Stock Index Chart Patterns – Jakarta Composite, Korea KOSPI, Taiwan TSEC – Oct 07 ‘11

Jakarta Composite Index Chart

The Jakarta Composite index chart pattern was like a beacon of light amidst all the gloom and doom prevailing in Asian as well as global stock markets, reaching its all time high of 4196 on Aug 2 ‘11. But that particular day’s trading formed a ‘reversal day’ pattern (slightly higher high but a lower close) that marked the end of the phenomenal 29 months long bull run.

A ‘reversal day’ pattern usually marks the end of an intermediate up (or down) move, but some times it can signal a reversal of a major trend. In the latter case, it often is an integral part of a larger trend reversal pattern (like a head-and-shoulders or a double-top). What is unusual in the Jakarta Composite chart is that the trend reversal came out of the blue.

Note that during the last leg of the bull run in Jul ‘11, the ROC, the slow stochastic and the RSI failed to reach higher tops with the index. The negative divergences did point to a correction. The ‘panic bottom’ on high volumes in Aug ‘11 was followed by a sharp bounce. But the bear attack in Sep ‘11 breached the Aug ‘11 low, proving the maxim that “panic bottoms seldom hold”.

The correction of 23% from the Aug ‘11 peak, and the break down below the 200 day EMA has signalled a bear market. The imminent ‘death cross’ of the 50 day EMA below the 200 day EMA will confirm it. All four technical indicators are looking bearish. The index may seek much lower levels.

Korea KOSPI Index Chart

Two weeks back, I had made the following observation about the Korea KOSPI index chart pattern: “… the Aug 9 '11 low of 1685 is under serious threat of being broken”. The index dropped to a new low of 1644 on the very next trading session on Sep 26 ‘11. Even that low may not hold much longer, as the index is sliding downwards with up moves getting resistances from the falling 20 day and 50 day EMAs.

The technical indicators are bearish. The slow stochastic and the RSI are both below their 50% levels. The MACD is negative and below its signal line. The ROC is also negative. The KOSPI continues to slide deeper into bear territory.

Taiwan TSEC Index Chart

The Taiwan TSEC index chart dropped to a new intra-day and closing low of 6877 on Sep 26 ‘11, only to bounce up above the 7200 level – where it faced resistance from the falling 20 day EMA. The index once again dropped below 7000 to a slightly higher intra-day low 6890 on Oct 4 ‘11. But the today’s close at 7212 meant a marginal 13 points loss on a weekly basis.

The technical indicators are bearish, and not offering the bulls much hope. After the sharp gap-down fall in Aug ‘11, the index seems to have settled into a more gradual down move. All three EMAs are falling together – a clear sign of a bear market.

Bottomline? Chart patterns of the Jakarta Composite, the Korea KOSPI and the Taiwan TSEC indices clearly show that the Asian indices are in a firm bear grip. Periodic rallies are being used by the bears to sell more. Stay on the sidelines till the selling abates.

Should investors keep a beady eye on the BDI (Baltic Dry Index)?

What makes successful investing in the stock market (or mutual funds) such a challenge (or, intellectually stimulating – depending on your mental makeup) is the wide variety of factors and indicators that you need to keep track of. The Baltic Dry Index (BDI) is one such indicator that many investors may not have a clue about.

What is the BDI, and why should investors keep a watchful eye on it? This is how wikipedia.com describes it:

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. … the index tracks worldwide international shipping prices of various dry bulk cargoes.

The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore, and grain."

In plain English, the BDI gives an indication of international rates for transporting raw materials by sea in cargo ships of different sizes – based on supply and demand of commodities.

Why should stock or funds investors be interested in the current state of the BDI? Most economic indicators, like consumer spending, unemployment figures, housing starts are lagging indicators. That means, we get to assess the implications after the events have already occurred.

However, the BDI is a leading economic indicator because increasing demand for raw materials (which leads to higher shipping rates) is a signal of greater economic activity. That in turn, leads to growth and higher stock prices. Likewise, a fall in the BDI indicates declining demand for raw materials, leading to reducing economic growth and a likely slide in stock prices.

Unlike stock and commodity exchanges, where speculation is an important part of the overall activity and may camouflage the actual supply-demand equation, the BDI is free of any speculation since the index is based on shipping rates on various representative routes submitted by international shipbrokers who have actual cargo to transport.

Supply and demand of raw materials is not the only reason for changes in the BDI. Availability of cargo carriers, heavy traffic on certain routes, bad weather, price of oil can all contribute to higher shipping rates. Like all indicators, the BDI can’t be used in isolation.

Over the past year, the BDI has fluctuated between a high of about 2750 in Oct ‘10 and a low of about 1050 in Feb ‘11. It rose sharply from 1270 in Aug ‘11 to its current level of 1890. Is it indicating that the global economy may not be in the doldrums that many economists are suggesting?

Gold and Silver Chart Patterns: end of long bull rallies?

Gold Chart Pattern

In an update to gold’s chart pattern two weeks ago, the following conclusion was drawn:

‘The present correction/consolidation – whatever it may turn out to be – should restore the technical health of gold’s chart for the next up move.’

The expected drop to 1600 from the double-top at 1900 happened quickly, and gold’s price has been consolidating in a narrow range of $50 since then. It is beginning to look like the next up move may take a while, and gold’s price may dip further – possibly to the 200 day SMA (at about 1520) - before a sustained rise can begin again.

Note that the 200 day SMA is still rising, with gold’s price trading above the long-term moving average. Technically, gold is still in a bull market. But extreme caution is advised about entering at this stage – since the yellow metal is trading below its 14 day, 30 day and 60 day SMAs. All three are likely to act as resistances on any up moves. Not to forget the valley level of 1750 (between the two tops at 1900), which should provide strong resistance to a price rally.

A fall below the 200 day SMA will also mean a 20% drop from its peak, and a likely trend reversal from bull to bear. If you are still holding and in profit, maintain a strict stop-loss at 1520.

Silver Chart Pattern

There are no doubts about the state of silver’s price chart pattern – it is in a bear market. It has dropped more than 20% from its peak and is trading below the 200 day SMA. The 14 day SMA has slipped below the long-term moving average. The 30 day and the 60 day SMAs have turned down and may cross below the 200 day SMA in the near future.

Why is silver faring worse than gold? The answer probably lies in the fact that silver is not something you just buy and lock up in a bank vault. It has several industrial uses as well. With global manufacturing in clear de-growth, industrial demand for silver is declining. (The fall in copper prices are also due to this same reason.)

If you are still holding, use any price rise to exit. On the down side, the next supports are at 24 and 20.