Stock Chart Pattern - DLF Ltd. (An Update)

The previous detailed update to the technical analysis of the stock chart pattern of DLF Ltd. was posted more than two years back (date marked by the grey vertical line on the chart below). A further update since then had not been considered necessary because there wasn’t anything new to add to the following recommendations:

“The stock chart pattern of DLF Ltd. does not hold out much hope for the bulls. If you are still stuck at higher prices, continuing to hold may increase your losses. Investors should not go anywhere near this stock.” 

So, why take a re-look at the DLF Ltd. chart now? The motivation came from the considerable interest generated by a recent report published by a Canada-based equity research house that tore the company’s business practices and financial condition to shreds. That report was based on fundamental analysis. But technical signals had warned of the decimation in the stock’s price back in Oct-Nov ‘09.

The weekly bar chart pattern of DLF Ltd shows the steady fall from the 3 yr high of 491, touched in Oct ‘09. The stock fell almost 65% to its Jan ‘12 low of 173. But that pales in comparison to the 90% fall from its all-time high of 1225 touched on Jan 15 '08 to the bottom of 124 on Feb 4 '09.

The subsequent rally led to a 300% gain (from 124 to 491) but retraced only a third of its bear market fall – less than the Fibonacci retracement level of 38.2%. That means the entire gain from 124 to 491 was a bear market rally within the long-term bear market that started from Jan ‘08. Hence the call to investors not to go anywhere near the stock. Very few stocks manage to recover from a 90% fall.

Note that the stock price formed a ‘reversal week’ pattern (higher high, lower close) when it touched 491 in Oct ‘09. A ‘distribution week’ pattern (high near open, close near low on higher volumes) followed the next week. The stock price then entered a bearish ‘rising wedge’ pattern.

After the expected break below the ‘rising wedge’, the stock dropped to 251 in May ‘10 but formed a ‘reversal week’ pattern (lower low, higher close) that marked the end of the first phase of the down move. A counter-trend rally took the stock price above the 20 week and 50 week EMAs to a high of 397 in Oct ‘10. Again, a ‘reversal week’ pattern (higher high, lower close) marked the end of the intermediate rally.

The next leg of the down move dropped the stock to a low of 173 in Aug ‘11. A bounce saw the stock price reach a high of 251 in Nov ‘11 before falling back to test the low of 173 in Jan ‘12. A rally along with the broader market took the stock to a high of 261 in Feb ‘12, when another ‘reversal week’ pattern ended the brief rally. Note the negative divergences in three of the four technical indicators (marked by blue arrows) that warned of a correction, which started even before the adverse report hit the market.

The weekly technical indicators are turning bearish. If the stock breaches its recent low of 173, it can drop all the way to test its Feb ‘09 low of 124. If you are holding the stock, ask yourself: Why?

Bottomline? The stock chart pattern of DLF Ltd. is in a long-term bear market that started more than 4 years ago, and shows no sign of ending. After years of financial shenanigans and taking customers and investors for a ride, the chicken are coming home to roost. The company is desperately trying to sell-off assets to survive, but are finding few takers. The stock doesn’t deserve to be an index constituent. AVOID.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jan 13, ‘12

S&P 500 Index Chart

In analysing the chart pattern of the S&P 500 last week, it was mentioned that the bulls had a little more clean up work left before the bears could finally be sent into hibernation. That work has been successfully completed. The index has moved past its Oct ‘11 intra-day high of 1293, forming a bullish pattern of higher tops and higher bottoms; and, the 50 day EMA has convincingly crossed above the 200 day EMA (the ‘golden cross’) confirming a return to a bull market.

Is it time to crack open the champagne? May be not just yet. The index has been trading within a bearish ‘rising wedge’ pattern since touching its Nov ‘11 low. Volumes tapered off during the week’s trading. The slow stochastic is trying to correct the overbought condition. The RSI is already heading down from its overbought zone. The ROC is sliding towards the ‘0’ line. The MACD is positive and above its signal line, but has stopped rising. Expect some correction or consolidation in the current week. Use the likely dip to add, but don’t forget to use a tight stop-loss.

The US economy continues its painfully slow growth, taking half a step back for every step forward. The Reuters/Univ. of Michigan Consumer Sentiment index rose, but ECRI’s WLI index dropped (indicating a weaker economy 6 months down the road). Retail sales in Dec ‘11 rose a meagre 0.1% month-on-month, but a  more respectable 6.5% year-on-year. Weekly initial unemployment claims rose to 399,000. Rail traffic for the week ending Jan 7 ‘12 was down 3.7% compared to the same week in 2011. Not the kind of data that supports a full-fledged bull market.

FTSE 100 Index Chart

The FTSE 100 index chart is trying to follow the S&P 500 into a bull market, but is facing some technical headwinds. The 20 day EMA has crossed above the 200 day EMA. The 50 day EMA is trying to do likewise. The index has not yet gone past its Oct ‘11 top. Instead, it is consolidating within a small rectangular ‘flag’ pattern from which it could break out in either direction. The spike in volumes on the last two days of the week is a concern, because the FTSE closed lower on those two days.

The technical indicators are hinting at a correction. The slow stochastic is turning down at the edge of its overbought zone. The MACD is positive and above its signal line, but has started falling. The RSI is moving sideways below its overbought zone. The ROC is positive, but falling sharply. The index has been trading within a bearish ‘rising wedge’ pattern since touching its Nov ‘11 low.

There was some good news for the UK economy. Inflation dropped to 4.8% in Nov ‘11 from 5% in Oct ‘11, and is expected to fall further. That may be a prelude to a dose of Quantitative Easing. But Eurozone problems are affecting exports and can push the economy into a recession. Unemployment remains quite high.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are climbing back into bull markets amid concerns of slow growth and recession. Bull markets are supposed to climb over a wall of worries. That doesn’t mean one has to be gung-ho bullish. Stay circumspect, and accumulate fundamentally strong stocks slowly.

Free eBook on Technical Analysis – thanks and clarifications

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

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

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

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

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

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

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

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

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

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jan 06, ‘12

S&P 500 Index Chart

In last week’s analysis of the S&P 500 index chart pattern, the technical indicators were looking bullish and the 20 day EMA had crossed above the 200 day EMA. The 50 day EMA has just crossed above the 200 day EMA – for the first time since Aug ‘11 – but the cross hasn’t been a convincing one yet. The ‘golden cross’ (of the 50 day EMA above the 200 day EMA) confirms a return to a bull market.

A little more work remains to be done by the bulls. The Oct ‘11 intra-day top of 1293 has to be surpassed to form a bullish pattern of higher tops and higher bottoms. There are a couple of technical concerns. Volumes have not been that great. The technical indicators are showing some signs of being overbought.

The slow stochastic is inside the overbought zone. The RSI is about to enter its overbought zone. The MACD is positive and rising above its signal line. The ROC is rising in positive territory. These are bullish signals. But there is a tendency to hesitate near a previous top (or bottom).

The US economy is returning to the growth path – albeit slowly. Initial unemployment claims came in lower at 372,000. Non-farm private sector employment rose to 325,000 in Dec ‘11 from 204,000 in Nov ‘11. Part of the rise can be attributed to holiday season part-time hires. The Jan ‘12 employment figures will reveal the true picture. AAII’s survey of individual investors showed bullish sentiment at an 11 month high of 48.9%, and bearish sentiment at a year low of 17.2%.

FTSE 100 Index Chart

The FTSE 100 index chart is trying to follow in the footsteps of the S&P 500 index by trading above its 200 day EMA – but is a few steps behind. Note that both the 20 day EMA and 50 day EMA are still below the 200 day EMA, though the 20 day EMA may cross above the long-term moving average soon.

Volumes are on the lower side, which puts a question mark on the sustainability of the current rally. The Oct ‘11 intra-day high of 5747 needs to be crossed. The technical indicators are showing signs of weakness. The slow stochastic is at the edge of its overbought zone, and moving sideways. The RSI is dropping towards its 50% level. The MACD, which is a lagging indicator, is rising above its signal line in positive territory. The ROC is also positive, but its upward move has stalled.

The UK economy continues to lag the bullish stock index. Retail sales during the recent holiday season were not up to the mark. This could lead to more job losses as businesses downsize to survive. Stronger-than-expected growth in the dominant services sector last month may have saved the UK economy from contraction in the final quarter of 2011, as per this article. The December PMI figure was 49.6, up from the 47.7 recorded in November, but still below the 50 mark that signals growth.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices appear poised to return to bull markets, despite the sluggish growth (or, lack of it) in the US and UK economies. However, every silver lining has a dark cloud. Both indices appear to be forming bearish ‘rising wedge’ patterns from their Nov ‘11 lows, which could lead to downward breaks and retreats back to bear markets. So, caution is advised till the Oct ‘11 tops are convincingly surpassed.

Stock Chart Pattern - IFCI Ltd (An Update)

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

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

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

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

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

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

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

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

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

Stock Chart Pattern - Cummins India (An Update)

In the previous analysis of the stock chart pattern of Cummins India in Dec ‘10, it was mentioned that the stock was in a bull market but facing some technical headwinds after touching an all-time high. Existing holders were advised to hold or book partial profits. New entrants were advised to await a bigger correction.

Despite being a well-managed, fundamentally strong and investor-friendly company, the Cummins India stock hasn’t fared well in 2011. It happens to be in the capital goods sector, which is completely out of favour with investors. Just goes to show that even the best of stocks can get badly mauled by bears.

Instead of chasing after ‘theme’ stocks with questionable management, small investors can benefit by periodic profit booking at or near all-time highs and buying the same stocks back at much lower prices. Let us see if the Cummins India stock is providing such an opportunity:

Note that after closing at an all-time high of 574 (adjusted for 2:5 bonus in Sep ‘11) on Nov 1 ‘10, the stock made a rare triple-top reversal pattern – marked T1, T2 and T3 on the chart. T1 itself formed a small double-top. After a long bull rally, a reversal pattern formation is the norm.

The stock price dropped sharply below the 200 day EMA to 440 in Feb ‘11, only to bounce up and start a counter-trend rally that formed a bearish ‘rising wedge’ pattern over the next three months. Those who failed to heed the warning from the triple-top were given another chance to exit the stock. The break below the ‘rising wedge’ in May ‘11 was followed by two unsuccessful pullback attempts.

Instead of falling, the stock price consolidated sideways during the first part of Jun ‘11. It then formed a small inverse head-and-shoulders pattern, followed by a brief rally above all three EMAs in Jul ‘11. In the process, all three EMAs got entangled together (marked by light blue oval) – which usually precedes a sharp move.

The RSI made a head-and-shoulders pattern in Jul ‘11. So, it was no surprise that the sharp move was downwards. The ‘death cross’ of the 50 day EMA below the 200 day EMA confirmed the bear market. The 440 support level was breached on a volume spike in Aug ‘11. Several subsequent attempts by the stock to break above the 440 level got thwarted – an example of how a support level turns into a resistance level.

The bonus issue (marked by light blue bell) in Sep ‘11 could not stem the rot. The stock continued its fall with the 20 day EMA acting as resistance to all up moves. The stock dropped to a lower bottom in Dec ‘11 but the MACD and ROC made higher bottoms (marked by blue arrows). The positive divergences – not supported by the RSI and the slow stochastic -led to a brief bounce.

The technical indicators are looking mildly bullish. The MACD is negative, but rising above its signal line. The ROC is above its 10 day MA and trying to stay positive. Both the RSI and the slow stochastic have just about managed to move above their 50% levels. The widening gap between the falling 50 day and 200 day EMAs can be a prelude to a period of consolidation.

At its Dec ‘11 closing low of 326, the stock price has corrected 43% from its Nov ‘10 closing high. Another 10-15% correction from current levels can’t be ruled out. But if you have the patience to wait 2-3 years, you can start accumulating the stock slowly. (Prudence dictates that you wait for a bottom reversal pattern to form and then start your buying – provided of course that you can identify a bottom reversal pattern if you see one.)

Bottomline? The stock chart pattern of Cummins India is in a strong bear grip, with no sign of a turnaround yet. The company has sensibly expanded manufacturing facilities during a period of slow down – and will be in a good position to benefit from the eventual return to growth. This is the kind of stock that small investors should hold in their long-term portfolios.

Gold and Silver Chart Patterns: an update

Gold Chart Pattern

Gold’s price had formed a double-top reversal pattern after touching 1900. The double-top was confirmed when the price dropped below the ‘valley’ level 1750 between the two tops. Downward target of 1600 was achieved quickly on gold’s chart, after which gold’s price has been consolidating within an upward-sloping ‘wedge’ pattern.

Most consolidation patterns tend to be continuation patterns. That means, the trend before entering the pattern – down, in this case – would continue once price break out happens. Unlike triangle and rectangle patterns, from which break outs can happen in either direction, the rising wedge is fairly dependable. It forms during bear phases, and the price break out is downwards.

Bulls may feel enthused that gold’s price is trading above the 14 day SMA, and the 200 day SMA is still rising – indicating that the bull market is far from over. But the possibility of a break below the rising wedge pattern, and a test of support from the 200 day SMA should induce caution.

Existing holders can keep a stop-loss at 1540 (the level of the 200 day SMA) and continue to hold. New entrants can wait for a likely upward bounce from the 200 day to accumulate. (Note: At the time of writing this post, gold’s price has dropped sharply to 1630, indicating a break below the rising wedge.)

Silver Chart Pattern

After dropping like a brick below the 200 day SMA, silver’s price has been consolidating within a symmetrical triangle. Though silver’s price is trading above the 14 day SMA – a short-term positive – the longer-term outlook is not bullish.

The 30 day SMA (not shown in chart above) has slipped below the 200 day SMA, and the 60 day SMA is likely to follow suit. The 200 day SMA is flattening and may turn downwards soon. Silver’s price is in a clear down trend, marked by lower tops and lower bottoms. Downside targets are 24 and 20. Wait for the correction to play out.

Stock Chart Pattern - Castrol India (an update)

The previous write-up about the stock chart pattern of Castrol India was posted back in July ‘09. A lot of water has flown down the Ganges since then, and the chart has formed some classic technical patterns. It is a good time for an update.

This zero debt, profit-making, cash-generating lubricants company requires very little capital expenditure, pays regular dividends and has issued bonus shares several times – the most recent was a 1:1 issue in Apr ‘10. (All price levels in the previous post should be divided by two for comparing with current prices.)

The stock had a spectacular 52 months bull run from the intra-day low of Rs 77 (pre-bonus 154) in Jun ‘06 to the intra-day high of Rs 590.10 in Oct ‘10 – a 667% gain. That was just the capital appreciation. The total dividend payout was Rs 93. Including the dividend – a 787% gain (8-bagger returns!).

While savvy investors have been sitting back and raking in the ‘moolah’, small investors have been running after mythical multibaggers like Suzlon, Punj Lloyd and Bartronics. Let us have a look at the one year closing chart pattern of Castrol India:

Note the classic head-and-shoulders pattern that halted the long bull run. Why classic? Watch the volume action (marked by the thick blue down-arrows). A volume spike when the left shoulder (LS) was being formed; lower volumes during the head (H) formation (which itself ended with an advanced warning sign of a small head-and-shoulders pattern); even lower volumes during the right shoulder (RS) formation.

The volume spike on the day after the break down below the upward-sloping neckline was a sign that worse was to follow. The pullback attempt following the break down from the head-and-shoulders pattern stopped well short of the neckline and entered a bearish rising-wedge pattern.

Interestingly, the bear market rally in Dec ‘10 also ended with a head-and-shoulders pattern where the head itself formed a mini head-and-shoulders pattern. The down-trend finally ended on Feb 25 ‘11 - correcting about 27% from the Sep ‘10 top, shortly after the 50 day EMA crossed below the 200 day EMA (the ‘death cross’).

While the stock price dropped to its 52 week low, all four technical indicators reached higher bottoms (marked by blue arrows). The strong positive divergences gave a signal that the bull market was ready to resume.

The sharp recovery climbed past the 200 day EMA within a month, pulled back to the long-term moving average in end-Mar ‘11 – giving a good entry opportunity, and tested the Sep ‘10 top on a huge volume spike.

Negative divergences in all four technical indicators, which made lower tops, led to a drop down to the rising 20 day EMA. The stock price is completing a bullish rounding-bottom pattern. A likely test and breach of the Sep ‘10 top of 528 can take the stock to its 52 week intra-day high of 590 in the near term.

Will the bears go into hibernation? Very unlikely in the middle of summer. But the technical indicators are not holding out much hope for them. The MACD is positive, and has crossed above the signal line. The ROC is rising in positive territory above its 10 day MA. The RSI is about to enter the overbought zone. Only the slow stochastic is showing some weakness, as it is below its 50% level. All three EMAs are rising, and the stock is trading above them. The bulls are back in control.

Bottomline? The stock chart pattern of Castrol India endured a six months long bull market correction; in spite of the ‘death cross’ and the two months spent below the 200 day EMA, the bears could not take control. Like Colgate, this stock can be added at any price, and most definitely on dips and corrections.