Free eBook on Technical Analysis – thanks and clarifications

The free eBook: ‘Technical Analysis – an Introduction’ was launched on the last day of 2011 – after considerable time spent at the planning stage. Some important concepts in technical analysis has been covered in brief, with real-life chart examples.

The idea was to generate curiosity and interest among small investors so that they may get motivated to delve deeper into the subject. There are some excellent and comprehensive books – such as the ones written by Edwards/Magee and Martin Pring – which cover technical analysis in greater detail. (The search box of flipkart.com at the bottom of the page can be used for searching books on investment.)

The response from regular as well as new readers has been quite overwhelming, and everyone deserves special thanks for making my endeavour in producing the eBook worthwhile. Some have already finished reading the eBook and provided suggestions for improvement. Reader involvement is appreciated.

A few of the reader feedbacks received so far made it necessary to post a few clarifications about the purpose of the eBook. The most important one is to demystify the subject of technical analysis.

Technical analysis is not a magic potion that will suddenly turn short-term trading losses into profits overnight. Nor will it identify unknown stocks that will turn a Lakh into a Crore within a short time. But knowing the basics will help investors to take more informed decisions about when to enter and when to exit a stock.

A second point worth mentioning is that the eBook is not going to turn novice investors into expert technical analysts. Becoming an expert requires several years of experience and application – as in any other subject.

A third point is that many technical patterns have specific ‘rules’ associated with them. Remembering the pattern but not the rules can cause serious losses. The human mind seems programmed to see patterns where none may exist. Bigger problems are confusing bottom-reversal and top-reversal patterns, and jumping to conclusions about a pattern before it has fully formed.

Last but not the least, is that it isn’t necessary for similar patterns to behave identically. In a recent post on IFCI Ltd, four ‘rising wedge’ patterns were identified - each behaved a little differently from the other. So, it is not enough to identify a pattern. One has to remain flexible about the outcome of the pattern.

If you haven’t yet received a copy of the free eBook, you can get one by sending an email to:mobugobu@yahoo.com

Stock Chart Pattern - IFCI Ltd (An Update)

The previous update of the stock chart pattern of IFCI Ltd was posted more than a year back. The stock had touched a high of 78 in Nov ‘10, followed by a sharp correction to 50 and appeared to be consolidating within a triangle.

All four technical indicators – MACD, ROC, RSI and slow stochastic - touched lower tops while the stock rose to its high. The combined negative divergences had provided advance warning of a correction. The following comments were made: “If you are still holding, maintain a strict stop-loss of 54. A better idea may be get out and not go anywhere near this stock again.”

The last comment seems almost prophetic when you look at the bar chart pattern of IFCI Ltd:

The negative divergences in all four technical indicators, formed during Oct – Nov ‘10 have been marked by blue arrows. After the sharp drop from the peak of 78 to a low of 50 below all three EMAs in Nov ‘10, the stock consolidated within a bearish ‘rising wedge’ pattern – marked 1 – and rose above all three EMAs.

The break down below the wedge in Jan ‘11 was followed by a pullback towards the wedge, which received combined resistances from the 20 day and 200 day EMAs. Such pullbacks happen often, but not always, as can be observed in the ‘rising wedges’ marked 2 and 4. The stock price dropped to a low of 46 in Feb ‘11 and started forming a slightly prolonged ‘rising wedge’ – marked 2. The ‘death cross’ of the 50 day EMA below the 200 day EMA confirmed a bear market.

‘Rising wedge’ number 2 failed to cross above the 200 day EMA. The stock broke down without a pullback to a low of 44 in May ‘11 before starting a consolidation within another ‘rising wedge’ – marked 3. The break down below ‘rising wedge’ number 3 wasn’t followed immediately by a pullback. It came after 10 days. The subsequent slide went all the way down to 28 in Oct ‘11, before the formation of ‘rising wedge’ number 4.

The sharp break down below ‘rising wedge’ number 4 touched a low of 20 in Dec ‘11. Note that all four technical indicators showed positive divergences by touching higher bottoms – marked by blue arrows – suggesting an upward bounce. Since the stock was deep in a bear market – having lost 75% from its peak of 78 – the bounce wasn’t strong enough to cross above the 50 day EMA, despite solid volume support.

There is every possibility of the stock falling to its Mar ‘09 low of 15. The fundamentals don’t look very encouraging. Hopes of a banking licence has receded. The MD is under scrutiny by the authorities. The government may replace its debt with equity and gain management control. The volatility in the price has turned it into a trader’s favourite.

Bottomline? The stock chart pattern of IFCI Ltd is an example of how mismanagement of operations and finances has enabled the bears to create havoc. Small investors should steer clear of such ‘cheap’ stocks.