Stock Chart Pattern - IFCI Ltd (An Update)

The previous update of the stock chart pattern of IFCI Ltd was posted more than a year back. The stock had touched a high of 78 in Nov ‘10, followed by a sharp correction to 50 and appeared to be consolidating within a triangle.

All four technical indicators – MACD, ROC, RSI and slow stochastic - touched lower tops while the stock rose to its high. The combined negative divergences had provided advance warning of a correction. The following comments were made: “If you are still holding, maintain a strict stop-loss of 54. A better idea may be get out and not go anywhere near this stock again.”

The last comment seems almost prophetic when you look at the bar chart pattern of IFCI Ltd:

The negative divergences in all four technical indicators, formed during Oct – Nov ‘10 have been marked by blue arrows. After the sharp drop from the peak of 78 to a low of 50 below all three EMAs in Nov ‘10, the stock consolidated within a bearish ‘rising wedge’ pattern – marked 1 – and rose above all three EMAs.

The break down below the wedge in Jan ‘11 was followed by a pullback towards the wedge, which received combined resistances from the 20 day and 200 day EMAs. Such pullbacks happen often, but not always, as can be observed in the ‘rising wedges’ marked 2 and 4. The stock price dropped to a low of 46 in Feb ‘11 and started forming a slightly prolonged ‘rising wedge’ – marked 2. The ‘death cross’ of the 50 day EMA below the 200 day EMA confirmed a bear market.

‘Rising wedge’ number 2 failed to cross above the 200 day EMA. The stock broke down without a pullback to a low of 44 in May ‘11 before starting a consolidation within another ‘rising wedge’ – marked 3. The break down below ‘rising wedge’ number 3 wasn’t followed immediately by a pullback. It came after 10 days. The subsequent slide went all the way down to 28 in Oct ‘11, before the formation of ‘rising wedge’ number 4.

The sharp break down below ‘rising wedge’ number 4 touched a low of 20 in Dec ‘11. Note that all four technical indicators showed positive divergences by touching higher bottoms – marked by blue arrows – suggesting an upward bounce. Since the stock was deep in a bear market – having lost 75% from its peak of 78 – the bounce wasn’t strong enough to cross above the 50 day EMA, despite solid volume support.

There is every possibility of the stock falling to its Mar ‘09 low of 15. The fundamentals don’t look very encouraging. Hopes of a banking licence has receded. The MD is under scrutiny by the authorities. The government may replace its debt with equity and gain management control. The volatility in the price has turned it into a trader’s favourite.

Bottomline? The stock chart pattern of IFCI Ltd is an example of how mismanagement of operations and finances has enabled the bears to create havoc. Small investors should steer clear of such ‘cheap’ stocks.

Gold and Silver Chart Patterns: pullback rallies

Gold Chart Pattern

Two weeks ago, the following comment was made about gold’s price chart: “A pullback to the long-term moving average was only to be expected, and has been in progress for the past three trading sessions.” Some times, price charts provide an ego boost to technical analysts by behaving exactly as per expectations. The pullback reached the still-rising 200 day SMA, only to encounter selling pressure and plummet to a close below the 1550 level.

The break down below the symmetrical triangle pattern and the pullback to the 200 day SMA were both selling opportunities. At the time of writing this post, another pullback attempt is in progress to prevent a bear market – but it may meet the same fate as the previous one. The 14 day SMA is about to drop below the 200 day SMA. A close below 1520 will confirm a bear market.

Technically, the support at 1550 hasn’t been convincingly breached yet because gold’s price jumped up after a single day’s close below 1550. There is stronger support between 1450 and 1480, if 1550 does get breached eventually. Can gold’s price fall even lower? Anything is possible once the bears get the upper hand – and the technical signals are looking ominous for bulls.

Silver Chart Pattern

There are no doubts about bear domination of silver’s chart pattern. The white metal dropped to a new closing low of 26 for a day before embarking on a sharp pullback. The 14 day SMA (as well as the 30 day and 60 day SMAs – not shown in the chart) is falling below the 200 day SMA and silver’s price is trading below both SMAs – the sign of a bear market.

Stay away till trend-reversal signals become visible.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Dec 30, ‘11

S&P 500 Index Chart

In the technical analysis of the S&P 500 index chart last week, it was mentioned that the technical indicators were looking bullish but showing signs of fatigue – due to negative divergences in the technical indicators and low volumes.

The index touched the highest levels of the month on Dec 27 ‘11 – both on intra-day and closing basis – by the narrowest of margins and accompanied by the lowest volumes in a holiday-shortened week. The weekly close was a bit lower; the monthly close was slightly higher; but the yearly close was absolutely flat.

All the technical indicators are showing bullishness. The 20 day EMA has crossed above the 200 day EMA. The 50 day EMA is about to follow suit. The slow stochastic is at the edge of its overbought zone. The MACD has started to rise above the signal line in positive territory. The RSI has moved above the 50% level. The ROC is in the positive zone. The low volumes are a concern for the bulls. Till the Oct ‘11 top of 1293 is overcome, the bears will remain in the game.

The US economy continues to grow ever so slowly, with most indicators showing mild growth. Q3 GDP grew 1.8% vs. 1.3% in Q2. Manufacturing PMI rose to 52.7 in Nov from 50.8 in Oct. Conference Board’s LEI index is looking bullish, but ECRI’s WLI index is bearish. Housing is unlikely to lead the economic recovery, with prices still falling, foreclosures rising and new home sales at multi-decade lows. Initial unemployment claims rose to 381,000. As long as inflation and interest rates remain low, the S&P 500 may thrive.

FTSE 100 Index Chart

The FTSE 100 index chart managed to close above the 200 day EMA in 3 days of trading in a holiday-shortened final week of the year, but on progressively lower volumes. The 20 day and 50 day EMAs are trading well below the 200 day EMA – so the bulls still have plenty of work to do.

The technical indicators are beginning to turn bullish. The slow stochastic is above the 50% level. The MACD is starting to rise above its signal line in positive territory. The RSI has just managed to edge above the 50% level. The ROC has climbed into the positive zone. For the rally to sustain, more volume support is required.

The UK economy is slowing down and facing strong headwinds with falling real incomes coupled with austerity measures and the debt crisis in the Eurozone leading to lower UK exports. The prospect of a recession is looming large. The only bit of good news is that inflation may come down.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices continued their Santa Claus rallies on weak volumes. That puts question marks on the sustainability of the rallies in the new year. Both indices are indicating that the worst may be over for the respective economies. The trends have been up since touching the Oct ‘11 lows. Till the Oct ‘11 tops are crossed, one can remain cautiously optimistic.