Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jan 28, ‘10

S&P 500 Index Chart

In last week’s analysis of the S&P 500 index chart pattern, I had given technical and fundamental reasons that pointed to a likely correction. While the correction hasn’t quite happened yet, the market is likely to head downwards.

The S&P 500 rose smartly through the week and touched a new high of 1303 on an intra-day basis on Fri. Jan 28 ‘11, but gave up all the gains by forming a bearish ‘reversal day’ pattern (higher high, lower close) on strong volumes. It closed the week at 1276 - 7 points lower on a weekly basis.

All three technical indicators made lower tops while the index reached a higher one. The combined negative divergences are likely to drag the index down. The MACD is positive, but falling below the signal line. The slow stochastic has dropped from the overbought zone. The RSI has been making a series of lower tops and lower bottoms as the index climbed higher, and is poised just above the 50% level.

Real GDP (net of inflation) grew 3.2% in Q4, which was lower than estimates but higher than 2.6% in Q3 and 1.7% in Q2. Consumer spending grew 4.4% in Q4 vs. 2.4% in Q3. But unemployment remains at 9.4% and jobless claims hit 454000, which was about 50000 higher than estimates. The economy is recovering, but the stock markets appear to have run ahead too far.

Friday’s sell off was attributed by some to the turmoil in Egypt. Markets tend to correct after hitting new tops, and Egypt was just the excuse for doing so. A correction down to the rising 50 day EMA (or even a little lower) will restore the health and sustainability of the bull market. Investors may want to take some profits off the table, and re-enter at lower levels. 

FTSE 100 Index Chart

The FTSE 100 index chart pattern bounced up nicely from the support of the rising 50 day EMA and even managed to clear the 6000 level intra-day on Wed. Jan 26 ‘11. But all the good work by the bulls was spoiled by a high volume ‘distribution day’ on Fri. Jan 28 ‘11. The index slipped below the 5900 level and the 50 day EMA and closed the week at 5881 – another lower weekly close.

The technical indicators are looking bearish and pointing to further downward movement. The MACD is barely positive, and well below the signal line. The slow stochastic bounced up nicely from its oversold zone to reach the 40% level, only to reverse direction. The RSI unsuccessfully tried to regain the 50% level, and has started to move down.

Note that the 200 day EMA is rising and the index is trading more than 200 points above it. That means the bulls are alive and kicking. However, a drop below the Jan 20 ‘11 low of 5867 will form a bearish pattern of lower tops and lower bottoms. So, investors should remain cautious.

Bottomline? The S&P 500 and FTSE 100 indices are in the midst of bull market corrections. This may be a good time to get rid of the weaker stocks in your portfolio. Lower index levels may provide better entry points.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jan 28, ‘11

In a post on Jan 18 ‘11, I had mentioned that the zone between the Apr ‘10 and Aug ‘10 tops should provide strong support. It wasn’t crystal-ball gazing. Previous tops tend to provide support. Both indices stopped exactly in the middle of their support zones. Will the support hold? The sheer volume of FII selling gives that a low probability.

BSE Sensex Index Chart

In last week’s analysis, the weakness in the technical indicators led me to comment that the correction wasn’t over and only a mild pullback rally could be expected. The pullback halted at the falling 20 day EMA. The subsequent correction has dropped the Sensex below the 200 day EMA and rung the first warning bell of trend-change possibilities.

The technical indicators are hinting that the correction may continue. The MACD is falling below its signal line into deeper negative territory. The ROC remains negative, moving up to the ‘0’ line but reversing directions towards its 10 day MA. Both the RSI and and slow stochastic are in their oversold zones.

How low can the Sensex go? Market sentiments don’t care much for arithmetic, but here are some technical support levels:

• The next zone of support is between 17500 (Oct ‘09 top) and 17800 (Jan ‘10 top)
• A 20% drop from the Nov ‘10 top will take the Sensex to 16900
• A 38.2% Fibonacci retracement level of the bull rally from Mar ‘09 to Nov ‘10 is at 16150
• A 50% Fibonacci retracement level of the bull rally is at 14600

Can the Sensex go even lower? Nothing can be ruled out when the bears go on a rampage, but it seems highly unlikely at this stage. Any drop below 17000 should provide good buying opportunities.

NSE Nifty 50 Index Chart

The drops below the 200 day EMA on Thu. Jan 27 ‘11 and into the support zone on Fri. Jan 28 ‘11 were accompanied by an increase in volumes, which doesn’t augur well for the bulls. Looks like the market wants to go lower – or, rather the FIIs would like to see lower levels. The technical indicators are not indicating any halt to the correction yet.

In case the support zone between 5400 and 5550 gets breached, the next support levels of the Nifty 50 can be:

• the zone between 5200 (Oct ‘09 top) and 5300 (Jan ‘10 top)
• at 5050, which is a 20% drop from the Nov ‘10 top
• at 4900, which is the 38.2% Fibonacci retracement level of the bull rally from Mar ‘09 to Nov ‘10
• at 4450, which is the 50% Fibonacci retracement level of the bull rally from Mar ‘09 to Nov ‘10

In technical analysis, we don’t deal with exact numbers, so the levels indicated have been rounded-off to the nearest 50. Remember that breach of any level is subject to a 3% ‘whipsaw’ lee-way.

It is not expected that the Nifty will fall too far below 5000. There is neither euphoria nor panic among investors. Q3 results declared so far have shown good growth in top and bottom lines of India, Inc. The companies that have fared poorly are getting hammered. The RBI is monitoring the economy well and there doesn’t seem to be any asset bubbles. Reforms are moving in fits and starts, but the track record of the Congress-led UPA has never been exemplary about taking bold decisions.

Now that food inflation has become a major problem, there is sudden talk of allowing MNCs to enter organised retail. That one single move can not only bring down food prices through better procurement, storage and distribution but also provide thousands of jobs to semi-literate youths. One can only hope that the Finance Minister takes this important step in the forthcoming budget.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices have formed bearish patterns of lower tops and lower bottoms. Jan 2010 was also a down month, but it helped buyers to enter at lower valuations. So look at this correction as an opportunity to accumulate blue-chip stocks. The correction hasn’t played out yet; avoid aggressive buying.

Notes from the USA (Jan 2011) – a guest post

The US economy continues on its slow and tortuous path to recovery. The US stock market is discounting the fact well in advance and seems to be in fine fettle. FIIs are booking profits in more expensive markets like Indonesia and India and redeploying ‘back home’. This is as good a time as any to do a proper health check of your portfolio.

In his inimitable style, that is exactly what KKP has suggested by drawing a parallel between how we try to manage our health, and how we should approach managing our wealth. It is a ‘big picture’ approach that investors should pay close attention to. Some times we get too wrapped up with ‘what to buy’ and ‘what to sell’ and which way the Nifty is headed.

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Manage Calories or Lose Weight?

Counting calories has been the most common buzz word for most women at some time in their life or another……Men also choose to do this, although to a lesser extent. Some translate this to another buzz word called "diet". Well, diet does not mean eating less to lose weight—although that’s what we commonly associate it with today. Someone "on a diet" is trying to eat less, or stop eating sweets, to fit into a smaller pant size or dress.

Low calorie and fad diets are common in our society today, but few know that these can have some very serious health implications—insufficient vitamin and nutritional intake, lethargy, slowed metabolism, hormonal effects, and even dehydration. Dieters commonly experience intense feelings of hunger and deprivation, which can lead to "cheating" or bingeing over time.

So, what is it that we should be doing?

• Managing Calories or
• Managing our Diet or
• Watching our Weight or
• Getting on a Exercise Program or
• a few more clichés!

Answer is “None of the above”. All of us need only one thing, and that is ‘net-weight-loss” to the point where we get our BMI (Body Mass Index) between 20 and 25 and our Height to Waist line ratio above 2. Getting involved in the ‘variety of actions’ versus focusing on stuff that ‘creates a bottom line’ is what matters. So, it is really all about “Focus on Stuff That Gets Stuff Done”.

So, why is all this relevant here?

Well, investing is pretty much along the same lines. Hang in here for a moment with me and I will share with you the similarities. We all get caught up in the various ‘tactical actions’ or ‘strategic planning’ that does not lead us to a fruitful bottom-line. If you do not get the actions down to the bottom line, then years later, your bottom line shows the poor growth in the accounts.

Small investors have a tendency to move from one strategy to another, not giving any strategy enough time to do its thing. So, what happens in the investment world is that we hear/read/discuss ‘tactical investment methodologies’. We have “Technical Analysis”, “Commodity/Currency”, “Mutual Funds and SIPs”, “Real Estate / Gold”, “FMP / FD”, “Trading Software”, “High Frequency Trading”, “Market Timing”, “Day Trading”, “Long Term Investing”, “ETF Trading” and tons of other tactical choices. All of these elements keep us involved in the ‘variety of actions’ versus focusing on stuff that ‘creates a bottom line’.

So, what is our bottom-line? It is Losing Weight when it comes to health. Some might call it Maintaining Weight (after you get to the ideal point) although nature has provided us a tendency to increase weight with age, so we are back to “Losing Weight”! In the investment world, this translates to “Total Return”. But this is also a cliché. What does that really mean?

In one global definition is it really ‘overall return on all of your assets’ that you have invested money whether you have it around your finger or neck (jewellery), under your feet (real estate), in the locker (diamonds), or in a demat account (stocks)? No. Because it should also include the cars parked in your driveway/garage, protection of assets, estate planning, education planning for kids, retirement accounts, past-and-future-inheritance management, and career growth (that leads to new income). Lets not stop there…..It continues onto the ‘advanced training that one needs to move up in a career’ as well as the ‘time and effort put into educating kids’. Once we include all of these elements (and I am sure I am missing some), it would classify as the variables that feed into the “Total Return”.

My current life style requires more than 24 hours in a day since I am managing so many elements of this Total Return, and making advances on all fronts in the best possible way I can. This is what keeps me motivated, constantly in a learning mode, and hopping from project to project throughout the day to move them an inch or two forward. Everyday is a stretch to learn, add movement to each of the variable-buckets that makes up the Total Return. It all leads to “Focus on Stuff That Gets Stuff Done”, and the “Stuff” here means the variables that make up the Total Return of my family life. With age comes wisdom that allows one to do this well…..The sooner you learn, the more your Total Return….

PS: By the way, I used the simple formula called “Output – Input > 0” meaning Output Calories minus Input Calories has to be greater than zero everyday to lose weight. Once this formula clicked in my mind, I lost 36 lbs or approx 17 kg in a short period of time, and have 18 lbs or 8 kg yet to go……It has been 13 months and 11 days from the day this “formula switch” flipped in my brain! So, to lose 1 lb of weight per week, you have to have a 3500 calorie deficit per week or 500 calorie deficit per day. Mathematically, Output – Input = 500 calories per day and you will be on your way to Net-Weight-Loss. Good luck…

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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.