Nifty mid-week update: bears defend 5400

The bulls seem to be facing a ‘last mile problem’ on the Nifty 50 chart – as the 5400 level is being well-defended by the bears. What is so great about the 5400 level? Quite a bit – if you are a regular follower of the technical analysis posts on this blog.

For starters, 5400 was a previous top in Apr ‘10 (and again in Oct ‘11). Previous tops have a tendency to act as support/resistance levels. In last Friday’s post, four technical definitions of a bull market were discussed. Two of them are of interest in the context of the 5400 level.

One, a 20% rise from the Dec ‘11 low of 4531 gives a level of 5437 – close enough to 5400. Two, a 50% Fibonacci retracement of the entire fall from the Nov ‘10 peak of 6338 to 4531 gives a level of 5434. To satisfy the technical definition of a bull market, the Nifty has to close above these two levels.

There is another point of technical interest mentioned in last Sunday’s post. Note the blue down trend line that dominated the Nifty chart for the past 15 months, and got breached on the upside during the recent rally. An upward breach of any resistance level is technically valid provided it closes at least 3% above the point of breach.

The down trend line was breached on Feb 1 ‘12, and the point of breach came at about 5220. A 3% higher close means a level of about 5370. In technical analysis, exact levels are not important. Approximately, 5370 is close enough to 5400.

Despite an intra-day breach of 5400 on Feb 7 ‘12, the Nifty has so far failed to close above 5370. Obviously, the bears understand and follow technical analysis and are putting up a fight to defend the 5400 level.

Who will win the battle? Will the bulls propel the Nifty above 5400 soon, or will the bears push the Nifty back into its down trend? What do readers think?

About Nifty Fibonacci retracement levels

During the previous bear market in 2008, I had written a post: ‘How low can the Sensex go?’, where the concept of Fibonacci retracement levels was introduced. Now that the Indian stock market has entered a bear phase once more, it may be a good time to revisit Fibonacci levels to get an idea of how low the Nifty may fall.

The assumption here is that the entire bull rally – from the closing low of 2573 on Mar 9 ‘09 to the closing high of 6312 on Nov 5 ‘10 – is being ‘corrected’. The Nifty had an up move of (6312 – 2573 =) 3739 points, which can be rounded-off to 3740 points.

The respective Fibonacci retracements are:

1. 38.2% of 3740 = 1428 points
2. 50% of 3740    = 1870 points
3. 61.8% of 3740 = 2311 points

So, the retracement levels are:

1. 6312 – 1428 = 4884; say, 4900
2. 6312 – 1870 = 4442; say, 4450
3. 6312 – 2311 = 4001; say, 4000

These levels have been marked on the Nifty closing chart below:

How sacrosanct are these Fibonacci retracement levels? No level is sacrosanct where the market is concerned. It can go anywhere and stop anywhere. But after studying hundreds of charts over many many years, the gurus of technical analysis discovered that markets tend to turn around near Fibonacci retracement levels – both in bull and bear markets.

So, how far down will the Nifty go? The 38.2% retracement level is where we are at now. Can it bounce up from here? Looking at the state of the global and Indian economies, and the weakness in the Nifty technical indicators, the answer is ‘no’.

The next likely support is near the 50% retracement level of about 4450. If that is broken, then the Nifty may go down to the 61.8% retracement level of 4000. Interestingly, 4000 is not only the downward target from the break out below the large descending triangle on the Nifty chart, it is also the top of the huge gap formed on the chart in May ‘09 (not visible in the closing chart). Such ‘coincidences’ make technical analysis a lot of fun.

Can the Nifty fall below 4000 to close the gap? Very unlikely, but not impossible. In Oct ‘08, the Sensex dropped to 7700, which was well below the 61.8% retracement level of 9900. What is the likely level where the Nifty may find support?

Note that the Fibonacci retracement levels are just some numbers calculated on the basis of empirical observations. More realistic support levels are at or near previous tops. The Jun ‘09 and Aug ‘09 tops occurred near 4700. The top on May 18 ‘09 was 4323 and that on Jul 3 ‘09 was 4424 (very close to the 50% retracement level). So, we can expect the Nifty to turn around from the zone between 4300 and 4700.

What should small investors do? Avoid buying or selling in a panic. If you didn’t book profit at 6300 or 5900, don’t start selling now. If you are planning to invest in an index fund or Nifty BeES, start accumulating below 4700. As far as individual stocks are concerned, carry out this same exercise on their respective charts to decide on entry points.

Stock Chart Pattern - Bharti Airtel (An Update)

The previous update of the stock chart pattern of Bharti Airtel was written way back in Jan ‘10. Prior to that, I had written a post in Oct ‘09 advising investors to switch out of telecom sector stocks. Despite growth in subscribers, low ARPUs, competition from overseas players with money power, and the likely high cost of the impending 3G auction were the reasons for my bearish view at that time.

Bharti’s stock had been an outstanding performer, giving multibagger returns to savvy investors who had entered early. Customer service was the best among the various service providers. The management was aggressive and clued on. But all sectors eventually mature. The fast growth of the early years tend to slow down to more stable and sustainable levels. Bharti was no exception.

The charts began to reflect the ground realities. The stock reached a high of 495 (adjusted for the subsequent 2:1 split) on May 19 ‘09 – thanks to the post-election market euphoria – but failed to test its Oct ‘07 top of 575. After a sharp correction, followed by a sideways consolidation, the stock attempted another rally – only to reach a lower top of 467 on Oct 1 ‘09. Combined with the fundamental headwinds, the weakness in the chart pattern confirmed that worse was to follow.

The bar chart pattern of Bharti Airtel from Jan ‘10 onwards shows that the worst may be over for shareholders, but there are technical hurdles that need to be crossed:

The stock continued to fall below its 200 day EMA after my previous post on Jan ‘10, till it fell below its Mar ‘09 bear market low of 272 and made three bottoms at 254 in quick succession (two in May ‘10 and one in Jun ‘10). An upward spike above the 50 day EMA on decent volumes was followed by a bullish rounding bottom pattern. A high volume spike took the stock above its 200 day EMA.

The subsequent rally reached a high of 376 on Sep 28 ‘10. Note that the ROC and RSI made lower tops (marked by blue arrows) while Bharti’s stock moved higher. The inevitable correction turned into a 6 months long sideways consolidation till Mar ‘11. The sharp rally in Apr ‘11 did not have volume support. The ROC and RSI were making lower tops (blue arrows). The negative divergences once again stalled the rally.

The high volume spike on May 6 ‘11 touched an intra-day high of 400.10 before closing lower than the previous day – a distribution day. The rise from the low of 254 to the high of 400.10 retraced 60.6% of the fall from 495 (May ‘09) to 254 - close to the Fibonacci retracement level of 61.8%. The stock needs to clear 400 convincingly (i.e. by at least 3%), and then cross the previous tops of 467 and 495 before the bulls can regain control.

The technical indicators are not conducive to bullishness. The MACD is positive, but falling below its signal line. The ROC is just above its 10 day MA, and barely positive. The slow stochastic is below its 50% level. Only the RSI is showing some bullishness by rising above its 50% level.

Shareholders who heeded my advice and sold the stock on Oct 7 ‘09 (it touched a high of 367.70 and closed at 358.35) would have made more money even if they kept the cash in a savings account. At today’s closing price of 369, the stock has gained less than 3%.

Bottomline? The stock chart pattern of Bharti Airtel is back in bull territory, but not yet out of the woods. Without a doubt, this is the best stock among the telecom service providers. But its glory days are behind it. As an investor, you always have choices. If you are going to invest in a slow growth, stalwart stock – would ITC or Dabur be better bets?

(My friend, Nishit, didn’t agree with my bearish view about Bharti and wrote a well-argued opposing view: http://investmentsfordummieslikeme.blogspot.com/2010/07/bullish-case-for-bharti-airtel-guest.html. What are your views about Bharti, dear reader? Are you bullish or bearish? Why?)

Stock Chart Pattern - Jagran Prakashan (An Update)

The stock chart pattern of Jagran Prakashan, which was last analysed back in June ‘10, hasn’t been able to progress much. From Sep ‘09 onwards, the stock has been trading within a rectangular band between 105 and 140 – frustrating long-term investors but providing reasonable trading opportunities.

Why am I writing about a company that has obviously failed to attract much investor attention? Because that is precisely where an opportunity may lie. A boring company name, a boring business - printing and publishing a newspaper which has the largest circulation in India, and earns sacks full of cash from its operations. With net profit margin above 15%, low debt/equity ratio, and regular dividend payments, it is just the kind of company that Peter Lynch recommends small investors should buy.

Why isn’t the stock price going anywhere? That’s a good question. Some times a company with good fundamentals gets overlooked by the market for long periods. But eventually, the market wakes up to the company’s potential, and the patience of long-term investors get rewarded. Till that happens, investors can take a look at the one-year bar chart pattern of Jagran Prakashan to time their entry and exit:

It is interesting to note how the long-term support-resistance levels of 105, 120 and 140 came into play during the past year. Back in May ‘10, the stock had bounced off its support at 105, quickly rose to 129 in Jun ‘10, dropped down below 120 to seek support from its 50 day EMA, touched the 140 level intra-day in Jul ‘10 only to drop down to the 120 level.

Another intra-day top in Aug ‘10 was at 144, but the price dipped to the 200 day EMA, only to bounce up all the way to an intra-day high of 142 in Sep ‘10. Another correction down to the 50 day EMA, followed by a rally to an intra-day high of 147 and a close at 141.50 on Oct 8 ‘10. On the next trading day (Oct 11 ‘10), the stock price closed at 140.35. These were the only two closes above 140 during the past year.

Penetration of any support or resistance level should follow the 3% ‘whipsaw’ leeway. In other words, the stock needed to close above 144 for a few days. That never happened, though on 7 occasions the stock rose to intra-day highs above 144. Technically, the support level of 140 hasn’t been broken.

The Oct ‘10 top was higher than the Sep ‘10 top, but the MACD, RSI and slow stochastic reached lower tops. The negative divergences gave adequate warning that the bull rally was coming to an end. The correction from the Dec ‘10 top of 148 took the stock price below all three EMAs, to the support level of 105 in Feb ‘11. The subsequent rally rose above the 200 day EMA for several days and touched a high of 131.70 on Apr 19 ‘11 – an exact 61.8% Fibonacci retracement of the correction. But the price has slipped below the 200 day EMA to the support level of 120.

The technical indicators are looking bearish. The MACD is below its signal line, and falling towards its ‘0’ line. The ROC has dropped into negative territory, below its 10 day MA. The slow stochastic is about to enter its oversold zone. Only the RSI is giving a contra-indication by moving above the 50% level. The price may not drop too much.

Bottomline? The stock chart pattern of Jagran Prakashan is trading between 105 and 140 for almost 21 months. Prices can break out of such a rectangular pattern in either direction. Any dip below the 120 level can be used for entry, but with a strict stop-loss at 102. If the stock price breaches the 140 level on strong volumes, it can test its previous bull market high of 170.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Apr 08, ‘11

In last week’s analysis, I had expected the bears to put up a fight as both chart patterns of BSE Sensex and NSE Nifty 50 indices were near the downward sloping trend lines and the 61.8% Fibonacci retracement levels of the corrections from the Nov ‘10 tops to the Feb ‘11 bottoms. It wasn’t a great surprise that both indices turned down from the expected resistance levels.

Does it mean that the rally from the Feb ‘11 low has come to an end, or is it a temporary pause for breath after a sharp rise? Such questions make the stock market a challenging place to make money in. The market is at an important phase, with the scales almost equally balanced between the bulls and bears.

BSE Sensex Index Chart

The bearish case:

As per Dow Theory, a trend remains in place till it is reversed. The downward sloping trend line connecting the Nov ‘10 and Jan ‘11 tops has provided resistance to all up moves for 5 months. The Sensex continues to trade in a bearish pattern of lower tops and lower bottoms. The ‘death cross’ has been negated by the ‘golden cross’ within a month, but volumes have increased during the past four days as the index corrected – a bearish sign.

The technical indicators are turning bearish. The MACD is positive and above the signal line, but has stopped rising. The ROC is still positive, but has fallen sharply below its 10 day MA. The RSI is well inside its overbought zone – a place from which it tends to turn around fairly quickly. The slow stochastic is also inside its overbought zone, but has started correcting.

On the downside, support can be expected from the 19000 level, and below that from the 50 day and 200 day EMAs. High inflation and oil prices are keeping bullish sentiments in check.

Nifty 50 Index Chart

The bullish case:

The 5 months long down trend hasn’t been reversed yet. But the Nifty has been trading in a bullish pattern of higher bottoms and higher tops since touching the Feb ‘11 low. The index is now above both the 50 day and 200 day EMAs. These are bullish signs.

More importantly, the FIIs have been net buyers right through the week, while the DIIs were net sellers. The FIIs have deeper pockets, and they seem to have realised that emerging markets is where the real growth is going to be over the longer term. Anna Hazare’s successful campaign against corruption should be taken as a positive by the markets.

Expect the Nifty to consolidate between 5700 and 5950 for some time, till Q4 results give a clear direction. As one of the experts commented on a business TV channel: It is a time for cautious optimism.

Bottomline? The BSE Sensex and NSE Nifty 50 chart patterns faced expected resistances from their down trend lines. This is a good time to book out of non-performers in your portfolio – specially if they are mid-caps or small-caps that have seen sudden spurts. Fresh buying only on a clear break out above the down trend lines.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Apr 01, ‘11

There is only one conclusion that can be drawn from the chart patterns of the BSE Sensex and Nifty 50 indices – the last of the bears seem to have been overwhelmed by a tsunami of FII buying. Are happy days here again for the bulls? Let us look at the charts to find out.

BSE Sensex Index Chart

The break out above the ‘flag’ consolidation pattern and the resistance level of 19150 occurred simultaneously, and the Sensex moved up to a 2 months high of 19575 before pulling back a bit. Note that 19650 is the 61.8% Fibonacci retracement level of the entire correction from the Nov ‘10 top 0f 21109 to the Feb ‘11 bottom of 17296. The Sensex stopped just short of it.

Technically, a breach of the 61.8% Fibonacci retracement level confirms a change of trend. The ‘golden cross’ of the 50 day EMA above the 200 day EMA that confirms a bull market hasn’t occurred yet. But it seems just a matter of time. It is likely that the bears may put up a last ditch effort to prevent the bulls from regaining control. A bit of consolidation between 19150 and 19650 levels is quite possible. On the way up, the 19650 level and the downward sloping trend line are likely to provide resistances. But the trend seems to have changed, and another sharp up move won’t be a surprise.

The technical indicators are looking quite bullish. The MACD has moved well above its signal line in positive territory. The ROC is above its 10 day MA inside the positive zone, and has reached a higher top than the ones touched in Nov ‘10 and Jan ‘11. The RSI has turned back after briefly entering its overbought zone, which is usually the sign of a consolidation or correction. The slow stochastic is inside its overbought zone.

The Sensex is less than 10% below its Nov ‘10 top. Buying should be very stock specific, with strict stop-losses.

Nifty 50 Index Chart

Rising volumes during the week’s rally is a good sign that buying interest is returning. The break out above the ‘flag’ pattern saw a volume spurt.

Food inflation dropped below 10%. March ‘11 auto sales was robust. European and US markets have recovered from their recent corrections. Communist governments in Kerala and West Bengal are likely to be dethroned in the forthcoming elections. Cricket diplomacy between Pakistan and India has broken the talks impasse. India’s current account deficit came in much lower than consensus estimates.

The spate of good news has provided just the fillip that the bulls needed. The 5895 level, which is the 61.8% Fibonacci retracement level of the entire correction from the Nov ‘10 peak of 6338 to the Feb ‘11 trough of 5178, is where the bears may try to fight back. The down trend line is just above it. A breach of both would mean a likely test of the Jan ‘11 and Nov ‘10 tops.

Q4 results will determine whether the bulls will be able to regain complete control. There are expectations of slow down in some pockets. The infrastructure and capital goods sectors are still struggling. The recent placement season at the IIMs went off extremely well, with number of offers and total pay packages exceeding last year’s figures. Corporate India seems to be chugging along nicely, in spite of the higher interest rates.

Bottomline? The chart patterns of the BSE Sensex and Nifty 50 indices are on the verge of returning to confirmed bull markets. Buying the dips should be the strategy. But maintain trailing stop-losses to protect profits.

Stock Chart Pattern - Dhanalakshmi Bank (An Update)

The stock chart pattern of Dhanalakshmi Bank had been consolidating sideways for 6 months within a rectangular band between 123 and 155 back in Apr ‘10, after making a bearish double-top at 178. The target of the double-top was met when the stock price fell to 130. By falling to 123, the stock retraced 39% of its spectacular rally from the low of 37 in Mar ‘09 to the high of 178.

The retracement was less than the Fibonacci level of 50%. The stock also found support from the rising 200 day EMA during the sideways consolidation. That led me to conclude that the bull market was intact, and the likely break out from the rectangular consolidation would be upwards. I had advised investors to buy only on a high-volume break out above 155.

Time to take another look at the bar chart pattern of Dhanalakshmi Bank. It is a text-book example of different technical chart patterns – consolidation, break out, divergence, support/resistance levels.

The sideways consolidation continued till early Jun ‘10 – the stock using support from the rising 50 day EMA, and testing the 155 level a few times. The inevitable happened on Jun 4 ‘10 – the stock broke above 155 on a volume spike, pulled back, consolidated sideways for a few days, and rose above its previous top of 178 on another volume spike on Jun 22 ‘10.

For the next 4 months, the stock made a series of higher tops and higher bottoms till it reached a new high of 212.50 on Oct 28 ‘10. Unfortunately for the bulls, it formed a bearish ‘reversal day’ pattern (higher top, lower close). Note that the MACD, ROC and RSI reached lower tops and the slow stochastic made a flat top while the stock touched a new high (marked by blue arrows).

The combined negative divergences hinted at a correction, which took the stock below its 200 day EMA to the 155 level in Nov ‘10. The pullback found resistance from the 200 day EMA, and the stock dropped like a stone to the 123 level in Dec ‘10. It is quite interesting how long-term support-resistance levels come into play in stock charts.

The ‘death cross’ (marked by blue oval) on Dec 16 ‘10 confirmed the bear market. On Jan 7 ‘11, the stock price broke below the support level of 123 and dropped to a low of 94 on Jan 31 ‘11. The correction from the peak of 212.50 was a huge 56% – and, in 3 months, retraced more than 67% of the entire bull rally of 20 months from 37 to 212.50. If the 94 level, which is another long-term support/resistance level, is broken the stock can drop to 74 or even lower.

The technical indicators have been making higher tops and bottoms of late. The MACD is above its signal line, but is still in negative territory. The ROC is below its 10 day MA and just inside the negative zone. The RSI touched its overbought zone, and dropped back but is above the 50% level. The slow stochastic briefly entered the overbought zone, but has dropped below the 50% level.

The bulls are attempting a revival. But things are not looking very bright. Even if resistance from the falling 50 day EMA can be overcome, the consolidation zone between 123 and 155 is likely to provide formidable resistance. The new management tried to expand too fast and finances and performance have been stretched.

The stock chart shows why investing in small-cap stocks is so risky, and why it is always a good idea to maintain a trailing stop-loss to protect profits. Ability to read technical signals provide adequate opportunities for entry and exit.

Bottomline? The stock chart pattern of Dhanalakshmi Bank is in the firm grip of bears. If you are still holding, sell on the next rise. This is not the time to be contrarian. Enter only after studying Q4 results. Yes Bank remains my preferred choice in the small-cap private bank space.

Stock Chart Pattern - Indian Hotel (An Update)

The previous update of the stock chart pattern of Indian Hotel – better known as the Taj Group – was back in Apr ‘10. In Jan ‘10, the stock price had reacted from 110, which was the 50% Fibonacci retracement level of the bear market fall from 180 to 35. The correction took the stock below its rising 100 day EMA.

A double-bottom at 85 in Feb ‘10 was followed by a resumption of the up move, with some high volume spikes in Mar ‘10. However, technical headwinds led me to make the following comments:

‘If it can move above 110, it is likely to face resistance at 120 - the May '08 high. The 61.8% Fibonacci retracement level of the bear market fall is at 125… Those investors who heeded my advice to enter the stock at 65-66 and are still holding, can book partial profits if the stock hesitates near the 110-125 band. Long-term investors can keep a stop-loss at 100 and stay long.’

Knowledge and interpretation of technical analysis can be really helpful, and the bar chart pattern of Indian Hotels for the period Jan ‘10 to Feb ‘11 is a clear example:

Note that the stock rose smartly to test the resistance from the 110 level in Apr ‘10. Five days in a row, it breached the 110 level on intra-day basis but failed to close above it. A quick drop to the rising 20 day EMA was followed by another failed test of the 110 level. This time the price dropped to the rising 50 day EMA, where it received good support.

An upward break out on good volumes took the stock up to a new high of 118 on May 14 ‘10. But it turned out to be a bearish ‘reversal day’. The stock dropped back into the trading band between 85 – 110 without testing the May ‘08 high of 120. That was the trigger for investors to book partial profits, because the stock failed to breach the resistance zone between 110 – 125.

On May 26 ‘10, the stock price closed at 99 – below the 100 day EMA, and the stop-loss level of 100. Investors should have sold their balance holdings at this point. Till the middle of Nov ‘10, the stock traded sideways between the rising 200 day EMA and the 110 level. After the 200 day EMA was breached in Nov ‘10, the ‘death cross’ (marked by the blue oval) in Dec ‘10 confirmed a bear market.

A rally took the stock above all four EMAs in Jan ‘11, but the respite for the bulls was brief. Once the correction resumed, the stock fell sharply below the support level of 85. The subsequent pullback found resistance from the 85 level, and shows how support levels tend to become resistance levels after a breach.

The technical indicators are looking bearish. The MACD is below the signal line in negative territory. The ROC is also negative, but has moved above its 10 day MA. The RSI is at the edge of its oversold zone. The slow stochastic has emerged from its oversold zone, but doesn’t seem to be going anywhere.

Fundamentally, there hasn’t been too much change. Q3 results were a bit disappointing, but not entirely unexpected. The re-branding exercise has been completed. The Taj at Mumbai has resumed full operations after renovations following the terror attack. Expansions are on track, but will require additional funding. The huge debt is a concern.

Bottomline? The stock chart pattern of Indian Hotel is in a bear market. There is good support at 70, and below that, at 55. A bounce up on good volumes from those levels can be good entry points. This company is the crown jewel of the hotel industry, well-managed and in a class of its own - but is strictly for long-term investors.