BSE Sensex and NSE Nifty 50 index chart patterns – Jan 07 ‘12

The BSE Sensex and NSE Nifty 50 index chart patterns spent the first week of the new year consolidating within narrow ranges in an extended week necessitated by the extra trading on Saturday to test a new software installation at NSE.

Food inflation came in at a negative figure – probably due to the high ‘base effect’ and seasonal inflow of vegetables. Much was made of the higher than expected PMI figure – but whether the improvement was due to inventory replenishment (which happens after inventory draw downs during a slower growth period) or rising production due to new orders will only be known after a couple of months.

Government’s annual budget has been postponed by two weeks to accommodate elections in a few states. Till then, important policy decisions will be kept in abeyance. Not that this government has been very forthcoming with important policy decisions! Q3 results, to be announced from this week onwards, and RBI’s interest rate policy announcement towards the end of this month will be the next triggers for the indices to change directions or continue their downward slides.

BSE Sensex index chart

The Sensex played hide-and-seek with its 20 day EMA and managed to stay above the support level of 15700. But it is trading well below its 200 day EMA, and also below its 50 day EMA and the small down trend line (marked DTL). The bears are very much in control. The convergence of the 50 day EMA and DTL may provide strong resistance on the up side.

Can the Sensex move up much further from here? The technical indicators are giving out mixed signals. The MACD is rising above its signal line, but is in negative territory. Mildly bullish. The ROC has dropped below its 10 day MA into the negative zone. Bearish. The RSI is rising above its 50% level towards the overbought zone. Bullish. The slow stochastic turned down immediately after entering its overbought zone. Mildly bearish. Honours were even between the bulls and bears last week.

Some more sideways consolidation can be expected in the near term.

NSE Nifty 50 index chart

Despite the extra trading session on Sat. Jan 7 ‘12, the weekly volume bar of the Nifty isn’t conducive for a stronger rally. Note that the last three green volume bars (representing weeks when the Nifty closed higher than the previous week) are reducing in size. That shows lack of buying conviction.

The technical indicators are all bearish, but showing faint signs of a turn around. The MACD is below its signal line, but has stopped falling. The ROC is looking very weak, falling below its 10 week MA, deeper into the negative zone. The RSI is trying to climb towards its 50% level. The slow stochastic is trying to emerge from its oversold zone.

The Nifty is trading well below its 20 week and 50 week EMAs, and remains in a bear market.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns continue their falls within downward-sloping channels. The balance of power is with the bears, and sharp falls below the channels may happen at any time. Some mid-cap and small-cap stocks have started jumping around. Don’t be tempted to buy – these are called ‘sucker’s rallies’. Remain patient. If you want to buy for the long term, accumulate fundamentally strong stocks slowly.

Stock Index Chart Patterns – Hang Seng, Singapore Straits Times, Malaysia KLCI – Jan 6 ‘12

The chart patterns of the Asian indices, last analysed three weeks back, are showing clearly diverging moves. The Hang Seng index is moving sideways in a bear market; the Straits Times index is sliding down in a bear market; the KLCI Malaysia index is climbing up in a bull market.

Hang Seng Index Chart

Since touching an intermediate top at 20173 in Nov ‘11, the Hang Seng index has been consolidating sideways within a symmetrical triangle pattern. The index is trading well below its falling 200 day EMA, so the logical break out of the triangle should be downwards. But triangles can be unpredictable. The index may break out upwards or continue to trade sideways.

The technical indicators are bullish, but showing signs of weakness. The MACD is above its signal line and trying to enter the positive zone. The ROC is positive and above its 10 day MA, but turning down. The RSI is above its 50% level, but its upward movement has stalled. The slow stochastic has dropped down from its overbought zone.

A break below the triangle could lead to a test of the Oct ‘11 low.

Singapore Straits Times Index Chart

The Singapore Straits Times index is in a bear market, and has been trading within a downward-sloping channel for the past couple of months. Note the falling volumes, which is typical in down trends.

The technical indicators are giving contrasting signals. The MACD is rising above its isgnal line, but is still in negative territory. The ROC is positive and above its 10 day MA, but has turned around sharply. The RSI has climbed towards its overbought zone. The slow stochastic has already entered its overbought zone.

The index may make another attempt to cross above the downward channel. Whether it will be successful or not is a moot point.

Malaysia KLCI Index Chart

The KLCI Malaysia index appears to have shaken off the bears as it climbed above all three EMAs. The index is trading within an upward-sloping channel. The 20 day EMA has crossed above the 200 day EMA. The 50 day EMA is all set to follow suit – the ‘golden cross’ will confirm a return to a bull market.

The bears have not been vanquished yet. Note the progressively lower volume peaks as the index has moved up. There are negative divergences visible in the MACD and ROC, which failed to touch higher tops with the index. The technical indicators are correcting from overbought conditions.

A drop to the lower edge of the channel is a possibility, but the up trend may not get reversed.

Bottomline? The three Asian index chart patterns are moving in three different directions. The Hang Seng index is consolidating within a triangle; await the break out. The Singapore Straits Times index is in a down trend; sell the rallies. The KLCI Malaysia index is in an up trend; buy the dips.

5 strategies to follow in a bear market

Most small investors enter the stock market when a bull market is nearing its peak. They don’t have clear goals and strategies, and get caught on the wrong foot by the bear market that inevitably follows. The trauma of losing money in a hurry can be soul-destroying.

Without the necessary skills and experience of surviving in a bear market, investors resort to all kinds of ill-advised strategies in an effort to quickly recover the losses. That only makes a bad situation worse.

The current bear phases in the Sensex and Nifty indices are 14 months old, and so far there has been very little indication of a reversal in the down trends. Experts are saying that the bear phase can last till the first half of Financial Year 2012-13. If they are right, the bear market may sustain till Sep 2012 – another 9 months!

Whether you are one of the unfortunates who are ‘stuck’ at higher levels, or a more seasoned investor who is sitting on cash to deploy at lower levels, here are 5 strategies that you may want to follow in the current bear market:-

1. Remember that bear market rallies are sharp and swift. Don’t jump in by thinking that you will miss a buying opportunity at a low entry price. Such rallies are some times ‘created’ by bears so that they can sell at a higher price.

2. Just because a stock has fallen to a 52 week low doesn’t mean it can’t fall any lower. As long as the trend is down, it can fall lower. If it is worth buying, being patient can help you to enter at a much lower price.

3. A sharp vertical drop in price – often accompanied by strong volumes - usually attracts a lot of buyers who believe that they are being smart by entering at a low price. It is the sign of a ‘panic bottom’, which seldom holds. Prices bounce up on the buying, but then fall lower than the ‘panic bottom’.

4. At the risk of sounding like a broken record (or, a damaged CD) – do not, repeat do not, average down in price. No one knows how much further a stock’s price will fall, or worse still, if it will ever recover (e.g. Cranes Software). It is far better to average up once the price forms a bottom and starts its up move.

5. Major down trends are not reversed in a day or a week. Bottom reversal patterns take a few weeks to a few months to form. Ability to ‘read’ chart patterns can help investors to accumulate a stock while a reversal pattern is ongoing (refer Chapter 7: Reversal Patterns of my free eBook: Technical Analysis – an Introduction).

If you can’t ‘read’ a reversal pattern, don’t worry. Eventually, prices will turn up and a new bull market will begin. You may enter at a higher price, but the chances of a loss can be minimised by using a trailing stop-loss.

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