Stock Chart Pattern - Reliance Capital Ltd. (An Update)

The previous technical analysis update of the stock chart pattern of Reliance Capital was posted back in Nov ‘09 (marked by a grey vertical line on the chart below). The stock price had corrected after touching an intra-day peak of 1066 in Jun ‘09 and had twice received support from the upper edge of the gap formed in May ‘09.

As long as the gap was not closed, there was hope of further upside. Accordingly, I had made the following recommendation to readers: “Existing holders can stay invested with a stop-loss at 680. New entrants should await a convincing cross above the 1050 mark.” A look at the chart below will show that my advice was timely and appropriate.

Regular readers know that I have a bias against any company with the word ‘Reliance’ in its name. If you don’t know (or remember) why, you can read this post. What is the reason then for posting this update? Well, there are two reasons. The first is to admit to a classic investing mistake. The original post on Reliance Capital in Apr ‘09 was premised on the prospect of likely monetisation of the company’s ‘hidden assets’ – its huge asset management business (Reliance Capital had the highest AUM back then) and its thriving insurance and financial services businesses. The mistake? Hidden assets may stay hidden and never get monetised. (This is particularly true for ‘holding companies’ that hold huge number of shares in different companies.)

The second and more important reason is to warn new investors that though the stock price had more than doubled – from the intra-day low of 225 (Jan 2 ‘12) to an intra-day high of 482 (Feb 22 ‘12) – during the recent rally, the stock is technically still in a bear market and in a down trend. There is no reason to enter now.

Let us have a look at the three years daily bar chart pattern of Reliance Capital:

The gap in the chart formed in May ‘09 – approximately between 620 and 680 – was filled a year later. That opened up further downsides and triggered the stop-loss of 680 mentioned in the previous update. The stock price bounced up from the lower edge of the gap, and over the next 5 months, gained 40%. But it formed a lower top that marked the beginning of a sharp down trend, which coincided with the bear phase in the broader market.

Note the sideways consolidation between 620 and 680 during Dec ‘10, before a convincing break down below 620 in Jan ‘11. A ‘panic bottom’ formed at 478 in Feb ‘11, following which the stock price bounced up quickly – only to face strong resistance from the earlier support level of 620 in Apr ‘11 and Jul ‘11. This is another example of how a breached resistance level becomes a support level, and a broken support level becomes a resistance level. Another point to note is that support-resistance levels provide better and safer entry-exit points than Fibonacci levels or EMA levels.

The stock price is oscillating near its 200 day EMA. The 50 day EMA is still below the 200 day EMA. The technical indicators are mildly bullish. The MACD is positive and just below its falling signal line. The ROC is also positive and above its 10 day MA, but has turned down. The RSI is a little below its 50% level. The slow stochastic has climbed above its 50% level. The stock price is trying to move up to test the blue down trend line once more, but the falling volumes mean another likely failure of an upward break out attempt.

Bottomline?  The stock chart pattern of Reliance Capital is a clear example of disenchantment within the investing community. The recent sharp rally may have provided huge short-term gains to a fortunate few. If you are one of them, book your profits. New investors can look at a company like Sundaram Finance. If you don’t trust the Ambanis, avoid all companies with ‘Reliance’ in its name.

Related post

Why rely on Reliance?

Gold and Silver chart patterns: bulls regaining control

Gold Chart Pattern

In an update on gold's chart pattern three weeks back, buying was recommended on a convincing rise above 1700. The down trend line (not shown in chart) connecting the tops touched in Sep, Nov and Dec '11 was near the 1700 level, and was expected to provide resistance. Shortly after that post, gold's price broke above the down trend line and the 1700 level - accompanied by a volume spurt. Volume support on an upward break is a requirement, and ensures that the break out is not a 'false' one.


Gold's price kept on rising, but volumes were falling - till the price reached the level of Dec '11 top of 1770. Falling volumes are not suitable for sustaining a rally, as it indicates lack of buying energy. Hesitation near a previous top isn't unusual. A 'reversal day' pattern (higher high, lower close) marked an intermediate top. A pullback towards the down trend line is in progress. The rising 20 day and 50 day EMAs may provide support on the way down.


Gold is trading above its rising 20 day, 50 day and 200 day EMAs - the sign of a bull market. The technical indicators are correcting from overbought conditions. The RSI has dropped from its overbought zone, but remains above the 50% level. The MACD is positive and above its signal line.  The slow stochastic is about to fall below its overbought zone.


The correction will allow gold's price to rise and test the 1800 level. Use the dip to add, with a stop-loss at 1630.


Silver Chart Pattern

Silver's chart pattern shows that the bulls have made quite a smart comeback after the white metal's price touched a low of 26. After climbing above the 200 day EMA to reach the 34 level within a month, silver's price is taking a breather for the past few trading sessions.


The next resistance is likely from the 36 level - which corresponds to the Oct '11 top. The down trend line (not shown in chart) connecting the Apr, Aug and Sep '11 tops is also near the 36 level - which may make it a strong resistance level.


Note that the 20 day EMA has crossed above the 50 day EMA, and both are rising. That is a bullish sign for the near term. However, both are still below the 200 day EMA. The technical indicators are bullish, but showing weakness. The RSI is above its 50% level, but dropped down after touching the edge of its overbought zone. The MACD is rising above its signal line in the positive zone, but its upward momentum is slowing. The slow stochastic is well inside its overbought zone, but has started drifting down.


The bears have not been routed yet, and may fight back. Enter on a convincing break above 36.

Stock Chart Pattern - Thermax Ltd. (An Update)

A little more than a year back, I had written a technical analysis of the stock chart pattern of Thermax Ltd. The stock had closed at 900 after touching an intra-day high of 927 (a little below its Oct ‘07 top of 968).

The technical indicators were looking quite overbought. The stock was trading at a TTM P/E of more than 50. A correction had looked imminent, and I had suggested that existing holders could book partial profits. Fundamentally strong stocks can get overpriced due to prevailing market sentiments. One of my concluding comments is worth repeating:

“The ability to discern and interpret technical analysis signals enable good entry/exit points for optimising returns.”

Going through reader comments on the earlier post is quite interesting, and provides some insights into the minds of small investors (despite the very small sample size). Buying and selling stocks is not as simple as opening a demat account and giving instructions to your broker. It requires a fair amount of skill if you want to get it right – and the one year bar chart pattern of Thermax Ltd. is a good example of that:

(The vertical line in Nov ‘10 indicates the day I had written my previous post on Thermax.)

I had no clue that the stock will start falling from the very next day after I wrote the earlier post, but if you note the state of the technical indicators, you will see that all four were looking overbought. The MACD was positive and well above its signal line. The ROC was also positive and well above its 10 day MA. Both the RSI and the slow stochastic were well inside their overbought zones. The technical set-up was of a ‘perfect storm’.

What one doesn’t know in advance is the extent of the subsequent correction. It could be a 10-15% correction, or it could lead to a change of trend and a huge fall. A trend change doesn’t occur over a couple of days. Typically, some sort of a reversal pattern will get formed over a few weeks or months. In the chart above, the stock formed a rare triple-top reversal pattern over two months – touching 927 on Nov 4 ‘10, 913 on Nov 25 ‘10 and 907 on Jan 4 ‘11.

What should have been the strategy of an investor who booked partial profits on Nov 5 ‘10 at say, Rs 900? The zone between 650 and 700 had acted as a support-resistance zone on the way up. So, it should have acted as a support-resistance zone on the way down. Did it?

Note that the stock fell right through the zone - after hesitating a bit during late Jan ‘11 and early Feb ‘11 – to a low of 577 on Feb 10 ‘11. The ‘death cross’ of the 50 day EMA below the 200 day EMA (marked by the light blue oval) confirmed a bear market. The technical indicators were looking oversold, but they can remain oversold for long periods some times. What happened next is interesting. The stock rose to the 650 level, faced resistance, and dropped to a new low of 543 on Feb 28 ‘11, but all four technical indicators touched higher bottoms.

The positive divergences gave a short-term buy signal. Why short-term? Because the stock was in a bear market, and counter-trend rallies are short and swift before they attract selling pressure. Note that the stock climbed up on a high volume spike to the 700 level on Apr 8 ‘11, failed to break through the dual resistance from the 700 level and the 200 day EMA, and has since been falling deeper into a bear market. All four technical indicators were looking overbought – clearly indicating a selling opportunity.

At its recent intra-day low of 407 touched on Oct 5 ‘11, the stock corrected 56% from its Nov 4 ‘11 peak. All four technical indicators looked oversold – hinting at another short-term rally. The market rally during Oct ‘11 helped the stock to climb above its falling 20 day and 50 day EMAs to a high of 503 on Nov 4 ‘11. This time, the overbought technical indicators signalled that the rally was over. The stock remains in a firm bear grip, and all rallies are being used to sell.

Q2 results were reasonably good. Top line increased by 19.4% on a YoY basis; bottom line rose by 13.6%. On a TTM EPS of 34.26, the stock is trading at a P/E of 13.3. But the negative sentiment in the capital goods sector may keep the stock’s price under pressure.

Bottomline? The stock chart pattern of Thermax Ltd has been in a bear grip for more than a year, and there doesn’t seem to be any respite in sight. But the company is fundamentally strong, well managed with negligible debt on its books. Just the kind that small investors should think about adding to their portfolio. The bear market isn’t over. No need to buy in a hurry. But slowly accumulating the stock may be a good idea.

Gold and Silver Chart Patterns: rallies reviving?

The sharp corrections seen on gold and silver chart patterns appear to be over, and the bull rallies are all set to resume. Gold’s price never dropped below the 200 day SMA, so technically it was just a bull market correction following a double-top reversal pattern. Silver’s price dropped below the 200 day SMA and has stayed below the long-term moving average for more than a month, raising the spectre of a bear market. However, there are signs of revival of late.

Gold Chart Pattern

Gold’s price is trading above its 14 day, 30 day, 60 day and 200 day SMAs, and all four moving averages are rising – which is the sign of a bull market. More importantly, the price has climbed above the 1750 level – the ‘valley’ level between the two tops at 1900.

Note that the 1750 level acted as a resistance during the recent up move, and once the resistance was overcome, the resistance level has turned into a support level. Gold’s price should start moving up towards its previous top of 1900, and eventually test and overcome the 1900 level to touch a new high.

A satisfactory resolution of the Eurozone debt problems may cause a renewed interest in risky assets and slow down the up move in gold’s price. But the bull market in gold is very much alive, and price dips can be used to add.

Silver Chart Pattern

Silver’s price is on a gradual recovery path, though it is still trading below the 200 day SMA. The fact that the white metal is trading above its 14 day and 30 day SMAs, and the 200 day SMA has started rising again point to a revival of interest in buying silver.

Intrepid investors can start accumulating slowly at current prices. The more prudent action will be to wait for a convincing cross above the 200 day SMA before buying. As with all purchases, a strict stop-loss should be maintained – say, at 32.

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.

Why technical and fundamental analysis are the two feet of a stock portfolio

Have you tried to stand on one foot for any length of time? Unless you are an expert in hathayoga, you won’t be able to do it for more than a few minutes. Even if you are able to balance yourself for 10 minutes on one foot, what purpose will be served? You won’t get anywhere! Like you, your stock portfolio needs to use two feet – technical analysis and fundamental analysis – to achieve success.

Being an engineer by training, technical analysis always appealed to me more when I started investing in the stock market. Semi-logarithmic charts, trend lines, symmetrical and right-angled triangles, rectangles, parallelograms, Fibonacci retracement levels were familiar terminology. I took to them like a duck to water.

Well, not quite. After losing a ton of money, I came to the fairly simple conclusion that familiarity with the terminology was not the same as knowledge of the subject matter. Understanding different chart patterns is not of any use unless you know which stock charts to study. But the alternative wasn’t intellectually stimulating enough.

Fundamental analysis meant dissecting the contents of Annual Reports. No exponentials or double integrals to apply one’s math skills. Just a bunch of numbers that needed to be added and subtracted and divided to unravel the secrets of well-disguised financial performances. Low-level clerical stuff – or so I thought.

Finally, a broker friend opened my eyes. He only had a B. Com degree but was rolling in cash and driving around in new cars. So I asked him what the secret was. His answer shook me up. Just plain grunt work, he said. Wading through annual reports to find financially strong companies that generate cash and don’t require too much capital to function.

How do you decide when to buy or sell?, was my next question. This is where a bit of knowledge of technical analysis can help, he responded. You have to first determine the trend – whether up, down or sideways. Moving average crossovers and support-resistance levels can then be used to determine entry and exit points.

That is all there is to it. No rocket science. Just school-level arithmetic, including familiarity with graphs and the discipline to go through annual reports in detail. Don’t have time and energy for all this hard work? Avoid individual stocks; buy mutual funds.

Related Post

Why Michael Ballack is a good role model for the better investor