BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jun 03, ‘11

The bears continue to dominate the chart patterns of the BSE Sensex and NSE Nifty 50 indices. In last week’s analysis, I had pointed out positive divergences and bullish rounding-bottom formations in the technical indicators. Net FII buying helped the cause of the bulls in the earlier part of the week.

By the end of the week, the bullish fervour got exhausted as both Sensex and Nifty found strong resistances form their 200 day EMAs. Friday’s trading turned out to be a ‘reversal day’ (higher high, lower close) - a signal that the mini-rally from the support levels of 17780 for the Sensex and 5345 for the Nifty has probably ended.

BSE Sensex Index Chart

The Sensex will remain in a down trend as long as it trades below the blue down trend line. It is technically in a bear market, since the 50 day EMA is below the 200 day EMA and the index is trading below both EMAs. That is bad news, as far as the bulls are concerned.

The good news is that in spite of the scams, raging inflation, rising interest rates, slowing GDP growth, the Feb ‘11 low has held so far. The periodic rallies have also ensured that the 200 day EMA has remained sideways for the past 5 months, and hasn’t yet decisively turned downwards. The Sensex closed 110 points higher on a weekly basis.

The technical indicators are showing signs of weakness, but the rounding-bottoms and positive divergences are still visible. The MACD has crossed above the signal line, but both are in negative territory. The ROC is above its rising 10 day MA, but has turned down sharply to the ‘0’ line. The RSI is at its 50% level after a brief foray above it. The slow stochastic is at the edge of its overbought zone, but turning down.

Nifty 50 Index Chart

The volume bars present an interesting picture. Tuesday’s (May 31 ‘11) up day volume was the highest during the previous month, as the Nifty jumped above the 20 day EMA. Volumes are only a secondary (or supporting) indicator, but do show buying interest (or lack of it) – particularly from the FIIs. By the way, FIIs were net buyers on Friday’s ‘reversal day’. A contrarian sign?

Looks like the bull rallies in the US and European markets are stalling. On a forward P/E basis, the Sensex and Nifty are not looking that expensive. Some outflows from the developed markets may re-enter emerging markets. A number of mid-cap and small-cap stocks with strong fundamentals are trading at attractive valuations.

GDP growth has been gradually coming down over the past few quarters, though it is at a still-respectable 7.8%. India Inc. seems to have put capital expenditures on hold on growth worries and high-interest rates. In a recent interview on a TV channel, Morgan Stanley’s Ridham Desai mentioned that the top 100 Indian companies are sitting on more than Rs 30000 Crores of cash! That should set the stage for some judicious mergers and acquisitions.

Bottomline? The BSE Sensex and NSE Nifty 50 index chart patterns are mired in down trends for almost seven months. Several revival efforts have been thwarted by the bears. Despite all the negative sentiments, apathy among retail investors rules out a crash. Good time to concentrate on picking good stocks for your ‘buy list’.

Stock Chart Pattern - Colgate Palmolive India (an update)

I had written an analysis of the stock chart pattern of Colgate Palmolive almost two years back. It was interesting to go through some of the comments on that post – including one where I had mentioned that the stock could be bought at any price.

In a post on FMCG sector stocks in Jan ‘11, a brief update was provided. The stock was consolidating within a symmetrical triangle after touching an intra-day high of 996 in Nov ‘10. Partial profit booking was suggested as the stock had entered the triangle from above, which indicated a possible break below the triangle.

The one year bar chart pattern of Colgate Palmolive shows some interesting technical developments that exemplify how strong the stock is technically:

Shortly after I wrote the brief update in Jan ‘11, the stock dropped below the triangle, took support from the 200 day EMA as expected, and jumped back inside the triangle. That was a warning of what was to follow.

By the end of Jan ‘11, a high volume break down breached the 200 day EMA and reached an intra-day low of 783 on Feb 2 ‘11 – correcting 21% from the Nov ‘10 peak of 996, slightly underperforming the Sensex (which lost 18%).

Despite spending several trading sessions below the 200 day EMA in Feb ‘11, the stock started to recover and by Apr ‘11 had moved up to the resistance level of 918 – its closing high in Sep ‘10. A sideways consolidation till May 10 ‘11 culminated in several unsuccessful attempts to break out above 918. The negative divergences in all the technical indicators ‘resisted’ the break out attempts.

A correction in a narrow downward channel breached the 20 day EMA but found support from the 50 day EMA. Today’s spurt on good volumes pushed the stock above the 918 level once more – but not convincingly as yet.

Note that the entire corrective move after touching the Nov ‘10 peak, including the consolidation within the symmetrical triangle, has formed a bullish cup-and-handle continuation pattern. A test and likely breach of the previous top is on the cards.

The technical indicators are turning bullish. The MACD has changed directions in the positive zone, though it is still below the signal line. The ROC has climbed above its falling 10 day MA into positive territory. The RSI bounced up from the edge of its oversold zone and is touching the 50% mark. The slow stochastic has moved up from its oversold zone towards the 50% level.

Fundamentally, the stock remains as solid as ever – growing its top and bottom lines, generating a ton of cash from its operations, with negligible debt in its books. The reserves have been built up considerably. A bonus issue won’t be a surprise. Like most FMCG companies, margins are under a bit of pressure.

Bottomline? The stock chart pattern of Colgate Palmolive is poised to test, and possibly breach, its all-time high of 996. The stock has been in a bull market since touching its 2007 low of 300 – tripling in four years. This is the kind of stock that small investors should buy whenever they have some spare cash, with the object of leaving it as a family treasure for future generations to enjoy.

What small investors can learn from my trip to the bank

Thanks to the technological innovations of debit cards and credit cards, my trips to the bank have become few and far between. So, on the rare occasions that I do visit a bank, I’m pleased to see lots of eager, young faces looking busy and ready with a smiling ‘Can I help you, Sir?’ welcome.

The initial good feeling soon turns to exasperation. I had gone to get a copy of the account statement for March ‘11 that I had misplaced. A pretty young lady said it would only take a couple of minutes, and would I mind the wait? Not at all, I assured her. That is when things started going wrong.

First, she wanted to know my account number. Since I didn’t remember it, I gave her the April ‘11 statement copy. My daughter’s name appeared as the holder. So, the next question – without even checking that I was the second holder – was, who do you bank with? I mentioned the name of two competing private sector banks.

She had taken a look at the account balance, and came up with: Can we help you with your investments? I said, no thanks. By this time, a bright-looking male colleague came to inform her that the printer was down and the statement will be couriered to me. But he had overheard our conversation and decided to jump into the fray with: Have you thought about a SIP in a mutual fund?

I was already feeling irritated because the trip to the bank had been a waste of time. So I mentioned my preference for investing in stocks and asked him whether he had started a SIP. He proudly announced that he invested 20000 in a SIP every month, and explained how his holding cost will average out over the ups and downs of the market.

Had he thought it through, or was he merely repeating what he had been taught? It was his turn to be irritated. Simple arithmetic, he scoffed. When the market goes up, he gets fewer units, but when the market falls he gets more – so it averages out!

Had he done the arithmetic with real data? Did he know that bull markets tend to last 3 to 4 times longer than bear markets? Therefore his average holding cost is likely to rise over time? Now he didn’t look so confident. So he tried a different tack – not willing to pass up an opportunity to ‘cross-sell’.

Had I thought about investing in a private equity fund? I told him that SIPs and private equity funds are thought up by fund managers to help the fund and their own pockets. They don’t benefit the investor to the same extent.

He made another effort: A competing bank has made a ton of money by floating three private equity funds. I responded with: Does it prove that your fund will make money? Now he played his trump card: How do I make money when the market is down – like now?

I explained that investing is not a job where one had to make money every day. If one invests in good dividend paying stocks, like TISCO or ITC, then one can earn money whether the market is up or down. ‘Every one knows ITC pays good dividends’ – was his parting shot. So how many ITC shares did he own? He had accumulated 70 shares. Instead of his SIP, why didn’t he buy 100 shares of ITC every month? No answer this time – end of debate.

The moral of the story is: Regardless of whether you concur with my antipathy towards SIPs or not, always question investing strategies – whether you have thought it up yourself, or received advice from anyone.

Related Posts

About Cost averaging and Value averaging strategies

If you must SIP, sip good Darjeeling tea