Stock Chart Pattern - Sintex Industries (An Update)

In the previous update a year back, the concluding comments were:

“The stock chart pattern of Sintex Industries is an example of how a stock that appears to be fundamentally investment-worthy is to be avoided for technical reasons. Sell.”

Lately, there has been a lot of chatter in various investment groups about the stock – so it may be worthwhile to have a look at the two years bar chart pattern of Sintex Industries and find out if there has been any worthwhile changes to reconsider the earlier advice:

A grey vertical line has been drawn to indicate the date on which the previous update was posted. Note that the expected ‘death cross’ (of the 50 day EMA below the 200 day EMA) happened a few days later, but the stock price found good support at 137 over the next two months and smartly bounced up above all three EMAs.

The rally topped out at 194 on May 31 ‘11 – much lower than its Nov ‘10 peak of 233, but higher than closing level of 168 when the previous update was posted in Jan ‘11. The three EMAs came quite close to each other, though they didn’t quite get entangled. This is often a precursor to a sharp move. The move came soon enough, but not before the stock price received good support from the 137 level once more during Aug ‘11.

Another upward bounce stalled just before reaching the falling 200 day EMA, and once the stock dropped below 137 in Sep ‘11, it fell in steps all the way down to 59 on Dec 16 ‘11 – losing 75% from its Nov ‘10 peak. Mid-cap (and small-cap) stocks find it very difficult to recover from such steep falls, and Sintex is unlikely to be an exception.

Despite a volume surge during the rally over the past month, the stock price has so far failed to climb above its falling 50 day EMA and is trading way below its 200 day EMA. The technical indicators are looking bullish, so the rally may not be quite over yet. The MACD is rising above its signal line, and is about to enter the positive zone. The ROC is positive, but has dipped below its 10 day MA. The RSI has just entered its overbought zone. The slow stochastic is about to do the same.

Bottomline? The chart pattern of Sintex Industries clearly shows that the bears are on top. The present rally should be used to exit the stock.

Stock Chart Pattern – SpiceJet (An Update)

What a difference a year can make! In the previous update to the analysis of the stock chart pattern of SpiceJet, I had mentioned about some fundamental changes in the company. The two most important ones were the replacement of financier Wilbur Ross by Kalanithi Maran of Sun TV fame (or, should I say notoriety?), and the departure of senior management personnel including CEO Sanjay Aggarwal.

Technically, the chart pattern was in a bull market – a long consolidation within a rectangle was followed by high volume break out to a new high of 79 – with a 100% gain in less than a year. A correction had ensued, but I had expected the stock price to recover and test its Jan ‘08 peak of 105. The analysis was concluded with the following notes of caution:

”Keep a trailing stop-loss and ride the bull. But remember that experienced airline hands have left the organisation. The new owners have political clout, which is great for wheeling and dealing but not so great for success in a complex and competitive industry which requires constant capital infusion, and globally doesn’t make much money.”

A look at the one year bar chart pattern of SpiceJet should convince readers that my warning was appropriate:

The stock couldn’t cross the 100 mark, reaching a top of 97.45 on Nov 8 ‘10 – which turned out to be a high volume ‘distribution day’ (a higher high but a close near the day’s low opening price). The subsequent correction took the stock price below the 50 day EMA, followed by a good recovery to a lower top of 92.70 on Dec 6 ‘10 – which turned out to be another high volume ‘distribution day’. That was the signal for bulls to exit.

A quick drop to the rising 200 day EMA was followed by a milder upward bounce and then a drift down to the 200 day EMA where the stock spent several trading sessions. The decisive break below the 200 day EMA on Jan 27 ‘11 led to increasing volumes as the stock dropped to the support level of 49 (the lower edge of the rectangular consolidation zone between Dec ‘09 and Jul ‘10).

Note the huge spike in volume as the stock breached the support of the 49 level (marked by the blue arrow) on Feb 7 ‘11. The high volume was a signal that the breached support would become a strong resistance. Shortly thereafter, the 50 day EMA crossed below the 200 day EMA (marked by the light blue oval) – the ‘death cross’ formally confirming a bear market. A pull back to the 49 level culminated with an intra-day breach on Feb 17 ‘11 – which was a ‘reversal day’ that provided another opportunity to sell.

Two more attempts at a pull back to the 49 level in Apr ‘11 were thwarted by the falling 50 day EMA. The stock has been dropping deeper into a bear market, touching a 2 year low of 19.30 on Aug 19 ‘11 that was an 80% correction from its Nov ‘10 peak of 97.45. The technical indicators are showing bullish signs, but it is a bear market rally that may attract more selling.

There is a well-known joke about the airline industry: If you want to become a millionaire in the airline business, you should start with a billion. Vijay Mallya’s Kingfisher Airlines is a classic example. SpiceJet is no exception – except for the brief period when the Ross-Aggarwal team was at the helm. The number of air-passengers are increasing day-by-day. That doesn’t mean that the business is a profitable one.

Bottomline? The stock chart pattern of SpiceJet is deep within a bear market, and in danger of becoming a penny stock. The DMK’s loss in the recent state assembly elections in Tamil Nadu has negated the considerable political clout of the Marans. Their only hope will be the appearance of a white knight who can bail them out. But don’t count on it. Get out if you are still holding.

European indices: crack under severe bear attacks

We keep reading and hearing about the poor economic growth and sovereign debt problems in Europe. One would expect the stock markets to perform badly. But through the past 12 months, most European indices have performed remarkably well – while the Indian stock market has been in a 10 months long down trend despite much better economic growth.

Things have changed of late. Even as our stock indices continue to struggle in bear markets, European indices have cracked under severe bear attacks. Most have dropped below their 2010 lows. Some have slipped to 2 year lows. The charts will tell the story:

Austria ATX

Austria’s ATX index peaked at 3000 back in Feb ‘11 and started correcting. The ‘death cross’ in Jul ‘11 confirmed a bear market. A vertical fall has dropped the index to a 2 year low in Aug ‘11. A ‘dead cat bounce’ has been followed by more selling. The index has lost more than 30% from its peak.

France CAC 40

France’s CAC 40 index has fared marginally better than Austria’s index. It dropped just under 30% from its peak, but also to a 2 year low.

Germany DAX

Germany’s DAX index had been a spectacular performer, till the first big crack appeared in Mar ‘11. The index went on to touch a peak of 7500 in May ‘11. A period of sideways consolidation concluded with a vertical drop to the Feb ‘10 low. The index has lost about 28% from its peak.

Holland AEX

Holland’s AEX index has fallen to a 2 year low, losing about 27% from its Feb ‘11 peak. The ‘death cross’ confirmed a bear market in Jun ‘11, so the recent crash should not have come as a big surprise.

Norway OSEAX

Norway’s OSEAX index has corrected more than 25% from its Mar ‘11 peak, but found support near its Aug ‘10 low. It is trying to consolidate before resuming its down move.

Sweden OMXSPI

Sweden’s OMXSPI index has also corrected more than 25% from a double-top at 375 to levels last seen in Oct ‘09.

Switzerland SMI

Despite the strength of the Swiss franc, Switzerland’s SMI index has been correcting since hitting a peak near 7000 back in Apr ‘10. More than a year’s sideways consolidation within a rectangle culminated in the ‘death cross’ in Jun ‘11.

Some experts on business TV channels have opined that FIIs will have no choice but to buy in India and other emerging markets - to chase growth that is lacking in their home markets. I have my doubts. FIIs would be less interested in chasing growth. Their main job will be to protect capital. That means booking profits in emerging markets to cover up the losses in their home markets. Their selling in India may continue till the global economy starts showing clear signs of recovery.

How to tackle a ‘panic bottom’

Panic bottoms, which are sharp price drops accompanied by large volumes, frequently occur in stock price and index chart patterns. It is important, therefore, that investors understand and learn how to tackle a panic bottom in a portfolio stock.

This is a follow up to last Friday’s post about the Crompton Greaves price crash after the Q1 results fiasco, which raised quite a few comments and queries from blog readers and investment group members.

The nature of some of the queries and comments mentioned below motivated me to write this post:

‘I bought at a higher price. What should I do now?’

‘I bought on the day the stock crashed, and will buy more if it falls further.’

‘A big fund bought large quantities on the day of the fall. Shouldn’t we buy as well?’

Like promises, technical analysis rules are made to be broken. That doesn’t mean we shouldn’t be aware of the rules before playing the game. So, here are the two basic rules about panic bottoms:

1. Panic bottoms usually occur in the middle (or second) stage of a bear market

2. Panic bottoms seldom hold.

How do we know if a stock is in a bear market? In a post titled: ‘Is this a Bear Market, or a Bull Market correction?’, I had provided four different definitions of a bear market. Let us look at the chart pattern of Crompton Greaves to find out if it was in a bear market when the ‘panic bottom’ occured:

In Jan ‘11, two of the definitions were satisfied: the stock corrected 20% from the Dec ‘10 peak of 349, and fell below the 200 day EMA. In Feb ‘11, the dreaded ‘death cross’ (marked by light blue oval) of the 50 day EMA below the 200 day EMA confirmed the bear market. (The fourth definition – a >50% correction of the previous bull rally – wasn’t checked, since three of the four definitions were met.)

The rally that led to the Apr ‘11 top above the 200 day EMA was a good opportunity to exit the stock. In the next (second) stage of the down move, the ‘panic bottom’ occurred – accompanied by heavy volumes.

An upward bounce from the ‘panic bottom’ – caused by bottom fishing and short covering – was a selling opportunity. Today’s low and close were both lower than the ‘panic bottom’ low of 171. Both rules of the ‘panic bottom’ have been followed.

The lessons?

1) Once a bear market is confirmed, hanging on to a stock – regardless of its fundamentals (or lack of them) – doesn’t make any sense. Use the first bear market rally to exit, and avoid the gut-wrenching experience of a ‘panic bottom’.

2) Don’t try to bottom-fish on a ‘panic bottom’ – because lower prices will be available later. It is safer and prudent to wait for a clear signal of change of trend before entering.

Stock Index Chart Patterns - BSE Sectoral Indices, May 27, '11

In last month’s analysis of the BSE Sectoral indices, I had looked at the weekly bar chart patterns from Mar ‘09 onwards. This month, I have attached the one year bar chart patterns once again to get a clearer view of the near term situation.

BSE Auto Index

BSE Auto index is technically still in a bull market – despite the dip below the 200 day EMA during Feb and Mar ‘11. The index received good support from the 8115 level and bounced up to prevent the ‘death cross’ of the 50 day EMA below the 200 day EMA. However, the technical indicators are looking bearish and the index is struggling to stay above its long-term moving average. The down trend from the Nov ‘10 top is intact. Hold.

BSE Bankex

BSE Bankex has once again slipped below the 200 day EMA and the ‘death cross’ looks imminent. The index has turned up before reaching its support level of 11330, but the technical indicators are not holding out much bullish hopes. The 7 months long down trend is yet to be reversed. Hold.

BSE Capital Goods Index

The down trend in the BSE Capital Goods index has turned into a bear market, confirmed by the ‘death cross’ in Jan ‘11. The recent rally faced strong resistance from the falling 200 day EMA. The technical indicators are mildly bullish. Buy only on a clear break above the 200 day EMA.

BSE Consumer Durables Index

BSE Consumer Durables index has been one of the better performers and is in a bull market. It recovered quickly from the drop below the 200 day EMA in Feb ‘11, but the up move faced resistance from the 6600 level. The index is making a saucer-shaped bullish pattern. Add on a break above 6600.

BSE FMCG Index

BSE FMCG index has been the star performer during the past year, and has outperformed the Sensex in the past 7 months. It formed a bearish triple-top pattern and dropped below the 200 day EMA in Feb ‘11. A magnificient recovery took the index to a new high this month. Negative divergences in all four technical indicators has stalled the rally. Any dips can be used to add. 

BSE Healthcare Index

BSE Healthcare index has recovered from a 2 months stay below the 200 day EMA, but the rally has lost momentum. Technically, the index is in a bull market but is well below its Jan ‘11 top. Hold.

BSE IT Index

BSE IT index performed sensationally till its peak in Jan ‘11. The subsequent correction bounced up strongly from the rising 200 day EMA, but failed to test its Jan ‘11 top. This time, the index has dropped below the 200 day EMA, and the ‘death cross’ will confirm a bear market. Technical indicators are bearish. Hold.

BSE Metal Index

BSE Metal index is in a bear market, despite a valiant effort in Apr ‘11 to reverse the trend. The technical indicators are hinting at a recovery, but the index has dropped well below the 200 day EMA. Buy only on a convincing move above the Apr ‘11 top. Avoid till then.

BSE Oil & Gas Index

BSE Oil & Gas index is a clear example of how populist government policies and meddling can push a good sector into a bear market. The so-so performance of the largest private sector player, Reliance, has also not helped the cause of the index. The index has recovered some what from oversold conditions, but has a long way to go. Avoid.

BSE Power Index

BSE Power index has been in a down trend since Oct ‘10 and sliding deeper into bear territory. The technical indicators are bearish. Avoid.

BSE Realty Index

BSE Realty index is also deep inside a bear market, with little hope of any recovery soon. Avoid.

Five sectoral indices are in bear markets. Even good performers like the BSE Bankex and BSE IT index are struggling to escape from strong bear grips. That doesn’t mean all the stocks in these sectors should be avoided. I have been posting about stocks comprising different sectoral indices – and a handful of them are bucking the trend. Those are the stocks to watch.

Stock Index Chart Patterns - BSE Sectoral Indices, Apr 26, '11

The weekly charts of the BSE Sectoral Indices, since the bull market began in Mar ‘09, provides a long-term perspective of the broader market. Most sectors have broken out of their down trends, but are yet to reach new highs. A couple of sectors are in long consolidation patterns. Two sectors are struggling in bear markets.

BSE Auto Index

The BSE Auto index breached its down trend line earlier this month after oscillating about its 50 week EMA for a few weeks. It is gradually rising above its 20 week and 50 week EMAs. The technical indicators are looking bullish, but hinting at a pull back to the trend line. That would be a buying opportunity.

BSE Bankex

The BSE Bankex moved above its down trend line in Mar ‘11, but the subsequent up move above its two EMAs has been gradual. The technical indicators are bullish, but showing signs of weakness. A drop to the 20 week or 50 week EMA is possible. The dip can be a buying opportunity.

BSE Capital Goods Index

The BSE Capital Goods index broke above its down trend line earlier in Apr ‘11, but pulled back immediately. The blue down arrow indicates the ‘death cross’ of the 20 week EMA below the 50 week EMA. Unless the index can sustain above its 50 week EMA, the bulls will be under pressure. Technical indicators are giving mixed signals, which means the correction may continue for a while. Hold.

BSE Consumer Durables Index

The BSE Consumer Durables index has been one of the better performers. It didn’t close below its 50 week EMA even for a single week, and convincingly breached the down trend line in Mar ‘11. Technical indicators are bullish. Dips can be bought.

BSE FMCG Index

The BSE FMCG index has been a star performer. Note that after almost meeting the down side target from the triple top at 3800, the index has climbed sharply above both its EMAs. Technical indicators are bullish, and a breach of the previous high is likely. But one should be cautious near a previous top – particularly one that has provided strong resistance earlier. Hold.

BSE Healthcare Index

The BSE Healthcare index breached its down trend line in Mar ‘11, but has been consolidating sideways for four weeks. Technical indicators are mildly bullish, suggesting that the consolidation may continue. Hold.

BSE IT Index

The BSE IT index remained above its 50 week EMA throughout the correction before comfortably breaching its down trend line last month. The pullback was equally sharp. Technical indicators are looking bearish. Time to book partial profits.

BSE Metal Index

The BSE Metal index has been consolidating within a symmetrical triangle-like pattern for more than a year, alternately moving below and above its 50 week EMA. It spent the previous 5 weeks above its 20 week and 50 week EMAs, but the technical indicators are not supporting an immediate upside break out. Hold.

BSE Oil & Gas Index

The BSE Oil & Gas index has been consolidating within a slightly upward sloping channel for almost two years. The ‘death cross’ marked by the blue arrow was followed by a bounce from the lower edge of the trading channel. Technical indicators are showing signs of bullishness. If oil prices are raised following the state elections, the index may break out above the channel. Trade the channel, or wait for a break out to buy/sell.

BSE Power Index

There is no power in the BSE Power index chart. After consolidating within an upward sloping channel for 20 months, the index dropped out of the channel in Jan ‘11. It subsequently made a bullish rounding bottom pattern, but the up move lost steam after moving briefly above the falling 20 week EMA. Technical indicators are mildly bullish, but the index is below its falling 50 week EMA – the sign of a bear market. Avoid.

BSE Realty Index

The BSE Realty index remains at the bottom of the pack. It never really emerged from its long-term bear market of more than 3 years duration – despite spending several weeks above its 50 week EMA. Note that the 20 week EMA failed to convincingly rise above the 50 week EMA, which would have confirmed a bull market. Technical indicators are showing bullish signs, but the index remains within a downward sloping channel, and well below its falling 50 week EMA. Avoid.

Stock Chart Pattern - OnMobile Global (An Update)

The previous update of the chart pattern of OnMobile Global generated a fair amount of reader queries and comments, which implies that the stock finds a place in the portfolios of many small investors. Some bought at the IPO price of 440 during the previous bull market. Others entered at various lower levels, but have not really got much returns from the stock.

What is the reason for investor fascination with OnMobile? Is it because the company is in the high-tech field of telecomm software, and investors assumed that growth in telecomm subscribers would automatically lead to growth in the telecomm software field? Or, is it because one of the promoters is an ex-Infosys employee, and OnMobile was going to be the ‘next Infosys’?

The disappointing performance of the OnMobile stock has left many small investors bewildered. However, the company is backed by a strong balance sheet – unlike Bartronics or Cranes Software, which were also favourites of small investors. So, the likelihood of the company providing decent returns in the future is high. The overseas rollouts of the company’s software services (for Vodafone and Telefonica) have commenced. These should boost revenues and profitability.

But investors must appreciate that growth in telecomm subscribers does not necessarily translate into higher profits for telecomm software providers. The company  provides discretionary value-added services, which users may not opt for. And, the ‘next Infosys’ is a myth.

What does the 2 years bar chart pattern of OnMobile Global tell us?

The stock has been in a down trend since touching a high of 682 back in Jul ‘09. A bear market was confirmed by the ‘death cross’ (marked by blue oval) of the 50 day EMA below the 200 day EMA in Nov ‘09. A bearish pattern of lower tops and lower bottoms continues. As per Dow Theory, the down trend remains in force till it is reversed.

Note that brief moves above the falling 200 day EMA in Jan ‘10, Sep-Oct ‘10 and earlier this month were met with selling. This is typical of bear markets where one is supposed to ‘sell the rises’. The rally from the Feb ‘11 low of 181 found resistance at the long-term support/resistance level of 310 and has dropped quickly to the next support/resistance level of 255.

The announcement of the 1:1 bonus issue on Mar 7 ‘11 (record date still to be decided) has not helped the bulls to loosen the bear hug on the stock so far. Is there a possibility of a trend reversal any time soon? The positive divergences in the technical indicators seem to suggest as much. All four reached higher tops while the stock made a lower top (marked by blue arrows). The stock may also be in the process of forming an inverse head-and-shoulders reversal pattern – with the left shoulder at the Nov ‘10 low of 226; the head at the Feb ‘11 low of 181; the right shoulder is still being formed; and the neckline at the 310 level.

Announcement of the record date for the bonus issue and good Q4 results can be the catalysts for the stock to reverse the down trend. Till then, one can expect the stock to consolidate between 255-310. The near-term technical indications are weak. The MACD is positive and just above its signal line, but has reversed direction. The ROC is also positive, but has dropped below its 10 day MA. The RSI has dropped from its overbought region, but is above the 50% level. The slow stochastic touched its overbought zone, only to fall below its 50% level.

Bottomline? The stock chart pattern of OnMobile Global is showing signs of reversing the down trend. Good volume support on up days is an indication that the bad days may be getting over. A high volume break out above 310 will be the first confirmation of a trend change, and a buying opportunity. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market.

Stock Index Chart Patterns - BSE Sectoral Indices, Mar 25, '11

Last month, the chart patterns of the BSE Sectoral indices were trying to recover after varying degrees of correction. Are the corrections over, or is there more pain in the offing? Let us take a look.

BSE Auto Index

The BSE Auto index has remained range bound within 8130 at the lower end and the 200 day EMA at the upper end. The bad news is that the long-term moving average is proving to be a tough hurdle. The good news is that the 50 day EMA is yet to fall below the 200 day EMA – keeping alive bullish hopes. The technical indicators are suggesting that the recent rally may break above the combined resistances from the 50 day and 200 day EMAs. The next hurdle on the up side will be the 9220 level. Hold.

BSE Bankex

The BSE Bankex is looking more bullish than the Auto index - showing real signs of recovery. The chart formed a bullish ascending triangle pattern (flat top, higher bottoms), from which it has broken upwards (marked by the blue arrow). In the process, the index has moved above both the 50 day and 200 day EMAs. The technical indicators are all bullish. The rally is likely to continue, but watch out for a pullback down to the 12770 level. Buy the dips.

BSE Capital Goods Index

The woes of the BSE Capital Goods index continue as it languishes in a bear market. The recent rally has found resistance from the falling 50 day EMA. The only solace for the bulls is that the Feb ‘11 low of 12146 has not been breached, and the index has managed to move above the 13000 level. In spite of the bullish technical indicators, the bulls need to cover a lot of ground just to reach its falling 200 day EMA. With rising interest rates, this sector is really taking it on the chin. Avoid.

BSE Consumer Durables Index

The BSE Consumer Durables index is back in bull territory after a steady rally. It seems to be forming a bullish rounding bottom pattern. All four technical indicators are looking bullish, but periodic corrections can be expected during the up move. Buy the dips.

BSE FMCG Index

The BSE FMCG index seems to have bottomed out, and is making another effort to climb above the 3500 level after several failed attempts earlier during the month. The index found support from the 200 day EMA during the recent corrective move, and is trading above both the 50 day and 200 day EMAs. The technical indicators are showing bullish signs. Buy the dips.

BSE Healthcare Index

The BSE Healthcare index is facing resistance from its 200 day EMA, but there is a good possibility that it will be back in bullish territory soon. Resistances from the 50 day EMA and the 6060 level need to be crossed convincingly. The technical indicators are supporting the bullishness. Hold.

BSE IT Index

The BSE IT index bounced up smartly from the 200 day EMA, moved above the 50 day EMA and is facing a temporary resistance from the 6380 level. The bulls appear to be wresting control from the bears. Buy the dips.

BSE Metal Index

The BSE Metals index finally succumbed to the ‘death cross’, and is technically in a bear market. The recent rally has found resistance from the falling 50 day EMA. The sector has suffered due to the poor growth in the capital goods and infrastructure sectors, and rising interest rates. Hold.

BSE Oil & Gas Index

The BSE Oil & Gas index is in a bear market, though there are some signs of recovery. The recent rally found resistance from the 200 day EMA – keeping the bearish pattern of lower tops and lower bottoms intact. Avoid.

BSE Power Index

The BSE Power index remains deep inside bear territory. The recent rally was resisted by the falling 50 day EMA. The technical indicators are looking bullish, but reaching the falling 200 day EMA seems to be an uphill task. Avoid.

BSE Realty Index

The BSE Realty index continues to bring up the rear. The technical indicators are suggesting a recovery, but I wouldn’t like to be a contrarian. A sector best avoided by small investors.

Stock Chart Pattern - Bharat Bijlee (An Update)

The stock chart pattern of Bharat Bijlee is an example of why technical analysis should never be relied upon completely. It is not a science. Price targets are fixed on the basis that previous chart patterns will get repeated. While this happens often, many times the outcomes are contrary to expectations.

Pattern failures happen when there isn’t appropriate volume support. One of the reasons why even fundamentally strong small-cap stocks are risky bets is because they tend to trade in miniscule volumes. That makes buying and selling a difficult proposition. Low volumes also renders technical analysis ineffective.

The bar chart pattern of Bharat Bijlee reveals the deficiencies in technically analysing small-cap stocks:

  

In the previous update back in May ‘10, I had observed a bearish descending triangle pattern being formed after the stock touched a high of 1170 in Jan ‘10. I had expected the stock to fall below the support level of 880 to a low of 700. Accordingly, I had recommended the following course of action to investors:

‘Existing holders should get out now, or at best, hold with a strict stop-loss at 880. New entrants should avoid the stock.’

Triangles are consolidation patterns that are generally unreliable. That means that the stock price can break out of a triangle in either direction. But ascending triangles (flat top, rising bottoms) and descending triangles (lower tops, flat bottom) tend to be more reliable. Price usually breaks above a flat top or below a flat bottom.

Note that the bearish descending triangle price pattern formed between Jan – Jun ‘10 turned out to be a failure. A burst of buying from the third week of Jun ‘10 propelled the stock price to a high of 1284 on Jul 2 ‘10. After a brief dip, a second burst of buying saw the stock reach 1316 on Jul 22 ‘10.

The fun and games of the bulls finally ran out of steam. While the stock reached a higher top, all four technical indicators made lower tops (marked by blue arrows). The combined negative divergences started a correction within another descending triangle pattern that has lasted almost 8 months.

Through Aug ‘10 and most of Sep ‘10, the stock price was supported by the 50 day EMA as a bearish pattern of lower tops and lower bottoms got formed. The stock found resistance from the downward sloping trend line of the descending triangle pattern on Oct 7 ‘10, and quickly dropped to the 200 day EMA. For the next 3 weeks, the stock traded between the 50 day and 200 day EMAs before decisively breaching the support from the long-term moving average on Nov 15 ‘10.

The ‘death cross’ signalling a bear market (marked by blue oval) happened on Dec 8 ‘10. On the next day, the stock plunged to the support level of 880 on a volume spike. A ‘reversal day’ pattern (lower low, higher close) on Dec 10 ‘10 marked the end of the fall. But the meagre volume suggested that the rally was unlikely to be a strong one. A 3 months long sideways consolidation has ensued, with up moves finding resistance from the 200 day EMA. If the support level of 880 doesn’t get breached soon, the second descending triangle pattern may also turn out to be a failure.

The technical indicators are not showing any clear direction – typical of consolidation periods. The MACD is entangled with the signal line, and both are barely in the positive zone. The ROC has fallen below its 10 day MA into negative territory. The RSI has moved down to its 50% level. The slow stochastic is about to drop to the 50% mark.

Bottomline? The stock chart pattern of Bharat Bijlee is almost back where it was 10 months ago. One can hold with a strict stop-loss at 880, and add only on a high volume break out above the descending triangle. At today’s closing price of 974.25, the stock is trading at less than 25% of its Jan ‘08 bull market peak price of 3950. Fundamentally, the company is financially sound and continues to perform well. But margins are under pressure.

5 Reasons to start buying now and 5 Reasons to wait

With the BSE Sensex and Nifty 50 indices dropping like bricks and shattering likely support levels, small investors are naturally anxious and bewildered by the quick turn of events. Both indices were near their all–time peaks just three months back. But a deadly cocktail of corruption and scams, generously mixed with untamed inflation and rising interest rates have left investors punch-drunk and chased FIIs to the exit doors.

In an earlier post, I had given 4 definitions of a bear market. So far, only definition number 2 has been satisfied, and definition 4 – the ‘death cross’ – may be satisfied soon. That will confirm a bear market. So what should investors do now? Use the correction to start buying, or wait for the correction to end?

Those are tough questions to answer – mainly because there are no simple answers that will satisfy all investors. Given below are 5 reasons why investors should start buying now, and 5 reasons why investors should wait. The idea is not to confuse, but to provide alternative arguments that investors can evaluate and then decide their own courses of action.

5 Reasons to buy now

1. The BSE Sensex and Nifty 50 indices touched their Oct ‘09 peaks. Since previous tops tend to provide support, a bounce up from current levels is a possibility. The technical indicators are looking oversold – also hinting at an upward bounce.

2. If you missed the rally from Mar ‘09 and had waited for a correction to enter, well you’ve got it. The indices are down 18% from their Nov ‘10 peak, and the downside seems limited. It is very difficult to time the market perfectly, so this is a good time to start accumulating.

3. You should invest when you have the money. It doesn’t matter if you have the cash to invest because you missed the rally, or because you were one of the smart ones who have been regularly booking profits. Many stocks are at or near their 52 week lows – even some good companies can be found in that group.

4. Inflation rate has shown the first signs of reducing. Whether it is the base effect or the effect of monetary tightening is some thing the economists can debate about. But a positive fall out for the stock markets could be that RBI may hold off on raising interest rates further.

5. The FIIs are selling, but not at the rate they did in 2008. It is more of profit booking in emerging markets and redeploying in developed markets because of valuation differences. With each passing day, Indian indices are falling and US and European indices are rising – progressively reducing the valuation gap. The Indian growth story is in tact. At some point, the FIIs will be back.

5 Reasons to wait

1. Volumes have been higher on down days than on up days. That means selling pressure hasn’t abated, and the up days have mostly been due to short covering rather than investment buying. That points to further selling.

2. If you missed the rally since Mar ‘09 because you waited for a correction, why not wait a little longer? No point trying to catch a falling knife. Let the selling subside. Once the indices start to turn around, that would be a better time to enter.

3. One of the four bear market definitions (mentioned above) have already been satisfied. If  the ‘death cross’ happens, a bear market will get confirmed. Any subsequent upward bounces will be sold into, and the indices may drop much lower. How much lower? Check this post. Remember the old saying: The early bird catches the worm? Guess what happens to the early worm – it gets caught! Many small investors bought during May ‘08 during a bear market rally. They were badly ‘caught’ in the crash that followed.

4. The government is trying to show that it can also act against scams and corruption. But so far it has been too little – too late. Investor sentiments have gone for a toss, and no one wants to step up and buy. FIIs continue to sell. This isn’t the time to be brave.

5. FIIs have lots of choices about where to invest. China has been growing faster than India. But the Shanghai Composite index has been in a bear market for more than 3 years. There is no reason to believe that FIIs will pour in money like they did in 2009-10. India’s GDP growth rate is beginning to slow down. Investors may be better off by taking advantage of the higher interest rates and safer option of bank fixed deposits till the correction plays out and the bull rally resumes.

What would you like to do, dear reader? Are you in the ‘buy now’ camp or ‘let us wait out the correction’ camp and why? Your opinion may help other readers to decide.