Stock Index Chart Patterns – S&P 500 and FTSE 100 – Feb 25, ‘11

S&P 500 Index Chart

In last week’s analysis, I had mentioned that the S&P 500 index chart looked overbought and ripe for a correction. But the way every dip was being used by the bulls to buy, any correction would be a short one.

I have added Bollinger Bands to the S&P 500 chart, which shows that the index failed to touch the upper edge of the band when it reached a new high of 1344 on Feb 18 ‘11. So, the three days of correction last week wasn’t entirely unexpected. Neither was the quick recovery on strong volumes on Fri. Feb 25 ‘11 that prevented the index from falling to the rising 50 day EMA and the lower edge of the band.

The technical indicators have weakened. The MACD is well below its signal line, and both are falling. The slow stochastic almost dropped to its oversold zone before making a slight recovery. The RSI showed a bit of resilience by bouncing up from its 50% level. The 1300 level should be observed closely. A drop below it could mean a breach of the 50 day EMA and formation of a bearish pattern of lower tops and bottoms.

The crisis in Libya and the resulting spike in oil prices may have triggered the correction. The downward revision in Q4 GDP growth rate from the earlier estimate of 3.2% to 2.8% may have been another trigger. Some times, investors just look for an opportunity to book profits. There is no immediate threat to the bull market. Stay invested, but maintain appropriate stop-losses.

FTSE 100 Index Chart

The addition of Bollinger Bands on the FTSE 100 chart shows a technical reason for last week’s correction. The new high of 6106, reached on Mon. Feb 21 ‘11 failed to reach the upper edge of the band. All three technical indicators reached lower tops than the one’s in Dec ‘10.

The negative divergences contributed to the sharp correction. The index breached the 50 day EMA and touched the lower edge of the band. The pullback on Fri. Feb 25 ‘11 helped the FTSE 100 to close above the 50 day EMA and the 6000 level. The index has traded within a range of 5800 – 6100 for nearly three months.

The technical indicators are looking bearish. The MACD is barely positive and well below the signal line. The slow stochastic had a small bounce from its oversold zone. The RSI is below the 50% level. There could be some more sideways consolidation. As long as the index trades above its rising 200 day EMA, bulls will be in charge.

Bottomline? The sharp corrections in the chart patterns of the S&P 500 and FTSE 100 indices were caused by technical and fundamental reasons. Uprisings in North Africa and the Middle-East have pushed up oil prices. Caution should be the watch-word till the dust settles. Take some profits off the table. Stay invested, with suitable stop-losses.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Feb 25, ‘11

In last week’s analysis, I had observed that the ‘reversal day’ pattern formed on Fri. Feb 18 ‘11 marked the end of the brief rally. Positive divergences in the technical indicators led to the conclusion that there could be a bit of consolidation within the support zone before the down move resumed. Readers of this blog were forewarned.

BSE Sensex Index Chart

The consolidation within the support zone (between 18000 – 18500) lasted exactly three days. The fall on Thu. Feb 24 ‘11 on massive volumes was followed by a test of the 17500 level on the last day of the week. The ‘death cross’, signalling a bear market (marked by the blue oval), is now a foregone conclusion.

How low will the Sensex go? If I knew the answer, I would get seriously rich! The index has fallen about 18%, and could easily fall another 10% from the current level. That would take it close to the May ‘10 low of 15960. Continued strong selling by the FIIs can take it even lower, but we will keep 15960 as the low target for now.

The technical indicators have turned bearish. The MACD is well inside the negative territory, but marginally above its signal line. The ROC has dropped below its 10 day MA, and into the negative zone. Both the RSI and slow stochastic are below their 50% levels.

One can expect a bit of a rally if the budget on Feb 28 ‘11 is a populist one. But it is unlikely that FIIs will return in a hurry. Without their follow-up buying, any rise in the index will provide the bears with another opportunity to sell. Any fall below 17000 can be used to accumulate large-cap stocks slowly.

NSE Nifty 50 Index Chart

The 5400 level was breached on a very high volumes on Thu. Feb 24 ‘11. FIIs sold heavily. DII buying could not stem the rot. A test of the 5200 level on the Nifty 50 chart is imminent. The 50 day EMA is about to drop below the 200 day EMA. The bears are in control. The index can fall to 4800.

A populist railway budget could only provide a mild boost to the Nifty. Let us wait and see whether the Finance Minister can pull a rabbit out of his hat. Going by his past record, the budget is unlikely to be revolutionary. The domino-like effect of protests in the middle-east and north African countries have pushed oil prices above the three digit mark. That is real bad news for India, which imports 70% of its oil requirements.

Rising oil prices would have an inflationary effect on a country already reeling under inflation. Another round of interest rate hike by the RBI is likely. The fine balance between controlling inflation, and keeping the growth engine functioning smoothly, may get tilted towards the former. That will not be received well by stock investors. 2011 is going to be a challenging year of consolidation for the Indian markets.

Bottomline? The chart patterns of the BSE Sensex and Nifty 50 indices are about to fall into confirmed bear markets. Investors should not panic. It is not the end of the world. Bear markets follow bull markets, and bull markets follow bear markets. Bear markets test your mettle as an investor. (Some what like playing good fast bowling on a bouncy pitch. You’ll get hit a few times, but unlikely to be seriously injured.) Be patient, and wait for an appropriate opportunity to buy.

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

Sitting in India, we tend to become obsessed with what is happening to the Sensex and Nifty. Specially when both indices start heading south. Part of the reason for the recent corrections in emerging markets, including India, is the flight of FII money.

Far away in the USA, KKP can be more objective about investing in global markets. In this month’s guest post, he looks beyond the BRIC (Brazil, Russia, India, China) nations to other markets on the growth path. May be it is time for Indian investors to start developing a global outlook as well, to improve the total returns on their portfolios.

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What Next After BRIC? 

So, we all feel that the organic and FDI (investments) in India and China is the end game, right? Wrong. We know that there are frontiers beyond that, and even though India and/or China will be the next super-power of the world, there will be growth in other regions of the world that we need to focus on to keep our investments earning higher returns. We have to, therefore, teach our children to be open minded not just to the ‘change’, but more importantly to the ‘rate of change’ going on in this world. This will move ‘preferred’ investments from one country to another, or one region to another, or as this article points out, from the favourite BRIC’s to the Frontiers! What does that mean? Lets look into it…

We all know the BRIC (Brazil, Russia, India and China) countries, and the tear that they have been in the last 10 years. Lets talk in CAGR terms (Compounded Annual Growth Rates), i.e. total return per year, compounded on an annual cycle.

BRIC in general have done 14.75% CAGR as of Dec 31, 2010. India has done 17.19% CAGR if you were wondering, but you know what – Indonesia did 26.74% CAGR in that timeframe. This is staggering. Being in the US, we have a choice to invest just about in any country through vehicles called ETFs/ETNs. These are a collection of stocks put together by one of the large brokerage houses or fund managers that invest in a basket of stocks following a particular index. So, now, consider Frontier Country ETFs to capture explosive growth in what I calling ‘new markets’. By the way, there are a slew of countries that we (as investors) have ignored for a long time…..although, the countries are not new at all. But the time has come, and that time is now. Here are the current list of countries that belong to this ‘general’ Frontier Country list with the ETF symbols (valid for US investors and informational for Indian Investors):

1. THD - Thailand
2. ECH - Chile
3. TUR - Turkey
4. VNM - Vietnam
5. IDX - Indonesia
6. EPU - Peru
7. ESR - Eastern Europe
8. GXG - Colombia
9. FRN - Diversified across frontier markets (one of my customers)
10. FFD - MS Frontier Emerging Markets Fund

These ETFs have been performing really well since Mar 2009, and it’s all been one way and hence it has been hard to find the best entry point. On any pullbacks, I personally will be interpreting it as a buying opportunity and starting to put some money (in SIP mode in USD) for long term investments. Keeping in mind that India used to belong to this group once upon a time, there are risks associated with each of them. They possess risks such as illiquidity, non-transparency, inadequate regulation, substandard financial reporting, and similar hazards. They are at the very edge of the investable public securities universe and along with high potential rewards, come high risk.

MSCI, which is a prominent builder of indices, recently announced their list of the frontier universe which includes the countries listed below. FTSE classified their list of countries slightly differently, but both lists overlap quite a bit.

FTSE classification, frontier markets list as of September 2010:

Argentina; Bahrain; Bangladesh; Botswana; Bulgaria; Côte d'Ivoire; Croatia; Cyprus; Estonia; Jordan; Kenya; Lithuania; Macedonia; Malta; Mauritius; Nigeria; Oman; Qatar; Romania; Serbia; Slovakia; Slovenia; Sri Lanka; Tunisia; Vietnam.

As of May 2010, MSCI Barra classified the following countries as frontier markets:

Argentina; Bahrain; Bangladesh; Bulgaria; Croatia; Estonia; Jordan; Kazakhstan; Kenya; Kuwait; Lebanon; Lithuania; Mauritius; Nigeria; Oman; Pakistan; Qatar; Romania; Trinidad and Tobago; Serbia; Slovenia; Sri Lanka; Tunisia; Ukraine; United Arab Emirates; Vietnam; Bosnia and Herzegovina; Botswana; Ghana; Jamaica; Saudi Arabia.

Here is the performance of the Guggenheim Frontier Equity ETF, which is one of the few choices available today. Since this concept of Frontier countries is new, there are not too many funds out there that do this investment, although many ETFs include them in their Asia funds or Latin America fund or even Eastern European funds/ETFs. I happen to like Guggenheim investments since they have been a good customer of mine in the technology world, and have done a lot of technology upgrades within their infrastructure to enable the fund managers to do their job well. Now, that does not necessarily mean good investment results, but they also happen to have great investment results relative to their peers. Guggenheim services a set of private clients who we would call the filthy rich families, i.e. ones with more than $10M in Net Worth!

As you can see from the performance, I rest my case, and even though I have woken up a bit late to these investment type, I think these are young, dynamic, and real-growth-engines that will see their middle income earners grow within their own countries, and provide some real contributions to their own GDPs. Where there is return, there is risk, so while bearing that in mind, one has to invest only a portion of the portfolio and manage the overall risk. When the overall geography turns sour in a bearish environment, I am sure these markets will go down faster, bearing a higher volatility factor than the average. Just another chink in the armour that I am now providing to you to include and manage as you think about future-proofing your portfolio with an ultra positive return kicker!

What do you think?

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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.