Wednesday, March 30, 2016

Is the stock market rallying only on hopes of a repo rate cut? - a guest post

Sensex and Nifty had touched lifetime highs in Mar '15. A year-long correction led to both indices touching 52 week lows on Feb 29 '16 - losing 25% from their Mar '15 tops.

The stock market did a sudden volte face from the beginning of Mar '16 - as bears (i.e. FIIs) turned bulls and bulls (i.e. DIIs) became bears. What triggered the abrupt change in sentiment?

Was it belated awareness of market players that the global economy was not doing as badly as they thought? Did FIIs get encouraged by the governments decision of sticking to its fiscal deficit targets? Or, was it a mix of both? 

In this months guest post, Nishit argues that expectation of a repo rate cut by RBI in its policy meeting on Apr 5 '16 may be the real reason for the current market rally.

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The Government recently slashed interest rates on Small Savings, thereby dealing a very big blow to Senior Citizens who depend on interest income. Postal Saving Schemes have suffered big cuts. The whole idea was to bring interest rates in line with Bank Fixed Deposit rates and thus make it a level playing field for banks.

The Government should have excluded special schemes - like the Senior Citizen Savings Scheme and the Girl Child scheme - which were specifically targetted at financially vulnerable sections of the population.

The Government has also committed to stick to its fiscal stability road map. With inflation under control, this has set the stage for a 25 basis point (0.25%) rate cut in the RBI policy meeting on April 5th. Optimists are expecting a 50 basis points (0.5%) rate cut.

Reduced Fixed Deposit interest rates are going to put a lot of people in difficulties - especially those who have retired and depend on Fixed Income.

Repo and Reverse Repo rates are most likely to be reduced by 25 basis points now and 25 basis points in June, depending on the progress of the Monsoon. The markets have rallied based on this. The 10 year Government Bond is trading at an yield of 7.51%, which is the lowest in past several years.

The Government will have to kick start several infrastructure projects if demand has to be generated. Only slashing interest rate is not enough. Road projects are a prime example.

Cheap funds for the banks to lend out are just one aspect. What the Government is ignoring is the social aspect as well of welfare schemes.

A stock market rally based only on expectations of an interest rate cut is a temporary phenomenon. Unless backed by pickup in demand and increased Government spending, the rally will fizzle out.

The Government is helping the RBI cut rates, but the transmission of lower rates to borrowers and huge NPAs of PSU banks need to be factored in. The current market rally should last till the RBI policy. What happens next should be a period of consolidation.

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

Tuesday, March 29, 2016

WTI and Brent Crude Oil charts: an update

WTI Crude Oil chart


The daily bar chart pattern of WTI Crude oil tried to defy gravity and made a surge towards its 200 day EMA. Low volumes during the last leg of the rally dashed bullish hopes of a sojourn into bull territory.

Oil's price faced strong resistance from its long-term moving average on Mar 18, formed a 'reversal day' bar (higher high, lower close) and corrected down to its rising 20 day EMA.

Daily technical indicators have corrected overbought conditions but remain in bullish zones. Oil's price can correct some more. Bulls may use the dip to mount another attempt at crossing the 200 day EMA.

On longer term weekly chart (not shown), oil’s price closed above its 20 week EMA for three straight weeks, but is trading below its falling 50 week and 200 week EMAs in a long-term bear market. Weekly MACD is in bearish zone. RSI is neutral. Slow stochastic looks ready to drop from its overbought zone. Despite the sharp rally, bears remain on top.

Brent Crude Oil chart


The daily bar chart pattern of Brent Crude oil made a feeble effort to cross above 42 on Mar 18, but formed a small 'reversal day' bar and corrected down to its rising 20 day EMA.

All three daily technical indicators showed negative divergences by failing to touch new highs with oil's price and triggered the correction.

Bulls can buy the dip to keep the rally alive. Falling volumes indicate that their enthusiasm may be waning.

On longer term weekly chart (not shown), oil's price closed above its 20 week EMA for the third week in a row, but is trading below its falling 50 week and 200 week EMAs. Weekly MACD and RSI are in bearish zones, but Slow stochastic has entered its overbought zone. The long-term bear market remains in force. Expect bears to pounce at any time.

Monday, March 28, 2016

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 24, 2016

S&P 500 index chart


In a trading week shortened by Good Friday, the daily bar chart pattern of S&P 500 formed a small 'reversal day' bar (higher high, lower close) on Tue. Mar 22 and started correcting down towards its 200 day EMA.

Readers were forewarned by the following comments in last week's post: "All three technical indicators are looking overbought, which may lead to a correction or consolidation. Also, the rally during Mar '16 has been within a 'rising wedge' pattern, which has bearish implications."

The 20 day EMA has crossed above the 200 day EMA, which is a bullish sign. However, the 'golden cross' of the 50 day EMA above the 200 day EMA, which technically confirms a bull market, is awaited.

Daily technical indicators are in the process of correcting overbought conditions. The correction towards the 200 day EMA may continue, but bulls have been buying the dips, and can do so again.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs for the third week in a row, but formed a 'reversal week' bar (higher high, lower close). The index is trading more than 200 points above its rising 200 week EMA in a long-term bull market, but a pullback towards the 50 week EMA is a possibility. Upward momentum of weekly technical indicators is waning.

FTSE 100 index chart


The daily bar chart pattern of FTSE 100 tested but failed to overcome resistance from its 200 day EMA. By the end of a holiday-shortened week, bears reasserted themselves. 

The index fell sharply on Thu. Mar 24 and closed below its 20 day EMA but just above the 6100 level - losing about 1.3% on a weekly closing basis.

Daily technical indicators are beginning to turn bearish. MACD has crossed below its signal line, and about to drop from its overbought zone. RSI is seeking support from its 50% level. Slow stochastic is falling towards its 50% level.

A fall below the 50 day EMA towards the 6000 level seems likely.

On longer term weekly chart (not shown), the index slipped below its 20 week EMA and is trading below its three weekly EMAs in a long-term bear market. Upward momentum of weekly technical indicators have stalled.

Saturday, March 26, 2016

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 23, 2016

Activity was expected to be at a low key during a 3-day trading week truncated by Holi and Good Friday holidays. Continued buying interest from FIIs ensured that both Sensex and Nifty gained about 1.5% each on a weekly closing basis.

As per provisional figures, FIIs were net buyers of equity worth nearly Rs 3500 Crores during the week. DIIs were net sellers of equity worth Rs 2600 Crores. Both indices are facing resistances from long-term support/resistance levels.

Stock indices may remain volatile next week due to F&O expiry and financial year end on Thu. Mar 31 '16. Hopes of an interest rate cut by RBI in April and short covering can continue to sustain the market rally from the Feb 29 low.

BSE Sensex chart pattern


The daily bar chart pattern of Sensex has traded above its 20 day and 50 day EMAs for the past 3 weeks. The 20 day EMA has crossed above the 50 day EMA after 5 months. These are short-term bullish signals.

However, after breaking out above the support/resistance level of 24830, the index is facing resistance from the 25450 level. The 200 day EMA is still falling, and the index is trading below it in bear territory.

Bears may put up a fight to defend the 200 day EMA. When - not if - the index moves above the 200 day EMA, expect stronger resistances from the support/resistance level of 26300 and the blue downtrend line.

Three of the four daily technical indicators - MACD, RSI, Slow stochastic - are in their overbought zones. ROC has corrected from its overbought zone, but remains positive.

Some correction or consolidation is likely as the index approaches its 200 day EMA.

On longer-term weekly chart (not shown), Sensex closed above its 20 week EMA for the first time after 5 months. The index is now 1750 points above its rising 200 week EMA in a long-term bull market.

Weekly MACD and ROC are still in negative zones. RSI is in neutral zone. Slow stochastic has crossed above its 50% level. Bulls are gradually gaining ground, but bears haven't given up the fight yet.  

NSE Nifty 50 chart pattern


The weekly bar chart pattern of Nifty 50 closed higher for the 4th straight week. It also managed to close just above the next support/resistance level of 7700, but remains below its 50 week EMA in bear territory.

Bears may try to defend the 50 week EMA. Stronger resistances are likely from the blue downtrend line and the next support/resistance level of 7950.

A change of trend will be confirmed only when the index crosses above the downtrend line convincingly (i.e. supported by a significant increase in volumes).

Weekly technical indicators are showing decent upward momentum. ROC and Slow stochastic have entered bullish zones. MACD has crossed above its signal line in negative zone. RSI is facing resistance from its 50% level.

Nifty closed 600 points above its rising 200 week EMA (not shown) in a long-term bull market. The scale continues to tilt towards bulls.

Bottomline? Chart patterns of Sensex and Nifty are testing long-term 'support/resistance' levels. Some correction or consolidation is a possibility. Use dips to enter fundamentally strong stocks. Long-term bull markets are recovering slowly but surely from year-long corrections.


Wednesday, March 23, 2016

Top-down Analysis: Finding the Right Sectors and Stocks

The stock market seems to be recovering from a year-long correction. Experts and analysts are suggesting that the next leg of a long-term bull market is about to unfold.

This is a good time for new investors to start building an investment portfolio. Note that I haven't mentioned anything about buying stocks just yet. 

Building an investment portfolio that will generate inflation-beating returns for many years requires careful planning and analysis. So, how should you begin the process?

Ideally, you should get in touch with a financial planner who will hand-hold you through the process of preparing a financial plan based on your current and future earnings and financial commitments.

Another option is to spend some time on research about how to prepare a financial plan, and do it yourself. It is not rocket science. Basic math skills and accounting knowledge is good enough.

Next, properly assess your risk tolerance. There are tools available to do such an assessment.

Based on your financial plan and risk tolerance, an asset allocation plan should be prepared. What is the necessity of an asset allocation plan? 

It diversifies your investments among different asset classes - like equity, mutual funds, fixed income instruments, gold - to enable better returns under different market conditions.

Now you are ready to build your investment portfolio according to your financial plan, risk tolerance and asset allocation plan.

To beat inflation, you have to invest in equity shares. It is not just about opening trading and demat accounts. You need to know which stocks to buy. 

For that, you need to go through another process, called Top-down Analysis - where you figure out how the economy is doing and which sectors are likely to perform better during the next leg of the bull market.

It helps to have some knowledge of the business processes in the identified sectors. 

If you have identified FMCG sector as a potential money-spinner due to the thrust on rural income by the government, you need to know that companies in the sector typically have huge advertisement costs, strong cash flows, low capex, well-known brands, high P/E, low growth, good dividend payouts.

You can choose the top two or three companies based on their rural distribution reach. Repeat the exercise for three or four more sectors to get adequate diversification. 

Now you have 10-12 stocks from three-four sectors for the equity part of your portfolio.

Read more about Top-down Analysis here.

Related Post

How to Pick Stocks for Investment - Part II

Tuesday, March 22, 2016

Gold and Silver charts: an update

Gold chart pattern


The daily bar chart pattern of Gold bounced up with strong volume support after a pullback to the top of the 'symmetrical triangle' on Thu. Mar 10 '16. The next day, it rose to touch a new 52 week high of 1288, but formed a 'reversal day' pattern (higher high, lower close) and corrected below its rising 20 day EMA and the 1230 level.

All three daily technical indicators touched lower tops (marked by blue arrows) when gold's price touched a new high. The combined negative divergences may have triggered the 60 points fall.

Just when it seemed that an 'end run' below the triangle was starting, gold's price bounced up to touch a lower top of 1270, formed another small 'reversal day' pattern on Thu. Mar 17, and dropped to seek support from its 20 day EMA.

Two of the daily technical indicators - MACD, RSI - are showing downward momentum but remain in bullish zones. Slow stochastic has dropped below its 50% level. Some more correction is likely.

On longer term weekly chart (not shown), gold’s price has dropped below its 200 week EMA after a brief sojourn above it. Weekly MACD and Slow stochastic are inside their overbought zones, and hinting at a possible correction. RSI is moving down after facing resistance from the edge of its overbought zone.

Silver chart pattern


The daily bar chart pattern of Silver started rallying after forming a 'cup and handle' pattern. The 20 day EMA has crossed above the 200 day EMA, and the 50 day EMA is trying to follow suit.

The 'golden cross' of the 50 day EMA above the 200 day EMA will technically confirm a return to a bull market. However, the formation of a 'reversal day' pattern (higher high, lower close) on Fri. Mar 18 '16 may have given a boost to bearish hopes.

All three daily technical indicators touched lower tops (marked by blue arrows) when silver's price rose higher. The combined negative divergences may end the rally.

Also, trading action during the past 5 weeks may have formed a bearish 'rising wedge' pattern, from which a downward breakout is likely.

On longer term weekly chart (not shown), silver’s price closed above its 20 week and 50 week EMAs but well below its falling 200 week EMA, and remains in a long-term bear market. Weekly technical indicators are in bullish zones. Slow stochastic has entered its overbought zone for the first time since Oct '15. 

Monday, March 21, 2016

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 18, 2016

S&P 500 index chart


The daily bar chart pattern of S&P 500 shows a pullback towards the 200 day EMA during the first two days of the week, which was used by bulls to buy. 

The index surged past the 2050 level intra-day with strong volume support before closing just below it with a weekly gain of 1.35%. US Fed's decision to keep interest rates unchanged boosted bullish sentiment.

Is it time for bears to beat a retreat? Not yet. Despite the 'double bottom' reversal pattern formed during Jan-Feb '16 and the subsequent strong rally, the sharp fall from the Dec 29 '15 top of 2082 has not been fully retraced.

The 20 day EMA is rising rapidly towards the 200 day EMA. A 'golden cross' of the 50 day EMA above the 200 day EMA will provide the technical confirmation of a return to a bull market.

Note what had happened after the 'golden cross' in Nov '15. The index failed to stay above its 200 day EMA for more than 2 months, and formed a bearish pattern of 'lower tops and lower bottoms' before correcting sharply.

There is a possibility that a similar pattern may get formed again. All three technical indicators are looking overbought, which may lead to a correction or consolidation. 

Also, the rally during Mar '16 has been within a 'rising wedge' pattern, which has bearish implications. So, it may be better to err on the side of caution because it is a bit late for jumping in feet first.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs for the second week in a row. At the time of writing this post, the index is trading more than 200 points above its rising 200 week EMA in a long-term bull market. Weekly technical indicators are looking bullish.

FTSE 100 index chart


The daily bar chart pattern of FTSE 100 continued to face strong resistance from the 6200 level during the first 3 days of the week. On Thu. Mar 17 '16, the index touched an intra-day high of 6220 and closed at 6201.

On Fri. Mar 18, the index rose further and tested resistance from its 200 day EMA with a strong volume surge (not shown), but formed a 'reversal day' pattern (higher high, lower close). 

The index gained just about 50 points on a weekly closing basis. However, at the time of writing this post, the index has slipped about 15 points. Bears continue to hold the upper hand, and may strike at any time.

Daily technical indicators are in bullish zones, but not showing any upward momentum. MACD is entangled with its signal line and moving sideways inside its overbought zone. RSI is moving sideways above its 50% level. Slow stochastic has slipped down from its overbought zone.

On longer term weekly chart (not shown), the index closed above its 20 week EMA for the 3rd week in a row, but below its sliding 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are looking bullish. MACD is rising in negative zone. RSI is straddling its 50% level. Slow stochastic has entered its overbought zone for the first time since Apr '15.

Sunday, March 20, 2016

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 18, 2016

FIIs were net buyers of equity worth more than Rs 4000 Crores during the past week. DIIs were net sellers of equity worth Rs 2350 Crores, as per provisional figures. Forex reserves increased by $2.54 Billion during the week.

Since the beginning of the month, FII net buying in equity has touched Rs 12700 Crores, exceeding their net selling during Feb '16. DII net selling in equity month-to-date is worth Rs 8000 Crores.

Both Sensex and Nifty closed higher for the third week in a row - at their highest levels in more than 2 months. However, long-term resistance levels on both indices have not been convincingly breached yet - keeping bearish hopes alive.

Next week has only three trading sessions because of Holi and Good Friday holidays. Volumes may remain muted, and both indices are expected to consolidate near current levels. 

BSE Sensex chart pattern



The daily bar chart pattern of Sensex consolidated sideways with a slightly upward bias, and closed with a weekly gain of 235 points (about 1%).

The index traded the entire week above its 20 day and 50 day EMAs, and closed above the long-term resistance level of 24830. The 20 day EMA is about to cross above the 50 day EMA. These are bullish signs in the near term.

Note that the 200 day EMA is still sliding down, and the index is trading below it. The close above the 24830 level has not been a convincing one yet - because the index remains within the 3% 'whipsaw' limit above it. The blue downtrend line continues to rule the chart. These are longer term bearish signs.

Three of the four daily technical indicators - MACD, RSI, Slow stochastic - are inside their overbought zones. ROC has already corrected from its overbought zone, and crossed below its 10 day MA. 

Some more consolidation or a correction may be just around the corner. Any dip can be used to add to existing positions. The 23840 level should provide good support on the downside.

In case the rally continues on the back of buying by FIIs, overhead resistances can be expected from the 200 day EMA, the downtrend line and the 26300 level.

On longer term weekly chart (not shown), Sensex closed nearly 1400 points above its rising 200 week EMA in a long-term bull market, but is facing resistance from its 20 week EMA. Weekly technical indicators are showing some upward momentum, but MACD, ROC and RSI remain in bearish zones. 

NSE Nifty 50 chart pattern



The weekly bar chart pattern of Nifty 50 gained 94 points (1.25%) on a weekly closing basis. It closed above the long-term resistance level of 7540, and also above its 20 week EMA for the first time since the week ending on Oct 23 '15.

However, the index is trading below its falling 50 week EMA. The blue downtrend line continues to dominate the chart. Bears may have lost a couple of recent battles, but can regroup and fight back at any time.

Weekly technical indicators are showing upward momentum, but haven't quite turned bullish yet - except Slow stochastic, which has crossed above its 50% level. MACD has crossed above its signal line in negative zone. ROC and RSI are in neutral zones.

If the rally continues, expect resistances from the 50 week EMA, the 7950 level and the downtrend line. Any dip towards 7240 can be used as a buying opportunity.

Nifty closed almost 500 points above its rising 200 week EMA (not shown) in a long-term bull market. The scale is gradually tilting towards bulls.

Bottomline? Chart patterns of Sensex and Nifty have managed to close above long-term 'support/resistance' levels. Some correction or consolidation can be expected. Use any dips to enter fundamentally strong stocks. Long-term bull markets are gradually recovering from year-long corrections.

Friday, March 18, 2016

4 Steps for Profitably Investing your Savings

Here are the 4 easy steps:

  • Open a 3-in-1 account - a combination of a demat account, a savings bank account and a trading account
  • Transfer your life's savings into the savings bank account
  • Visit some popular online investment boards for cheap small-cap stock ideas
  • Buy stocks by the truck-load and get rich in double quick time

Do I hear a murmur of disbelief from blog readers? Are you thinking: He's kidding, right? 

Right. I'm kidding. Those are the 4 easiest steps to kiss your savings goodbye.

So, are there any easy steps that one can follow for profitably investing one's savings? 

First, the bad news. The answer is: No.

Now, the good news. 

There are 4 simple steps that you can follow - but these steps are not easy. They require a certain amount of planning, discipline, patience and commitment.

If you already have a successful career or business, you will know what I am talking about.

If you are still a student, think of the way you have progressed in your studies towards a career.

There are no guarantees - in life, or in investing. Most successful investors will readily admit that a large dose of luck is required to get rich.

But the 4 simple steps will definitely help you to turn a tidy profit from your investment portfolio.

So, without further ado, here are the 4 Steps to Building a Profitable Portfolio.

Related Posts

How to generate income and build wealth


Wednesday, March 16, 2016

Nifty chart: a midweek update (Mar 16 '16)

FIIs have been net buyers of equity worth Rs 1600 Crores this week, as per provisional figures, despite net selling of Rs 54 Crores on Tue. Mar 15. DIIs have been net sellers on all three days - their sales totalling almost Rs 1800 Crores.

WPI inflation for Feb '16 was negative for the 16th straight month at -0.91% against -0.9% in Jan '16. CPI inflation eased to a 4 months low of 5.18% against 5.69% in Jan '16. Lower food prices helped. RBI may now consider a rate cut in Apr '16.

Exports fell for the 15th month in a row by 5.66% to $20.73 Billion in Feb '16. Imports also fell, by 5.03% to $27.28 Billion. The trade deficit of $6.54 Billion was the lowest this fiscal year.


The 1 year closing chart pattern of Nifty 50 shows the importance of the long-term 'support/resistance' level of 7550. After acting as a support level in Sep '15, it has been providing strong resistance during the past 2 months.

A couple of recent attempts by the index to overcome the resistance have failed. Remember that a support or resistance level gets weakened by frequent tests.

So, will Nifty breakout upwards soon? Daily technical indicators are not giving much encouragement to bulls. Upward momentum on all three have stalled. 

The 'double bottom' reversal pattern formed in Feb '16 may have ended the year-long down trend, but bears are in no mood to give up just yet.

The TRIN breadth indicator (not shown) is just above its overbought zone. The index is trading below its falling 200 day EMA in bear territory. 

Odds are favouring a correction more than a rally. Bulls can take heart that every dip is being used as a buying opportunity - clearly indicating a change in sentiment.

Several companies are falling over each other in declaring interim dividends to beat the Apr 1 deadline for an additional tax on those receiving more than Rs 10 Lakh in dividends (viz. promoters).

Please don't rush in to buy such company stocks in the hope of dividend stripping. Do so only if fundamentals justify a buy.

Remain patient and stay focussed on your asset allocation plan and your own portfolio. As regular blog reader Eswar mentioned recently: Some times the best stock to buy is something you already own.

Tuesday, March 15, 2016

WTI and Brent Crude Oil charts: sharp bear market rallies coming to an end

WTI Crude Oil chart


The daily bar chart pattern of WTI Crude oil shows a splendid gain of 50% from its Feb '16 low that raised bullish hopes of an end to the long bear market.

Speculation that Russia, Saudi Arabia, Kuwait, Qatar and Venezuela will cut their output, and falling US shale oil production had sustained the month-long rally.

Continued Iraqi production and Iran's decision to increase output to pre-sanction levels have deflated bullish hopes. If the rally continues towards 50, US shale oil production may revive and add to record high inventory levels. 

Daily technical indicators have started to correct overbought conditions. RSI and Slow stochastic failed to touch new highs with oil's price on Fri. Mar 11. The negative divergences may lead to a correction towards 34.

On longer term weekly chart (not shown), oil’s price closed above its 20 week EMA for the first time in more than 5 months, but is trading below its falling 50 week and 200 week EMAs. Weekly MACD and RSI are in bearish zones. Slow stochastic has reached the edge of its overbought zone. The long-term bear market is far from over. 

Brent Crude Oil chart


The daily bar chart pattern of Brent Crude oil rallied past its 50 day EMA, gaining more than 50% from its Jan '16 low of 27, but fell short of the 42 mark.

On Mar 8 '16, oil's price formed a 'reversal day' pattern (higher high, lower close), backed by strong volumes, and slid down below 40.

All three daily technical indicators are showing downward momentum. MACD and Slow stochastic are inside their respective overbought zones. RSI faced resistance from the edge of its overbought zone.

A correction towards 36 appears likely.

On longer term weekly chart (not shown), oil's price closed above its 20 week EMA for the first time in more than 9 months, but is trading below its falling 50 week and 200 week EMAs. Weekly MACD and RSI are in bearish zones, but Slow stochastic is about to enter its overbought zone. The long-term bear market remains in force. 

Monday, March 14, 2016

Stock Index Chart Patterns: S&P 500 and FTSE 100 – Mar 11, 2016

S&P 500 index chart


The daily bar chart pattern of S&P 500 faced resistance from its 200 day EMA during the first four trading days of the week, but broke out upwards on Fri. Mar 11 '16 to close at its highest level in 2016.

The following comment was made in last week's post"If the index finds support around 1960 and bounces up, it will be a good buying opportunity." 

Note that the index touched an intra-day low of 1969 on Thu. Mar 10 - giving an entry opportunity.

The index gained 1.1% on a weekly closing basis, but Friday's upward breakout was not accompanied by a significant increase in volumes. 

All three technical indicators are looking overbought. Slow stochastic is showing negative divergence by failing to touch a new high with the index. 
Also, the sharp correction during Jan '16 has not yet been fully retraced.

There is a possibility that bears may become active. But dips are being used to buy - which is a sign of bull dominance. Some consolidation can be expected, if not a correction.

On longer term weekly chart (not shown), the index closed above its three weekly EMAs for the first time in 2016. At the time of writing this post, the index is trading nearly 200 points above its rising 200 week EMA in a long-term bull market. Weekly technical indicators are looking bullish.

FTSE 100 index chart


The following comment was made in last week's post on the daily bar chart pattern of FTSE 100: "A likely pullback and subsequent bounce up from the 6050 level can be a buying opportunity."

By closing below its 20 day EMA at 6037 on Thu. Mar 10 and subsequently bouncing up on Fri. Mar 11, the index did provide a buying opportunity. However, on a weekly closing basis, the index lost about 1%.

The index has been unable to overcome strong resistance from the 6200 level since the beginning of the month, and is trading below its 200 day EMA in a bear market.

Daily technical indicators are in bullish zones after correcting overbought conditions, but not showing much upward momentum. 

Some consolidation can be expected around current level before the index can make an attempt to breakout above its 200 day EMA.

On longer term weekly chart (not shown), the index closed above its 20 week EMA for the 2nd week in a row, but more than 150 points below its sliding 50 week and 200 week EMAs in a long-term bear market. Weekly technical indicators are looking bullish, but MACD is still in negative zone and Slow stochastic is near its overbought zone.

Sunday, March 13, 2016

Why small investors should relentlessly pursue Saraswati and wait patiently for the blessings of Lakshmi - instead of the other way around

In Hindu mythology, the Holy Trinity of Lord Brahma, Lord Vishnu and Lord Maheshwara represent the cycle of life - Creation, Preservation and Destruction.

They are also symbols of the three ‘gunas’ (or attributes) of the soul – sattva, rajas, tamas – that have to be understood and then transcended for the soul’s liberation and eventual union (yoga) with the Universal Consciousness.

The Divine Consorts of the three Lords are Saraswati, Lakshmi and Parvati. Saraswati is the Goddess of learning, speech and music. Lakshmi is the Goddess of wealth, prosperity and generosity. Parvati is the Goddess of fertility, love and devotion.

Here, we will concern ourselves with Saraswati and Lakshmi – who appear to be mutually exclusive. Where one is present, the other is absent.

There is a Bengali proverb that says: “Those who concentrate on their education eventually get to ride in nice cars.” In other words, pursue Saraswati, and Lakshmi will eventually give you her blessings.

Times have changed. Saraswati has taken a back seat. Lakshmi has become the Goddess to be pursued – by hook or by crook. The concept of ‘capitation fees’ paid by wealthy parents to private medical and engineering colleges to admit their academically inferior sons and daughters is a glaring example.

Those with knowledge and learning have very little money. Those who have lots of money are often crude and semi-literate. Many of our rowdy Parliamentarians have amassed vast amounts of money through dubious means.

Many small investors perhaps get influenced by what is going on around us. The video of a farmer who has not paid the last three instalments of a Rs 1 Lakh loan getting beaten up by uniformed cops no longer shock us.

The King of Good Times, a willful defaulter of over Rs 9000 Crores of loans from several banks, thumbs his nose at authorities and flies off to a foreign land and there is a murmur of protest in social media, which will soon die down.

As someone put it succinctly: “If you owe 1 Crore to a bank, it is your problem. But if you owe Rs 1000 Crores, it becomes the bank’s problem."

So, why am I suggesting that small investors should pursue Saraswati and wait patiently for Lakshmi? First, I belong to the old school of the Bengali proverb mentioned above.

Second, most small investors may not have the resources of our wily politicians to launder their wealth into real estate projects or foreign bank accounts through ‘hawala’.

Making money from the stock market is the easier part. Retaining that money and growing it into long-term wealth requires skill and learning.

If you are suddenly blessed by Lakshmi and make a 10-bagger return on a penny stock, will you know how to turn that 10-bagger return into 100-bagger wealth? Or, in your urgency to chase Lakshmi, will you reinvest in another penny stock and lose it all?

Not only do you need to learn about the economy, money market, bond yields, put/call ratios, fundamental and technical analysis to survive in the stock market, you need to follow proper financial and asset allocation plans.

Without the blessings of Saraswati – which requires life-long commitment to learning – the blessings of Lakshmi may be short-lived. Unless – according to a Marathi proverb – she breaks her leg and has to stay put at your home for some time. 

Saturday, March 12, 2016

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 11, 2016

After 4 straight months of net selling in equities, FIIs have firmly turned bulls in Mar '16. Their net buying in equities was worth Rs 2700 Crores during the week, and Rs 8600 Crores during the first 8 trading days of the month.

DIIs have turned bears after 4 consecutive months of net buying in equities. Their net selling in equities was nearly Rs 3200 Crores during the week, and Rs 5600 Crores during the first 8 trading days of the month.

Both Sensex and Nifty have rallied more than 10% from their 52 week lows touched on Feb 29 '16, and closed with weekly gains for the 2nd week in a row, but are facing resistances from long-term support/resistance levels.

The IIP number in Jan '16 was -1.53%, against -1.18% in Dec '15. It was the 3rd straight month of contraction in factory output, due mainly to degrowth in manufacturing and capital goods. However, the cumulative figure for the first 10 months of the fiscal year (Apr '15 to Jan '16) was 2.7%, against 2.6% in the previous 10 months period.

"With young workforce and continuing policy reform, India has not only emerged as the fastest-growing economy, but its stars also shine bright amid the current global gloom",  IMF Managing Director Christine Lagarde said earlier today.

BSE Sensex chart pattern


The daily bar chart pattern of Sensex closed with a small weekly gain of 72 points, and managed to trade above its 20 day and 50 day EMAs in a holiday-shortened week. 

But the index continues to trade below its falling 200 day EMA and the blue downtrend line in bear territory, and failed to cross above the long-term 'support/resistance' level of 24830.

All four daily technical indicators are in bullish zones. MACD and ROC are showing upward momentum, but RSI and Slow stochastic are not. ROC and Slow stochastic are well inside their overbought zones.

Expect some correction or consolidation in the zone between 23840 and 24830, before the index can gain sufficient technical 'strength' to rise higher.

If the index does manage to break out above 24830, it will face resistance from its falling 200 day EMA (currently at 25700), and twin resistances from the next 'support/resistance' level of 26300 and the downtrend line. On the downside, 23840 should provide support.

On longer term weekly chart (not shown), Sensex closed more than 1150 points above its rising 200 week EMA in a long-term bull market, but is facing resistance from its 20 week EMA. Weekly technical indicators are showing upward momentum, but remain in bearish zones. 

NSE Nifty 50 chart pattern


The weekly bar chart pattern of Nifty 50 gained about 25 points on a weekly closing basis, but is facing twin resistances from the long-term 'support/resistance' level of 7540 and its sliding 20 week EMA.

If the index overcomes the twin resistances, expect more resistances from the falling 50 week EMA (currently at about 7800), the next 'support/resistance' level of 7950, and the blue downtrend line.

Weekly technical indicators have corrected oversold conditions, but remain in bearish zones. MACD, RSI and Slow stochastic are showing some upward momentum.

The NSE TRIN market breadth indicator (not shown) is looking overbought - hinting at a correction towards 7240. The likely dip will be an adding opportunity.

Bottomline? Chart patterns of Sensex and Nifty are facing strong resistances from long-term 'support/resistance' levels. Some correction or consolidation can be expected. Use the opportunity to enter fundamentally strong stocks. Long-term bull markets are in the process of recovering from year-long corrections.

Friday, March 11, 2016

Fundamental Analysis: Solvency ratios and Liquidity ratios

Selecting a company for investing is not a trivial task. Many small investors get into trouble because they buy a stock without doing adequate homework. 

A stock may be in the news as a potential multibagger, or may be approaching its 25th or 50th year of existence or has a reputation of distributing large dividends.

Those may be good reasons for someone to buy the stock in the hope of making some quick gains. But for building wealth for the long-term, more detailed analysis is necessary to determine a company's staying power.

Ratio analysis is a good way to differentiate a company from its peers and competitors. But there are so many ratios to analyse - where should you start?

The state of financial health of a company is one of the first things you should evaluate. If the financial foundation is strong, many other shortcomings can be overridden.

Solvency ratios - like debt/equity and interest coverage - indicate the ability of a company to meet its long-term financial commitments.

Liquidity ratios - like current ratio and quick ratio - indicate how well a company can meet its short-term financial obligations.

To learn more about solvency and liquidity ratios - how to calculate and evaluate them - visit the following links at investopedia.com:

Link 1

Link 2

Wednesday, March 9, 2016

Nifty chart: a midweek update (Mar 09 '16)

After Monday's holiday, FIIs continued their buying in equities. Their net buying crossed Rs 1200 Crores on Tuesday and Wednesday, as per provisional figures. In a reversal of roles, DIIs have turned bears. Their net selling exceeded Rs 2150 Crores.

The salaried middle-class heaved a sigh of relief as the Finance Minister withdrew his budget proposal of taxing 60% of EPF savings made after Apr. 1, 2016. The Finance Bill will need to be amended accordingly.

Oil's price has been rising on speculation that major producers may agree to a cut in production. Meanwhile, Vijay Mallya has flown the coop as banks tried to pressurise him to honour his personal guarantees against huge loans taken by the now-defunct Kingfisher Airlines.


After touching a 52 week intra-day low of 6826 on Feb 29 '16, Nifty rallied sharply above its 20 day EMA, the 'support/resistance' level of 7240 and its 50 day EMA - gaining more than 700 points (10.3%).

All three daily technical indicators touched higher bottoms (marked by blue arrows) while the index dropped lower. The combined positive divergences had provided a technical trigger for the rally.

The possibility of the index facing resistance from the next 'support/resistance' level of 7540 was mentioned in last week's update.

What will Nifty do next? In the past 2 days, DII selling has exceeded FII buying. Slow stochastic is well inside its overbought zone. The TRIN market breadth indicator (not shown) has entered its overbought zone for the first time since the third week of Dec '16. 

A correction towards 7240 may be just around the corner. The dip will be a good buying opportunity.

Some experts are suggesting that the index may fall below 7240 and test its Feb 29 low. That seems unlikely - unless there is a sudden global sell-off for some reason.

A third possibility is Nifty overcoming the resistance from the 7540 level and moving up to 7700, which is the next 'support/resistance' zone.

Can the index move even higher? Sure it can. But there is a limit to how far short-covering can propel this rally.

Eventually, fundamentals need to be conducive for the bull market to resume in earnest - such as, an interest rate cut by RBI in Apr '16 and better Q4 results from India Inc.

Till then, use every opportunity to get rid of any dud stocks from your portfolio, and switch to fundamentally stronger ones.


Tuesday, March 8, 2016

Gold and Silver charts: long-term bear markets coming to an end?

Gold chart pattern

The following comments were made in the previous post on the daily bar chart pattern of Gold: "All three daily technical indicators are looking extremely overbought, which can lead to a price pullback towards the 1180 - 1200 zone. Bulls may take the opportunity to buy again."

Note that gold's price dropped inside the zone between 1180 - 1200 as expected, successfully tested support from the previous top of Oct '15, and then entered a sideways consolidation within a 'symmetrical triangle' pattern, from which an upward breakout occurred on Mar 3 '16.

The next day, gold's price touched a 52 week high of 1280 with a huge volume spurt, only to pullback towards the top of the triangle before bouncing up. 

Earlier, gold's price had formed a 4 months long 'rounding bottom' reversal pattern - clearly visible on the 50 day EMA. The subsequent 'golden cross' of the 50 day EMA above the 200 day EMA (marked by blue oval) technically confirmed a return to a bull market after almost 4.5 years.

All three daily EMAs are rising, and gold's price is trading above them. Is it time for bears to throw in the towel and beat a quiet retreat? Probably not so quiet - because of several bearish technical signals. 

First, volumes during the upward breakout from the triangle should have been significantly higher to technically confirm the breakout - but wasn't. Second, gold's price and its 20 day EMA have risen too steeply above the 200 day EMA. Such steep climbs are often unsustainable.

Third, all three daily technical indicators, after correcting overbought conditions, failed to touch new highs with gold's price. The combined negative divergences can lead to a correction, or even an 'end run' below the 'symmetrical triangle'.

On longer term weekly chart (not shown), gold’s price has closed above its 200 week EMA for the first time in nearly 3 years. Weekly technical indicators are looking overbought, and hinting at a possible correction. Any dip may be used as a buying opportunity by bulls.

Silver chart pattern


The following comments were made in the previous post on the daily bar chart pattern of Silver"All three daily technical indicators are inside their overbought zones. A pullback towards - and a likely drop below - the 200 day EMA is on the cards."

Silver's price dropped below all three EMAs, but bounced up sharply into bull territory and appears to have formed a bullish 'cup and handle' pattern. The pattern is more clearly visible on the 20 day EMA. 

A convincing rally past the 16 level will technically confirm the 'cup and handle' pattern.

Daily technical indicators corrected overbought conditions and are in bullish zones. The 'golden cross' of the 50 day EMA above the 200 day EMA, which will technically confirm a return to a bull market, is awaited.

On longer term weekly chart (not shown), silver’s price closed above its 20 week and 50 week EMAs but well below its falling 200 week EMA, and remains in a long-term bear market. Weekly technical indicators are in bullish zones, but not showing much upward momentum.