Why good investment stocks may not be good trading stocks – and vice versa

The hundreds of stocks that are regularly traded in the BSE and NSE can be broadly separated into three groups – stocks that are good for investment; stocks that are good for trading; and, stocks that are plain junk and should not be touched.

Regular readers of this blog know that I’m neither a great fan of short-term or day trading, nor do I encourage small investors to do so. The only person that gets rich is the broker. No wonder various internet investment groups are full of brokers constantly giving short-term buy and sell calls.

However, it is a fact of life that small investors fall prey to the lure of making quick and easy money, and frequent investment groups and web sites that offer ‘free 100% sure-shot short-term calls’ as a short-cut to untold riches.

I was taken aback when I read read about a short-term sell call on Titan Industries. If the stock falls below a certain level, then it could fall by a whopping 2% more! However, if it rises above a certain level, then the uptrend will resume. A quick look at Titan’s 2 years closing chart pattern shows a more than 50% gain from its Feb ‘11 low, followed by a 3% correction that must have triggered the call.

Titan has gained 300% in 2 years, providing fabulous returns to long-term holders. Any sensible broker would have given a ‘buy the dip’ call instead of a short-term sell call for a paltry 2% profit.

Put it down to ignorance, or inexperience, or both. Many traders believe in the myth that all fundamentals are ‘in the price’ – so it is a waste of time to spend hours in stock analysis.

A trader, if he wants to make money consistently, has to spend hours studying technical charts to try and get into trades that will make huge profits - to cover up many small losses that are part of a trader’s life. Even a novice can take a look at Titan’s chart and conclude that a trade on the long side will be more profitable.

It is precisely because Titan is such a great stock for long-term buy-and-hold investment that it is not a good stock for short-term trading. It doesn’t provide enough wild swings to get in and out with big profits.

Is the vice versa true – that good trading stocks do not make good investment stocks? What is a good trading stock? For the answers to both questions, take a look at the 2 years closing chart pattern of Reliance.

Thanks to its massive market capitalisation, the Reliance stock finds a place in most large-cap and diversified equity funds as an investment-grade stock. But on 2 years, 1 year, 6 months and 3 months time frames, it has provided negative returns.

The rounding-top bearish pattern of the 200 day EMA, and the 50 day EMA trading below the 200 day EMA for the past five months are clear indications that the bears are getting the upper hand.

Experienced traders probably got seriously rich just by trading Reliance over the past couple of years. Look at the frequent and large price swings – just the kind of chart that should make traders rub their hands in glee.

The moral of the story? Whether you are a trader, or investor, or both – it improves your chances of making big money if you do your homework in selecting stocks.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jun 10, ‘11

S&P 500 Index Chart

In last week’s post, I had mentioned that a deeper correction in the S&P 500 chart pattern was likely as the technical indicators were looking quite bearish. The index slid down the slippery slope of the lower Bollinger Band almost to the 200 day EMA, before closing a bit higher at 1271.

From the May 2 ‘11 intra-day peak of 1371 to last Friday’s (Jun 10 ‘11) intra-day trough of 1268, the index has corrected 7.5% for its sixth straight lower weekly close. Will the S&P 500 bounce up from the support of the 200 day EMA, or go down further to test the Mar ‘11 low of 1249?

Even if there is a bounce from the long-term moving average, the technical indicators are suggesting that the correction isn’t over. The MACD is falling further away from its signal line in negative territory. The slow stochastic is deep inside its oversold zone. The RSI is just above its oversold zone. A convincing drop below 1249 could signal a change of trend.

The labour market is improving, but ever so slowly. QE2 has pretty much failed to boost the economy. The housing market is still in doldrums, despite falling mortgage rate. The weekly leading index growth indicator of the ECRI declined for the 7th straight week.

FTSE 100 Index Chart

The FTSE 100 index chart managed to stay above the 200 day EMA for the better part of the week, raising bullish hopes. Friday’s 100 point swing pushed the index below the long-term moving average for the first time in nearly three months.

Next downward target? A test of the Mar ‘11 low of 5592. Will the index get there? The bearish technical indicators are pointing that way. The MACD continues its slide into deeper negative territory below the signal line. The slow stochastic has entered its oversold zone. The RSI is below its 50% level and falling.

The slowdown in the economy and the government’s austerity measures have led to consumers cutting back on going out, car usage, food shopping and holidays, as per this article. The poor industrial production figures of April is a matter of concern.

Bottomline? The chart patterns of S&P 500 and FTSE 100 indices are struggling to stay above their 200 day EMAs. The percentage corrections from the May ‘11 peaks are in single digits, and the falling 50 day EMAs are well above the 200 day EMAs – so these are technically still bull market corrections. It may be prudent to wait for the corrections to play out before re-entering.

Stock Index Chart Patterns – Hang Seng, Singapore Straits Times, Malaysia KLCI – Jun 10 ‘11

The chart patterns of the Asian indices are still struggling in down trends. The Hang Seng and Straits Times indices are trading below their rising 200 day EMAs. The Malaysia KLCI index is in better shape, and is ready to break above its (blue) down trend line.

Hang Seng Index Chart

In last month’s analysis, I had written that the Hang Seng ‘may trade for a while longer’ within the downward sloping channel. The index dropped briefly below the 200 day EMA, but didn’t fall down to the lower edge of the channel. A sharp rally above all three EMAs, supported by good volumes, seemed encouraging for the bulls.

Bears stopped the bull charge. High volume selling has pushed the index below the 200 day EMA again. The technical indicators are bearish, suggesting that worse may follow. The MACD has crossed below the signal line in negative territory. The ROC has dropped below its 10 day MA into negative zone. The RSI is falling towards its oversold zone. The slow stochastic has slipped into its oversold zone.

Maintain a strict stop-loss at 21800.

Singapore Straits Times Index Chart

The Singapore Straits Times index oscillated between the down trend line and the 200 day EMA, till it breached the support from the long-term moving average on Fri. Jun 10 ‘11. That is not good news for the bulls.

The technical indicators are bearish, which means a deeper correction is likely. The MACD is below its signal line and has entered the negative zone. The ROC is below its 10 day  MA and has dipped into negative territory. The RSI bounced off the edge of its oversold zone, but is below the 50% level. The slow stochastic has dropped into its oversold zone.

A drop below 3040 could test the Mar ‘11 low.

Malaysia KLCI Index Chart

The technical indicators of the Malaysia KLCI index were looking bullish last month, and I had mentioned the ‘possibility of another test – and even a break – of the down trend line’. The down trend line has held firm so far, despite several attempts by the bulls to breach it. The index is trading above all three EMAs – which is the sign of a bull market.

Bears will not give up the fight as long as the down trend line holds. The rally from the May ‘11 low of 1508 has seen decreasing volumes. The technical indicators are bullish, but showing signs of weakness. The MACD is positive, but touching the signal line. The ROC is barely positive, and has crossed below its 10 day MA. The RSI has risen to its overbought zone. The slow stochastic is above its 50% level.

Buy only on a convincing break above the down trend line. Without strong volume support, any break out may turn out to be a ‘false’ one.

Bottomline? The chart patterns of the Asian indices are struggling in down trends. Of the three, the Hang Seng and Straits Times are showing weakness and may face deeper corrections. The Malaysia KLCI is in a bull market, but facing headwinds. Good time to take some profits off the table.