turning down on fears of policy gridlock, unless something is done quickly. “The world and the U.S.’s own people need Washington, D.C. to be sensible,” wrote O’Neill. “We had a rehearsal of life without a fiscal package in August 2011, and it wasn’t very pleasant.”

  • Treasury Doesn’t Collect More Taxes — Should we cross the fiscal cliff, income tax rates that were initially lowered by George W. Bush would reset to levels not seen since 2001. A family with a household income of $72,000 would owe a top marginal rate of 28 percent instead of the current 15 percent. Most Americans pay their taxes by having a pre-determined sum withheld from their paychecks, and with a no-decision or delayed decision, employees will have to change their withholding and get smaller paychecks. Now, everyone knows what happens with smaller paychecks.
  • Spend Now, Cut Later — Congress approves agency budgets, but the White House often decides how to “apportion” money over the course of the year. Budget office does not have to instantly demand that agencies meet the combined $109 billion worth of cuts to Defense and domestic programs next year. Obama could fund some agencies at their current levels, while planning for later cuts that—if a deal is reached—might never be needed.

In short, there is a lot at stake with this ‘Fiscal Cliff’ that we have been talking/hearing about for the last 4-12 months. According to Mohamed El-Erian, CEO of the world’s largest bond fund, PIMCO, (who I respect a lot including his boss Bill Gross and listen to everything both of them have to say):

"We would contract our GDP by 1 to 2 percent. Our unemployment rate -- stuck at 7.9 percent -- would go up to at least 9 percent. Our long-term unemployed, currently 41 percent of the unemployed, would be unemployed for even longer resulting in greater atrophy. Our youth unemployment, we have 24 percent of 16-19 year olds out of jobs, would go up. And at that age, if you are unemployed for a while, you become unemployable -- meaning a lost generation.”

So, I agree that it is not a risk that US based Washington politicians should be taking very lightly and trying to make decision under duress and in ‘overtime mode’ (past deadlines). All of the past issues of raising debt limits, increase in the pool of credit for banks ($700Bn), and the $40Bn per month Quantitative Easing (#3) are all perfect examples of quick, broad-brushed decisions. We have a debt problem that is so huge that it is not something that can and should be solved with such blunt instruments that have a broad and indiscriminate effect on a variety of economic fronts (without specific targets).

Mohamed El-Erian’s recommendation is that we need to have serious adults craft a serious and balanced plan for the next decade that will give markets confidence that we can bring our debt under control -- and that will give Americans confidence that we're doing so in a fair way.

Solutions to such long term problems that will impact every American -- and people all over the world -- should not be crafted in a matter of hours or days. Politicians in Washington need to think about the big picture, and not solve our long-term debt problem like a student cramming for an exam he/she is not prepared for. This will get you past the current course and exam to be called a literate, but are you educated to make a career out of your learning?

You decide how to invest based on this short and long term issue that US and EU governments ponder upon every 2-3 months. Caution is the word since all of our investing today comes with a huge amount of volatility that is unknown from one day or week to another. Invest wisely, carefully and for the long haul. Trust nothing and be ready for a new tomorrow, everyday.

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Tuesday, November 27, 2012

Gold and Silver charts: an update

Gold Chart Pattern

Gold_Nov2612

In the previous post on gold’s 2 years weekly bar chart pattern, the formation of the ‘handle’ of a bullish cup-and-handle continuation pattern was technically confirmed, when gold’s price rose above its 20 week EMA backed by a volume spurt.

After a pullback down to the rising 20 week EMA the following week, gold’s price resumed its up move in a truncated trading week due to the Thanksgiving holiday. So, lower volumes last week is not a matter of concern.

Weekly technical indicators remain bullish. MACD is moving sideways and has merged with its signal line in positive territory. RSI and slow stochastic are also moving sideways above their 50% levels.

Hold, with a stop-loss at the level of the 20 week EMA. Add more on a convincing break out above the 1800 level. After consolidating for more than a year, gold’s long-term bull market looks ready to scale new heights.

Silver Chart Pattern

Silver_Nov2612

Silver’s 2 years weekly bar chart pattern seems to be moving in lock-step with gold’s chart – completing the formation of the ‘handle’ of a bullish cup-and-handle pattern and resuming its up move after a pullback down to the rising 20 week EMA.

Weekly technical indicators are looking slightly more bullish. MACD has started moving above its signal line in positive territory. RSI is moving sideways above its 50% level. Slow stochastic is also above its 50% level, and inching up towards its overbought zone.

Hold, with a stop-loss at the level of the 20 week EMA. Add on a convincing break out above 36. Silver is back in a long-term bull market after a prolonged correction.

Monday, November 26, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Nov 23, ‘12

S&P 500 Index Chart

S&P 500_Nov2612

The oversold technical indicators in last week’s analysis of the daily bar chart pattern of S&P 500 had hinted at a possible upward bounce towards the 200 day EMA. Bears were expected to sell on such a bounce.

In a Thanksgiving holiday-shortened week, further truncated by reduced trading hours on Friday, bulls staged a surprisingly strong rally that propelled the index past its 200 day and 20 day EMAs. By the end of the week, the index moved up further but halted at its 50 day EMA.

Is the correction over? For the answer, take a look at the last four volume bars on the chart above. Even after discounting the low volumes on Fri. Nov 23 due to early closure of trading, the rally was accompanied by falling volumes – and hence, unlikely to sustain. Looks like the bears may be setting up a bull trap.

Daily technical indicators are turning bullish. MACD has crossed above its signal line, but both are in negative territory. RSI and slow stochastic have risen above their 50% levels. The bulls need to arrange some more follow-up buying – failing which, the bears may overwhelm them.

FTSE 100 Index Chart

FTSE_Nov2612

The 6 months daily bar chart pattern of the FTSE 100 index staged a smart recovery to move above all three EMAs into bull territory. Is it a good time to buy?

Daily technical indicators seem to suggest so. MACD has crossed above its signal line, though both are still negative. RSI is just below its 50% level. Slow stochastic has climbed up to its 50% level. Just the kind of technical set-up that suggests a continuation of the rally.

But trading volumes paint a different picture. Volumes trailed off as the index rose last week, which means the index is moving up on hope and a prayer. It is no surprise that the index is trading below the 5800 level at the time of writing this post.

Bottomline? Daily bar chart patterns of S&P 500 and FTSE 100 indices staged smart rallies but on falling volumes. Bears may have set bull traps. Caution is advised. Any buying should be done with strict stop-losses.

Saturday, November 24, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Nov 23, 2012

BSE Sensex index chart

In last week’s post on the daily bar chart pattern of the Sensex, several bullish and bearish possibilities were discussed. The breach of the blue uptrend line was bearish. Support from the ‘gap’ in the chart was bullish. Has last week’s trading tilted the balance?

May be slightly – in favour of the bulls. Why? Three days in a row – on Fri. Nov 16, Mon. Nov 19 and Tue. Nov 20 – the index dropped inside the ‘gap’ but closed above it. So, at best, the ‘gap’ was only partly filled. The index closed above its 50 day EMA on the last two days of the week, after spending 4 days below it.

Bears (read DIIs – who remain net sellers) are still in the game. The index failed to move above its falling 20 day EMA or the blue uptrend line. As long as Sensex trades above its rising 200 day EMA, the bull market remains intact.

SENSEX_Nov2312

Can the bulls prevail even if the index fails to cross above the uptrend line? Yes. It is quite possible for the index to keep climbing higher while staying below the uptrend line. In that case, a second uptrend line may need to be drawn by connecting the Jun ‘12 and Nov ‘12 lows. A chart evolves over time, and technical analysis needs to be flexible to adjust to the pattern being generated.

Daily technical indicators are bearish, but showing some signs of turning around. MACD is below its signal line in negative territory and moving sideways, while the histogram has started to rise. ROC is also negative, but has moved up slightly towards its falling 10 day MA. RSI failed to climb past its 50% level, and is dropping towards its oversold zone. Slow stochastic has emerged from its oversold zone, but is well below its 50% level.

Bears are unlikely to give up easily. Bulls have their work cut out.

NSE Nifty 50 index chart

The winter session of parliament was expected to begin with fireworks, but the UPA government seems to have done their homework. The no-confidence motion by Mamata Banerjee’s Trinamool Congress was a damp squib. Revelations by a former CAG staff member about the 2G telecom scam has put the BJP on the back foot.

The FDI in retail issue may not cause the kind of embarrassment the opposition parties were hoping for. The net effect may be that some pending policy bills may actually get passed. That will be good for the stock market.

Nifty_Nov2312 

After a close just below the uptrend line in the previous week, the weekly bar chart pattern of Nifty pulled back to close exactly on the uptrend line last week. Despite the brief drop below the uptrend line, the index is trading above its 20 week and 50 week EMAs. The bull market is alive and kicking.

Weekly technical indicators are bullish, but showing some weakening signs. MACD is positive, but has dropped to touch its signal line. ROC has fallen sharply below its 10 week MA, but hasn’t entered the negative zone yet. RSI is moving sideways below its overbought zone. Slow stochastic has drifted down to the edge of its overbought zone.

As long as the FIIs keep buying, there is no need to worry about a big fall in the index.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are still in consolidation mode, with bulls and bears about evenly matched. As long as the indices trade above their 200 day and 50 week EMAs, the bulls will have the upper hand. This is a good time to accumulate fundamentally strong but below-the-radar stocks (like those suggested in my paid monthly newsletter).

Wednesday, November 21, 2012

A look at the 4-wheeler auto segment – a guest post

Despite the double whammy of a slowdown in the Indian economy and high interest rates, sales growth of passenger cars, MPVs and SUVs show little signs of abating. This is perhaps an indication of the aspirations and increase in income of the Indian middle-class, since growth in 4-wheeler sales have outstripped that of 2-wheelers.

In this month’s guest post, Nishit takes a look at the top three listed players in the 4-wheeler segment of the auto sector.

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Auto Sales are a very important part of the economy. They serve as a barometer to show the health of the economy. Auto Sales form a part of discretionary expenditure - which can be deferred or lowered by buying a second-hand vehicle.

Auto Sales include Two-Wheeler, Three-wheeler and Four-wheeler sales. Let us focus on Four-wheelers for the moment as they constitute a higher expenditure. As India grows and the purchasing power of the people increases, it will be reflected in Auto Sales. Let us try and explore the Indian Car Market.

In India the major players are Maruti (No. 1, with 40%+ market share), Hyundai at No. 2, M&M at No. 3 and Tata Motors at No. 4. Then we have fringe players like Volkswagen, Toyota, Honda, Ford. Fringe players do not interest us for two reasons: they are not listed in India, and their sales volumes are too small.

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(PVs* – Passenger Vehicles; CVs** – Commercial Vehicles)

The three main players of interest for us are Maruti, M&M and Tata Motors. Let us explore each of them.

Maruti (CMP: 1492)

It is best placed amongst all the companies. They have best selling models at various price points. At below Rs. 3 lakh price point are the Alto and EECO; next are Zen/Wagon R/Ritz at the Rs. 3-5 lakh range; followed by Swift and Dzire at the Rs. 5–7 lakh price points, and Ertiga at the Rs. 8-10 lakh price range.

They have the best service network amongst all auto companies. The downside is the lack of a proper diesel range of vehicles. The key point to observe is the pricing of the stock.

M&M (CMP: 943)

M&M has 2 best selling SUVs in their kitty: XUV500 and Quanto. The older Bolero and Scorpio models continue to sell very well. The sub-4 meter Logan has a presence in the passenger vehicle segment. The takeover of Ssangyong, Korea has resulted in new technology being available to the M&M stable. M&M has demonstrated an ability to introduce new models and this resulted in them overtaking Tata Motors to capture the No. 3 slot in India.

M&M is also the largest manufacturer of tractors in India. Any slowdown in the 4-wheeler segment may be offset by tractor sales.

Tata Motors (CMP: 265)

Tata Motors had 2 best sellers in the past: Indica and the Indigo. They have not been able to refresh their product line. The new launch of Nano has not done as well. The Diesel Nano may turn up their fortunes. They are coming up with Manza CS, a sub-4 metre sedan in 2013. The domestic woes are balanced by a strong global sales outlook from Jaguar and Land Rover.

Tata Motors is also the leader in the commercial vehicles segment, with vehicles based on their mini-truck ‘ACE’ platform doing particularly well.

In a nutshell, Maruti is the current leader in the 4-wheeler auto segment with a good product line, pursued by M&M and Tata Motors. The other 4-wheeler manufacturers either have a very fledgling product pipeline or are yet to come out with future plans. Maruti is well positioned with plans for more new launches in 2013.

Two-wheeler sales are showing signs of deceleration, as the economic slowdown hits the common man. Auto sales numbers can be tracked to buy the listed auto companies, or wait for signs of improvement in the economy and lower interest rates to enter.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan).

Tuesday, November 20, 2012

WTI and Brent Crude Oil charts: an update

WTI Crude chart

WTI Crude_Nov1912

The 6 months daily bar chart pattern of WTI Crude oil managed to overcome the resistance from its 20 day EMA and the 88 level to close just above its 50 day EMA. However, up-day volumes (in green) continue to be less than down-day volumes (in red). Bears are still ruling the chart.

Daily technical indicators are turning bullish. MACD is negative, but has crossed above its signal line and both lines are rising. RSI and slow stochastic have climbed above their 50% levels.

WTI Crude oil price may move up to test the resistance from its falling 200 day EMA. Bears are likely to use the opportunity to sell. The price rise appears more due to speculation about possible escalation of the conflict in the Gaza strip, and not due to any actual supply shortfall.

Brent Crude chart

BrentCrude_Nov1912_weekly

After spending 5 weeks below its 20 week and 50 week EMAs, Brent Crude oil is trying to cross above its two EMAs. Whether it manages to close above the two EMAs by the end of the week will depend on how much follow-up buying the bulls can arrange.

Weekly technical indicators are showing some bullish signs. MACD is marginally negative and trying to cross above its signal line. RSI is barely above its 50% level. Slow stochastic is below its 50% level, but rising.

http://www.blogdash.com/full_profile/?claim_code=0d02a1385f24fec2897011e3ef214336

The long-term bull market is intact – as is evident from the rising 200 week EMA. But bears may not be ready yet to surrender their advantage.

Monday, November 19, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Nov 16, ‘12

S&P 500 Index Chart

S&P 500_Nov1612

Bears have tightened their grip on the daily bar chart pattern of S&P 500 index. Four days in a row, the 200 day EMA provided good support to the falling index. But on Wed. Nov 14 ‘12, heavy selling pushed the index 20 points (1.5%) below its 200 day EMA, and also below the stop-loss level of 1360.

By the end of the week, the index pulled back to the 1360 level. Technically, the breach of the 200 day EMA will be confirmed if the index closes below 1335 (applying the 3% ‘whipsaw’ rule). Note how the index ‘whipsawed’ twice in May and Jun ‘12 after dropping below the 200 day EMA.

However, the uncertainty about the ‘fiscal cliff’, plus the Eurozone recession calls for caution. If you didn’t sell when the 200 day EMA and the 1360 level got breached, you can sell on a likely pullback towards the 200 day EMA. Let the correction play out. Re-enter on a convincing move above the 200 day EMA.

Technical indicators are bearish, and looking oversold. MACD is below its signal line and falling deeper into negative territory. RSI is trying to emerge from its oversold zone. Slow stochastic is well inside its oversold zone. An upward bounce towards the 200 day EMA is possible.

Keep a close watch on the support level of 1270 from where the index had bounced up in Jun ‘12. A drop below 1270 may end the bull market.

FTSE 100 Index Chart

FTSE_Nov1612

The one year daily bar chart pattern of FTSE 100 index received token support from its 200 day EMA before dropping like a stone below the long-term moving average and the stop-loss level of 5625.

The breach of the 200 day EMA will be confirmed only on a close below 5550 (applying the 3% ‘whipsaw’ rule), which coincidentally happens to be the downward target of the triple-top reversal pattern that formed a week ago.

Technical indicators are looking bearish, and a bit oversold. MACD is falling below its signal line in negative territory. RSI has dropped to the edge of its oversold zone. Slow stochastic is deep inside its oversold zone. Any upward bounce towards the 200 day EMA is likely to be used by the bears to sell.

Bottomline? Chart patterns of S&P 500 and FTSE 100 indices have breached supports from their respective 200 day EMAs after sharp corrections following ‘triple top’ reversal patterns. Bears are tightening their grips. Let the correction play out, and keep a close watch on the Jun ‘12 lows.

Sunday, November 18, 2012

When will stocks in the Consumer Durables sector revive?

The slowdown in the Indian economy has taken its toll on stocks from the Consumer Durables sector. But the revival process seems to have started.

However, as in every other sector, some stocks are performing better and some stocks are performing worse than the rest. Many small investors fall into the trap of buying stocks that appear ‘cheap’, because the ‘good’ stocks seem too expensive.

But ‘cheap’ stocks often become cheaper, and good stocks become even more expensive when the sector starts to flourish.

Bajaj Electricals

BajajElec_Nov12

From a peak of 347 touched in Oct ‘10, the stock dropped 61.7% to a low of 133 in Dec ‘12. The subsequent revival has not yet retraced 50% of the fall. The stock is struggling to stay above its 200 day EMA. Can be considered for entry only on a convincing move above 240.

Blue Star

BlueStar_Nov12

Blue Star had touched a peak of 554 in Sep ‘10, before losing a huge 73% to touch a low of 151 in Dec ‘11. The bears are yet to release their tight grip, as the stock struggles to stay above its 200 day EMA. Avoid.

Gitanjali Gems

GitGems_Nov12

The stock has made a bullish ‘rounding bottom’ pattern and is back in a bull market. However, all four technical indicators are showing negative divergences by failing to touch higher tops. The likely dip can be used to add.

Rajesh Exports

RajExp_Nov12

The stock has been in a down trend for the past 6 months, and has slipped below its falling 200 day EMA. A fall below the blue uptrend line will be quite bearish. The stock has wild price swings – which may be good for trading, but not for investment. Avoid.

Titan Industries

Titan_Nov12

Despite the number of shares multiplying by 20 times due to a 1:1 bonus and a 10:1 stock split, there seems to be no slow down in the upward momentum of Titan’s stock. This was the recommendation in the previous post: “Whenever you have a little spare cash, buy a few Titan shares – instead of trying to find the next mythical multibagger.” There is no reason to change the recommendation.

Videocon

Videocon_Nov12

The bear phase in the stock started after it touched a peak of 295 in Oct ‘10. Though the stock price appears to be moving sideways, the bear phase is still intact. Avoid.

VIP Industries

VIP_Nov12

Once a darling of the stock market, and well-promoted by two of the major players (RJ and RD), VIP has hit skid row after its 5:1 stock split in Nov ‘11. Stay away.

Whirlpool

Whirlpool_Nov12

Whirlpool’s stock is in an uptrend from the beginning of the year. The price is consolidating within a rectangular band between 240 and 272, and currently seeking support from the uptrend line. Hold, with a stop-loss at 232. Add only on a convincing break above 272.

Saturday, November 17, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Nov 16, 2012

BSE Sensex index chart

Late selling on Fri. Nov 16 ‘12 pushed the daily bar chart pattern of the Sensex below its 50 day EMA and the blue uptrend line, down to the ‘gap’ area marked in the chart below. The index closed the week below the uptrend line, but 20 odd points above the ‘gap’.

In last week’s post, a big fall in the Sensex was ruled out due to several bullish signals. But the Sensex did close below the uptrend line. It may be prudent to remain cautious. However, one need not sell-off in a panic. Why?

For two reasons. First, the breach of, and close below, the uptrend line is still within the 3% ‘whipsaw’ zone. Only a close below 17900 will technically confirm a breach of the uptrend line. Second, the index has received support from the top of the ‘gap’. There is a possibility that the index may bounce up from here and move above the uptrend line.

SENSEX_Nov1612

What if the Sensex closes the ‘gap’ and falls below 17900? Wouldn’t that be bearish? Yes, and no. Yes, if the index also falls below the 200 day EMA and the Sep ‘12 low of 17250. In that case, all bullish bets should be off.

But closing of the ‘gap’ by itself will not be bearish. Typically, an index or stock closes a ‘gap’ only to resume its previous move – which in this case would be upward. Even a close below 17900 – which will confirm a breach of the uptrend line – may not be bearish if the index bounces up from the 200 day EMA and resumes its up move.

There is a bearish possibility of an ‘island reversal’, if the index opens below the ‘gap’ on Mon. Nov 19 ‘12 and continues to trade below the ‘gap’ for the next few days. The entire trading above the ‘gap’ will then form an ‘island’ of trading, which has bearish implications. However, ‘island reversals’ are rare, and some times get negated by a subsequent up move.

Daily technical indicators are looking bearish. MACD is falling below its signal line, and about to enter the negative zone. ROC has dropped below its 10 day MA into negative territory. RSI is below its 50% level and falling further. Slow stochastic has dropped to the edge of its oversold zone.

The ‘gap’ may get partly or completely filled soon.

NSE Nifty 50 index chart

Q3 results season is over. There were very few positive surprises. Finance Minister urged the RBI governor to open up new banking licences, but the governor is unlikely to get pushed into any hasty decisions. Battle lines are being drawn by opposition parties to take on the government during the winter session of parliament against FDI in retail and insurance sectors.

Nifty_Nov1612

There are very few positive triggers for the index to move up, since all the good news has already been digested. FIIs are still net buyers, which is bullish. Nifty has closed below the uptrend line but remains above its 20 week and 50 week EMAs. So, the nascent bull market is not under threat yet.

Weekly technical indicators are showing signs of weakness, but haven’t turned bearish yet. MACD is touching its signal line in positive zone, after correcting a bit from its overbought region. ROC has crossed below its 10 week MA, but is still positive. RSI has slipped from its overbought zone. Slow stochastic is sliding down, but remains inside its overbought zone.

A drop below the 20 week EMA is a possibility in the coming weeks.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are still undergoing consolidations below known resistance zones. Consolidations may be turning into corrections, but so far the bull markets are not under any threat. Use dips to accumulate good quality stocks (like the ones recommended in my paid monthly newsletter).

Thursday, November 15, 2012

Stock Chart Pattern - Carborundum Universal (An Update)

The previous technical update to the stock chart pattern of Carborundum Universal (date marked by grey vertical line on chart below) had the following concluding comments: “The stock chart pattern of Carborundum Universal is consolidating after a strong rally. Existing holders can book partial profits. New entrants can add on the likely dip.”

A week after the previous post, the stock price rose to touch a new high of 164 before dropping sharply below its 20 day and 50 day EMAs to a low of 132 in Aug ‘11 – providing a profit booking and a re-entry opportunity.

Note that in Oct ‘11 (marked by light blue bell in chart below), the face value of the stock was split from Rs 2 to Rs 1, which means the number of stocks doubled without any increase in equity capital. All stock prices mentioned in the previous update needs to be divided by 2 for comparison purposes.

Carborundum_Nov1512

After the 2:1 stock split in Oct ‘11, the stock price rose to touch a new intra-day high of 174 in Nov ‘11, but RSI and slow stochastic indicators failed to touch new highs (marked by blue arrows). The negative divergences hinted at a possible correction – which came swiftly. The stock dropped below all three EMAs to touch an intra-day low of 131 in Dec ‘11.

The subsequent sharp rally in Jan and Feb ‘12 coincided with the rally in the broader market. The stock rose to a slightly lower top of 173 in Feb ‘12, but all four technical indicators touched higher tops. Positive divergences indicated that the bulls were not quite done yet.

After a correction below 20 day and 50 day EMAs in Mar ‘12, the stock price rose quickly to touch a new intra-day high of 175 in Apr ‘12. This time, all four technical indicators touched much lower tops (marked by blue arrows). The combined negative divergence stalled the bulls on their tracks.

After dropping below all three EMAs to an intra-day low of 141.50 in Jun ‘12, the stock has been in a sideways consolidation, alternately moving above and dropping below its 200 day EMA. For the past 17 months, the stock price has been consolidating within a wider rectangular band between 132 and 174 – frustrating long-term holders.

Technical indicators are looking bearish, to the point of being oversold. MACD is falling below its signal line in negative territory. ROC is also negative, but has crossed above its 10 day MA. RSI and slow stochastic are both near the edge of their oversold zones.

Bottomline? The stock chart pattern of Carborundum Universal has been in a long period of consolidation. Like many companies in the infrastructure and capital goods sectors, it is facing a triple whammy of higher input costs, Rupee depreciation and slow down in export markets. Margins are under pressure, and it may take a while before net profit starts to improve. But the company has a strong balance sheet, with low debt and positive cash flows from operations. Patient investors can accumulate on dips towards the lower edge of the consolidation range.

Tuesday, November 13, 2012

Gold and Silver charts: bullish cup-and-handle patterns formed

Gold Chart Pattern

Gold_Nov1212

Chart patterns don’t always play out as expected. But once an identifiable pattern starts forming, it is better to await the completion of the pattern (or its negation) before taking a buy/sell decision. In the previous post on gold’s 2 years weekly bar chart, the following points were mentioned:

  • The ‘handle’ of a bullish ‘cup and handle’ pattern was still being formed
  • A drop below the 50 week EMA would be bearish and negate the ‘cup and handle’ pattern
  • Investors were advised to ‘hold, with a strict stop-loss at 1660’.

The ‘cup and handle’ pattern formed as per expectations. Note that gold’s price dropped below the 20 week EMA, but stopped short of the 50 week EMA and the 1660 level. The subsequent jump above the 20 week EMA last week was on significantly strong volumes – indicating that gold’s price is unlikely to drop below the 20 week EMA any time soon, and technically confirming the ‘handle’ formation.

Weekly technical indicators are looking bullish. MACD is moving sideways in positive territory, after merging with its signal line. RSI bounced up from its 50% level. Slow stochastic is also moving sideways above its 50% level.

If you failed to enter during last week’s upward bounce, no need to fret. Enter now with a stop-loss at 1700. Add more when gold’s price crosses 1800 (the rim of the ‘cup’). Upward target on a break out above 1800 is 2080.

Silver Chart Pattern

Silver_Nov1212

The formation of the ‘handle’ of a bullish ‘cup and handle’ pattern has been completed on silver’s 2 years weekly bar chart. Silver’s price dropped below its 20 week and 50 week EMAs two weeks back and closed almost exactly at the stop-loss level of 31.

Last week’s upward bounce above its two weekly EMAs was accompanied by strong volumes. That means silver’s price is unlikely to fall below its 50 week EMA in a hurry. Weekly technical indicators are looking bullish. MACD has merged with its signal line in positive zone. RSI has bounced up from its 50% level. Slow stochastic is moving sideways above its 50% level.

One can enter with a stop-loss at 31.50. Add more on a convincing move above 36 (the rim of the ‘cup’). Upward target on a break out above 36 is 46.

Monday, November 12, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Nov 9, ‘12

S&P 500 Index Chart

S&P 500_Nov0912

The bull market in the 6 months bar chart pattern of S&P 500 index is looking shaky. The US president’s re-election was supposed to strengthen the hands of the bulls by removing the uncertainty of who the next president would be. Instead, the uncertainty about the ‘fiscal cliff’ is suddenly looming large.

The index had already formed a ‘triple top’ reversal pattern – some would say that it is an example of the stock market discounting bad news in advance. The downward target of 1400 was breached in a high-volume fall. The index dropped lower to test support from the 200 day EMA before bouncing up briefly.

The good news is that the support from the long-term moving average held. The bad news is that the 20 day EMA has crossed below the 50 day EMA, and the 50 day EMA has formed a bearish ‘rounding top’ pattern. Volumes are also showing bear domination, with down-day volumes exceeding up-day volumes. Hold with a stop-loss at 1360.

Technical indicators are looking quite bearish. MACD is below its falling signal line, and falling deeper into negative territory. RSI has bounced up weakly from the edge of its oversold zone. Slow stochastic has fallen back inside its oversold zone. Any upward bounce is likely to be used by the bears to sell.

Economic recovery continues to be slow and labourious. Initial unemployment claims dropped some more – but it could be partly due to ‘Sandy’, which prevented people from going out to file claims. Consumer sentiment is up a bit. But ECRI’s WLI (Weekly Leading Index) has fallen. If Obama fails to negotiate the ‘fiscal cliff’, a recession is likely in 2013.

FTSE 100 Index Chart

FTSE_Nov0912

The 6 months bar chart pattern of FTSE 100 reminds me of one of the numerous quotes attributed to Yogi Berra, former player and manager of the NY Yankees: “It’s deja vu all over again.” The index has formed a ‘triple top’ reversal pattern, and dropped to its 200 day EMA before bouncing up.

The downward target of the ‘triple top’ is 5550. If the index falls there, it may be ‘game over’ for the bulls. Technical indicators are looking bearish. MACD is below its signal line, and has slipped into negative territory. RSI fallen below its 50% level. Slow stochastic has dropped to the edge of its oversold zone.

Note that MACD and RSI touched progressively lower tops while the FTSE was forming its ‘triple top’. The negative divergences may cause a deeper correction. Any upward bounce may induce bear selling. Hold with a stop-loss at 5625.

A GDP growth of 1% in Q3 meant that UK’s economy had emerged from a double-dip recession. However, poor retail sales and slowdown in the services sector have raised the spectre of a triple-dip recession.

Bottomline? Chart patterns of S&P 500 and FTSE 100 indices are seeking support from their respective 200 day EMAs after sharp corrections following ‘triple top’ reversal patterns. Bull rallies will be under threat if the supports are breached. Hold with strict stop-losses.

Sunday, November 11, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Nov 9, 2012

BSE Sensex index chart

The daily bar chart pattern of the Sensex made two abortive attempts to break out of the narrow 300 points range within which it has been trading for the past 5 weeks. The first, on Oct 30 ‘12, was a downward break out attempt, following the disappointment over RBI’s failure to effect a cut in repo and reverse repo rates.

The second, on Nov 7 ‘12, was an upward break out attempt, following general euphoria over Obama’s re-election as the US President (or, more realistically, due to the removal of uncertainty as to who would be the next US President). Both break out attempts turned out to be ‘false’, as the Sensex reverted back inside the 300 points rectangular range.

FIIs have been net buyers and DIIs were net sellers during the past week – sticking to their strategies since the uptrend (marked by the blue uptrend line) began from the Jun ‘12 low. The index is trading just below the resistance zone between 19000 and 19800 (refer last week’s weekly chart), which has so far proved a tough hurdle for the nascent bull market.

SENSEX_Nov0912

Are the bulls getting exhausted by their repeated failure to overcome the resistance zone? Is the Sensex getting ready for a big fall? These may be questions in the minds of many investors. On the evidence visible on the chart above, the answer is ‘No’ to both questions.

Why? Because the various technical definitions of a bull market have already been satisfied. These are:

  1. The index is trading more than 20% above its Dec ‘11 low of 15136
  2. The index is trading above its rising 200 day EMA
  3. The 50 day EMA has crossed above the 200 day EMA (‘golden cross’), and both EMAs are rising
  4. The index has retraced more than 61.8% of its fall from its Nov ‘10 peak to its Dec ‘11 bottom

So, what can be observed on the chart is a period of consolidation below a known resistance zone in a bull market. One can think of it as ‘catching one’s breath’ after running up a few flights of stairs. Once the consolidation is over – may be over the next few weeks – the Sensex is likely to gather the strength to climb above the resistance zone.

How can one be sure of such an outcome? There are no certainties in life – and definitely none in index or stock movements. But there is more evidence supporting a bullish outcome. Have a look at the blue uptrend line. It has been tested three times already, and may face a fourth test soon. Unlike a support or resistance level, a trend line tends to get stronger with each test. So, the Sensex is unlikely to fall below the trend line.

Even if it does, there should be strong support from the ‘gap’ area, and below it, from the 200 day EMA. Therefore, a big fall in the Sensex can be ruled out for now. Technical indicators are looking weak, but not bearish.

NSE Nifty 50 index chart

Arvind Kejriwal and his ‘India Against Corruption’ group took on some top industrialists and businessmen for maintaining Swiss bank accounts, and challenged the government to raid the high and mighty instead of penalising a few small-time thieves. Anna Hazare has formed a new team after his split with Kejriwal. More action from anti-corruption crusaders should keep things heated up during the winter months.

Those investors who still believe that the ‘Reliance’ name will cast a magic spell on their portfolios should start looking at other (better) alternatives. Telecom and real estate are unlikely to be better alternatives.

Nifty_Nov0912

The weekly closing chart of the Nifty continues its sideways consolidation below the resistance zone between 5750 and 6000. Weekly technical indicators are bullish but showing a hint of weakness. MACD is positive and above its signal line, but moving sideways. ROC is also positive, and has crossed above its 10 week MA. RSI and slow stochastic are inside their overbought zones, but slipping down a little.

Note the blue downtrend line that ruled the Nifty from Nov ‘10 till Jun ‘11. Though the rally from the Dec ‘11 low to the Feb ‘12 top penetrated the down trend line decisively, it was a bear market rally and not the beginning of a new bull market.

Why? Because of three reasons. First, the rally was too steep and on very high volumes. Such steep rallies are unsustainable. Second, the 20 week EMA failed to cross above the 50 week EMA – the ‘golden cross’ that heralds a bull market didn’t occur. Third, the index dropped below the downtrend line in May ‘12, and failed to cross above it in its first attempt.

The rally from the higher bottom of Jun ‘12 is however, the first leg of a new bull market. The ‘golden cross’ and the bullish pattern of higher tops and higher bottoms have technically confirmed it. Plus the four technical criteria mentioned in the Sensex analysis above have also been met by Nifty.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are still undergoing consolidations below known resistance zones after two ‘false’ break out attempts. Use the opportunity to accumulate good quality stocks. Waiting for indices to fall further may be futile.

Friday, November 9, 2012

How is the Sensex performing against global indices?

The Sensex bottomed out in Dec ‘11 after more than 13 months of a bear phase. In Jun ‘12, it formed a higher bottom and has been in an uptrend ever since. Technically, it looks like the early stage of a new bull market in the Sensex.

Though the index is trading more than 10% below its Nov ‘10 top, many stocks have touched their all-time highs – thanks to relentless buying by FIIs. There have been some doubts about the real source of such FII inflows. Apparently, a lot of black money is being funneled out through ‘hawala’ routes and round-tripping back into the country in the garb of FII investments.

Where are the ‘real’ FIIs buying? A look at the 1 year closing chart patterns of some global indices may provide some clues.

Brazil IBOVESPA vs. SENSEX (in green)

Bovespa

After outperforming the Sensex till May ‘12, Brazil’s IBOVESPA index has underperformed for the past 6 months. Some FII money may have been diverted from Brazil to India of late.

Russia RTSI vs. SENSEX (in green)

RTSI

Russia’s RTSI index was an equal performer with the Sensex till Feb ‘12 before outperforming in Apr and May ‘12. Since Jun ‘12, Sensex has outperformed the Russian index. Some FIIs may have booked profits and invested in India.

Hang Seng vs. SENSEX (in green)

HangSeng

The Hang Seng index was an equal performer in Nov ‘11 and again during Jun to Sep ‘12. It has outperformed the Sensex during the other 7 months.

Jakarta Composite vs. SENSEX (in green)

Jakarta

Indonesia’s Jakarta Composite index has comfortably outperformed the Sensex during the past year, clearly indicating which market the ‘real’ FIIs prefer.

Germany DAX vs. SENSEX (in green)

DAX

Despite the economic woes in Europe, Germany’s DAX index has clearly outperformed the Sensex during the previous 12 months. Is this an indication that India’s so-called economic growth doesn’t have many takers among ‘real’ FIIs?

S&P 500 vs. SENSEX (in green)

S&P500

Only during Nov ‘11, and during the recent correction, was the Sensex able to keep up with the S&P 500 index. The slow growth and high unemployment in the US economy hasn’t shaken the faith of FIIs in their home market.

Wednesday, November 7, 2012

Nifty and Defty charts: mid-week technical update

Nifty chart

Nifty_Nov0712

The daily bar chart pattern of Nifty has been consolidating within a rectangular band of about 100 points since the ‘flash crash’ a month back. Rectangular patterns are unpredictable because an eventual break out from the pattern can occur in either direction.

Last week’s downward break – following RBI’s policy announcement – proved to be a ‘false’ break out. Why? Because the break out wasn’t confirmed since the index failed to close more than 3% below the support level of around 5630. The 3% ‘whipsaw’ rule takes care of such situations – i.e. you avoid a ‘whipsaw’ by not taking any action.

Today (Nov 7 ‘12), the index has broken out above the rectangle on good volume support. That gives credibility to the upward break out. But again, the 3% ‘whipsaw’ rule becomes applicable. That means, the Nifty needs to close above 5900 for the upward break out to be technically valid.

Should one wait for 5900 to be crossed to enter? Won’t that mean losing more than 100 points of rally? It depends one one’s risk tolerance and skills. The ‘false’ break out last week, followed by a ‘gap’ up move above the 20 day EMA, provided an entry point. Today’s break out was another entry point.

If you missed both, you can wait for a pullback to the top of the rectangle and then enter on the subsequent upward bounce. Whatever you do, keep a stop-loss. Note that Nifty is in an up trend in a bull market. So, all dips can be used as entry points.

Defty chart

S&P CNX Defty_Nov0712

The daily bar chart pattern of CNX Defty (Nifty calculated in US Dollars) clearly shows an uptrend in a nascent bull market. The ‘flash crash’ found support on the blue uptrend line. The subsequent correction got good support from the rising 50 day EMA.

Note that the ‘gap’, formed on the chart in Sep ‘12 when Defty moved above its 200 day EMA, was filled by the ‘flash crash’. ‘Gaps’ typically get filled. Some times they get partly filled. Either way, the previous move before the ‘gap’ usually continues. On rare occasions, ‘gaps’ don’t get filled at all. Then they tend to become strong resistances to future down moves.

Technical indicators are about to turn bullish. MACD is below its signal line but has managed to remain in positive territory, and showing signs of moving up. ROC has crossed above its 10 day MA and about to enter positive territory. Both RSI and slow stochastic are rising towards their 50% levels. Looks like the month-long correction is over.

Tuesday, November 6, 2012

WTI and Brent Crude Oil charts: bears on top

WTI Crude chart

WTI Crude_Nov0512

In the previous post on Oct 23 ‘12, it was mentioned that the 88 level on the daily bar chart pattern of WTI Crude oil may get breached. Note that the breach occurred the same day, accompanied by strong volumes. That is usually an indication that the support would turn into a strong resistance for future up moves.

The other point to note is that down-day volumes (in red) continue to be higher than volumes on up-days (in green). That is a sign of distribution. All three EMAs are falling and oil’s price is falling deeper into a bear market.

Technical indicators are bearish, but there are positive divergences visible. MACD is negative and below its signal line. But it is moving sideways. RSI is below its 50% level, but touched a slightly higher bottom while oil price dropped lower. Slow stochastic is inside its oversold zone, but also touched a slightly higher bottom.

WTI Crude price may attempt to move up, but is unlikely to cross the hurdle at 88. 

Brent Crude chart

BrentCrude_Nov0512_weekly 

The 2 years weekly closing chart pattern of Brent Crude oil is in an intermediate down trend. The 20 week EMA is on the verge of crossing below the 50 week EMA, which is bearish in the medium term.

Oil’s price dropped below the two EMAs and the support level of 110 on a volume surge. Any upward bounce is likely to face strong resistance from the two EMAs and the 110 level. However, the 200 week EMA is still rising and oil’s price is trading well above it. The long-term bull market is intact.

Weekly technical indicators are bearish. MACD has crossed below its signal line and entered negative territory. RSI has dropped below its 50% level. Slow stochastic has fallen sharply below its 50% level and getting ready to enter its oversold zone.

Any up move towards the 110 level can be used to book profits.

Monday, November 5, 2012

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Nov 2, ‘12

S&P 500 Index Chart

S&P 500_Nov0212

In last week’s analysis of the S&P 500 index chart pattern, the following observations were made: “Note that the breaches of the 20 day and 50 day EMAs were accompanied by strong volumes. That means any upward bounce from current levels is likely to face resistance from the short-term and medium-term EMAs.”

In a trading week shortened by a devastating hurricane, the index bounced up sharply but faced strong resistance from the 50 day EMA, and headed downwards. The strong volumes on Fri. Nov 2 ‘12 indicate that bears are in control for the time being. However, the index is well above its rising 200 day EMA, so the correction following a triple-top reversal is a bull market correction, and not a trend reversal.

Technical indicators are looking bearish. MACD is below its signal line in negative territory. RSI moved up to its 50% level but turned down. Slow stochastic has emerged from its oversold zone. The downward target of the triple-top reversal pattern is around 1400.

The US economy appears to be on the mend. Things may look a lot worse after the massive damages caused by hurricane ‘Sandy’ are fully assessed. Initial claims of unemployment dropped to 363,000. ISM’s PMI index showed manufacturing expansion for the second month in a row.

FTSE 100 Index Chart

FTSE_Nov0212

What had looked like a double-top reversal pattern on the FTSE 100 chart pattern did not get confirmed technically, because the ‘valley’ level of 5738 between the two tops at 5930 did not get breached. Patterns don’t always play out as expected. That is why it is important to wait for technical confirmations before taking buy/sell decisions.

The index has moved smartly above its 20 day and 50 day EMAs. All three EMAs are rising and the index is trading above them. The bulls appear to have overcome a strong bear challenge. Technical indicators are turning bullish. MACD has made a small rounding-bottom pattern to touch its signal line in positive territory. RSI has crossed above its 50% level. Slow stochastic is about to do likewise.

The UK economy still lacks growth momentum, as per this article. The manufacturing sector contracted for the sixth straight month in October. So why is the FTSE still rising? Probably because the worst appears to be over.

Bottomline? Chart patterns of S&P 500 and FTSE 100 indices are showing divergent views. While the S&P 500 is still in a corrective mode, the FTSE 100 index seems to have recovered from a correction. Both indices are in bull markets – evident from the rising 200 day EMAs. Hold on to existing positions, or add to them. Maintain suitable stop-losses.

Sunday, November 4, 2012

BSE Sensex and NSE Nifty 50 index chart patterns – Nov 2, 2012

BSE Sensex index chart

Last week’s trading was influenced by RBI’s announcement of a 25 bps (0.25%) cut in the CRR ratio but status quo on repo and reverse repo rates. Market players were obviously disappointed and the index dropped sharply on Tue. Oct 30 ‘12. FIIs took the opportunity to book profits.

Better sense prevailed during the rest of the week as realisation dawned that the CRR cut would inject more liquidity into the banking system. The index closed the week at its highest level in 4 weeks. Another attempt to test the resistance zone between 19000 and 19800 appears imminent.

Will the resistance zone get breached on the upside? May be not just yet – unless the FIIs and DIIs both buy together. So far, they have been working at cross purposes – one buying and the other selling. A slew of PSU divestments have been lined up, which may divert DII buying attention. LIC has booked huge profits in anticipation.

Sensex_Nov0212

The uptrend (marked by the blue uptrend line) on the weekly chart of Sensex is intact. The 20 week and 50 week EMAs are both rising with the index trading above them. The nascent bull market is under no immediate threat.

Weekly technical indicators are looking bullish. MACD is positive and above its rising signal line, though it hasn’t started moving up yet. ROC is also positive and has stopped falling, but remains below its 10 week MA. RSI has started rising inside its overbought zone. Slow stochastic dropped to the edge of its overbought zone, but is showing signs of turning up.

The correction/consolidation of the past 4 weeks provided an entry opportunity for those who didn’t enter earlier. If you are still waiting for much lower levels predicted by some analysts, you are likely to miss the bus altogether.

NSE Nifty 50 index chart

The upcoming elections in Gujarat and Himachal has led to accusations, counter-accusations and mud-slinging by different political parties. This is not unusual and provides decent entertainment.

Leaders at the helm of Congress and BJP – the two main parties in the election fray – are facing serious corruption charges. The electorate has to decide between the lesser of two evils – which is a sad commentary on the state of Indian democracy 65 years after independence.

Nifty_Nov0212

In spite of the single day’s ‘flash crash’ visible on the daily bar chart of Nifty, the uptrend in the index is intact. Last week’s trading was characterised by a ‘false’ break down below the 100 points trading range within which the Nifty had been trading for the past 4 weeks.

Why ‘false’? Is it because the Nifty has climbed back inside the trading range? Partly yes. But more importantly, Nifty fell less than 1% below the lower edge of the trading range. This is the reason for following the 3% ‘whipsaw’ rule.

Unless an index (or a stock) breaches a support or resistance level by more than 3% on a closing basis (i.e. not an intra-day breach), the breach remains subject to a ‘whipsaw’. This is exactly what happened on the Nifty chart.

There is another interesting point to note. After receiving good support from the 50 day EMA, Nifty has moved above its 20 day EMA with a gap, backed by decent volumes. That opens up the possibility of a break out above the upper edge of the rectangular trading range.

Daily technical indicators are showing signs of turning around, but haven’t turned bullish yet. MACD is still below its signal line in positive territory. ROC is touching its 10 day MA just below the ‘0’ line. Both RSI and slow stochastic have risen to touch their 50% levels.

Nifty is just below the long-term resistance zone between 5750 and 6000 (refer last week’s closing weekly chart), and may struggle a bit before it can move higher.

Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices gave ‘false’ break downs below narrow trading ranges, before moving back inside their trading ranges. There are good possibilities of upward break outs in a pre-Diwali rally. Continue to add/accumulate good quality stocks, but maintain suitable stop-losses.

(Note: If you don’t know how to identify ‘good quality stocks’, you can pre-register to subscribe to my paid Monthly Newsletter. New subscriptions will be offered in Jan. 2013.)

Friday, November 2, 2012

Are you susceptible to the ‘backfire effect’?

Before I explain what the ‘backfire effect’ is (please be reassured that it has nothing to do with a badly tuned two or four wheeler) and why you should or should not be susceptible to it, please allow me a little digression.

Before I started writing this blog more than 4 years back, I used to be a regular visitor and participant in various online investment groups. My altruistic objective was to leverage more than 2 decades of investing experience to spread knowledge and awareness among young, novice investors.

The bull run was continuing unabated, and most discussions in various investment groups were about unknown or questionable companies whose stock prices had already zoomed up to unreasonable levels.

Since this was a tell-tale sign of a bull market nearing its peak, I cautioned investors by posting contrary fundamental and technical opinions about some of the companies being discussed. Surprisingly, most responses to my posts ranged from the indignant (“I will buy more if the stock price falls”) to the downright offensive (“Don’t spread stupid rumours”).

In one of the groups, I had posted in Oct ‘07 that the Sensex was looking extremely overbought technically and investors should book profits. In those days, many small investors were unconvinced about the efficacy of technical analysis. Many still are.

There was a hue and cry among group members and I was banned from the group for my heresy. It opened my eyes, and taught me that it is very difficult to convince some one in an argument if a strong opinion has already been formed.

That brings me to the ‘backfire effect’, that most human beings are susceptible to and can prove disastrous in investing. This is how Wikipedia describes it: (It) is a cognitive bias that causes individuals challenged with evidence contradictory to their beliefs to reject the evidence and instead become an even firmer supporter of the initial belief.

In a recent discussion in an investment group, the topic of discussion was a tea producing company that had entered into an agreement with an overseas company for training and maintenance of flight simulators, and had also launched a chain of ‘kebab’ outlets. I questioned the di’worse’ification because of the lack of synergy between the three businesses.

I shouldn’t have bothered. The response was predictable. The investor who had initiated the thread posted that he loved di’worse’ified companies, and would add more to his substantial holdings if the stock price dropped. A classic case of the ‘backfire effect’!

Related Posts

About Confirmation Bias in the Stock Market
Are you emotional or logical in your investment decisions?

Thursday, November 1, 2012

Notes from the USA – a guest post

News and views coming out of Europe and USA generally paint a gloomy picture of the economies on both sides of the Atlantic. Europe is still struggling under recessionary conditions. USA has got its neck above the water, but growth has been painfully slow.

In a guest post full of interesting and revealing insights, KKP presents a ground-zero view of where the US economy is headed and how small investors can gear up for the unfolding scenarios.

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Macro Level: Good, Bad and Ugly of the US Economy

The best predictor of economic times is the overall results, i.e. GDP. But underneath that layer there is a key measure, and that is manufacturing. Of course, the US GDP at 2.0% and the softness in GDP prediction for Canada says it all…….OK, let me say it: It is weak GDP numbers by all measures, and in the 70’s or 80’s or 90’s, Greenspan would have started lowering the rates to boost production.

Bottom-line is that without manufacturing an iPad, Car, Refrigerator, Engines, Parts etc. there would be no service industry. Manufacturing is key to any GDP number. It is best to follow this truly leading indicator that shows the slow-downs, turn-ups and turn-downs as a great predictor of the times ahead with some level of comfort and confidence. Mix it up with others in this write-up and we will get to know the Good, Bad and Ugly of the situation.

image

Housing is stronger right now, although Existing Home Sales is weak and has never recovered due to upside-down mortgage situations of thousands of people. Building permits is another great leading indicator.  It is costly to get a building permit, so it involves a real commitment.  Steven Hansen has a nice analysis of this report (on the net), showing the data from various perspectives.  This is the chart that I think is most helpful, so we know that there is hope ahead and America is not doomed for a crash and burn, as many are hoping and predicting. 330 million people are going to be creative, generate productive hours and produce something that they themselves need, and possibly others in the world might use (iPads, Drugs, LEDs, Biotech seeds, etc.).

image

Recent Retail Sales were much stronger, and not consistent with the onset of a recession, which is what makes such analysis very good, since it gives contrary opinions and indications, and it is the human mind that has to decipher it to come to a single conclusion. Are we headed for a recession or slow growth era or a depression? My view is that we will muddle along at the 1% to 2% GDP growth, which is nothing to write home about! The next 2-4 months are going to provide telltale signs of the real happenings since that is when we will be past the Christmas shopping season, and the Elections in the US.

image

Review this new Recession Resource Graphic which explains many of the concepts people get wrong and what the current status of the US economy is under the covers:

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Chinese economic growth is worse than you think, and it is the second most watched economic data since so much of China is humming based on American demand.  This week's data may have seemed positive on first blush but the problem is that China uses year-over-year reporting rather than a quarterly report with seasonal adjustments.  It is quite possible that China's GDP growth had a "six handle" in Q2, although there might now be a rebound.  Stephen Green from Standard Chartered finds the strong export growth is not so impressive either. Green runs his own seasonal adjustment on the data to find it’s sluggish for the pre-Christmas ordering period.

There is a sizeable seasonal effect in September, likely related to Christmas exports. Thankfully, despite their difficulties, the Americans and Europeans still appear to be on track for celebrating in December. The picture looks less impressive in seasonally adjusted (SA) terms, though, and it is worrisome.

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The Financial Times has a totally awesome graphics department. Check out this beauty, showing various aspects of China’s economic shift, and the picture speaks a 1000 words here on China:

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In conclusion, things have improved on a comparative year over year basis, but we are at the delicate point where we need to come out of the cave and show our might, and if we cannot do so through the Christmas season with a strong President, we are doomed to get back into recession, and drag the entire world into it also. Companies like Tata, Infosys/Wipro/TCS, Auto-parts, Call Centers etc. are going to see the immediate effect of it. Also, the USD taking a nose dive will start to affect the currency translations, and hence create a second domino drop. Once we foresee this happening, news of a GDP reduction in India and China will start circulating and take the markets down with it. So, it is the Ugly that we need to be afraid of since we have the Good and Bad out there now, but, we do not want the Ugly to show up, and just let the Good and Bad shake hands and keep the US economy at the 1% to 2% GDP levels for the next 1-2 years. You draw your own conclusions from the data above, and be ready to make the right moves in the Indian and US market.

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.