Stock Index Chart Patterns – S&P 500 and FTSE 100 – Jul 01, ‘11

S&P 500 Index Chart

After hovering for two week’s near the 200 day EMA, the S&P 500 decided it didn’t want to drop into a bear market after all. The strong 5.6% weekly gain – the best weekly performance in two years by the index – sent the bears scurrying for cover.

What caused the sudden rally? It may seem that the financial bail-out package for Greece, forcing their government to adopt stringent austerity measures in the face of riots and protests by Greek citizens, caused world-wide relief that led to euphoria in the stock markets. The more likely reason was that the bull’s used the Greece news as an excuse to trap the bears.

The combined effect of buying and short-covering took the index well above its 50 day EMA and beyond the upper Bollinger Band. The bands are widening, which means trading can turn volatile. An entire month’s losses have been recovered in a week.

The technical indicators have turned bullish to the point of being overbought. The MACD has risen away from its signal line into positive territory. The slow stochastic is deep inside its overbought zone. The RSI is rising quickly towards its overbought zone.

There hasn’t been any great change in the US economy to warrant such a sharp rise. The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) dropped for the 10th straight week to 2.0 from the previous week’s 2.9. Initial unemployment claims declined by 1000 to 428000 – the 12th consecutive week above the psychological 400,000 mark.

FTSE 100 Index Chart

The FTSE 100 managed to hold on to the support level of 5650, and embarked on a swift rally – ostensibly due to all-around relief that Greece’s sovereign default was temporarily averted. The index sailed above its 200 day and 50 day EMAs, pierced the upper Bollinger Band, and regained all the ground it had lost during the month of June ‘11.

The technical indicators are looking bullish, which means the rally is likely to continue this week. The MACD has crossed above its signal line, and is about to enter positive territory. The slow stochastic has entered its overbought zone. The RSI has moved above its 50% level.

UK’s manufacturing sector grew at its slowest pace in two years. The good news is that it was still a growth. Whether the growth will sustain in the domestic market or not is debatable, as austerity measures are expected to take a toll. However, exports are picking up, which is a silver lining.

Bottomline? The chart patterns of S&P 500 and FTSE 100 indices recovered spectacularly last week. Global economic growth is slowing down, so it was more of a relief rally that the Greek crisis has been averted for now. Conservative investors can take some profits off the table. The more adventurous can use trailing stop-losses to ride the rally.

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jul 01, ‘11

All good things must come to an end, and the sharp bull rallies in the chart patterns of the BSE Sensex and NSE Nifty 50 indices appear to have hit strong road-blocks.

Last week, I had mentioned that even if the 50 day and 200 day EMAs were breached, the 8 months long down-trend lines would prove to be tougher hurdles. Both indices climbed past their 50 day and 200 day EMAs with ease, but stopped short of the down-trend lines.

BSE Sensex Index Chart

For a different perspective, let us take a look at the weekly bar chart pattern of the Sensex. A couple of interesting patterns are visible – and I will provide bullish and bearish views.

The Sensex formed a ‘diamond’ reversal pattern between Sep ‘10 and Dec ‘10, which ended the bull rally from Mar ‘09, and started the corrective phase from the Nov ‘10 peak. A ‘diamond’ pattern has measuring implications: the height of the diamond should be less than or equal to the subsequent fall below the diamond.

In the Sensex chart, the height of the ‘diamond’ is about 2400 points. After breaking down below the ‘diamond’, the Sensex dropped almost 2900 points to the low of Feb ‘11. So, the downward target of the ‘diamond’ has been met. The subsequent up move was halted by the down-trend line (blue dotted) that became an extension of the diamond.

The next leg of the correction found support at the level of the Feb ‘11 low of 17300, followed by last week’ rally. Note that the Sensex has formed a large descending triangle pattern which has bearish implications – a breakdown below the 17300 level is a distinct possibility.

All isn’t lost for the bulls - yet. In spite of the prolonged correction, the 20 week EMA has remained above the 50 week EMA (equivalent to the 200 day EMA on daily charts). Technically, we are still not in a full-fledged bear market.

The other bullish news is that the FIIs have turned net buyers again. If they continue their buying spree, the down-trend line may get breached next week. But if it isn’t a high-volume break out, the index may pull back into the descending triangle.

The technical indicators look weak, but are showing some signs of recovery. The MACD is negative and below its signal line, but trying to turn up. Likewise, the ROC is negative and below its 10 week MA but trying to rise. The RSI is straddling its 50% level. The slow stochastic has bounced up from the edge of its oversold zone, but is below the 50% level.

Nifty 50 Index Chart

 

The up move in the Nifty daily bar chart ended with Friday’s ‘reversal day’ (higher high, lower close) pattern – marked by the light blue oval. Since it is within handshaking distance of the blue down-trend line, chances are that the Nifty will reverse directions next week.

The negative divergence in the RSI, which reached a lower top while the Nifty touched a higher one (marked by blue arrows), is also signalling an end to the brief rally. The MACD, ROC and slow stochastic are looking bullish. Note that the ROC has climbed well above its 10 day MA – a correction or consolidation may follow.

The macro situation is getting a little worrisome. The price hike of diesel, LPG and kerosene will add to the inflation problem, though duty cuts will soften the blow. Passenger car sales have slowed down. Q1 results are likely to be below par. However, any positive surprises can lead to fresh buying.

The Indian economy is still growing – perhaps better than most countries except China. There is scepticism all around – particularly among retail investors. The monsoon rains are gradually covering the entire country. Not a time to be despondent. Being cautiously optimistic may be better for your investment health.

Bottomline? The BSE Sensex and NSE Nifty 50 chart patterns have completed brief relief rallies that failed to breach their down-trend lines. The scales are tipping towards a break below the descending triangles. Expect some consolidation before that can happen. Be careful, not fearful.

Announcing re-opening of paid subscriptions to my Monthly Investment Newsletter

I am pleased to announce the re-opening of paid subscriptions to my monthly investment newsletter for a 3 weeks period from July 1-21, 2011. Only a limited number of subscriptions will be offered – strictly on a first-come first-served basis – to enable me to provide personalised attention and guidance to each subscriber.

If you are interested in subscribing, please send an email to: mobugobu@yahoo.com at the earliest for details. Your email address will be kept in confidence.

The newsletter has completed 18 issues. The past few months have been a challenging and humbling experience for me. It was a challenge to find stocks with growth potential at reasonable prices while the Sensex kept reaching new 52 week highs through most of 2010. The prolonged 8 months long corrective phase since Nov ‘10 has been humbling because many stocks have not performed up to expectations, and yet subscribers have kept faith in my stock picking abilities.

Those who have been following my blog posts regularly know by now what kind of stocks I like, and what type of stocks I avoid. The guiding principle has been to choose well-managed, financially sound companies that give steady (rather than spectacular) returns and have growth prospects.

Non-subscribers may be interested to know how the recommended stocks have fared. Without revealing the names of the stocks (it won’t be fair to my subscribers to do so), here is a brief results table with prices on recommended dates, subsequent high and low prices, and gains/(loss) in percentage as on July 1 ‘11:

Stock	Date	Price	High	Low	Close	Gain/(Loss)
1a	Jan ‘10	206	399	195	374	81.5
1b	Jan ‘10	131	316	120	185	41.2
2	Feb ‘10	78	94	55	65	(16.7)
3	Mar ‘10	178	305	168	236	32.6
4	Apr ‘10	82	116	61	73	(11)
5	May ‘10	171	247	85	125	(26.9)
6	Jun ‘10	101	156	98	127	25.7
7	Jul ‘10	285	305	213	230	(19.3)
8	Aug ‘10	274	434	264	421	53.6
9	Sep ‘10	130	141	95	123	(5.4)
10	Oct ‘10	120	135	89	108	(10)
11	Nov ‘10	101	150	55	71	(29.7)
12	Dec ‘10	53	59	37	48	(9.4)
13	Jan ‘11	91	122	90	116	27.5
14	Feb ‘11	294	329	257	295	0.03
15	Mar ‘11	444	502	405	480	8.1
16	Apr ‘11	107	117	95	105	(1.9)
17	May ‘11	275	280	250	277	0.07

All 18 stocks are small or mid-caps, picked for long-term investment of minimum 2 to 3 years. The fact that some of them are showing decent gains – even after falling from their highs - is a testimony to their underlying strength. Note that 9 of the 18 stocks are showing losses. That gives me a ‘hit ratio’ of only 50% – which is no better than tossing a coin.

But have a look at the ‘High’ column. One stock more than doubled, five gained 50% and every single stock moved up after my recommendations. In a 2-3 year time frame, I expect most of the laggards to make up the slack.

What is important to appreciate is that these stocks were not ‘cheap’ and had already run up quite a bit when they were recommended. The lesson is that even near 52 week highs and subsequent corrective phases of the Sensex, there are stocks available that can provide decent returns. Since the recommended stocks are all regular dividend payers, the actual returns will be higher.

If you need help in selecting good stocks in uncertain times, all you need to do is subscribe to my Monthly Investment Newsletter. Send me an email (at mobugobu@yahoo.com) soon – subscriptions will close on July 21, 2011.