Stock Index Chart Patterns - BSE Sectoral Indices, Feb 22, '12

A few days after the previous post two months back on the chart patterns of BSE’s Sectoral indices, the Sensex touched a bottom and embarked on a two months long rally. It may be a good time to check how the Sectoral indices have fared.

BSE Auto Index

The BSE Auto index received good support from the lower end of the rectangular consolidation zone between 8000 and 9700 and rallied smartly to the upper end of the band earlier in Feb ‘12. After a brief consolidation, the index has broken out to test its Jan ‘11 top.

A pullback down to the top of the rectangular band can be expected. The ‘golden cross’ of the 50 day EMA above the 200 day EMA and more than a 20% rise from its recent bottom have confirmed a return to a bull market. Add on dips.

BSE Bankex

The BSE Bankex has risen more than 40% from its Dec ‘11 low, but is yet to test its 2011 tops. The index has moved well past the support/resistance level of 11400 and its 200 day EMA, but the ‘golden cross’ is still awaited. That should not deter investors from accumulating.

BSE Capital Goods Index

The BSE Capital Goods index is struggling to break the stranglehold of the bears. It is trading below the support/resistance level of 12300 and is yet to convincingly move above its 200 day EMA. Accumulate selectively.

BSE Consumer Durables Index

The BSE Consumer Durables index has risen almost 40% from its Dec ‘11 low and is on the verge of entering a bull market. Three ‘fan lines’ have been drawn through the Nov ‘10 top. Note that the second line drawn through the Apr ‘11 top became a support level in Jun, Aug and Nov ‘11. After getting breached in Dec ‘11, it briefly acted as a resistance level. Accumulate selectively.

BSE FMCG Index

One look at the BSE FMCG index should make it clear to all why it is my favourite sector. Despite a brief drop below the 200 day EMA in Feb ‘11, the index remained in a bull market and outperformed the Sensex. Nothing spectacular or exciting, just a steady climb along the second fan line. Add on dips.

BSE Healthcare Index

After a 13 months long consolidation within a triangle pattern, the BSE Healthcare index has broken out upwards and returned to a bull market. It is currently consolidating within a small ‘falling wedge’ pattern from which it should break out upwards. Accumulate.

BSE IT Index

The BSE IT index has sailed above the blue down trend line and back into a bull market. The expected slow down in the Eurozone didn’t happen. Add on dips.

BSE Metal Index

The BSE Metals index is still in a bear market, despite rising 37% from its Dec ‘11 low and a brief foray above the 200 day EMA. The blue down trend line continues to rule the chart. One can be a contrarian, but be very selective in choosing stocks.

BSE Oil & Gas Index

The BSE Oil & Gas index is trying desperately to stay above the 200 day EMA, but has still not broken its down trend line. Interference by the government has almost ruined this sector. Avoid the oil PSUs. The gas PSUs are in better shape.

BSE Power Index

A spectacular rally in the beaten down BSE Power index has almost propelled it into a bull market. The index is trading above its 200 day EMA and has pulled back to the blue down trend line after climbing past it. The ‘golden cross’ is still awaited. Rumours of likely sops in the forthcoming budget has fuelled the rally. Unless coal supply is ensured, the power sector may continue to face headwinds. Avoid.

BSE Realty Index

The BSE Realty index had been hammered to a pulp by the bears, but is trying to make a strong recovery. The chart shows an upward break out from a bullish inverse head-and-shoulders reversal pattern. The ‘head’ of the pattern is itself a mini inverse head-and-shoulders pattern. Note that the minimum upward target from the inverse head-and-shoulders pattern has been met.

After climbing above the 200 day EMA and the support-resistance level of 1900, the index is pulling back towards both. If you want to invest in the sector, you may want to read this recent post.

Stock Index Chart Patterns - BSE Sectoral Indices, Dec 2, '11

The BSE Sectoral index charts were looking down and out when I had looked at them three months back. The Sensex rally in Oct ‘11 was led by the auto and FMCG sectors. The other sectors failed to make much progress.

BSE Auto Index

The BSE Auto index chart has been redrawn from a bearish descending triangle to a more neutral rectangular consolidation pattern. The Oct ‘11 rally propelled the index above its blue down trend line, and all the way up to the 9770 support-resistance level. The index subsequently dropped back inside the triangle to the 8115 level (the lower edge of the rectangle), only to jump up above the down trend line last week.

The technical indicators are correcting the oversold condition but haven’t turned bullish yet. The 200 day EMA is moving sideways with the index oscillating around it. A break below 8115 will push the Auto index into a bear market. Hold.

BSE Bankex

The BSE Bankex had broken below the support level of 11400 in Aug ‘11. The support level turned into a strong resistance level and effectively thwarted all subsequent up moves. The ‘death cross’ in Aug  ‘11 had confirmed a bear market, and the index is falling deeper inside bear territory. Q3 results may be worse. Stay away.

BSE Capital Goods Index

The BSE Capital Goods index struggled vainly to cling on to the support level of 12160 in Sep ‘11, failed to cross above the falling 50 day EMA, and has been sliding down ever since. The sector has been hard-hit by the slow down in infrastructure projects due to the high interest rate regime. It may take a couple more quarters before the sector shows some signs of life. Avoid.

BSE Consumer Durables Index

The BSE Consumer Durables sector tried valiantly to remain in a bull market. The lower top formed in Oct ‘11 seemed to be the last straw that broke the sector’s back, as it plunged into a bear market.

Technically interesting are the three fan lines drawn on the chart. Note how the index kept rising in Sep ‘11 but stopped short of the first fan line. The failure to move above the first fan line was a sign of weakness. The index got good support from the second fan line before breaking below it. A break below the third fan line (where it is currently receiving support) may push the sector deeper into a bear market. Sell.

BSE FMCG Index

The BSE FMCG index is still in a bull market, despite its failure to cross above the first fan line. The 200 day EMA is rising; the 20 day and 50 day EMAs as well as the index are trading above the 200 day EMA. The second fan line is acting as the revised up trend line.

It is the only sector still in a bull market and has prevented the Sensex from collapsing. Now you know why it is my favourite sector. It saves your portfolio during bear markets. Accumulate.

BSE Healthcare Index

The BSE Healthcare index has been trading within a large triangle pattern. In spite of the ‘death cross’ (of the 50 day EMA below the 200 day EMA) in Sep ‘11, the index hasn’t fallen much. It may continue to consolidate within the triangle for some more time before finally breaking out.

Logically, the break out should be upwards, since consolidations tend to be continuation patterns. But triangles are unreliable, so be prepared for a downward break. Hold.

BSE IT Index

The BSE IT index collapsed into a bear market in Aug ‘11. The recovery has been quite stunning. The index rallied for three straight months before stalling at the upper edge of the downward sloping channel. It has been trading within the channel for the past month.

The technical indicators are showing some bullish signs. Unless the Eurozone debt problems get resolved satisfactorily, the IT sector will continue to face headwinds. The good news is that the US economy is finally showing some signs of improvement. Hold.

BSE Metal Index

The BSE Metals index had dropped below its downward sloping channel in Aug ‘11, and has stayed below it – making a series of lower tops and lower bottoms as it falls deeper inside a bear market. Unless the metals sector and the capital goods sector turn around, the Sensex will not be able to come out of the bear’s grip. Avoid.

BSE Oil & Gas Index

The BSE Oil & Gas index is falling within a broad downward sloping channel in a bear market. The government continuous meddling and failing to take tough decisions of decontrolling diesel and kerosene prices is pushing the sector into huge losses and increasing the subsidy burden.

Reliance, the market favourite, is under all kinds of threats and pressures. The company has been an acknowledged expert not just in backward and forward integration of its businesses, but in bending every rule in the book. Thanks to Anna Hazare’s anti-corruption campaign, government officials are now seeing snakes under every rock. Without the support of ONGC and Reliance, the sector will remain in the doldrums. Avoid.

BSE Power Index

The BSE Power index failed to rise above the support-resistance level of 2250 during the Oct ‘11 rally. After breaking down below the downward sloping channel, it is attempting a pullback towards the channel. If it fails to do so, the index may fall much lower. The great hype about the power sector has fizzled out. Avoid.

BSE Realty Index

The BSE Realty sector continues to be the worst performer among the BSE Sectoral indices. After three months of sideways consolidation between 1625 and 1900 the index broke down below the rectangular zone. It is attempting to re-enter the rectangular band but facing resistance from the falling 20 day EMA. Avoid.

(Note: I have suggested a few ‘Hold’s and an ‘Accumulate’. The rest are ‘Avoid’s. That doesn’t mean individual stocks in the sectors should be avoided. One or two may be good contrarian buys. It may be better to avoid basket buying in the underperforming sectors.)

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.