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Wednesday, April 29, 2015

How to make money in the stock market the easy way – a guest post

There are two kinds of investors in the stock market. Those who know, and those who don’t. Those who know what is going on (a minority), use their knowledge to ‘take’ money from those who don’t have a clue about how and when to buy or sell stocks (a majority).

There is no harm in not knowing something – as long as you acknowledge the fact, and don’t put your money in it. The majority of small investors lose money in the stock market because they fail on both counts. They are in denial about their market knowledge (rather, the lack of it), but invest their money any way.

In this month’s guest post, targetted at the majority of investors, Nishit suggests a simple and easy way to make money in the stock market. In fact, it is a ‘no-brainer’. The only drawbacks(?) of this simple strategy are that it is boring, requires discipline and works only over the long-term.

If you are looking for excitement or adrenaline rush while ‘investing’ – visit a casino or a race course. You may enjoy yourself while you lose money!

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The stock market is a complex place and it keeps rising and falling without any apparent logic. Those who are acquainted with the market can make a killing by picking the right stock at the right price and at the right time. A vast majority of the population does not have this skill set. So, what can they do to participate in the gains?

There are various asset classes like fixed deposits, real estate, gold and equities. Equities far outclass the other asset classes as they give significantly high returns over a long period of time. Real estate is illiquid and one needs to have vast sums of money to invest in real estate. Gold also has long periods of time where it moves nowhere and inflation eats away the returns.

For those who have no clue about equities, the first step is to identify 3-4 good Mutual Funds. There are several funds, like HDFC Top 200, which have given compounded returns of 20% for the past 20 years.

Next, they have to invest a fixed amount every month (SIP) - which could be as low as Rs 1000. Over a period of time, the bull phases and bear phases will be taken care of to give smooth annualised returns.

Of course, somewhat alert and savvy investors can tweak this model further by investing more amounts when markets have tanked and booking profits after significant run ups. Nowadays there are many free blogs (like mine and Subhankar’s), which can guide investors about the trend in the market. Also, there are general phenomena - like the market peaking in Feb-March and then correcting 20-30%. The current year is a classic example of this.

Someone may ask the question: How does one identify the right mutual fund? For this one can ask a savvy investor friend, a financial planner or check out the website www.valueresearchonline.com.

This website gives a list of 5 star rated funds in various categories. Based on this, one can shortlist the funds and do a periodic investment in these selected funds. A handful of funds should be more than adequate.

With the advent of the internet, it has become very easy even for those with limited financial knowledge to invest and earn money from the markets.

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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. You can reach him at nish.stockid@gmail.com)

Monday, April 27, 2015

There is a growing disconnect in the US stock market

The daily bar chart pattern of S&P 500 closed at a new lifetime high on Fri. Apr 24 ‘15 – just marginally higher than the level of Mar 2 ‘15. All three EMAs are rising and the index is trading above them in a long-term bull market.

The index may be forming a bullish ‘ascending triangle’ pattern, from which the likely break out is upwards. The ‘symmetrical triangle’ drawn on last week’s chart has been discarded.

But bulls need not take out the champagne bottle from the cooler – as all three daily indicators are showing negative divergences by failing to touch new highs with the index. A correction is waiting to happen.

S&P 500_Apr2415

A recent Bank of America Merrill Lynch survey has found a growing disconnect in the US stock market. US investors have pulled $79 Billion out of equities year to date — including net outflows in 9 of the past 10 weeks — despite stock prices continuing to break new record highs.

As this imbalance grows, the risk of something not seen in the market in years will continue to grow: a proper correction.

See an interesting chart about the disconnect here.

Sunday, April 26, 2015

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 24, 2015

The retrospective MAT claim on FIIs came down drastically from an estimated Rs 40000 Crores to a more realistic Rs 600 Crores. Any MAT exemption claims by FIIs located in jurisdictions having double-taxation treaties with India will be settled within a month.

Despite these clarifications, FIIs were in no mood to relent and hit the sell buttons on their equity and debt holdings. The bulk deal on Ranbaxy equity was the sole exception. Buying by DIIs could not prevent Sensex and Nifty from closing about 3.5% lower for the week.

Q4 results declared so far remain mixed. Private sector banks delivered a good set of numbers. But large IT services companies showed top and bottom line weaknesses. Both indices are near important and strong support levels. Any breach of these support levels may lead to  bigger corrections.

BSE Sensex index chart

Sensex_Apr2415

The daily bar chart pattern of Sensex tested the lower edge of the ‘support-resistance zone’ between 27350 and 28800, and managed to close just above it.

The rising 200 day EMA is just below 27350, and should act as a strong technical support. Why? Because bulls know that a breach of the 200 day EMA can lead to a much bigger correction. So, they will try their best to prevent it.

Daily technical indicators are looking bearish, and a bit oversold. MACD is falling below its signal line in negative territory. ROC is below its 10 day MA and entered its oversold zone. RSI is falling rapidly towards its oversold zone. Slow stochastic has reached the edge of its oversold zone.

Some more correction can not be ruled out, but the odds are beginning to favour a bounce up at any time. A resumption of the bull rally may require some consolidation around current levels.

NSE Nifty 50 index chart

Nifty_Apr2415

The weekly bar chart pattern of Nifty dropped sharply below its 20 week EMA, but stopped just short of testing support from the lower edge of the ‘support-resistance zone’ between 8180 and 8630.

All four weekly technical indicators are looking bearish. MACD is falling below its signal line in positive zone. ROC has dropped well below its 10 week MA to its lowest level since Feb ‘14. RSI and Slow stochastic have crossed below their respective 50% levels.

A test of support from the lower edge of the ‘support-resistance zone’ and the rising 50 week EMA appears likely. A fall below the 50 week EMA (at about 8100) can take Nifty down to 7850.

A high volume bounce-up from current levels can send the bears scurrying to cover their shorts. So, remain cautious but stay invested. The bull market isn’t coming to an end any time soon.

Bottomline? BSE Sensex and NSE Nifty charts are feeling the effects of the retrospective MAT overhang, and have dropped to the lower edges of their ‘support-resistance zones’. Both indices are in long-term bull markets. Stay invested. Maintain appropriate stop-losses and use the correction to add to existing stocks in your portfolios.

Saturday, April 25, 2015

Europe Showing Signs of Life

In a recent video interview with Jeremy Glaser, Bob Johnson, Director of Economic Analysis at Morningstar shares his opinions on the state of the European, US and Chinese economies.

Here is an excerpt:

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. One of the dominant themes in the recent past has been the U.S. economy growing faster than Europe and some concerns about a slowing China. But is that growth starting to balance out? I'm here with Bob Johnson, our director of economic analysis, for his look at the data.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, let's start in Europe. They've been very aggressive, at least recently, in terms of quantitative-easing programs, in terms of trying to weaken the euro against the dollar. Are there any signs that these policy moves are starting to have an appreciable effect on the European economy?

The rest of the interview can be found at the link below:

http://www.morningstar.com/cover/videocenter.aspx?id=692914

Wednesday, April 22, 2015

Nifty chart: a mid-week update (Apr 22 ‘15)

FIIs have been in serious selling mode during the past few trading sessions. Demand notices sent by the Income Tax department for paying Minimum Alternative Tax (MAT) on past capital gains have sent alarm bells ringing.

MAT on capital gains have been removed from Apr ‘15 onwards by the Finance Minister. The junior FM, Jayant Sinha, tried to assuage FII concerns by clarifying that investors based in jurisdictions that have tax treaties with India will not be subject to MAT.

That may have led to the late buying surge in the stock market today after five straight days of correction.

Nifty_Apr2215

The daily bar chart pattern of Nifty formed a ‘reversal day’ pattern (lower low, higher close) after dropping close to the lower edge of the ‘support-resistance zone’ between 8180 and 8630.

Can the index correct some more? The answer would have been an emphatic ‘No’ had the volumes been stronger today. Even if the index corrects some more, it is likely to receive strong support from its 200 day EMA (which has merged with the lower edge of the ‘support-resistance zone’).

Technical indicators are looking bearish. MACD is falling below its signal line in negative territory. ROC has dropped sharply below its 10 day MA into negative zone. RSI has slipped below its 50% level. Slow stochastic has fallen to the edge of its oversold zone.

The blue Up trend line 2 had tracked Nifty’s bull rally from its Aug ‘13 low. But it was breached in Mar ‘15, followed by a pullback that failed to convincingly cross above it. That should be good enough reason to discard it.

Note that a single breach of a trend line does not mean that the bull market has ended (or, will end soon). A less steep trend line (Up trend line 3?) may need to be drawn from the Feb ‘14 low. That can be done after Nifty bottoms out – if it has not already done so.

Remember that as long as the 200 day EMA keeps rising and Nifty trades above it, all corrections are to be treated as bull market corrections. That means, ‘buy the dips’.

Tuesday, April 21, 2015

Gold and Silver charts: an update

Gold Chart Pattern

GOLD_Apr2015

The bear market rally on the daily bar chart pattern of gold appears to have ended. In the previous post, the possibility of an upward break out from an ‘inverse head and shoulders’ pattern (with a neckline at 1220) was mentioned. But it turned out to be a case of pattern failure.

Gold’s price had made one abortive attempt to break out above the neckline at 1220. It subsequently dropped into a consolidation range between 1180 and 1210. It closed just below the 20 day EMA, and is trading well below its falling 200 day EMA in a bear market.

Technical indicators are turning bearish. MACD is moving sideways just above the ‘0’ line. RSI has slipped below its 50% level. Slow stochastic formed a ‘double top’ reversal pattern and dropped below its 50% level.

Strong volumes on recent down-days indicate that bears are beginning to regain control.

On longer term weekly chart (not shown), gold’s price faced resistance from its 20 week EMA, and is trading below its three weekly EMAs in a long-term bear market. Technical indicators are in bearish zones, and showing signs of downward momentum.

Silver Chart Pattern

SILVER_Apr2015

The daily bar chart pattern of silver failed to sustain above the 17 level. Bear selling dropped silver’s price below its 20 day and 50 day EMAs, and the 16 level. The brief bear market rally during Mar ‘15 is over.

Daily technical indicators are in bearish zones. MACD is falling below its signal line in negative territory. RSI is below its 50% level and showing downward momentum. Slow stochastic has re-entered its oversold zone.

Strong volumes on down-days is a sign of bear dominance. Silver’s price may again test support from the zone between 15 and 15.50.

On longer term weekly chart (not shown), silver’s price closed well below its three weekly EMAs in a long-term bear market. Technical indicators are in bearish zones, and showing strong downward momentum.

Monday, April 20, 2015

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Apr 17, 2015

S&P 500 Index Chart

SPX_Apr1715

The daily bar chart pattern of S&P 500 continued its sideways consolidation within a ‘symmetrical triangle’ pattern. The index faced resistance from the upper edge of the triangle and dropped sharply below its 20 day EMA, but managed to close above its 50 day EMA – losing 1% on a weekly basis.

The index is trading well above its rising 200 day EMA in a bull market. So, the expected break out from the ‘symmetrical triangle’ – which is usually a continuation pattern – is upwards. But since triangles tend to be unreliable, it would be prudent to wait for the break out before deciding to buy or sell.

Technical indicators are showing a bit of weakness. MACD has started to fall towards its signal line in positive zone. RSI has slipped below its 50% level. Slow stochastic has dropped down from its overbought zone.

Expect the index to consolidate sideways a little longer.

On longer term weekly chart (not shown), the index formed a ‘reversal week’ bar (higher high, lower close), but closed above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but MACD and RSI are showing downward momentum.

FTSE 100 Index Chart

FTSE_Apr1715 

The daily bar chart pattern of FTSE 100 closed at a lifetime high of 7097 on Wed. Apr 15. The next day it rose to touch a new intra-week high of 7119, but formed a ‘reversal day’ bar (higher high, lower close), and dropped to seek support from its 20 day EMA.

At the time of writing this post, the index has bounced up to trade above the 7000 level and its three daily EMAs in a bull market. Bears are not completely out of the game, as the index continues to trade within a large bearish ‘rising wedge’ pattern since the beginning of the year.

Technical indicators are in bullish zones but showing downward momentum. All three showed negative divergences by failing to touch new highs with the index.

On longer term weekly chart (not shown), the index touched a lifetime high but formed a ‘reversal week’ bar and closed below 7000. The index is trading well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but showed negative divergences by failing to touch new highs with the index. The market may be getting set up for a big bear attack – so, stay invested but remain cautious.

Sunday, April 19, 2015

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 17, 2015

India’s Current Account (i.e. trade) deficit was almost $12 Billion in Mar ‘15 – nearly double of the deficit in Feb ‘15. Exports were lower by more than 20%. For the fiscal year 2014-15, the deficit was $137 Billion – compared with $135 Billion in the previous fiscal year.

Sentiments remained bearish in a holiday-shortened trading week. As per provisional figures, FIIs were net sellers of equity worth Rs 365 Crores; DIIs were net buyers worth Rs 490 Crores. Both Sensex and Nifty lost ground.

Despite weak Q4 results declared by Indian companies so far, Moody’s have reaffirmed their bullish outlook for the Indian economy. The government needs to accelerate infrastructure investments to keep the economy on the growth track.

BSE Sensex index chart

Sensex_Apr1715

The daily bar chart pattern of Sensex closed above the 29000 level on Mon. Apr 13, but it wasn’t a convincing close above the ‘support-resistance zone’ between 27350 and 28800. Bears struck swiftly and pushed the index below its entangled 20 day and 50 day EMAs inside the ‘support-resistance zone’.

Daily technical indicators are still in bullish zones, but showing downward momentum. MACD is above its signal line but looks ready to drop back inside negative territory. ROC has dropped from its overbought zone and crossed below its 10 day MA. RSI is falling towards its 50% level. Slow stochastic has fallen from its overbought zone.

Some more correction is likely. Looks like company earnings may take a couple of more quarters to catch up with market valuation. However, the index continues to trade above its rising 200 day EMA in a bull market.

Stay invested and closely study Q4 results for pockets of opportunity.

NSE Nifty 50 index chart

Nifty_Apr1715

The weekly bar chart pattern of Nifty formed a ‘reversal week’ pattern (higher high, lower close) and dropped back inside the ‘support-resistance zone’ between 8180 and 8630.

The index continues to face overhead resistance from Up trend line 2, but managed to stay above its two weekly EMAs in a bull market.

Weekly technical indicators are giving mixed signals. MACD is sliding below its signal line in positive territory. ROC is below its 10 week MA, and failed to enter positive zone. RSI is moving sideways above its 50% level. Slow stochastic crossed above its 50% level.

Expect the index to consolidate around current levels for some time before resuming its up move. IPOs and FPOs are getting oversubscribed – which is a clear indication of underlying bullish sentiment.

Bottomline? BSE Sensex and NSE Nifty charts are still feeling the effects of bearish sentiment, and have dropped back inside their ‘support-resistance zones’. Both indices are in long-term bull markets. There is no need to panic and sell. Stay invested. Maintain appropriate stop-losses for individual stocks in your portfolios.

Friday, April 17, 2015

Is the stock market defying conventional logic?

Interest rate has started coming down. So has inflation. WPI inflation is actually negative. IIP number is positive and inching up – indicating manufacturing growth.

Forex reserves are at an all-time high. Sales of medium and heavy commercial vehicles are rising – which is an indication of a recovering economy. Passenger car sales grew after 2 years of de-growth.

These are all signs of an economy that is returning to a path of growth. As per conventional logic, a growing economy should lead to a rising stock market.

So, why is the stock market defying logic? It is like asking: “Why do mosquitoes sting?”  The answer is: “It is their nature to do so.”

Experts and analysts try their level best to explain the reasons for a market correction. As if they really know.

Some said that expectations of poor Q4 results led to the correction. But everyone has been expecting poor Q4 results for quite some time.

Others said that PSU divestments and IPOs are sucking out cash from the secondary market. Weren’t these same experts saying a couple of weeks back that a lot of ‘cash is waiting in the sidelines’? 

(By the way, ‘cash waiting in the sidelines’ is one of those enduring myths in the market. Unless the cash gets invested in FPOs or IPOs, it always remains in the sidelines. Think about it.)

One talking head on a business channel said: “The market has been boosted by a liquidity driven rally.” Wonder what kind of a rally will occur without any liquidity!

The market has a tendency of going against consensus estimates and expectations. Which increases the probability that Q4 results will throw up some positive surprises.

IndusInd Bank has declared very good results. TCS came out with a decent set of numbers – if you look beyond the one-time bonus payment to employees.

Smart investors look for opportunities to buy during such corrections. That doesn’t mean you need to jump in feet first. Do your homework, be patient and wait for opportunities.

Have you looked at hospitality sector stocks lately? Most small investors are shunning them. The “e-Visa on arrival” scheme should be a huge boon for the sector.

Tuesday, April 14, 2015

WTI and Brent Crude Oil charts: consolidating sideways within support-resistance zones

WTI Crude chart

WTIC_Apr1315

The daily bar chart pattern of WTI Crude oil rallied strongly after touching a 6 years low of 42.50 on Mar 17 ‘15, and re-entered the ‘support-resistance zone’ between 47.50 and 54. (Note that all three technical indicators had shown positive divergences by failing to touch new lows with oils’ price.)

After crossing above the 20 day and 50 day EMAs, oil’s price corrected down to the lower edge of the ‘support-resistance zone’, only to bounce up on strong volumes all the way to the top of the ‘support-resistance zone’. Bear selling stalled the rally.

Oil’s price is trading above its 20 day and 50 day EMAs, but well below its falling 200 day EMA in a bear market.

Daily technical indicators are in bullish zones, and showing some upward momentum. Oil’s price may make another attempt to cross above the 54 level. Expect bears to prevent that from happening.

On longer term weekly chart (not shown), oil’s price continues to trade below its three weekly EMAs in a long-term bear market. Weekly technical indicators have corrected oversold conditions, and are showing some upward momentum.

Brent Crude chart

BRENT_Apr1315

The daily bar chart pattern of Brent Crude oil had bounced up strongly after receiving good support from the lower edge of the ‘support-resistance zone’ between 52.50 and 64. After crossing above its 20 day and 50 day EMAs, oil’s price stalled near the 60 level on Mar 26 ‘15.

Since then oil’s price has traded sideways within a band between 55 and 60. In spite of a couple of closes above its 50 day EMA, oil’s price is trading well below its 200 day EMA in a bear market.

Daily technical indicators are in bullish zones, but their upward momentum is weak. MACD is above its signal line, and somehow managed to enter positive zone after a month. RSI is moving sideways just above its 50% level. Slow stochastic is above its 50% level but not making much headway.

On longer term weekly chart (not shown), oil’s price is trading below its three weekly EMAs in a long-term bear market. Technical indicators are showing some upward momentum after correcting oversold conditions.

Monday, April 13, 2015

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Apr 10, 2015

S&P 500 Index Chart

SPX_Apr1015

The daily bar chart pattern of S&P 500 closed 35 points (1.7%) higher on a weekly basis, and climbed back inside the large ‘rising wedge’ pattern (see last week’s post) once again. The index is consolidating sideways within a ‘symmetrical triangle’ pattern since the last week of Feb ‘15.

Triangles are usually continuation patterns, so the likely break out from the triangle should be upwards. If that happens, the bearish ‘rising wedge’ pattern is likely to be negated. However, triangles are unreliable patterns, so it is better to wait for the eventual break out before initiating any buy/sell action.

Technical indicators are in bullish zones. MACD has crossed above its signal line and entered positive territory. RSI and Slow stochastic have climbed above their respective 50% levels. The index closed above its three EMAs in bull territory.

On longer term weekly chart (not shown), the index received good support from its 20 week EMA, and closed above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones but their upward momentum is weak. Be prepared for another bear attack if the index fails to break out convincingly above the triangle.

FTSE 100 Index Chart

FTSE_Apr1015

In a holiday-truncated week, the daily bar chart pattern of FTSE 100 rallied splendidly to close at a lifetime high. The index closed above its three EMAs in bull territory, but remains within the large ‘rising wedge’ pattern within which it has been trading for the past three months.

Daily technical indicators are in bullish zones, but all three are showing negative divergences by failing to touch new highs with the index. Bears may come to the fore if the index fails to convincingly cross above the ‘wedge’ pattern.

On longer term weekly chart (not shown), the index closed at a lifetime high - well above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but showing negative divergences by failing to touch new highs with the index.

Sunday, April 12, 2015

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 10, 2015

There was good news on the macroeconomic front. The IIP number for Feb ‘15 was at a three-month high of 5%. The revised figure for Jan ‘15 is 2.8%. Growth was broad-based. Only consumer durables showed contraction.

Passenger car sales increased by 5% during 2014-15, after decrease of 7.7% and 4.7% in the previous two years. Commercial vehicle sales declined by 2.8%. However, sales of medium and heavy commercial vehicles increased by 16%.

In the 2-wheeler segment, motorcycle sales declined 2.5%, but scooter sales jumped 25%. A deficient monsoon last year and unseasonal rains this year affected motorcycle sales in rural India.

FIIs and DIIs were net buyers of equity during the past week. As per provisional figures, FIIs bought equity worth Rs 1150 Crores. DIIs were net buyers of Rs 240 Crores. Both Sensex and Nifty indices are back in bull territory, but facing overhead resistances.

BSE Sensex index chart

Sensex_Apr1015

The following comment was made in last week’s analysis of the daily bar chart pattern of Sensex: “Bears may put up a fight to defend the 28800 level.”

Sensex is trading above its three EMAs in bull territory, but has so far failed to convincingly cross above the upper edge of the ‘support-resistance zone’ between 27350 and 28800.

The index has retraced nearly 60% of its 2777 points correction from its Mar 4 top of 30025 to the Mar 27 low of 27248. A retracement of more than 50% (a Fibonacci level) usually means that a correction is over.

However, a more convincing retracement of a correction will be the Fibonacci level of 61.8% – i.e. a close above 28965. Is that likely to happen soon?

Daily technical indicators are suggesting as much. MACD is rising above its signal line, and is poised to enter positive zone. The signal line is forming a bullish ‘rounding bottom’ pattern. ROC is above its 10 day MA – which has also formed a ‘rounding bottom’ pattern - in positive territory. RSI has moved above its 50% level. Slow stochastic has entered its overbought zone.

Will the index touch a new high? There should not be any doubts about that. When? That’s a good question! Let’s say – sooner rather than later.

NSE Nifty 50 index chart

Nifty_Apr1015

The weekly bar chart pattern of Nifty closed at its highest level in 5 weeks, and climbed out of the ‘support-resistance zone’ between 8180 and 8630.

The index is trading above its two weekly EMAs in bull territory, but is facing resistance from Up trend line 2. Strong volumes during the week is a good sign for bulls.

Weekly technical indicators are beginning to turn bullish. MACD is below its signal line, but has stopped falling. ROC is below its 10 week MA, but about to re-enter positive territory. RSI is moving sideways above its 50% level. Slow stochastic has stopped falling, and looks ready to start rising again.

Bears may make a last stand at current levels, but bullish sentiment is gaining ground.

Bottomline? BSE Sensex and NSE Nifty charts have almost recovered from sharp bull market corrections, but bulls still need to overcome overhead resistances. Both indices are in long-term bull markets. Mid-cap and small-cap indices are showing strength. This may be a good opportunity to get rid of some of the non-performers in your portfolios.

Saturday, April 11, 2015

5 Rules to take your Trading to the Next Level

In yesterday’s post, a link to an article by Greg Guenthner of Daily Reckoning – that commented on the first 4 of a set of investment rules of Ned Davis - was provided.

These rules have been developed by Davis during 35 years of a successful investment career. Understanding and mastering these rules – which are universal in nature, i.e. not specific to a particular region or market - will help you to become a better investor.

Here are the balance 5 rules:

5. Be disciplined

6. Practice risk management

7. Remain flexible

8. Money management rules

9. Those who do not study history are condemned to repeat its mistakes

Guenthner’s comments of these rules can be found here.

An hour-long interview of Ned Davis is available at this link.

Friday, April 10, 2015

4 Rules You Must Know to Beat the Market

In a recent article in Daily Reckoning, Greg Guenthner discussed the first 4 of a set of investment rules followed by Ned Davis (of Ned Davis Research Group). During 35 years of a successful investment career, Davis has used these rules to beat the market.

If you want to succeed in the market – whether it is in a bull phase, or a bear phase or a sideways consolidation phase – you need to understand and master these set of rules.

Here are the first 4 rules:

1. Don’t fight the tape (i.e. the trend)

2. Don’t fight the Fed (i.e. RBI in our case)

3. Beware of the crowd at extremes

4. Rely on objective indicators

Read the comments by Guenthner on the above rules here.

Wednesday, April 8, 2015

Nifty chart: a mid-week update (Apr 08 ‘15)

RBI maintained status quo on interest rates, and nudged banks to lower their lending rates. Banks had been reluctant to pass on the benefit of RBI’s two earlier 25 bps interest rate cuts to borrowers.

SBI, HDFC Bank, ICICI Bank and Axis Bank have lowered lending rates by a modest 15 bps (0.15%) each. More banks are likely to follow suit. There are some signs of increasing capital expenditure activity – going by recent corporate announcements.

The government has been proactive with its share divestment plan for the new financial year. The REC OFS (offer for sale) went through smoothly. Expect more such offers in the near term.

FIIs have been net buyers of equity worth Rs 800 Crores during the first 4 trading days of this month (though they were net sellers today). DIIs have also been net buyers of equity worth Rs 80 Crores during the same period.

Nifty_Apr0815

The daily bar chart pattern of Nifty corrected below its 20 day and 50 day EMAs and the Up trend line 2 to the lower edge of the ‘support-resistance zone’ during Mar ‘15.

It has bounced back spiritedly to retrace more than 50% of its 850 points fall. The 200 day EMA continued to rise during the correction – indicating that the long-term bull market was intact.

Nifty has managed to climb out of the ‘support-resistance zone’ with rising volume support – which is a bullish sign. However, Up trend line 2 has not been convincingly crossed yet.

Daily technical indicators have corrected oversold conditions, and are turning bullish. MACD has crossed above its signal line, but is still in negative zone. ROC has crossed above its 10 day MA to enter positive zone. RSI is facing some resistance from its 50% level. Slow stochastic has risen to the edge of its overbought zone.

Bulls still have a little work left. A strong move above 8850 should send the bears packing.

Tuesday, April 7, 2015

Gold and Silver charts: bear market rallies approaching strong resistance zones

Gold Chart Pattern

GOLD_Apr0615

The daily bar chart pattern of gold bounced up strongly from the ‘support zone’ (between 1130 and 1150), and climbed above its 20 day and 50 day EMAs but faced resistance from the 1220 level.

The possibility of an upward bounce – due to oversold technical indicators - was mentioned in the previous post. A likely interest rate hike by the US Fed may have also fuelled some buying.

Note that after dropping below its 20 day and 50 day EMAs in the last week of Mar ‘15, gold’s price rallied to breach the 1220 level intra-day on Apr 6, but dropped to close below it.  In the process, gold’s price may have formed another ‘inverse head and shoulders’ reversal pattern – with the ‘neckline’ at 1220 - from which an upward break out can be expected.

Gold’s price had earlier formed a larger ‘inverse head and shoulders’ pattern (during Sep to Dec ‘14). An upward break out from that pattern had propelled gold’s price above the ‘support-resistance zone’ (between 1240 and 1280) in Jan ‘15. Just when a trend reversal looked imminent, bears struck viciously and pushed gold’s price down below its three EMAs.

Daily technical indicators are in bullish zones. MACD is moving above its signal line and entered positive territory. RSI is rising above its 50% level. Slow stochastic has re-entered its overbought zone. A continuation of the rally is likely to face resistance from the falling 200 day EMA – and stronger resistance from the ‘support-resistance zone’.

On longer term weekly chart (not shown), gold’s price closed just above its 20 week EMA, but is trading below its falling 50 week and 200 week EMAs in a long-term bear market. Technical indicators are in bearish zones, but showing signs of upward momentum.

Silver Chart Pattern

SILVER_Apr0615

The daily bar chart pattern of silver bounced up strongly from the ‘support zone’ (between 15 and 15.50), and climbed above its 20 day and 50 day EMAs but faced resistance from the 17.50 level.

It dropped to seek support from its entangled 20 day and 50 day EMAs, bounced up once more but fell short of the 17.50 level and closed just below 17.

Daily technical indicators are in bullish zones. MACD is rising above its signal line in positive territory. RSI is treading water above its 50% level. Slow stochastic dropped from its overbought zone, but is trying to move up again.

The bear market rally may continue a bit longer, but is expected to face resistance from the falling 200 day EMA and the ‘support-resistance zone’ (between 18 and 19).

On longer term weekly chart (not shown), silver’s price closed above its 20 week EMA, but is trading below its 50 week and 200 week EMAs in a long-term bear market. Technical indicators are in bearish zones, but showing signs of upward momentum.

Monday, April 6, 2015

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Apr 02, 2015

S&P 500 Index Chart

SPX_Apr0215

In a holiday-truncated trading week, the daily bar chart pattern of S&P 500 closed marginally higher on a weekly basis, but dropped below the large ‘rising wedge’ pattern once again after briefly pulling back inside the ‘wedge’.

The index closed below its 20 day and 50 day EMAs, but is trading well above its rising 200 day EMA in a long-term bull market. Volumes on Tue. and Wed. (which were ‘down days’) were higher than volumes on Mon. and Thur. (which were ‘up days’). Bears are in no mood to give up just yet.

Some good news for bulls: the index stayed above the 2040 level during the week. A drop below 2040 will technically confirm a ‘double top’ reversal pattern (forming within the large ‘rising wedge’ pattern).

Technical indicators are in bearish zones. MACD is falling below its signal line in negative territory. RSI and Slow stochastic are below their respective 50% levels. The stage is set for a fight for control of the 2040 level.

On longer term weekly chart (not shown), the index bounced up after receiving support from its 20 week EMA, and closed above its three weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones but not showing any upward momentum. The index may be in the midst of a topping formation.

FTSE 100 Index Chart

FTSE_Apr0215

The following remarks appeared in last week’s analysis of the daily bar chart pattern of FTSE 100: “The prospect of a drop below the ‘wedge’ is looming large.”

The index fell sharply below the ‘wedge’ on Tue. Mar 31, supported by strong volumes (not shown on chart). On the next two days, the index pulled back to the lower edge of the ‘rising wedge’ pattern, but closed below its 20 day and 50 day EMAs – losing 22 points on a weekly basis.

The index is trading above its rising 200 day EMA in a bull market – but for how much longer?

Technical indicators are in bearish zones. MACD has entered negative zone below its falling signal line. RSI is below its 50% level, but showing mild upward momentum. Slow stochastic is plummeting towards its oversold zone.

A drop below the 200 day EMA may signal a trend reversal.

On longer term weekly chart (not shown), the index bounced up after receiving support from its 20 week EMA, and closed above its three rising weekly EMAs in a long-term bull market. Weekly technical indicators are in bullish zones, but showing downward momentum.

Saturday, April 4, 2015

BSE Sensex and NSE Nifty 50 index chart patterns – Apr 01, 2015

In a holiday-shortened trading week of just 3 days, DIIs were net buyers of equity. FIIs were net buyers on Tue. and Wed. (Mar 31 and Apr 1). Both Sensex and Nifty bounced up from important support zones.

For the month of Mar ‘15, FIIs were net buyers of equity worth Rs 6600 Crores (as per provisional figures). Thanks to a late buying surge, DIIs were also net buyers of equity – but only worth Rs 200 Crores. So, who was responsible for the correction during Mar ‘15? (Hint: read last week’s post.)

HSBC’s Purchase Manager’s Index (PMI) for Mar ‘15 was 52.1 – higher than 51.2 in Feb ‘15, but lower than 52.9 in Jan ‘15. (A reading above 50 indicates economic expansion.) But the average reading for Q4 at 52.06 was lower than the Q3 average of 53.13.

As per the survey, manufacturing growth is improving but capacity constraints and inflation are stifling growth.

BSE Sensex index chart

Sensex_Apr0115

The following comment appeared in last week’s analysis of the daily bar chart pattern of Sensex: “Technically, a turnaround seems just around the corner.”

Sensex filled the ‘gap’ near the lower edge of the ‘support-resistance zone’ (between 27350 and 28800) and appears to have resumed its up move. However, the index is facing resistance from its falling 20 day and 50 day EMAs.

A convincing move above 28800 is required break the bear shackles. Will it happen soon?

Daily technical indicators have corrected oversold conditions, but remain in bearish zones. MACD is moving up towards its falling signal line in negative zone. ROC has crossed above its 10 day MA, but is yet to enter positive territory. RSI and Slow stochastic have emerged from their respective oversold zones, but are below their 50% levels.

Bears may put up a fight to defend the 28800 level. Forthcoming Q4 results – not expected to show much improvement over Q3 – will decide their fate.

Note that the 200 day EMA is still rising and the index is trading above it in a long-term bull market. The correction gave a good adding opportunity.

NSE Nifty 50 index chart

Nifty_Apr0115

The weekly bar chart pattern of Nifty rallied above its 20 week EMA but is facing resistance from the upper  edge of the ‘support-resistance zone’ (between 8180 and 8630).

The index has pulled back to the dark blue Up trend line 2 after breaching the trend line in the previous week. Is the pullback a selling opportunity? Bears will say ‘Yes’.

Bulls will point out that the index is in a long-term bull market, and is trading above both its weekly EMAs. Also, the breach below the trend line was not convincing (i.e. the previous week’s close was within the 3% ‘whipsaw’ limit).

Three of the weekly technical indicators are looking bearish. MACD is falling below its signal line in positive zone. ROC is falling below its 10 week MA in negative zone. Slow stochastic is falling below its 50% level. However, RSI is looking bullish by bouncing up from its 50% level.

Some consolidation can be expected at current levels before Nifty resumes its up move.

Bottomline? BSE Sensex and NSE Nifty charts show upward bounces from important support levels, but bulls need to overcome strong overhead resistances. Both indices are in long-term bull markets. The strategy in a bull market should be to ‘buy the dips’, or, if you are holding from much lower levels, just ride out such corrections.

Thursday, April 2, 2015

Evolving IT Services Market Warrants Attention

The global IT services market may be worth $1 Trillion, but it is highly fragmented. The top three players – IBM, HP, Accenture – account for 12.5% global market share. Other top players – like CAP Gemini, Computer Sciences Corp., Cognizant – account for around 1% share each.

The bulk of the market is shared by hundreds of smaller companies that do low margin but regular work like Business Process Outsourcing, software maintenance, data centre operations, application hosting. Most Indian companies get their bread and butter from such ‘outsourced’ work.

Some of the larger outfits – like TCS, Infosys, HCL Tech – have moved up the value chain through higher margin but more discretionary systems integration projects. But they are well behind the big boys in the top end, high margin consulting business.

In a recent article, Andrew Lange of Morningstar has provided an overview of the current global IT services market and its prospects. Those already invested in the sector, and particularly those planning an investment in some of the smaller Indian players, may find the article useful.