Chart Patterns of Housing Finance Companies (an update)

A few days after the Sensex and Nifty peaked in Nov ‘10, news of the housing finance scam dampened investor sentiments further. I had written a post on the chart patterns of housing finance companies at that time - all of them were correcting from their respective peaks.

Multiple interest rate increases since then have taken a toll on interest-rate sensitive industries, including housing finance companies. However, there are always one or two stocks that buck the trend. Those are the ones to put on your buy list. Let us look at the current charts in alphabetical order:

Can Fin Homes

After touching an intra-day high of 172 in Aug ‘10, the stock has been in a long down trend – halving in value when it touched an intra-day low of 86.55 in Feb ‘11. It has been consolidating within a bearish descending triangle pattern. The likely break below the support level of 90 can push the stock deeper into a bear market. On the upside, the 200 day EMA and the blue down trend line will provide strong resistances. Avoid.

Dewan Housing Finance

The stock peaked at 347 in Nov ‘11 before starting a prolonged correction within a downward sloping channel. So far, the stock has corrected 47% from its peak. Today’s high volume spurt was on news of its fund-raising plans. The stock is in a bear market, and such news driven spurts are good selling opportunities. Avoid.

GIC Housing Finance

The stock has been trading within a downward sloping channel, and is in a bear market. The drop from its Nov ‘10 high of 161 to its recent low of 74 has corrected 54% from its top – making it the worst performer among the housing finance stocks. Avoid.

GRUH Finance

This HDFC subsidiary has been a star performer – outperforming even its better known parent. After making a double-bottom (311 in Feb ‘11 and 310 in Mar ‘11) pattern, the stock embarked on a strong bull rally that peaked at 629 in Nov ‘11 – a 100% gain in 8 months. This was one of the two top picks in my previous post, and has certainly lived up to expectations. Add on dips.

HDFC

The stock was the other top pick in my previous post. It has been a favourite of the FIIs. That perhaps led to its relative underperformance, even though the fundamentals remain strong. The FIIs have been net sellers of Indian equity in 2011, and stocks like Infosys and HDFC have borne the brunt of their selling. The stock has been moving sideways – oscillating around its 200 day EMA. Hold.

LIC Housing Finance

This scam-tainted stock had a sharp fall, followed by a 5:1 stock split (marked by light blue bell) that exacerbated the fall as a large number of stocks hit demat accounts. The company had no alternative but to make top-level changes, which led to a decent recovery. The stock has been trading within a rectangular consolidation pattern for the past 8 months. Hold.

Bottomline? The stock chart patterns of housing finance companies clearly show that high interest rates have affected performance – with the sole exception of GRUH Finance. Its business concentration in the state of Gujarat – one of the best administered states in India – has helped its cause.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Oct 07, ‘11

The BSE Sensex and NSE Nifty 50 index chart patterns have completed 11 months in down trends, and the past 9 weeks within rectangular trading ranges below large descending triangle patterns. The longer both indices consolidate within their rectangular ranges, the greater will be the significances of the eventual break outs.

Unfortunately, there is no way of knowing in advance the direction of the eventual break outs. If both indices climb above the upper resistance levels, the up moves should be accompanied by strong volumes. A break down below the lower support levels need not have much volume support.

Consolidation patterns tend to be continuation patterns. That means the previous down trends, before the indices entered rectangular consolidation zones, will continue. Probabilities of downward break outs are greater. 

Rectangular trading ranges have measuring implications. On a break down below the rectangles, the indices are expected to fall an equivalent of the height of the rectangles. Therefore, the downward targets for the Sensex and the Nifty will be 14100 and 4200 respectively; i.e. another 10-15% or so from the current levels. These downward targets are very similar to the downward targets mentioned in an earlier post.

BSE Sensex Index Chart

Note that the BSE Sensex chart has formed several small gaps during the past 9 weeks, including the upward gap on Fri. Oct 7 ‘11. Such gaps, formed within a rectangular consolidation zone, are called ‘common gaps’ that have little technical significance. The much larger downward gap that occurred when the Sensex broke down below the descending triangle (marked by light-blue oval), is a ‘breakaway gap’ that is more crucial technically. Till that gap is filled, bulls will remain at the receiving end.

The technical indicators are bearish, but showing some signs of recovery. The MACD is negative and below the signal line, but attempting a turnaround. The ROC has climbed above its 10 day MA, but is negative. The RSI has bounced up a bit near its oversold zone, but remains below the 50% level. The slow stochastic is trying to emerge from its oversold zone.

Q2 results should start hitting the market in the coming week. They are unlikely to be great, but the markets tend to discount such expectations in advance. Still, there will be stock-specific moves based on positive or negative surprises. Investors should remain nimble to take advantage of any opportunities.

NSE Nifty 50 Index Chart

Despite the rally on Fri. Oct 7 ‘11, the weekly bar on a holiday-shortened week clearly shows a lower top, a lower bottom and a lower weekly close. So, the bears ‘won’ last week’s exchanges. Market sentiment remains weak, and the technical indicators are reflecting the market mood.

The distance between the 20 week and 50 week EMAs is widening, and the Nifty is trading below both EMAs. The bear market is gaining in strength. The MACD is moving sideways below its signal line in negative territory. The ROC is also negative and below its 10 week MA, but attempting to rise. Both the RSI and the slow stochastic have slipped into their oversold zones. Is the Nifty getting ready to fall below its 9 weeks long trading range?

Inflation remains a thorn in the side of the UPA government. Instead of fighting the problem together, senior government ministers are engaged in backstabbing each other. The opposition is caught on the horns of a dilemma – whether to expose the government’s corrupt deals, or to set their own house in order. The RBI will have no alternative but to increase interest rates once more.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are within trading ranges for the 9th straight week. The longer the consolidation, the stronger will be the move out of the range. The politicial and economic environment is not conducive to an up move. But strong FII buying (or selling) can change all equations quickly. This is a great time to learn the art of being patient till the right opportunity presents itself.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Sep 30, ‘11

The BSE Sensex and the NSE Nifty 50 index chart patterns have spent almost 11 months in a down trend from their Nov '10 peaks, forming large bearish descending triangles. Both indices dropped below the triangles, as expected, but have been consolidating within rectangular ranges for the past eight weeks. Is the bear phase coming to an end, or is the consolidation only a lull before a selling storm?

BSE Sensex Index Chart

The BSE Sensex tested the lower edge of the rectangular trading range, but bounced up on a bout of short-covering and some bottom fishing on F&O expiry week. Though the index gained almost 2% on a weekly basis (which is a bullish sign), it formed a 'lower-top and lower-bottom' bar for the week (which is bearish). The bulls ensured that the index didn't fall below the rectangular trading range. The bears prevented the index from moving up too much.

The weekly technical indicators show that the scale is slightly tipped towards the bearish side, which isn't a surprise during a bear phase. The MACD is negative, and gently sliding below its falling signal line. The ROC is negative and below its 10 week MA. The RSI is moving sideways, just above its oversold zone. The slow stochastic is about to slip into its oversold zone.

The question is: Should one start buying now, or is it better to wait? The answer depends on whether you have money to invest, and on your risk appetite. Buy, if you have the money and can identify value. But be prepared to see even lower levels. What if there is a sudden turnaround in sentiment and the Sensex starts shooting up? Remember that it is practically impossible to catch the exact tops and bottoms. If you invest in reputed companies for the long-term, buying a stock Rs 10 lower or Rs 15 higher won't make too much of a difference. A suitable stop-loss will act as an insurance in the event of a market crash.

NSE Nifty 50 Index Chart

Triple resistances from the 5180 level, the 20 day EMA and the 50 day EMA are keeping the bear market rallies in check. The 4700 level has twice provided support to the falling Nifty. Logically, the index should break down below 4700 and fall another 10-15%. But stock market moves are not based  on logic.

As Graham has taught us, the market behaves like a voting machine in the short-term. In other words, sentiments rule. In the long-term, the markets act like a weighing machine. That means the earnings of companies are 'weighed' to find their true worth. Q2 results are due in two weeks, and they are not likely to be very good. High interest rates are not conducive to earnings growth. 'Weigh' the upcoming results before committing big money into the market. Ignore the TV experts, most of whom have vested interests.

If you are a regular visitor to the grocery market, you know that food prices are showing very little signs of moderation. With the festival season upon us, food prices have been hiked further. Corporate hiring is slowing down, and in some cases there have been talk of layoffs. The failure to launch several FPOs by PSUs have left the government coffers depleted. More borrowing will be resorted to - which will stoke the inflation fire. Expect another 25 bps rate hike by the RBI in Oct '11.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices are still within trading ranges - unable to make up their minds which direction they want to go. The downside risk is greater, so be cautious about bottom fishing. Buy if you must, but with strict stop-losses. Waiting for, and evaluating the upcoming Q2 results may be a better option.

Stock Index Chart Patterns - BSE Sectoral Indices, Sep 23, '11

The Sensex has been trading within a range for seven weeks, after breaking down below a large descending triangle reversal pattern. That means some sectoral indices are going down; some are going up; and some are going nowhere. The risk takers believe that the ones that are going down are likely to be the ones that will lead the next bull market. The more conservative investors prefer the sectors that can protect the downside better. Let us take a look at how the BSE Sectoral indices are faring.

BSE Auto Index

The BSE Auto index showed remarkable strength by climbing above all three EMAs, only to face strong resistance from the blue down-trend line of the descending triangle pattern. Technically, it is yet to break down below the triangle. But the technical indicators are bearish, and it should break downwards sooner than later. Q2 results unlikely to be great. Avoid.
 
BSE Bankex

The BSE Bankex seems to be tracking the Sensex as it consolidates within a trading range after breaking below the descending triangle. The technical indicators are looking bearish. A test of, and break below, the Aug '11 low is likely. Wait for Q2 results.

BSE Capital Goods Index

The BSE Capital Goods index made a brave effort to climb above the resistance level of 12160, only to face strong resistance from the falling 50 day EMA. A sharp correction has taken the index below its Aug '11 low. Avoid.

BSE Consumer Durables Index

The BSE Consumer Durables index climbed above all three EMAs but couldn't get past the down trend line. The index is consolidating within a large 'pennant' pattern and as long as it trades above its rising 200 day EMA, it will be in a bull market. The weakening technical indicators are hinting at another possible drop below the 200 day EMA. Await Q2 results.

BSE FMCG Index 

The BSE FMCG index, hitherto the best performer among the BSE Sectoral indices, is finally facing selling pressure from the bears. A drop below the 200 day EMA is imminent. The index is poised near the long-term support level of 3800. A break below can take the index down to 3500. Hold. 

BSE Healthcare Index

The BSE Healthcare index is consolidating within a 'pennant' pattern, somewhat similar to the one on the BSE Consumer Durables index chart - but with a big difference. The Healthcare index is trading below its 200 day EMA and the 'death cross' has confirmed a bear market. Considered a defensive sector, it is facing selling pressure due to the perceived slow down in export business from Europe and USA. The bearish technical indicators are pointing to a break below the 'pennant', which could lead to a 400 points drop. Await Q2 results.

BSE IT Index

The slow growth in the Eurozone and US economies has cast a pall of gloom over the BSE IT index - somewhat unfairly perhaps. The rally from the Aug '11 low stalled at the 50 day EMA, and the index is heading downwards again. The breakdown below the downward-sloping channel points to further weakness. Await Q2 results.

BSE Metal Index

The BSE Metal index is likely to test, and possibly break below, the Aug '11 low. The bearish technical indicators are certainly supporting the possibility. Q2 results are unlikely to bring much cheer. Avoid.

BSE Oil & Gas Index

A smart recovery back inside the downward-sloping channel of the BSE Oil & Gas index chart proved to be a temporary respite. The index is about to drop below the channel, in spite of the hike in petrol's price. Artificially lower prices of diesel and kerosene are increasing the subsidy burden, and playing havoc with the burgeoning fiscal deficit. Reliance seems to be under the gun for its financial shenanigans. The bearish technical indicators are suggesting a deeper cut. Avoid. 




BSE Power Index

The BSE Power index is desperately trying to cling on to the lower edge of the year-long downward sloping channel. The sector has redefined Murphy's Law - everything that could possibly go wrong is going wrong. The new land acquisition bill has put paid to some existing projects as well. New projects are unlikely to get off the ground. Shortage of coal is another wild card. Stay away.
 
BSE Realty Index

An attempt by the BSE Realty index to recover lost ground has failed. The biggest players in the sector are in serious financial trouble, but are still not giving up on their strategy of cartelisation to hold on to existing inventory at higher prices. But there are signs of cracks, and efforts to raise cash by selling off land banks acquired at high prices. Avoid.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Sep 23, ‘11

The BSE Sensex and NSE Nifty 50 index chart patterns have spent seven straight weeks in trading ranges immediately below the large descending triangle reversal patterns. The 17300 level on the Sensex and the 5200 level on the Nifty have become almost insurmountable resistances. However, both indices have proved quite resilient and have not crashed despite all the negative news flying around.

BSE Sensex Index Chart

The Sensex rally of the previous three weeks made two serious attempts to break above the trading range. The first effort on Sep 8-9 '11 crossed 17200, but fell short of the 17300 resistance level. The second attempt on Sep 21 '11 faced strong resistance from the falling 50 day EMA. A huge 700 points drop on the following day has ended bullish hopes for the time being.

There has been plenty of advice from 'experts' on TV channels. "This is a great time to buy", and "If you don't buy now, when will you buy?" are some of the pearls of wisdom. Every fall in the Sensex is not necessarily a buying opportunity. What matters more is whether individual stocks one wants to buy are trading at attractive valuations or not.

The technical indicators are suggesting that the worst may not be over yet. The MACD is about to cross below its signal line in negative territory. The ROC is also negative, and below its falling 10 day MA. Both the RSI and the slow stochastic have fallen below their 50% levels and are heading towards their oversold zones. If the Aug '11 intra-day low of 15766 is broken - and there is every chance of that happening soon - another 10-15% correction from current level is likely.

NSE Nifty 50 Index Chart

It was FII buying that boosted the 3 weeks' rally in the Nifty 50 chart, and it was their selling that caused the 200 points drop on Thur. Sep 22 '11. There can be no doubt that they 'own' our markets. Why the sudden selling? Possibly the realisation - after digesting the details of the US Fed's "Operation Twist" - that no amount of wishful thinking is going to clean up the huge mess in the US and Eurozone economies.

Growth is slowing down in India, thanks to the pro-active stance of the RBI. But the UPA government is embroiled in so many corrupt deals that are getting exposed one by one, that policy decisions have been put on the back burner. Monetary policies alone has not helped in reigning in inflation. Valuations are looking attractive based on past earnings. Q2 results, due in another three weeks, should lead to earnings downgrades.

The technical indicators are all bearish, but haven't reached oversold conditions yet. So, be prepared for further down side in the Nifty, and a probable break below the trading range.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns seem to be getting ready for a break below the last seven weeks' trading range. Some short-covering can be expected because of the settlement day next week. Any bounce up from the Aug '11 lows will provide another selling opportunity. Stay on the sidelines.

To make money in the stock market, avoid these three buying mistakes

Stock markets have trading days or holidays. Using stock market jargon, trading days can be either ‘bullish’ or ‘bearish’. But if you follow the so-called experts on business channels or the pink papers, stock markets have ‘good’ days or ‘bad’ days. On ‘good’ days, the Sensex gains. On ‘bad’ days, the Nifty falls.

What happens when both the Nifty and the Sensex drop by 4% – like they did today? It is a ‘terrible’ day! For whom? Obviously for the brokers and the business channels, because their business thrives on ‘good’ days. When the market moves up, more viewers tune in, and more investors place ‘buy’ orders. For investors, who were lucky or prudent to sell at higher levels, ‘panic’ days offer a great opportunity to cover back the stocks sold earlier.

So, are ‘panic’ days great opportunities to buy? The short answer is: No. In an earlier post, ‘How to tackle a ‘panic bottom’, I had explained that panic bottoms seldom hold. Technically, today’s heavy FII selling didn’t create a bottom in the Sensex or the Nifty. But it is a sign that the lower level of the last six weeks’ trading range may get tested, and possibly broken.

If you ever watch a tennis match between a top 10 player and a player ranked much lower, you will notice that there may not be much difference in their respective skill levels. The big difference lies in their ‘unforced errors’ stats. The better player makes fewer ‘unforced errors’.

In stock market investments, there are three such ‘unforced errors’ that you must learn to eliminate to enjoy greater success. These are common buying mistakes that many investors make:-

1. Buying near a top
2. Buying during a down trend
3. Buying before a bottom is formed

The buying mistakes in 1 and 3 are caused mainly due to inexperience with technical analysis. In the majority of bull and bear markets, a top or a bottom just do not happen out of the blue. There is a process, usually accompanied by a clearly identifiable reversal pattern, through which a top or a bottom gets formed. Such reversal patterns may take a few weeks, or a few months to form.

In both the Sensex and the Nifty, the Nov ‘10 peaks were part of ‘diamond’ reversal patterns, which transformed into large ‘descending triangle’ reversal patterns. So, we actually had two reversal patterns to indicate a change of trend from bull to bear.

The 2008 bear market ended with a 5 months long rectangular reversal pattern. It is expected that the current bear market will also form an identifiable pattern before the next bull phase can start. No such pattern is visible yet.

It is easier to identify reversal patterns after the pattern is fully formed. But there are prior signals given by various technical indicators that help to ascertain whether a reversal pattern is in progress. It is better to err on the side of caution when stock markets are rising or falling fast.

Buying during a down trend is acceptable only if you are covering up an earlier sale at a higher price. Not otherwise. Unlike tops and bottoms, which are tougher to identify, a simple trend line or the 200 day EMA can show whether a stock or an index is in a down trend. The biggest mistake you can make is to think that ‘it can’t fall any lower’. Learn to be patient and stay away during down trends. Buy only after an up trend is re-established.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Sep 09, ‘11

In last week’s analysis, I had speculated about the cause of the rallies in the BSE Sensex and NSE Nifty 50 index chart patterns. Why stock markets go up or down can’t always be explained logically, or fundamentally. Technical analysis may help some times – but not always – by studying chart patterns that have occurred many times before under various economic conditions.

Once a clearly visible and identifiable pattern emerges – like the large descending triangles on the Sensex and Nifty charts – one should respect the pattern and expect a similar outcome that has been repeated many times before. In our case, the outcome has been as expected: a break below the descending triangle, followed by a pull back to the lower edge of the triangle. Such pull backs are selling opportunities.

BSE Sensex Index Chart

Is the rally in the Sensex over then? It seems like that. The FIIs were net buyers during the first four days of the week. The index climbed above the 20 day EMA and seemed ready to move above the 17300 level. Out of the blue came the FII selling on Friday (Sep 9 ‘11) that caused a ‘reversal day’ pattern on the chart (higher high, lower close) and marked an intermediate top.

Did the FIIs sell because the index was close to 17300, or were they merely booking profits before the weekend? Only they can answer the question, but my guess is that it was a bit of both. FIIs use sophisticated models for managing their portfolios, and were aware that a resistance level was near.

Can’t more FII buying cause the rally to continue next week? Sure it can. Support and resistance levels only indicate the probability of a turn around, not a certainty. But there are a number of likely resistances to a further up move – the 17300 level; the falling 50 day and 200 day EMAs; the 300 points gap on the chart; and the blue down trend line.

The technical indicators are bullish, but showing signs of weakness. The MACD is rising above its signal line, but is negative. The ROC is positive and above its 10 day MA, but turning down. The RSI is moving sideways after crossing the 50% level. The slow stochastic entered its overbought zone, but is turning down. The Sensex is likely to consolidate between 17300 and the next support level of 15580 over the next couple of weeks.

NSE Nifty 50 Index Chart

The weekly bar chart of the Nifty found resistance from the lower edge of the descending triangle but managed a marginally higher weekly close. The up-tick in volumes may encourage the bulls, but the technical indicators are not that encouraging.

The MACD has stopped falling, but is negative and below its signal line. The ROC is also negative and below its 10 week EMA, and has started falling. The RSI emerged from its oversold region, but has been unable to move up. The slow stochastic is trying to emerge form its oversold zone. Some more consolidation within the 4700 – 5200 band is likely.

Food inflation came off slightly but the overall inflation remains high and a 25 bps (0.25%) interest rate hike by the RBI is almost inevitable. Has the market discounted the rate hike? We will find out next Friday (Sep 16 ‘11), but there is a section of analysts who are expecting a pause by the RBI. The pause may lead to buying. The rate hike will attract sellers. The monsoon has been pretty good. Q2 results next month may not be so good.

Bottomline? The BSE Sensex and Nifty 50 index chart patterns are consolidating in bear markets. The good news is that the indices haven’t crashed. The bad news is that the possibility of a crash can’t be ruled out by any means. This may be a good time to avail of the higher interest rates in short-term bank fixed deposits.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Sep 02, ‘11

In a trading week truncated by two consecutive holidays, the BSE Sensex and NSE Nifty 50 index staged sharp rallies to move above their respective 20 day EMAs.

What caused the rally? Did the fundamentals of the market change suddenly? Actually, they worsened – because inflation rose back to double digits, opening the door for another interest rate hike later in the month. Stock markets abhor rising interest rates.

So, was the rally celebrating Anna Hazare’s ‘victory’? Maybe. The FIIs bought heavily, and that always boosts the market. Technically, the market was oversold, and a rally was on the cards. Reasons why the market is going up or down are always debatable. One should concentrate instead on the possible opportunities.

BSE Sensex Index Chart

The technical indicators were looking oversold last week and they were showing positive divergence with the index. That had indicated the possibility of a rally. The rally has corrected the oversold condition.

The MACD has crossed above its signal line, but is deep inside negative territory. The ROC is rising above its 10 day MA, but is yet to enter the positive zone. The RSI rose from its oversold zone to the 50% level, but faced resistance and turned down. The slow stochastic has managed to climb above the 50% level.

Can the rally continue? Yes, but it is losing momentum. Strong resistance is likely from the 17300 level (the lower edge of the descending triangle), and above it, from the gap and the falling 50 day EMA. The index may consolidate in the band between 17300 and the next likely support level of 15580 before deciding on its next move – which should be downwards.

NSE Nifty 50 Index Chart

The weekly bar chart pattern of the NSE Nifty shows a nice recovery after 5 straight lower weekly closes. The week’s volume bar doesn’t inspire much confidence – but that is because of the two holidays during the week.

The technical indicators are showing positive signs, but haven’t turned bullish yet. The MACD is negative and below its signal line. The ROC is also negative and below its 10 week MA, but trying to turn around. The RSI has emerged from its oversold zone, but is below the 50% level. The slow stochastic is still in the oversold zone.

Further up move will face resistance at the 5180 level – the lower edge of the descending triangle. In case the Nifty can climb back inside the triangle, the falling 20 week and 50 week EMAs may prove to be stronger resistances.

With Anna Hazare off the front page, the government should concentrate on taking policy decisions that will help economic growth. GDP growth is definitely slowing. In a high interest rate environment, capital investments are held back, and profit margins get squeezed leading to even lower growth.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns staged relief rallies last week, correcting oversold conditions. Such counter-trend rallies are selling opportunities. Global growth is slowing, and that is never a good sign for stock markets. Both indices are in bear markets, which means one should avoid trying to be brave.

Stock Index Chart Patterns - BSE Sectoral Indices, Aug 30, '11

A sharp rally during the last two trading days of Aug ‘11 – thanks to FII buying – saw the Sensex gain more than 800 points. Questions in the mind of many small investors, specially those without prior experience of bear markets, are: “Has the bear phase come to an end?”, and “Is this a good time to start buying?”

The short answer to the first question is: “No” – which a look at the chart patterns of the BSE Sectoral indices will confirm. The second question has already been answered in a post on Aug 11 ‘11. If you missed it earlier, it may be a good idea to go through it now.

BSE Auto Index

The BSE Auto index has technically not broken down below the large descending triangle yet – unlike the Sensex. The gap in the chart was followed by a test and intra-day breach of the 8115 support level. The quick recovery closed the gap, but faced resistance from the falling 20 day EMA. Another test and a closing breach of the support level is a warning that worse may follow.

The subsequent upward bounce closed above the 20 day EMA. There is strong overhead resistance from the falling 50 day and 200 day EMAs, and the blue down trend line. The technical indicators are showing some bullish signs, but the support level may get breached technically (i.e. by more than 3% on a closing basis). Time to head for the exit door.

BSE Bankex

The BSE Bankex has slipped into a bear market – the ‘death cross’ and the breach of the support level at 11330 have confirmed that. The current bounce is likely to face resistance from the falling 20 day EMA and the broken support level. Use the bounce to exit.

BSE Capital Goods Index

The BSE Capital Goods index has been technically in a bear market since the ‘death cross’ back in Jan ‘11. It has now broken below the Feb ‘11 lows, only to pull back to the support level of 12160. It is also facing resistance from the falling 20 day EMA. Even if it rallies some more, it may not be able to cross the hurdle of the falling 50 day EMA. Sell.

BSE Consumer Durables Index

The BSE Consumer Durables index failed to test its Nov ‘10 top, broke below the blue up-trend line and is in danger of dropping into a bear market. The technical indicators are not holding out much hope of a speedy recovery. As per trend line theory: a trend remains in force till it is broken. The closing chart pattern (not shown) reveals a small head-and-shoulders reversal pattern with a downward-sloping neckline, with the head formed by the Jul ‘11 top. The ‘death cross’ will confirm a bear market. Sell.

BSE FMCG Index

The BSE FMCG index has been the star performer among the BSE sectoral indices, and appears to have escaped the bear attack with minor bruises. The blue up-trend line was breached with a gap, but the index is consolidating within a symmetrical triangle, and is trading above its rising 200 day EMA.

Technically, the bull market remains in force. The ROC, the RSI and the slow stochastic are showing positive divergences (reaching higher tops while the index made a lower top). The FMCG sector may not give spectacular returns in bull markets, but its resilience in bear markets makes it my favourite sector. It is a pity that most investors don’t find it an attractive investment option. Accumulate, with a stop-loss at 3720 (200 day EMA).

BSE Healthcare Index

The BSE Healthcare index is supposed to represent a defensive sector, but it has broken down sharply below the blue up-trend line and the 200 day EMA. Note the classic pullback to the 200 day EMA before dropping further. The imminent ‘death cross’ and a drop below the Feb ‘11 low will confirm a bear market. The attempt at a recovery is likely to be thwarted by the 50 day and 200 day EMAs. Reduce.

BSE IT Index

The question mark about the growth in the US and Eurozone economies have worsened the outlook of the BSE IT index, which has broken sharply below a downward-sloping channel, and is in a bear market. Could this be a contrarian play? Anecdotal evidence suggests that overseas clients haven’t cut down on IT expenditure. Bet on TCS or Infosys, if you must – not on HCL Tech or Wipro. It may be more prudent to await Q2 results before entering.

BSE Metal Index

The BSE Metal index has also broken below a downward-sloping channel, and slipped deeper into a bear market. In spite of the recovery effort, more pain is likely. Avoid.

BSE Oil & Gas Index

The BSE Oil and Gas index also breached a downward-sloping channel, but is attempting a recovery. With inflation still not in control, diesel and kerosene prices have not yet been raised – adding to the subsidy burden. Reliance may face investigation for inflating costs of the KG-D6 basin exploration to avoid paying taxes and sharing profits with the government. Avoid.

BSE Power Index

The wind has gone out of the sails (or, more appropriately, the steam has gone out of the boilers) of the BSE Power index. Capacity additions have been way behind target; State Electricity Boards are in deep financial trouble due to mismanagement and power theft; new land acquisition laws will put a further spanner in the works. The index is going steadily down hill. Avoid.

BSE Realty Index

The BSE Realty index didn’t fall during the six months period between Feb ‘11 and Jul ‘11. But all hopes of revival of the sector has been belied. The CCI slap of a huge fine on DLF came as a further blow to an already-beleaguered sector, and pushed the index below the support level of 1895. Buy real estate; avoid realty sector stocks.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Aug 26, ‘11

Last week, I had analysed the two gaps (labelled GAP1 and GAP2) on the chart patterns of the BSE Sensex and the NSE Nifty 50 indices. The following conclusions were drawn:

1. GAP1, a ‘breakaway’ gap from a bearish descending triangle pattern, was unlikely to get filled in a hurry
2. GAP2 was a ‘common’ gap that both indices were likely to fill on an upward bounce over the next two trading days
3. Bears would use the upward bounce to sell
4. Both indices would consolidate for a while before resuming the downward journey.

Some times, technical analysis can be almost prophetic. ‘Almost’ because the first three events happened exactly as per expectation; but not the fourth. GAP2 got filled during the first two days of the trading week. The down trend resumed immediately, and ended the week by breaking below the May ‘10 lows (15960 for the Sensex and 4786 for the Nifty).

BSE Sensex Index Chart

How important is the break below the May ‘10 low of 15960? Not very – other than indicating that the Sensex is ready to fall lower. During down trends, supports occur at previous tops. While a previous bottom is like a milepost on the way down, it usually acts as a resistance during future up moves. It may be worthwhile noting that.

Which are the previous tops from which the Sensex can seek some support? The Jun ‘09 top of 15580 is the nearest one. Below that is the likely support from the May ‘09 top of 14930. That is barely 5% below this week’s closing level! Can the index go down further to fill the big gap formed in May ‘09? The top level of that partly-filled gap is at 13220. Nothing can be ruled out. A fresh look can be taken if and when 14930 (the May ‘09 top) is breached.

The technical indicators are looking very bearish, and oversold. Note that the ROC, the RSI and the slow stochastic reached higher bottoms as the Sensex dropped to a new low. The positive divergences should lead to an upward bounce. The way FIIs are selling at every rise, any rally may be short-lived.

NSE Nifty 50 Index Chart

The weekly bar chart pattern of the Nifty 50 index clearly shows five straight lower weekly closes. It is a good time for a counter-trend rally. Will it happen?

The weekly technical indicators are looking oversold, so a rally is a possibility. Note that the weekly RSI hardly spends any time in the oversold zone. In the past year, it had spent only one week in Feb ‘11. Now it has remained in the oversold zone for two straight weeks.

Please remember that the ‘death cross’ of the 20 week EMA below the 50 week EMA has confirmed a bear market. That means, any counter-trend rally will be a selling opportunity. For likely lower Nifty levels, check out my post of Aug 24 ‘11.

Food inflation seems out-of-control. Daily use vegetables (except potatoes) cost Rs 40 – 60 a Kg in Calcutta. Last year, they were in the Rs 30 – 40 a Kg range. The Anna Hazare anti-corruption demonstration has tied up the Parliament in knots - to the point where important and necessary policy decisions are not forthcoming. Unless the Lokpal Bill is tabled soon, stock markets will slide, as FIIs will continue selling.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns are falling deeper into bear markets. Any upward bounce next week may only prolong the pain. Stay on the sidelines and start brushing up on analysis and stock-picking skills.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Aug 12, ‘11

BSE Sensex Index Chart

The weekly bar chart pattern of the BSE Sensex index has several points of interest, and I will take them up one by one. The first is the ‘diamond’ reversal pattern that formed during Sep ‘10 to Dec ‘10 – marking the end of the strong bull rally from the low of Mar ‘09 to the peak of Nov ‘10. The diamond is quite a rare formation, and can be thought of as a head-and-shoulders pattern with a bent neck line. The downside target after the break out is the height of the diamond – which was met when the Sensex touched the low of Feb ‘11.

Reversal patterns should have ‘something to reverse’. That condition was amply met by the rally from 8000 to 21000. The diamond morphed into a large descending triangle pattern, from which the expected downward break out occurred on Fri. Aug 5 ‘11. Note that the break out coincided with the ‘death cross’ of the 20 week EMA below the 50 week EMA (marked by blue arrow) that confirmed a descent into a bear market. The week’s low of 16432 was 22% lower than the Nov ‘10 peak of 21076. A 20% fall from the peak – though it has taken a considerable amount of time – is another confirmation of a bear market.

The technical indicators are looking bearish. The MACD is falling below its signal line in negative territory. The ROC is also negative, and below its 10 week MA. The RSI and the slow stochastic are at the edge of their oversold zones. The next support level for the Sensex is the zone between 15000 and 16000. A breach of that zone can push the Sensex down to 14000 - the downside target of the break out below the descending triangle.

A wave of FII selling in Aug ‘11 has caused the breakdown; their buying can change the situation quickly. LIC is sitting on a pile of cash – around Rs 40,000 Crores – which they are deploying to prevent a bigger fall. But the bears are in no mood to give up their stranglehold on the Indian stock market.

NSE Nifty 50 Index Chart

In Wednesday’s update of the Nifty 50 chart pattern analysis, I had made the following comment: “The strong volumes on the downward break last Friday (Aug 5 ‘11), followed by two more down days on good volumes should make the 5200 level a strong resistance to any up moves in the near term.”

The bulls tested the resistance of the 5200 level through the week, but was unable to pierce it. High volume selling pressure on Fri. Aug 12 ‘11 finally overwhelmed them. The technical indicators are pointing to a deeper correction. The MACD and ROC are in negative territory. The RSI is inside its oversold zone. The slow stochastic tried to emerge from its over sold zone, but is slipping back in.

The IIP numbers pleasantly surprised on the up side. But inflation rose again – which may mean another 25 bps interest rate hike in Sep ‘11. Q1 results of India Inc. are indicating a slow down in profit margins. The overhang of the debt problems in USA and the Eurozone are making the FIIs jittery, and Asian stock indices are facing the brunt of their selling.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns have entered bear markets. The good news is that the indices haven’t collapsed yet. But there is every possibility of deeper corrections. Mid-cap stocks, and even a few large-cap ones are beginning to look attractive. If you are brave enough, start accumulating. Sitting out the correction may be a more sensible approach.

Nifty has dropped below 5200 – what next?

In last Wednesday’s post - ‘Will the market crash if Nifty falls below 5200?’ – I had mentioned a worst case scenario of a drop to 4020, based on the theory of break outs from descending triangles. A more likely support level was mentioned as 4840 – the May ‘10 low.

I want to revise the support levels, based on the theory of supports and resistances – covered in my post of Sep 3 ‘09. Support levels usually coincide with previous tops on the way down, and resistance levels tend to occur at previous bottoms on the way up.

Resistances, when broken, become supports; supports, when broken, become resistances. Volume action during a break of support or resistance determines how strong that particular level is going to be in future. Since 4840 is a previous bottom, it is unlikely to act as a support and will probably be tested and broken.

So, where are the Nifty supports? Let us look at a longer-term bar chart (from May ‘09 till date):

Note that the 5200 level, which formed the bottom of the large descending triangle, was the resistance level for the tops in Oct ‘09 and Dec ‘09. After crossing above 5200 back in Jan ‘10, the index dropped to the support level of 4700 in Feb ‘10. 4700 was the resistance level for tops in Jun ‘09 and Aug ‘09. It once again acted as a support in May ‘10 – when the Nifty dropped to 4840.

Below 4700, the next support is at 4500 – which corresponds to the resistance level for tops in May ‘09 and Jul ‘09. It subsequently acted as a support in Oct ‘09. In other words, the zone between 4500 and 4700 should act as a good support for the Nifty, and can be used as a ‘buy’ zone with a strict stop-loss at 4350 (3% below 4500). However, the descending triangle target level of 4020 is not being ruled out as yet.

Now, a few words about what transpired in today’s trading.

Take a look at the volume bars for the last few day’s trading. The index pulled back to the pierced 5200 support level today, but closed a little lower on reduced volumes. Such pull backs are quite common after a break out, and is a good selling opportunity for those who missed out earlier.

Can the Nifty move back up inside the triangle? There are no rules in technical analysis that haven’t been broken – so it is a possibility. Even if it can climb back into the triangle, will the index be able to close the gap? Yes, but not any time soon.

The strong volumes on the downward break last Friday (Aug 5 ‘11), followed by two more down days on good volumes should make the 5200 level a strong resistance to any up moves in the near term. Note that the RSI and slow stochastic are yet to emerge from their oversold zones.

I’m not in the prediction business – but odds are favouring a test of the zone between 4500 and 4700.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Aug 05, ‘11

BSE Sensex Index Chart

Two weeks back, I had made the following comment while analysing the one year closing chart pattern of the BSE Sensex index: “As long as the support level of 17460 holds, bullish hopes will be alive.”

Last Friday (Aug 5 ‘11), the Sensex touched a 52 week intra-day low of 16991, and ended the day at a 52 week closing low of 17306 (marked by light blue circle). The 3% ‘whipsaw’ lee-way rule means that the fall below the large descending triangle will be technically valid only on a close below 16950. That may be a question of ‘when’, not ‘if’.

The technical indicators are bearish, to the point of being oversold. But the index can remain oversold for a while. The MACD is negative, and falling below its signal line. The ROC is also negative, and falling below its 10 day MA. The RSI has entered its oversold zone. The slow stochastic is well-entrenched in its oversold zone.

Looks like it will be a season of discontent for the bulls – and not just because of insufficient rains. The height of the descending triangle – from the Nov ‘10 top to the Feb ‘11 bottom - is about 3500 points. A 3500 points fall below the triangle – to 14000 - is within the realms of possibility.

NSE Nifty 50 Index Chart

In last Wednesday’s post, ‘Will the market crash if Nifty falls below 5200?’, I had mentioned that if a downward break out is accompanied by high volumes, it may be a ‘shake out’ or a ‘bear trap’. So, should we be prepared for the Nifty to quickly turn around and trap the bears?

Under ‘normal’ circumstances, the answer would be ‘Yes’. But the downward gap (marked by the light blue oval) accompanied by increasing volumes has changed the equation in favour of the bears. A break out with a gap is considered to be a stronger break out than a ‘normal’ break out without a gap.

So, a deeper correction down to the 4000 level is a more probable outcome – provided high volume trading continues for a few more days. If volumes peter out, then the Nifty may seek support between 4600 – 4800.

Inflation is still untamed. Growth is slowing, and corporate profits are shrinking. The downgrade of US sovereign debt from AAA to AA+ is likely to send shock waves through global markets. India may not be immune to the side effects. Till interest rates start coming down, bulls will be on the back foot.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns have breached important support levels with downward gaps accompanied by strong volumes. That points to deeper corrections. Use any upward bounces to lighten up. (If you are feeling depressed, listen to Gregg Allman singing “Southbound”. It’s quite an up-tempo number.)

Stock Chart Pattern - Tata Steel (An Update)

The previous update to the technical analysis of the stock chart pattern of Tata Steel was posted a year back. The stock rallied strongly from its Mar ‘09 low of 150 to its Apr ‘10 peak of 694, followed by a correction down to 450, and was struggling to escape the clutches of the bears at 520.

Let us have a look at the one year closing chart pattern of Tata Steel, to find out what kind of progress it has made in the past 12 months:

I had recommended that investors use a drop below 500 to enter the stock. An entry opportunity presented itself when the stock closed just below the 500 level on Aug 25 ‘10. The next leg of the up move started almost immediately, and the stock quickly rose to close at 678 on Oct 6 ‘10 – falling short of its previous closing high of 694.

A correction ensued, during which the stock price fell below the 50 day EMA on several occasions, and in the process, formed a bullish rounding bottom pattern that propelled the stock to a new closing high of 703 on Jan 3 ‘11.

Note that while the stock managed to reach a higher top, all four technical indicators failed to follow suit. The MACD and the RSI touched lower tops, and the ROC and the slow stochastic reached flat tops (marked by blue arrows). The combined negative divergences pushed the stock price into a down trend that has lasted more than 7 months, and has formed a bearish descending triangle pattern.

The closing level of 559 on May 23 ‘11 meant a more than 20% drop from the peak, and the ‘death cross’ (marked by the light blue oval) on May 24 ‘11 confirmed a bear market.

The Tata Steel stock is a component of both the Sensex and the Nifty indices. So it isn’t a great surprise that the stock has formed a descending triangle pattern similar to the ones formed on the Sensex and Nifty charts. The difference is that the price peaked two months later – in Jan ‘11 instead of in Nov ‘10 – so the duration of the triangle is two months less.

Will the stock bounce up from the long-term support of 557, or will it break down below the descending triangle? All four technical indicators are looking bearish, so any bounce up is likely to be temporary. The MACD and ROC are negative. The RSI is below its 50% level. The slow stochastic is in its oversold zone, where it may remain for a while.

The height of the descending triangle from the peak of 703 to the support level of 557 is 146 points. On a break down below the triangle, the stock price can fall to (557 – 146 =) 411. However, there are long-term supports at 500 and 450 levels, and the stock price may turn back from one of those two supports.

Bottomline? The stock chart pattern of Tata Steel is trading below all three EMAs and looks all set to drop below the support level of 557. This is the best stock to own in the steel sector. Any drop below 500 can be a good opportunity to start accumulating again. 

Will the market crash if Nifty falls below 5200?

What is the point of asking this question when the Nifty closed above the 5400 level today? Regular readers may have the answer to the second question: Because the Nifty has formed a large ‘descending triangle’ pattern from which the likely break is downwards through the horizontal support level of 5200.

The one year bar chart pattern of the Nifty clearly shows the large descending triangle:

  

To try and attempt an answer to the first question, we need to look at some of the technical ‘rules’ associated with triangles. If you are new to technical analysis, it may be worth mentioning that there is nothing technical about ‘technical analysis’. It is just a name. A better name would be ‘sentiment analysis’ or, better still, ‘supply and demand analysis’.

Price charts tend to form certain patterns based on the supply and demand for individual stocks. In the case of an index, the patterns are formed by the combined supply and demand for stocks that are included in an index. The ‘rules’ for certain patterns are based on observations made over many many years of stock and index charts.

What are the rules associated with a ‘triangle’ pattern?

1. A triangle is a ‘consolidation’ or a ‘continuation’ pattern. That means, the previous price trend consolidates within the triangle before continuing in the same direction as its earlier price trend. Sometimes, a triangle can be a ‘reversal’ pattern; i.e. a previous up trend becomes a down trend (and vice versa).
2. An upward price break out from a triangle should be accompanied by an increase in transaction volumes. But a downward break out need not be accompanied by higher volumes. If an upward break out happens on weak volumes, it may lead to an ‘end run’ or a ‘false’ break out. If a downward break out is accompanied by high volumes, it may be a ‘shake out’ or a ‘bear trap’.
3. A break out – in either direction – should happen within two-thirds or three-fourths of the perpendicular distance between the base and the apex of the triangle.
4. In the case of right-angled triangles, price break out occurs through the flat side; i.e. upward from an ‘ascending triangle’ (flat top and rising bottoms), and downward from a ‘descending triangle’ (flat bottom and falling tops).
5. Triangles seem to lose their ‘power’, the closer the prices get towards the apex. Some times prices move right through the apex without a clear break out in any direction.
6. Triangles have measuring implications. On an upward break out, an upward sloping line is drawn parallel to the lower side; on a downward break out, a downward sloping line is drawn parallel to the upper side. The height of the triangle will be equal to the extend of the upward or downward move following the break out.

Since we have a clear descending triangle pattern on the Nifty, let us evaluate the rules to arrive at the most likely occurrence.

If we extend the downward sloping trend line and the flat bottom of the descending triangle to the right of the chart above, the apex will be formed around 5 months from now; i.e. in early Jan ‘12. The triangle started forming from the peak of Nov 5 ‘10, so the distance to the apex of the triangle in terms of time will be about 14 months.

A break out should happen within two-thirds (9 months 10 days) and three-fourths (10 months 15 days) of the distance to the apex from Nov 5 ‘11. That gives the period between Aug 15 and Sep 20 ‘11 within which a downward break out should occur. A break out may occur even earlier. The measuring implication will be the height of the triangle, which is 6340 (Nov 5 peak) – 5180 (Feb 11 trough) = 1160 points. So, the Nifty can drop to (5180 – 1160 =) 4020. That will be the worst case scenario.

If the downward break out is accompanied by high volumes, then the Nifty can turn around and resume its up trend by shaking out the bears. There is a possibility that the Nifty consolidates within the triangle beyond Sep 20 ‘11 and breaks out closer to the apex. In that case, it may fall only till 4840 (its May ‘10 low). A break out above the triangle is also a possibility – but should be accompanied by high volumes. The other possibility is that the Nifty continues to drift sideways and fizzles out through the apex of the descending triangle.

The answer to the original question is: It may do so. In technical analysis, there are no certainties – only possibilities and probabilities. A downward break out with a drop to 4840 is the most probable outcome. But a drop to 4020 can not be ruled out by any means.

What should small investors do? Keep a close watch on portfolio stocks and the 5200 level in the Nifty. The technical indicators are looking bearish – signalling a downward break below 5200.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jul 29, ‘11

BSE Sensex Index Chart

The large descending triangle pattern continues to dominate the BSE Sensex chart, despite substantial FII buying. The reason for the failure to breach the blue down trend line was apparently the unexpected 50 bps interest rate hike by the RBI (as an experienced fund manager claimed). But the Sensex had failed to breach the down trend line in Dec ‘10, Apr ‘11 and earlier in Jul ‘11. Different reasons were put forth at those times as well.

For those who still don’t believe in technical analysis, the blue down trend line on the one year weekly bar chart of the BSE Sensex index is as clear an example as possible of trend line theory: A trend, once established, remains in place till it is convincingly broken. Whatever the fundamental reasons, the index has remained below the down trend line. There is no point in betting against a down trend unless there are clear signals of a trend reversal. No such trend reversal signals are visible at present.

The weekly technical indicators are bearish, which means a likely test of the 17300 support level. If that level is broken – as it should from a descending triangle – the Sensex can go much lower. For the bulls, the silver lining is that the 20 week EMA is still above the 50 week EMA (equivalent to the 200 day EMA on daily charts).

No need to sell in a panic. The Sensex is less than 15% below its Nov ‘10 top. A high-volume breach of 17300 can lead to a ‘shake out’ that may see a resumption of the bull market.

NSE Nifty 50 Index Chart

Volumes were heavy as the Nifty 50 index dropped below all three moving averages after another failed attempt at breaching the blue down trend line. The support level at 5190 or so is likely to be tested, and possibly breached. A low volume breach will be considered ‘normal’. A high volume breach may be a ‘bear trap’. So, remain prepared.

The technical indicators are bearish. The MACD is below its signal line, and about to fall into negative territory. The ROC is negative and below its 10 day MA. The RSI is below the 50% level, trying to make up its mind about which way to go. The slow stochastic has entered the oversold zone. Doesn’t look good for the bulls in the near term.

Whether the latest interest rate hike is going to have any effect on rising inflation will not be known for a couple of months. Q1 results declared so far are revealing a pattern of lower profits in spite of growth in sales. A couple more interest rate hikes can’t be ruled out altogether. We are nearing the peak of the high interest rate cycle, and still the Nifty hasn’t really crashed. The turnaround – when it comes, probably around Diwali – should result in a strong rally. Stay invested.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns are consolidating within large descending triangles, after several failed attempts to break out upwards. Tests and possible breaches of the support levels are on the cards. A good time to stay away and spend the time usefully by studying Annual Reports in detail.