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 & Silver Chart Patterns: in strong bull markets

I have been writing about gold’s chart pattern for more than a year. There has been a few requests of late to write about silver. So, here is my first shot at silver’s chart pattern. I must confess that I’m not a great fan of investing in precious metals because there are no returns other than capital gains.

Part of the ‘fun’ in stock market investing is being able to analyse Annual Reports to uncover what businesses have been doing to stay ahead, and discover ‘below the radar’ small companies that can become future stars. Buying precious metals is as exciting as investing in a cumulative fixed deposit in a bank – only riskier.

If an investor is looking for diversification, allocating 5-10% of one’s portfolio to gold and silver may not be a bad idea. More so now, because investments in both precious metals have been performing phenomenally well.

Gold Chart Pattern

Last month, profit booking caused gold’s price to fall below the rising 14 day SMA and the triple top at 1421. I had expected a drop to the support level of 1400, and advised investors to buy the dip. The chart pattern played out exactly as per expectations.

The upward bounce from the 1400 level reached a new high of 1440, followed by a brief consolidation within a symmetrical triangle pattern. The break out from the triangle touched another new high of 1461.50 in quick time. The yellow metal seems to be on an unstoppable ride. Fasten your seat belts, maintain trailing stop-losses, and enjoy. Buy only on dips below the 14 day SMA.

Silver Chart Pattern

Silver’s gains have been more spectacular. While gold gained nearly 4.4% from its recent low of 1400, silver rose 16.5% from its recent low of 34 to a new high of 39.63. The rise has been too sharp too soon, as can be seen from the rapidly widening gap between the 14 day and 200 day SMAs. Both moving averages are rising, which is the sign of a strong bull market.

A correction down to the rising 14 day SMA, or even lower, can occur at any time. 37 should be a good support level, and an upward bounce can be expected there. Stay invested, and use any dips to add.

Gold Chart Pattern: another buying opportunity?

Last month, gold’s 2 years price chart was struggling to move above the 30 day SMA after recovering from a drop to 1315 from its earlier peak of 1421. I had suggested buying below 1340, and accumulating on a convincing move above 1356. After consolidating a bit near 1356, gold’s price shot up close to its previous high of 1421, and after a brief pause rose to a new all-time high of 1437.

Profit booking seems to be the reason why the price has slipped to 1411, just below the rising 14 day SMA. Can it fall some more? Yes, it can. It has already dropped below the triple top at 1421. The next support level is at 1400, from where an upward bounce can be expected.

Is this correction another buying opportunity? Yes, it is. Note that the 200 day SMA continues to rise, and gold’s price is trading much above the long-term moving average. That is the sign of a bull market, and the strategy should be to ‘buy the dips’. Note that the chart pattern is close to two previous peaks. Accumulating in small quantities would be a more prudent approach, rather than buying in bulk.

How long will this bull market in gold continue? Who knows, and why should investors be bothered? There is still a lot of uncertainty all around. Emerging markets are facing inflation pressures, which could lead to a slow down in their economies. The recoveries in the US and Europe have been less than stellar so far. The unrest in North Africa and the Middle East is pushing oil prices higher, which will not at all be conducive to faster economic growth.

Gold seems to be the safest haven of all. Stay invested with a suitable trailing stop-loss, may be at the level of the rising 200 day SMA. That is as close to a ‘sure thing’ as you can get in investing these days.

Stock Index Chart Patterns - BSE Sectoral Indices, Feb 18, '11

My previous analysis of the chart patterns of the BSE Sectoral indices was back in Dec ‘10. Many of the indices were correcting along with the Sensex. Some had started their down moves even earlier. The IT index had touched a new peak.

Warren Buffet had said that only when the tide goes out do we find out who has been swimming naked. Nothing like a good correction to find out which indices still have their clothes on. The Sensex has been in a down trend for more than 3 months – and the losers are clearly getting separated from the winners.

BSE Auto Index

The BSE Auto index succumbed to the selling pressure, and dropped below the 200 day EMA to 8154 on Feb 9 ‘11 – wiping out all the gains made since Jun ‘10. The recent upward bounce found strong resistance from the 200 day EMA. The 50 day EMA is sliding, but remains above the long-term moving average – giving the bulls some hope. The RSI is pointing to a resumption of the down move. The sector is a ‘hold’.

BSE Bankex

The BSE Bankex also dropped below the 200 day EMA to a low of 11353, erasing the gains made since Jul ‘10. A spirited upward bounce has taken the index above its 200 day EMA. The RSI is above the 50% level and the slow stochastic is in the overbought zone. The 20 day EMA has started rising, and may support the index if the correction resumes. The sector is a ‘buy on dips’.

BSE Capital Goods Index

The BSE Capital Goods index has suffered a serious setback. It briefly fell below the year-long support level of 12990, and is struggling to stay above it. The ‘death cross’ (50 day EMA falling below the 200 day EMA), marked by the blue oval, confirmed a bear market 3 weeks back. The RSI is suggesting lower levels. The sector is a clear ‘avoid’. 

BSE Consumer Durables Index

The BSE Consumer Durables index is behaving much like the Bankex – falling below the 200 day EMA, but bouncing up above it. But the technical indicators are weaker. The slow stochastic is above the 50% level, and touched a slightly higher top while the index made a lower top. But the RSI has turned down before reaching its 50% level. Hold.

BSE FMCG Index

The BSE FMCG index made a bearish triple top pattern. The sector is under margin pressure because of higher commodity prices. The good news is that the minimum down side target of the triple top has been met when the index fell below the 200 day EMA. The upward bounce from the long-term support level of 3160 has found resistance from the 200 day EMA. Both the RSI and slow stochastic have emerged from their oversold zones. But both reached lower bottoms than the ones touched in Jul ‘10 when the support level of 3160 was tested earlier. Hold.

BSE Healthcare Index

The BSE Healthcare index touched a new high in Jan ‘11. The subsequent correction was swift. The index dropped below the 200 day EMA to the support level of 5800. The upward bounce is desperately trying to move above the 200 day EMA. The technical indicators are looking weak. Both the RSI and slow stochastic are below their 50% levels.

BSE IT Index

The BSE IT index also touched a peak in Jan ‘11. However, the subsequent correction stopped well short of the rising 200 day EMA – keeping the bull market intact. The RSI and slow stochastic are both below their 50% levels – hinting at a test of support from the 6050 level or even the 200 day EMA. With the US and European economies showing signs of recovery, the IT sector should continue to perform well. Buy the dips.

BSE Metal Index

The BSE Metal index is trading sideways but has weakened considerably in the last 2 months. The index is trading below the 200 day EMA and the ‘death cross’ seems imminent. The slow stochastic is above the 50% level but the RSI has reversed directions after touching its 50% level. Hold.

BSE Oil & Gas Index

The BSE Oil & Gas index is showing the effects of the prolonged price interventions by the government in an effort at inflation control. The ‘death cross’ and the fall to the long-term support level of 9000 is an indication that the worst isn’t over. The slow stochastic is above but the RSI is below their 50% levels. Both have started to move down. Avoid the sector.

BSE Power Index

The BSE Power index is in a clear bear market with no sign of recovery. The recent upward bounce after a steep fall has been resisted by the falling 20 day EMA. Sell.

BSE Realty Index

The BSE Realty index is the clear winner of the ‘wooden spoon’ (a consolation prize given to the last place finisher in sporting events – particularly golf). This is not a contrarian play. Sell.

Gold Chart Pattern: is this a good time to buy?

In last month’s analysis of gold’s chart pattern, a bearish triple-top was getting formed. A decent correction looked imminent. I had mentioned that a break below 1340 would confirm the triple-top. Gold’s price dropped all the way down to 1315 on Jan 27 ‘11, correcting about 7.5% from the Nov ‘10 top of 1421.

Since then, gold’s price has pulled back above the falling 14 day SMA, and managed to close at 1356 on Feb 3 ‘11 – a 38.7% retracement of the fall from 1421 to 1315, and marginally higher than the 38.2% Fibonacci retracement level. That may be one of the reasons why the chart is struggling a bit to move higher.

But that isn’t the only reason. Let us look at the 2 year closing chart pattern of gold to understand why:

Note that the pullback is facing resistance from the falling 30 day SMA. That opens up the possibility of a drop down to test support from the rising 200 day SMA. There is a third reason as well. The US stock markets have been bullish and investors are regaining their appetite for riskier assets.

The doom and gloom reports about the US and European economies are getting less frequent. GDP growths remain meagre, but growth is definitely more visible. Inflation remains low. Same with interest rates. That points to a further rally in the equity markets, and a correspondingly lower investor demand for safer havens, like gold.

Is the bull market in gold over? Far from it. As long as gold’s price remains above the rising 200 day SMA, the strategy should continue to be: ‘buy the dips’. Last month, I had advised new entrants to accumulate below the level of 1340. A possible drop to the 200 day SMA may provide an opportunity to add. A convincing close above 1356 can also be used to accumulate.

Please don’t forget to maintain adequate stop-losses. This close to an all-time high is not the time to throw caution to the winds. 1350 is a support-resistance level. If the support holds, gold’s price is likely to move higher – may be after a period of consolidation. A break below 1350 could lead to a test of the 200 day SMA.