BSE Sensex and NSE Nifty 50 index chart patterns – Nov 11 ‘11

In last week’s analysis, I had explained why both the bearish descending triangle patterns and the bullish island reversal patterns that seemed to form on the Sensex and Nifty charts needed to be discarded.

The ruling patterns on both charts have now been redrawn as downward sloping channels, which have followed ‘diamond’ reversal patterns that marked the transition from a bull market to a bear market a year ago.

BSE Sensex index chart

On the Sensex chart above, Gap1 had formed when the index broke down below the descending triangle. Instead of continuing the downward move to reach the triangle's target of 14000, the index started to consolidate in a rectangular band between 15700 and 17300. Such consolidations often follow when an index (or stock) breaks out of a previous pattern.

Since the overall trend of the market was down, it was expected that the Sensex would eventually resume its down move from the rectangular consolidation (a period when bulls and bears are equally matched). The index did just the opposite, by forming Gap2 and climbing back inside the descending triangle. This price action negated the bearish descending triangle, and raised the possibility of a bullish ‘island reversal’ pattern – the entire consolidation within the rectangular band forming an ‘island’ of trading separated by the two gaps.

Once again, the Sensex surprised by doing the exact opposite of technical expectations. It failed to rise convincingly above the falling 200 day EMA; could not test resistance from the upper edge of the downward-sloping channel; and, more importantly, filled the gap area on the chart. The filling of the gaps ruled out the bullish ‘island reversal’ pattern, and strengthened the case for the downward sloping channel.

Despite its name, technical analysis is more art than science because it tries to make sense of the combined fear and greed of market participants. Unlike scientific analysis, conclusions can’t be firmly drawn based on strict rules. The observation of different chart patterns at different times enable the technical analyst to form an opinion at best. Treating chart patterns as predictive tools and buying or selling only on the basis of such predictions is what causes losses.

The technical indicators are turning bearish, and signalling the possibility of a further correction. The ROC oscillated about its 10 day MA for a while, but has dropped below it into negative territory. The MACD is positive, but has crossed below its signal line. Both the RSI and the slow stochastic have dropped from their overbought zones, and are about to fall below their 50% levels.

The Sensex is technically in a bear market, and the downward sloping channel will continue to dominate the chart till the index can break out convincingly above the channel. That doesn’t appear likely in the near future. 

NSE Nifty 50 index chart

In a trading week shortened by two holidays, bulls were reluctant to increase their commitments. Bears took the opportunity to reassert their domination of the past 12 months. The weekly chart pattern of the Nifty clearly shows that the rally during Oct ‘11 failed to cross the 50 week EMA convincingly.

The change in bullish momentum is visible on the technical indicators. The ROC reached a higher top than the one in Jul ‘11, but has dropped off sharply towards the negative territory and its 10 week MA. The MACD is above its signal line, but has stopped rising in negative zone. The RSI stopped short of its 50% level. The slow stochastic has risen above the 50% level, and is the only indicator that is looking bullish. Any up moves may provide another selling opportunity to the bears.

The change of guard in Greece and Italy, acceptance of austerity measures, and the determination shown by the Eurozone leaders to tackle the debt problems are likely to provide some welcome respite to global stock markets. But our market doesn’t have much to cheer about. Inflation remains high. IIP numbers clearly show growth deceleration. Q2 results are a stark example of how high interest rates affect corporate bottom lines. It may take another two or three quarters before the economy can get back on the growth track.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns have been trading within downward-sloping channels for the past 12 months. Unless inflation and interest rates begin to moderate, there is no point in feeling bullish. Capital preservation and very selective value buying should be the strategy for the next couple of quarters.

Stock Chart Pattern – Cairn India (an update)

In my previous post about the stock chart pattern of Cairn India a year back, the overseas promoters were trying to offload the company to the Vedanta group. A lot of water has flown down the Ganges since then, but the Vedanta group has still not been able to complete the Cairn acquisition. 30% owner ONGC raised objections regarding royalty payment, and the deal has been going around through various government departments. Every time it seems that the deal is nearing completion, some one throws a spanner in the works.

Recently, the shareholders voted for the proposal of royalty sharing with ONGC, followed by ONGC agreeing to provide a no-objection certificate subject to a binding legal agreement between the two owners on royalty sharing. Only a few minor procedures and approvals are left for the deal to finally conclude successfully.

A different problem has now cropped up. Several members of the top management at Cairn India, including the CFO, have left the organisation recently. Apparently, professional managers were apprehensive of working with Vedanta's Agarwal. In a specialised business like oil exploration, loss of top management staff may hamper future prospects.

How have the procedural delays regarding the acquisition and exit of top management staff affected the stock's price? The one year bar chart pattern of Cairn India shows that the damage has been substantial: 

The stock price had started correcting after touching a high of 368 in Aug '10. The correction continued till the stock price fell sharply to a low of 285 in Nov '10, well below the rising 200 day EMA. The recovery was equally sharp, but the price momentum slowed down and the stock price reached a lower top of 347 in Jan '11. Another bout of correction dropped the stock below its 200 day EMA once more, but to a higher bottom of 306 in Feb '11.

This time, the stock sailed past its previous top to a new high of 372 in Apr '11, but formed a 'diamond' reversal pattern that marked the end of the bull market. The 'diamond' can be thought of as a head-and-shoulders pattern with a bent neck line that has measuring implications. From the break out point - usually downwards - the stock price is expected to drop at least the same amount as the height of the 'diamond'. In this case, about 40 points.

Note that after breaking down below the 'diamond', the stock consolidated for more than a month between support from the 200 day EMA and resistance from a horizontal line drawn through the right apex of the 'diamond'. Eventually, the stock broke below the 200 day EMA on Jun 17 '11, and quickly reached its downside target over the next two trading sessions.

A recovery followed, and the stock managed to climb above the 200 day EMA on intra-day basis, only to face resistance from the horizontal line through the apex of the 'diamond'. Such 'coincidences' make technical analysis interesting. The bears decided enough was enough. Heavy selling dropped the stock deep inside a bear market, where it touched a low of 250 in Aug '11 - a 32.8% correction from the peak of 372.

A rally took the stock past its falling 20 day and 50 day EMAs, but fell short of the falling 200 day EMA. The stock is trading below all three EMAs and is in a bear market. The technical indicators are looking quite bearish. The MACD has crossed below its signal line into negative territory. The ROC has fallen steeply below its 10 day MA into negative territory. The RSI has dipped below the 50% level after reaching its overbought zone. The slow stochastic has descended from its overbought zone, and is below its 50% level.

Bottomline? The stock chart pattern of Cairn India is suffering due to technical and fundamental headwinds. If you are holding the stock, use any rise to exit. New entrants should await the acquisition deal to go through, and the stock to form a bottom. The Vedanta group has acquired a few companies in the metals and mining sector, but have no experience in the oil exploration business. Keep that in mind if you are contemplating an investment.

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 – 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.

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

All good things must come to an end, and the sharp bull rallies in the chart patterns of the BSE Sensex and NSE Nifty 50 indices appear to have hit strong road-blocks.

Last week, I had mentioned that even if the 50 day and 200 day EMAs were breached, the 8 months long down-trend lines would prove to be tougher hurdles. Both indices climbed past their 50 day and 200 day EMAs with ease, but stopped short of the down-trend lines.

BSE Sensex Index Chart

For a different perspective, let us take a look at the weekly bar chart pattern of the Sensex. A couple of interesting patterns are visible – and I will provide bullish and bearish views.

The Sensex formed a ‘diamond’ reversal pattern between Sep ‘10 and Dec ‘10, which ended the bull rally from Mar ‘09, and started the corrective phase from the Nov ‘10 peak. A ‘diamond’ pattern has measuring implications: the height of the diamond should be less than or equal to the subsequent fall below the diamond.

In the Sensex chart, the height of the ‘diamond’ is about 2400 points. After breaking down below the ‘diamond’, the Sensex dropped almost 2900 points to the low of Feb ‘11. So, the downward target of the ‘diamond’ has been met. The subsequent up move was halted by the down-trend line (blue dotted) that became an extension of the diamond.

The next leg of the correction found support at the level of the Feb ‘11 low of 17300, followed by last week’ rally. Note that the Sensex has formed a large descending triangle pattern which has bearish implications – a breakdown below the 17300 level is a distinct possibility.

All isn’t lost for the bulls - yet. In spite of the prolonged correction, the 20 week EMA has remained above the 50 week EMA (equivalent to the 200 day EMA on daily charts). Technically, we are still not in a full-fledged bear market.

The other bullish news is that the FIIs have turned net buyers again. If they continue their buying spree, the down-trend line may get breached next week. But if it isn’t a high-volume break out, the index may pull back into the descending triangle.

The technical indicators look weak, but are showing some signs of recovery. The MACD is negative and below its signal line, but trying to turn up. Likewise, the ROC is negative and below its 10 week MA but trying to rise. The RSI is straddling its 50% level. The slow stochastic has bounced up from the edge of its oversold zone, but is below the 50% level.

Nifty 50 Index Chart

 

The up move in the Nifty daily bar chart ended with Friday’s ‘reversal day’ (higher high, lower close) pattern – marked by the light blue oval. Since it is within handshaking distance of the blue down-trend line, chances are that the Nifty will reverse directions next week.

The negative divergence in the RSI, which reached a lower top while the Nifty touched a higher one (marked by blue arrows), is also signalling an end to the brief rally. The MACD, ROC and slow stochastic are looking bullish. Note that the ROC has climbed well above its 10 day MA – a correction or consolidation may follow.

The macro situation is getting a little worrisome. The price hike of diesel, LPG and kerosene will add to the inflation problem, though duty cuts will soften the blow. Passenger car sales have slowed down. Q1 results are likely to be below par. However, any positive surprises can lead to fresh buying.

The Indian economy is still growing – perhaps better than most countries except China. There is scepticism all around – particularly among retail investors. The monsoon rains are gradually covering the entire country. Not a time to be despondent. Being cautiously optimistic may be better for your investment health.

Bottomline? The BSE Sensex and NSE Nifty 50 chart patterns have completed brief relief rallies that failed to breach their down-trend lines. The scales are tipping towards a break below the descending triangles. Expect some consolidation before that can happen. Be careful, not fearful.

Is this a ‘diamond pattern’ which I see before me?

With apologies to the late great William S. for paraphrasing a quote from Macbeth’s soliloquy, it does look like the Nifty 50 index formed a rare ‘diamond pattern’, which is usually a reversal pattern. It can some times be a continuation pattern also.

What are the conditions that are needed to satisfy a diamond reversal pattern? Like all reversal patterns, it should have something to reverse – in other words, it should form at a market top after a prolonged up move. In the case of the Nifty 50 index, this condition has been satisfied.

Like the name, the pattern must be visually diamond-shaped – a initial broadening formation that transforms into a converging symmetrical triangle. A look at the weekly Nifty 50 bar chart confirms this second condition.

Why a weekly chart? The diamond pattern is more clearly defined and easier to spot on a weekly chart. (I did take a look at Nifty’s long-term weekly chart recently, but the pattern wasn’t visible in the closing chart pattern.)

A clearly discernible diamond pattern has been marked on the Nifty 50 chart above. British comic writer Douglas Adams said: “If it looks like a duck and quacks like a duck, we have at least to consider the possibility that we have a small aquatic bird of the family anatidae on our hands.”

We also have to consider the possibility that we have a diamond of the bearish reversal pattern family on our hands. Another condition – that of depleting volumes during the pattern formation – has not really been satisfied. Is there a possibility that this particular diamond may end up shining brightly for the bulls and prove to be a consolidation pattern that was designed to trap the bears? Nothing can be ruled out on chart patterns. (No wonder investors get confused by technical analysis!)

Was the diamond indeed a reversal pattern, in spite of the comparatively higher volumes during its formation? Like the head-and-shoulders reversal pattern, the diamond has measuring implications. The index is expected to fall at least by the same amount (from the break down point) as the difference between the peak and trough of the diamond.

In our case, the high of the week ending Nov 5 ‘10 was 6338 (diamond peak) and the low of the week ending Nov 26 ‘10 was 5690 (diamond trough) giving a difference of 648 points. Interestingly, the break down point from the diamond pattern occurred at 5900 – a support/resistance level. (Now you know why the Nifty is struggling to cross 5900!)

How far did the Nifty fall? 722 points to the low of 5178 in the week ending Feb 11 ‘11 – thereby more than meeting the minimum down side target of 648 points. Does that mean that the Nifty reversal is over and done with? It would appear so from the subsequent pattern formation.

Would readers like to take a shot at analysing the pattern(s) that formed since the break down from the diamond? The technical indicators are suggesting bullish pattern(s) with measuring implications.

There will be no brickbats thrown for incorrect responses, so no need to feel shy about attempting an answer! Logical answers with upside targets will be duly acknowledged. Note that diamond patterns, which are quite rare, hardly ever form at bottoms of chart patterns.