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?

BSE Sensex and NSE Nifty 50 index chart patterns – Mar 9 ‘12

Both index charts – BSE Sensex and NSE Nifty – show classic break outs above down trend lines followed by pullbacks and upward bounces from the down trend lines. That should mean that trend reversals have occurred and it is time to buy. But all is not well as yet.

Results of the elections in five states have come and gone. The market was not expecting the thrashing that the Congress Party got at the hustings. There are rumblings from UPA partners about big-brotherly treatment. Another surprise was the 75 bps cut in the CRR announced by the RBI prior to its Mar 15 review meeting – probably to preempt the likely liquidity shortfall in the system due to advance tax payments. The better-than-expected manufacturing IIP number has further confused market players.

RBI’s Mar 15 meeting appears to have become a non-event. The good IIP number may dash any possibility of a cut in interest rates. Some experts are already suggesting that the CRR cut will be inflationary. Very little is expected from the Mar 16 budget announcement from a government that has backed itself into a corner financially and politically, with its populist measures and inability to take tough decisions.

BSE Sensex index chart

In the weekly bar chart of the Sensex, last week’s bar shows a dip below the down trend line followed by a strong upward bounce. The ‘golden cross’ of the 20 week EMA above the 50 week EMA has not taken place yet. The technical confirmation of a bull market is still awaited.

The weekly technical indicators remain bullish, but there are signs of weakness. The MACD is positive and above its signal line, but it has stopped rising and the histogram has started falling. The ROC is positive and above its rising 10 week MA. The RSI has started falling towards its 50% level. The slow stochastic has slipped down from its overbought zone.

The pre-budget rally may turn out to be a sideways consolidation. A budget without any negative surprises may provide the trigger for the rally to resume in earnest.

NSE Nifty 50 index chart

The daily bar chart pattern of the Nifty shows the break out above the down trend line, followed by a pullback and then a bounce up with a gap. Note that the volume bar is smaller on last Friday’s bounce up. That is not a positive sign for bulls.

The technical indicators are bearish, but showing signs of a turnaround. The MACD is falling below its signal line, but hasn’t yet entered negative territory. The ROC is negative, but is trying to cross above its 10 day MA. The RSI has bounced up from the edge of its oversold zone, but remains below the 50% level. The slow stochastic is trying to emerge from its oversold zone.

The 50 day EMA has crossed above the 200 day EMA, signalling a return to a bull market. But see what happened back in Apr ‘11 (left part of chart above). The 50 day EMA crossed above the 200 day EMA – only to drop back below it. Any fall below the down trend line can snuff out the bull rally.

Bottomline? Chart patterns of the BSE Sensex and NSE Nifty 50 indices have bounced up nicely after pullbacks to their down trend lines. Such bounces from resistance levels offer entry opportunities – provided there is adequate volume support and bullish technical indications. These seem to be lacking – probably because of the budget announcement hanging like the proverbial sword of Damocles. Those who are already invested should hold with stop-loss at the levels of the down trend lines. New entrants should await the budget announcement.

Stock Index Chart Patterns – Jakarta Composite, Singapore Straits Times, Malaysia KLCI – Mar 09, ‘12

A month ago, the chart patterns of the Jakarta Composite, Singapore Straits Times and Malaysia KLCI indices were looking bullish, after recovering well from bear attacks. The bulls have been trying hard to regain control and momentum. But the bears are still reluctant to give up ground. In the process, some interesting chart patterns have been forming.

Jakarta Composite Index Chart

The Jakarta Composite index never entered a bear market technically. The 50 day EMA had bounced off the 200 day EMA back in Oct ‘11, and has been moving up since. After a sharp drop below the 200 day EMA and an equally sharp recovery, the index has been trading within an upward-sloping channel for the past four months.

The interesting thing to note is that the index faced strong resistance from the 4030 level, where it had earlier faced resistance in Jul, Aug and Sep ‘11. As a result, the index has not been able to make any headway for the last two months – though it is trading above its rising 200 day EMA and is technically in a bull market.

The technical indicators are mildly bullish. The MACD is barely positive and has merged with its signal line. The ROC has crossed above its 10 day MA into positive territory, but appears unable to decide which direction it wants to go. The RSI is resting at its mid-point. The slow stochastic has dropped from its overbought zone.

The bulls still have some work left to be able to test the Aug ‘11 top of 4196. 

Singapore Straits Times Index Chart

The Singapore Straits Times index climbed smoothly above all three EMAs. The ‘golden cross’ of the 50 day EMA above the 200 day EMA (marked by light blue oval) technically confirmed a return to a bull market. But the lower edge of the gap (at 3030 level) formed in Aug ‘11 is providing strong resistance to the bull rally.

After a short correction down to its rising 50 day EMA, the index has bounced up smartly. But the technical indicators are yet to turn bullish. The MACD is still positive, but has made a bearish ‘inverted saucer’ pattern and is falling below its signal line. The ROC has dropped into negative territory. The RSI is below its 50% level. The slow stochastic bounced up from the edge of its oversold zone, but is below its 50% level.

The bulls need to concentrate their efforts on closing the Aug ‘11 gap before they can hope to regain control.

Malaysia KLCI Index Chart

The Malaysia KLCI index chart is clearly trending up in a bull market, and looks the most bullish of the three indices. After coming within two points of its Jul ‘11 top of 1597, the KLCI index had to beat a slight retreat. Will the brief setback turn into a correction?

The technical indicators are suggesting the possibility. Volumes have reduced considerably and all four indicators touched lower tops (marked by blue arrows) as the index rose to test its previous top. The combined negative divergences may pull the index down some more.

Note that all three EMAs are rising in tandem and the KLCI is trading above them. That is a clear sign of a bull market. Do not make the mistake of shorting a rising index. Use any dips to add.

Bottomline? The Asian index chart patterns are back in bull markets. The bears haven’t given up the fight, but are slowly losing ground. Once the nearby resistance levels are overcome, the bulls will regain complete control. Add the dips and maintain trailing stop-losses.

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.

Gold and Silver chart patterns: bears fight back

Gold Chart Pattern

Gold’s chart pattern shows a strong fight back by the bears, just when all seemed lost. After moving above the 1770 level, gold’s price consolidated a bit before rising to a 2 months high of 1790. Proximity to the Nov ‘11 top of 1800 was used as an excuse by the bears to indulge in heavy selling.

Note that all three technical indicators touched lower tops as gold’s price reached a 2 months high. The negative divergences warned of an impending correction. But the high volume of selling marked a ‘distribution day’ (high near the opening level and a much lower close). Such high volumes were last seen during the sell-off in Sep ‘11. Volumes on down days (red volume bars) have exceeded volumes on up days (grey volume bars) on several occasions, and is a sign of distribution.

Gold’s price has dropped below its 20 day and 50 day EMAs, and it looks like it may drop further to its 200 day EMA. The technical indicators are looking bearish. The RSI has slipped below its 50% level. The MACD is still positive, but is falling below its signal line. The slow stochastic bounced up a bit from the edge of its oversold level, but it looks like a ‘dead cat bounce’.

Gold is still trading above its rising 200 day EMA – which means it is technically in a bull market. Hold, with a strict stop-loss at 1650.

Silver Chart Pattern

Silver’s chart pattern shows strong buying by the bulls in the third week of Feb ‘12 that pushed the price above the 37 level. High volume selling and a ‘reversal day’ pattern (higher high and lower close) marked the end of the intermediate rally from the Dec ‘11 low of 26.

The technical indicators are looking bearish. The RSI has dropped from the overbought zone to its 50% level. The MACD has crossed below its signal line, and is barely positive. The slow stochastic has fallen below its 50% level from its overbought zone.

Despite spending more than a month above the 200 day EMA, a bull market was not confirmed technically because the ‘golden cross’ of the 50 day EMA above the 200 day EMA didn’t occur.

Silver’s price is likely to fall below its 200 day EMA, and return to a bear market after a foray into bull territory. Sell.

Stock Index Chart Patterns – Hang Seng, Taiwan TSEC, Korea KOSPI – Feb 24, ‘12

Chart patterns of the Asian indices are in various stages of recovery from their 2011 lows. Technically, only the Korea KOSPI chart has re-entered a bull market. The Hang Seng chart is about to join the Korean index in bull territory. The Taiwan TSEC index is still struggling to get out of a bear hug.

Hang Seng index chart

The Hang Seng index has climbed almost 35% from its Oct ‘11 low of 16170, and closed the larger of the two downward gaps formed on the chart in Aug ‘11. It has sailed past its 200 day EMA and is correcting a bit after almost reaching the 22000 level. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a return to a bull market. Note the bullish pattern of higher tops and higher bottoms from the Oct ‘11 low.

Negative divergences are visible in all four technical indicators – three of which touched lower tops as the index rose higher, while the MACD remained flat. The ongoing correction may continue a bit longer. The dip can be used to add selectively.

Note the head-and-shoulder patterns that formed on the ROC, RSI and slow stochastic during Oct-Nov ‘11 even though such a pattern isn’t visible on the Hang Seng chart. The subsequent correction over the next two months turned out to be a consolidation within a symmetrical triangle.

The upward break out from the triangle in early Jan ‘12 was accompanied by increasing volumes, which validated the break out. However, volumes have been sliding ever since the index crossed above its 200 day EMA – raising questions about the sustainability of the rally.

Taiwan TSEC index chart

The Taiwan TSEC index has risen 21% from its Dec ‘11 low of 6609 and past its 200 day EMA on strong volumes, but is facing resistance from the lower end of the large gap formed on the chart in Aug ‘11. The 20 day EMA has crossed above the 200 day EMA, but the 50 day EMA is still a couple of hundred points below the long-term moving average.

The gap on the chart needs to be closed before the index can re-enter a bull market. The technical indicators are suggesting that may not happen in the near term. The slow stochastic is inside its overbought zone, but has started falling. The MACD is positive and touching its signal line, but has also started falling. The ROC is positive but sliding towards the ‘0’ line. The RSI has dropped sharply from its overbought zone.

A correction to the rising 20 day EMA is likely.

Korea KOSPI index chart

The Korea KOSPI index chart has gained almost 25% from its Sep ‘11 low of 1644 and is trading well above its 200 day EMA. The lower of the two gaps on the chart, formed in Aug ‘11, has been closed. The 50 day EMA has crossed above the 200 day EMA. The rally has gained strength during Feb ‘12 – as indicated by the rising volumes.

However, all is not well. All four technical indicators are showing negative divergences by sliding down while the index was rising. A correction has started, and may continue a bit more. The dip can be used to add.

Bottomline? The chart patterns of the Asian indices are in the process of recovering from their brief bear markets. The bulls still have some work left. The bears are unlikely to give in easily. The doomsday scenario painted by many - thanks to the sovereign debt problems in the Eurozone – may not turn out to be as bad as expected. Use the ongoing correction/consolidation to buy selectively.

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 17 ‘12

Before getting into detailed analysis of the BSE Sensex and NSE Nifty 50 index chart patterns, I have a confession to make. One of the reasons technical analysis is looked down upon by many well-known investors is because it can not ‘predict’ what will happen next – so why even bother to look through charts?

Well, the fault doesn’t lie in the charts but with the analyst who is interpreting the charts. The sudden rally that started on the Sensex and Nifty charts from the Dec ‘11 lows appeared to come as a bolt from the blue and was attributed to a rush of FII buying. That is only part of the story. On a closer inspection of both short-term and long-term charts over the weekend, it became quite clear that both indices clearly formed symmetrical triangle reversal patterns for about 4 weeks.

Why did I miss these reversal patterns earlier? A combination of hubris and a bid to second-guess the market. Symmetrical triangles are usually continuation patterns. Since the indices were in bear markets, it was expected that the break out from the triangles will be downwards. But triangles are notorious for being unreliable and can break out in either direction. Not often do triangles turn out to be reversal patterns. Also, the reversal pattern lasted only 4 weeks – much shorter duration than expected after a year-long down trend.

BSE Sensex index chart

Is this still a bear market rally or the first phase of a new bull market? Two patterns on the 6 months daily bar chart of the Sensex suggests that the trend has indeed changed. First, the small rectangular ‘flag’ pattern that formed after the index convincingly crossed above its 200 day EMA. Such patterns usually form at the mid-point of a strong up (or down) move. That gives an upward target above the 20,000 level. The ‘golden cross’ of the 50 day EMA above the 200 day EMA will confirm a bull market.

The break out above the ‘flag’ happened with a ‘gap’ – which makes the break out a strong and valid one. So, the rally is likely to continue despite the overbought condition. The MACD is positive and above its signal line, but the histogram has reduced in height - correcting the overbought situation a little. The ROC is showing negative divergence by failing to reach a new high and slipping below its 10 day MA. Both the RSI and the slow stochastic are well inside their overbought zones, and can stay there a while longer.

If you are holding from lower levels, don’t sell off in a hurry. Maintain trailing stop-losses and ride the bull. If you have missed the rally, don’t jump in now. At some point, there should be a decent 5-10% correction. Enter then.

NSE Nifty 50 index chart

The 4 weeks long consolidation within a symmetrical triangle on the 1 year weekly bar chart pattern of the Nifty was followed by an upward break out on increased volumes. The volumes kept rising even further as the index climbed past the 50 week EMA and the blue down trend line. Strong volume support validates upward break outs.

The technical indicators have turned bullish. The MACD is rising above its signal line and has entered the positive zone. The ROC is also positive and above its 10 week MA. The RSI has moved above its 50% level. The slow stochastic has entered its overbought zone. Any pullback to the blue down trend line – if it happens – will provide a buying opportunity. The ‘golden cross’ of the 20 week EMA above the 50 week EMA will be the final confirmation of a return to a bull market.

The fundamentals remain a matter of concern. Q3 results have shown continued downward pressure on margins of India Inc. The fiscal deficit will end up much higher than announced in the previous budget. Big ticket reforms are pending for a long time. Interest rates remain high.  A Greek sovereign default hasn’t been ruled out. War drums are being beaten - an Israeli attack on Iran can change bullish equations.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices have entered bull markets – thanks to strong buying support from the FIIs. It is unusual to see mid-cap and small-cap stocks making smart moves at the early stage of a bull market. Stock markets move on their own logic – there is no point in trying to second-guess the market. As Steve Winwood sang not too long ago: “Just roll with it, baby” – but remember to maintain trailing stop-losses.

Stock Chart Pattern - Canara Bank (an update)

The previous post about the stock chart pattern of Canara Bank was back in Oct ‘09. The stock price was correcting after touching a 52 week high. Due to my aversion to PSU stocks in general, and Canara Bank in particular, I had advised investors to look at a couple of other PSU banks.

One of the mistakes that investors often make is failing to perceive the difference between a company and its stock chart pattern. A stock of a fundamentally sound company can perform poorly; another company that may have a weak balance sheet, can shoot up like a rocket for no rhyme or reason.

I am not ashamed to put up my hand up and say: “Mea culpa.”  I allowed a poor opinion of the customer service standards of the bank to cloud my outlook for its stock chart. A look at the three years closing chart pattern of Canara Bank will show how badly wrong I was:

Note the two dark grey vertical lines on the chart – the first marks the date of my earlier post and the second marks the date when the stock touched its all-time closing high of 836 (a whopping 470% gain from its Mar 17 ‘09 closing low of 146 – outperforming the Sensex by a huge margin).

Shortly after I wrote the previous post, the stock price completed its correction by bouncing up from its rising 50 day EMA and then entered a 7 months long consolidation within a rectangle pattern before breaking out in July ‘10. The stock had a parabolic rise over the next 4 months and touched its all-time high of 836. Only the MACD touched a new high. The other three technical indicators - ROC, RSI and slow stochastic – failed to reach new highs.

The negative divergences gave advance signal of an impending correction, which turned out to be a change of trend as the stock fell within a downward-sloping channel for more than a year to touch a closing low of 354 on Dec 28 ‘11. The big fall of almost 500 points (58% from the peak of 836) underperformed the Sensex by more than two times.

The current FII driven rally has seen a strong recovery by the stock, which has risen nearly 55% from the low of 354 – this time outperforming the Sensex by two times. Such a performance – outperforming the Sensex during bull periods and underperforming during bear periods – can be expected from a mid-cap stock, but not from a large-cap stock like Canara Bank.

Note the two blue down arrows on the right hand side of the chart. The top one is pointing to the break out above the downward channel (and the 200 day EMA), followed by a pullback and the subsequent vertical rise. The bottom one is pointing to the sharp upsurge in volumes that accompanied the break out and subsequent rise, thus validating the break out.

Interestingly, the pullback to the top of the channel coincided with declaration of disappointing Q3 results. Net profit fell nearly 21% though income rose by 33% compared to the year-ago Q3. Both gross and net NPAs rose on a YoY and QoQ basis, which is a worrying sign. The technical indicators are looking overbought, but they have looked that way for the past month, and may remain so a while longer.

Bottomline? The stock chart pattern of Canara Bank clearly shows that it performs more like a mid-cap stock – providing large gains during bull phases and big falls during bear phases. Looks like another bull phase has begun. Add on dips, but don’t forget to maintain a suitable stop-loss.

Stock Index Chart Patterns – Jakarta Composite, Singapore Straits Times, Malaysia KLCI – Feb 10, ‘12

It has been almost two months since the Asian index chart patterns were last analysed, and it is quite interesting to see how they have fared during the global liquidity-led rally since then.

Jakarta Composite Index Chart

The Jakarta Composite index had been one of the best performers in 2011. Despite the sharp correction during Aug and Sep ‘11, the index did not technically enter a bear market – as can be seen from the behaviour of the 50 day EMA, which bounced off the 200 day EMA and started rising again. The ‘death cross’ that confirms a bear market never happened.

But the rally seems to have run into strong headwinds. The index has dropped to its 50 day EMA, and may fall some more. The technical indicators are looking bearish. The MACD is positive, but falling below its signal line. The ROC is below its 10 day MA and has dropped into negative territory. The RSI and the slow stochastic are sliding and are below their 50% levels.

Singapore Straits Times Index Chart

The Singapore Straits Times index technically fell into a bear market in Aug ‘11, as confirmed by the ‘death cross’ of the 50 day EMA below the 200 day EMA. The index has recovered smartly by rising above its 200 day EMA on strong volume support and formed a bullish pattern of higher tops and higher bottoms, but the 50 day EMA is still below the 200 day EMA. The big gap formed in Aug ‘11 hasn’t been filled yet, and may provide resistance to the rally.

The technical indicators are beginning to correct from overbought conditions. The MACD is positive and above its signal line, but starting to turn down. The ROC has dropped below its 10 day MA, which has made a bearish rounding top pattern. Both the RSI and the slow stochastic are in their overbought zones, but starting to slip down.

Malaysia KLCI Index Chart

The Malaysia KLCI index is technically back in a bull market. The ‘golden cross’ of the 50 day EMA above the 200 day EMA has confirmed that. After spending the month of Jan ‘12 in a rectangular sideways consolidation, the index broke out upwards on a rapid increase in volumes and filled the gap formed in Aug ‘11.

The MACD is positive and above its signal line. The ROC is above its 10 day MA in the positive zone, but turning down. Both the RSI and the slow stochastic are in their overbought zones. The rally may still have some steam left in it.

Bottomline? Strong liquidity-driven rallies have changed the technical complexion of the Asian index chart patterns. The bulls have gained the upper hand, but the bears are not yet out of the picture and may make a last ditch effort to turn around their fortunes. Use any dips to buy selectively.

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.

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 3 ‘12

The down trend lines connecting the falling tops on the BSE Sensex and NSE Nifty 50 index charts have been breached on a weekly closing basis – the first time that has happened since the down trends began in Nov ‘10.

It is immaterial to debate the cause of the sudden bullishness. It may be ‘hot money’ flowing in, or anticipation of a change in the fundamentals – but that isn’t important. What is important is that trend lines in force for 15 months have been breached, and such breaches have to be respected. Does that mean both indices have returned to bull markets?

Technically, not yet – as was explained in a post on Feb 3 ‘12. There is another reason. Any breach of a trend line (or support/resistance level) should be subjected to a ‘3% whipsaw leeway’. That means, an index (or stock) should go past by more than 3% to avoid a ‘whipsaw’ pullback. Despite strong volumes that accompanied the upward breaches last week, neither index have moved above their down trend lines by more than 3%. Those levels are about 17830 (for the Sensex) and 5370 (for the Nifty).

BSE Sensex index chart

A burst of FII buying did what 15 months of negative sentiments could not – turn the Sensex chart pattern from bearish to bullish. A little more work is left for the bulls before the bears can be finally sent off to hibernation.

Technical indicators are reflecting the bullishness, but there are a couple of concerns. Three of the indicators – ROC, RSI and slow stochastic – are showing negative divergences by touching lower tops as the Sensex rose higher. The RSI and the slow stochastic are well inside their overbought zones, which usually precedes a correction. But the ROC is hugging its 10 day MA, and the MACD is rising above its signal line in the positive zone without moving too far away – so, the up move may not end immediately.

The likely outcome may be a bit of consolidation after a strong rally, or a pullback to the top of the breached down trend line. Note the bullish ‘rounding bottom’ pattern that is forming on the 50 day EMA.

NSE Nifty 50 index chart

The weekly bar chart of the NSE Nifty 50 index clearly shows the breach of the down trend line, accompanied by the strongest volumes in the past year. A trend line break on strong volumes is a sign of a valid break. Both the 20 week and 50 week EMAs have started rising, though the 20 week EMA is well below the 50 week EMA.

Three of the technical indicators – MACD, ROC and slow stochastic – are indicating overbought conditions. The MACD histogram (the bars that plot the difference between the MACD and its signal line) has risen to its highest level in the past year. On two previous occasions – in Apr ‘11 and Oct-Nov ‘11 – rising histogram led to corrections.

The ROC has climbed far above its 10 week MA – note the corrections that followed when this happened in Apr ‘11 and Oct ‘11. The slow stochastic has reached its overbought zone for the first time since Apr ‘11. The RSI is in neutral territory, straddling its 50% level – but has touched a slightly lower top (than the one in Nov ‘11). Looks like a correction may be around the corner after 5 straight weeks of higher closes.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns have rallied impressively from their Dec '11 lows on the back of strong FII buying, and have breached their downward-sloping channels. Technically, the breaches haven’t been confirmed yet – but that could be just a matter of time. Fundamentally, not much has changed since Dec ‘11 when both indices hit their lows. Don’t be surprised if the FIIs decide to book profits. It is always better to concentrate on individual stocks instead of getting hung-up about index movements.

Stock Chart Pattern - Sanghvi Movers (An Update)

In the previous update of the stock chart pattern of Sanghvi Movers back in Jan '11, the stock had broken down below a bearish descending triangle pattern. Descending (and ascending) triangles have measuring implications. The downward target was calculated as 116. Stock prices don't really understand or follow arithmetic. Actual targets are never exactly met. Prices typically overshoot upward targets and fall short of downward targets.

So, what happened? The two years bar chart pattern of Sanghvi Movers is an example of how a fundamentally strong stock with a good business model can suffer when sentiments turn negative towards the sector in which the company operates:

The stock fell to a high volume 'panic bottom' of 114 in Feb '11, meeting the downward target of 116 almost exactly. It bounced up sharply - only to face resistance from the falling 50 day EMA and then dropped past its 'panic bottom' of 114 to a low of 104 in Mar '11. 'Panic bottoms' seldom hold and this is another example of it. But that doesn't prevent intrepid investors from trying to bottom-fish - and get stuck at higher levels.

Note that both the RSI and the slow stochastic were deep inside their oversold zones when the stock price dropped to 104. A correction to the earlier down move usually follows. The ROC touched a higher bottom and hinted at a possible correction or consolidation. Over the next 8 months, the stock price consolidated within a bearish 'rising wedge' pattern - oscillating around its entangled 20 day and 50 day EMAs. Throughout the consolidation period within the 'rising wedge' pattern, the 200 day EMA continued to fall - leaving no doubt that the bears were in control.

After breaking downwards below the 'rising wedge' on Nov 14 '11, the stock price attempted a pullback to the wedge. Such pullbacks after a downward break happen often, and provide a selling opportunity. The stock continued to fall on high volumes and dropped to a low of 84.50 on Jan 2 '12. It has since been trading within a small symmetrical triangle, and may seek even lower levels.

The technical indicators are bearish, but showing faint signs of improvement. The MACD is above its signal line, but in negative territory. The ROC is below its 10 day MA, and trying to climb out of the negative zone. The RSI dropped below its 50% level, but trying to rise. The slow stochastic fell inside its oversold zone, and is trying to come out.

The infrastructure sector has turned from being a darling of investors to a villain. Stocks of almost all companies with any links to the sector are getting hammered - regardless of their underlying fundamentals. The stock of Sanghvi Movers has been no exception. Debt/equity ratio is more than 1, but for a capital intensive company, that shouldn't be a major issue. Cash flows remain positive. Margins are definitely under pressure - but that is a common feature with stocks from almost all sectors. But the market knows best. No point in betting against it.

Bottomline? The stock chart pattern of Sanghvi Movers is facing technical headwinds though fundamentals appear to be reasonable. As and when the infrastructure sector starts picking up, the company will again start making a lot of money. But that seems a couple of quarters away. Watch Q3 and Q4 results before considering an entry.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jan 27, ‘12

S&P 500 Index Chart

The S&P 500 index chart touched an intra-day high of 1333 on Jan 26 ‘12 but closed lower than the previous day’s close – forming a bearish ‘reversal day’ pattern. Reversal day patterns, when formed at the end of an intermediate rally or decline, can signal a change of the intermediate trend. The index had moved up too fast, and a correction will restore the health of the bull market.

The technical indicators are signalling that a correction may be on its way – though the weekly close was flat. The slow stochastic is still inside the overbought zone, but has started to fall. The MACD is positive and above its signal line, but has also started to fall. The RSI formed a small head-and-shoulders pattern before dropping from its overbought zone. The ROC is positive, but heading down.

The US economy reminds me of a badly tuned automobile that is knocking and backfiring but still moving forward. Initial jobless claims rose to 377,000. New home sales dropped in Dec ‘11. But durable goods orders rose in Dec ‘11. AAII’s sentiment survey indicated bullishness at 48.4% was higher than its historical average of 39%; bearishness at 18.9% was much below the historical average of 30%. Q4 GDP came in at an annualised 2.8%, of which inventory build-up accounted for 1.9%. Q1 ‘12 GDP may suffer as a consequence.

FTSE 100 Index Chart

The FTSE 100 index chart has followed the S&P 500 index into a bull market by rising to an intra-day high above the 5800 level and making a bullish pattern of higher tops and higher bottoms, but closed flat on a weekly basis. Volumes dropped off during the week, which doesn’t auger well for a sustained rally.

The technical indicators are signalling a correction. The slow stochastic has made a head-and-shoulders pattern and slipped down from its overbought zone. The MACD is positive and touching its signal line on the way down. The RSI is above the 50% level but moving down. The ROC is falling towards the ‘0’ line.

Britain moved closer to its second recession in three years after official figures showed the UK economy contracted by more than expected in the last three months of 2011. Eurozone problems are not going away, and are affecting UK’s growth prospects.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are technically back in bull markets, even as the US and UK economies continue on their painful roads to recovery. The rallies appear to be on their last legs. Corrections are around the corner - use them to add selectively.

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 27 ‘12

The following concluding comment was made in last week’s analysis of the BSE Sensex and NSE Nifty 50 index chart patterns: “…a flood of FII buying can throw all analysis out of the window.” The deluge of FII buying drowned DII selling, and overbought conditions in the market became even more overbought.

Reminds me of the title of a funny Jack Nicholson movie: Something’s gotta give. Technicals are pointing to a correction at any time, but the market just keeps marching up. Benjamin Graham had said that in the short-term, the market acts like a voting machine. FIIs are definitely voting for a return to a bull market. Q3 results declared so far continue to demonstrate pressure on the bottom lines, even as there have been some growth in top lines.

BSE Sensex index chart

The BSE Sensex weekly bar has just about managed to close above its 50 week EMA and is only 100 odd points below the upper edge of the downward-sloping channel (within which it has traded during the past 15 months). If the FIIs continue their buying spree, the index may breach the channel on the upside and return to a bull market.

The technical indicators are looking bullish and supporting the up move. The MACD has crossed above its signal line, but remains in negative territory. The ROC has risen sharply above its 10 week MA. The RSI has edged above its 50% level. So has the slow stochastic.

Note that the technical indicators were in a similar bullish state during the previous rally in Oct ‘11, but the bear market rally fizzled out near the top end of the channel. Will the Sensex behave differently this time? Only FIIs can provide the answer.

NSE Nifty 50 index chart

The NSE Nifty daily chart is looking bullish to the point of being heavily overbought. The index climbed above the 200 day EMA on a volume surge and has reached the top of the downward-sloping channel. The 20 day EMA has crossed above the 50 day EMA, and though both EMAs are rising they remain well below the 200 day EMA.

The rally has been too fast and too steep, which is typical of bear market rallies. The technical indicators are looking quite overbought. The MACD is above its signal line, and both are rising in positive territory. The ROC is also positive, and rising above its 10 day MA. The RSI and the slow stochastic are well inside their respective overbought zones.

The Nifty can remain overbought for long periods, but a correction, even a short one, will restore the technical health of the index. Otherwise, the bulls may get tired of buying and allow the bears to resume their control.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns had strong bear market rallies from their Dec '11 lows, and have reached the top end of their downward-sloping channels. Will they be able to break out of the bear grips finally? Technically, yes. Fundamentally, no. Nothing has changed much from the time that the Dec ‘11 lows were touched. Interest rates remain at their high points. Same with oil price. Balance of payments continue to deteriorate. Nothing is happening in the policy or reforms front. Inflation has moderated a bit, but that has more to do with the base effect. The Rupee has strengthened, mainly due to the FII inflows. This still looks like a sucker’s rally – but betting against the market can be hazardous to your wealth. Enjoy the ride while it lasts.

Stock Chart Pattern - Sintex Industries (An Update)

In the previous update a year back, the concluding comments were:

“The stock chart pattern of Sintex Industries is an example of how a stock that appears to be fundamentally investment-worthy is to be avoided for technical reasons. Sell.”

Lately, there has been a lot of chatter in various investment groups about the stock – so it may be worthwhile to have a look at the two years bar chart pattern of Sintex Industries and find out if there has been any worthwhile changes to reconsider the earlier advice:

A grey vertical line has been drawn to indicate the date on which the previous update was posted. Note that the expected ‘death cross’ (of the 50 day EMA below the 200 day EMA) happened a few days later, but the stock price found good support at 137 over the next two months and smartly bounced up above all three EMAs.

The rally topped out at 194 on May 31 ‘11 – much lower than its Nov ‘10 peak of 233, but higher than closing level of 168 when the previous update was posted in Jan ‘11. The three EMAs came quite close to each other, though they didn’t quite get entangled. This is often a precursor to a sharp move. The move came soon enough, but not before the stock price received good support from the 137 level once more during Aug ‘11.

Another upward bounce stalled just before reaching the falling 200 day EMA, and once the stock dropped below 137 in Sep ‘11, it fell in steps all the way down to 59 on Dec 16 ‘11 – losing 75% from its Nov ‘10 peak. Mid-cap (and small-cap) stocks find it very difficult to recover from such steep falls, and Sintex is unlikely to be an exception.

Despite a volume surge during the rally over the past month, the stock price has so far failed to climb above its falling 50 day EMA and is trading way below its 200 day EMA. The technical indicators are looking bullish, so the rally may not be quite over yet. The MACD is rising above its signal line, and is about to enter the positive zone. The ROC is positive, but has dipped below its 10 day MA. The RSI has just entered its overbought zone. The slow stochastic is about to do the same.

Bottomline? The chart pattern of Sintex Industries clearly shows that the bears are on top. The present rally should be used to exit the stock.

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 20 ‘12

BSE Sensex and NSE Nifty 50 index chart patterns closed smartly higher on a weekly basis. Both indices crossed above their 50 day and 20 week EMAs. The FIIs continued their buying, and DIIs continued their selling to keep the up moves in check. No prizes for guessing that the FIIs prevailed in last week's bull vs. bear contest.


Q3 results declared so far show that India Inc. is facing downward pressure on their bottom lines, even as there have been instances of top line increase. Reliance announced a buyback during the early part of last week, which boosted its stock price and both indices. By the end of the week, the company announced disappointing results, which may trigger a correction.

Both Sensex and Nifty indices are trading within downward sloping channels and below their respective 200 day and 50 week EMAs. That is a sign that the bears are still on top, and the rallies from the Dec '11 lows should be treated as bear market rallies; i.e. opportunities to sell. Breaking above the downward sloping channels and sustaining above them for a few days can finally change the trend. Will the indices be able to do that?

BSE Sensex index chart

The Sensex has moved up smartly above its 20 day and 50 day EMAs, and the 20 day EMA is about to cross above the 50 day EMA. Overhead resistance to a further up move can be expected from the falling 200 day EMA and the upper edge of the downward-sloping channel. The index had failed to cross above the downward channel on three previous occasions. Will it be fourth-time-lucky?

The technical indicators seem to suggest so. Both the MACD and the ROC have entered positive territory and are still rising. But the RSI and the slow stochastic are in their overbought zones from where they appear to be turning back.

Next week has an early settlement because of Republic Day holiday on Thursday. Coupled with the less-than-stellar RIL results, the stage may be set for some profit booking.

NSE Nifty 50 index chart

The weekly chart of the Nifty shows a clear breach of the 20 week EMA on strong volumes, which is a bullish sign. Three of the technical indicators are also showing signs of bullishness. The MACD has crossed above its signal line and the ROC has risen above its 10 week MA, but both are still negative. The slow stochastic has emerged from its oversold zone, but is yet to climb up to its 50% level. The RSI is showing a contra-indication by slipping down after touching its 50% level.

Both indices are indicating short-term bullishness but long-term bearishness. Let us take a look at two breadth indicators to gauge the sustainability of the current rally. 

First, the Nifty A-D line:

Note that the A-D line is moving sideways, and failed to climb higher with the Nifty. This is a negative divergence that may trigger a correction.

Now, the Nifty TRIN:

A week ago, the TRIN was at an overbought level of 0.6. Last week, it dropped further to 0.5. Note that in the past 12 months, the TRIN has bounced up from the zone between 0.6 and 0.8 a few times (0.75 is the demarcation level, below which the market is overbought). While the market can remain overbought or oversold for long periods, the upside risk has increased considerably.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns had splendid bear market rallies from their Dec '11 lows, and look ripe for profit booking. RIL's disappointing results may trigger the selling. The fundamental situation hasn't shown any great improvement to sustain a rally. But a flood of FII buying can throw all analysis out of the window. It may be prudent to wait for a break out of the downward sloping channels before deciding on entering.

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.

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 13 ‘12

BSE Sensex and NSE Nifty 50 index chart patterns closed higher on a weekly basis but both indices are yet to convincingly cross above their 50 day EMAs and down trend lines (marked DTL). The FIIs have stepped up their buying, but DII selling kept the up moves in check.

Q3 results have started to trickle in. Infosys did well, but their Q4 guidance disappointed the market and the stock took a beating. IndusInd Bank declared encouraging results. HDFC results were also good. The market is factoring in some positive policy announcement by the RBI later this month.

Both the indices are trading within their down trend channels and are in bear markets. Till they break out above their downward channels, the bears will remain on top.

BSE Sensex index chart

The Sensex is facing resistance from the blue down trend line (DTL) within the downward-sloping channel. In case the FIIs continue their buying, the up move will need to cross above three important hurdles – the falling 20 week and 50 week EMAs and the upper end of the channel.

The weekly technical indicators are still bearish, but showing signs of turning around. The MACD is negative, but has moved up to touch its signal line. The ROC is negative and below its 10 week MA, but starting to rise. The RSI is just below its 50% level. The slow stochastic has emerged from its oversold zone.

Note that the last four weeks’ trading has formed a bearish ‘flag’ pattern, from which the likely break is downwards. However, volumes have risen during the formation of the flag, which is a contrary indication. Has the rally run its course?

NSE Nifty 50 index chart

The Nifty index has moved above its 50 day EMA and the DTL, but not very convincingly yet. Volumes have picked up in the last week, thanks to FII buying. The technical indicators are bullish, but showing signs of weakness. The RSI is above its 50% level, but touching lower tops while the index moved higher. The slow stochastic is turning back after entering its overbought zone. The MACD is rising above its signal line, and about to enter the positive zone. The ROC is positive and above its 10 day MA, but its upward momentum has slowed down.

There has been bullish opinions expressed among some technical analysts that the DTL and the lower end of the downward channel has formed a bullish falling wedge pattern. But two reasons put a question mark over such a prognosis. Falling wedges usually occur as continuation patterns within an up trend. Any pattern formation within a prolonged downward channel is unlikely to have any long-term implication.

A look at the Nifty TRIN should send most bulls scrambling for cover:-

The current rally in the Nifty started after touching a low of 4531 on Dec 20 ‘11 when the TRIN (in red) touched an extremely oversold level of 1.5 (any level of 1.2 and above is considered oversold). The TRIN has now dropped to an overbought level of 0.6 (levels of 0.75 and lower are considered overbought). Is this a warning prior to a break below the downward channel?

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns are in bear markets and falling within downward sloping channels. Several counter-trend rallies have provided bears with opportunities to sell. A sharp fall below the down trend channels can occur at any time. Smart investors may use such a fall to accumulate fundamentally strong stocks for the long-term.

Related Post

Two market breadth indicators

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.

BSE Sensex and NSE Nifty 50 index chart patterns – Jan 07 ‘12

The BSE Sensex and NSE Nifty 50 index chart patterns spent the first week of the new year consolidating within narrow ranges in an extended week necessitated by the extra trading on Saturday to test a new software installation at NSE.

Food inflation came in at a negative figure – probably due to the high ‘base effect’ and seasonal inflow of vegetables. Much was made of the higher than expected PMI figure – but whether the improvement was due to inventory replenishment (which happens after inventory draw downs during a slower growth period) or rising production due to new orders will only be known after a couple of months.

Government’s annual budget has been postponed by two weeks to accommodate elections in a few states. Till then, important policy decisions will be kept in abeyance. Not that this government has been very forthcoming with important policy decisions! Q3 results, to be announced from this week onwards, and RBI’s interest rate policy announcement towards the end of this month will be the next triggers for the indices to change directions or continue their downward slides.

BSE Sensex index chart

The Sensex played hide-and-seek with its 20 day EMA and managed to stay above the support level of 15700. But it is trading well below its 200 day EMA, and also below its 50 day EMA and the small down trend line (marked DTL). The bears are very much in control. The convergence of the 50 day EMA and DTL may provide strong resistance on the up side.

Can the Sensex move up much further from here? The technical indicators are giving out mixed signals. The MACD is rising above its signal line, but is in negative territory. Mildly bullish. The ROC has dropped below its 10 day MA into the negative zone. Bearish. The RSI is rising above its 50% level towards the overbought zone. Bullish. The slow stochastic turned down immediately after entering its overbought zone. Mildly bearish. Honours were even between the bulls and bears last week.

Some more sideways consolidation can be expected in the near term.

NSE Nifty 50 index chart

Despite the extra trading session on Sat. Jan 7 ‘12, the weekly volume bar of the Nifty isn’t conducive for a stronger rally. Note that the last three green volume bars (representing weeks when the Nifty closed higher than the previous week) are reducing in size. That shows lack of buying conviction.

The technical indicators are all bearish, but showing faint signs of a turn around. The MACD is below its signal line, but has stopped falling. The ROC is looking very weak, falling below its 10 week MA, deeper into the negative zone. The RSI is trying to climb towards its 50% level. The slow stochastic is trying to emerge from its oversold zone.

The Nifty is trading well below its 20 week and 50 week EMAs, and remains in a bear market.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns continue their falls within downward-sloping channels. The balance of power is with the bears, and sharp falls below the channels may happen at any time. Some mid-cap and small-cap stocks have started jumping around. Don’t be tempted to buy – these are called ‘sucker’s rallies’. Remain patient. If you want to buy for the long term, accumulate fundamentally strong stocks slowly.