Retirement Planning

I feel childhood is the best period which you can go through during your life. You are just born and everybody comes and meets you, play with you, entertain you (or probably you entertain them), give you toffees, candies, cookies, toys and everything that you love. The only problem with childhood is that you don’t remember that period of your life when you grow up. By the time you are big enough to know what’s happening around you, you start going to school and just when you were beginning to enjoy that period you get increasingly heavier doses of homework that it leaves you little time to play. But that is still better as compared to your adult life since you can play an hour or two a day whereas in adulthood you don’t even get time to that.

The second best period of life comes when you go to college. That is the age when you have friends with you, you are big enough to venture out alone with your friends and are not under the constant watch of your parents’ eyes. Once you finish college and start working, life is all downhill. Sure, there are milestones which you enjoy like your first salary, your first music system, your first …. oops, I mean, your marriage and your first child, your dream vacation, your dream house, your 60th birthday and then your retirement. That is the time when you think that you are free from all responsibilities and that you will live life king size. But how often does it happen? Did you know that 60% of the people endure retirement rather than enjoy it? And that is because they don’t plan their retirement well.

One has to plan for one’s retirement early in life and the more you delay the planning, the more you will suffer in your old age. Things are becoming costly. Inflation, which was just between 3-4% a few of months back, is now well over 8%. You can see the price of petrol. I remember the cheapest petrol that I have purchased was Rs.21/- per litre. Now it is touching Rs.46/- (in Delhi. In Mumbai it is past Rs.48/-). Let us just do a simple calculation. You want to buy a LCD TV which costs between Rs.30000 to well over a lakh. Let us assume you plan to buy a Rs.35000/- LCD TV but then you think it is better to buy it when you retire rather than now. And you save Rs.25000/- now thinking that the LCD would probably cost Rs.80000/- by the time you retire and during the same time, your investment of Rs.20000 would also probably fetch you Rs.80000/- and you would be able to buy it. Let us say your retirement is 30 years away. But can you guess what would be the cost of the LCD 30 years from now assuming an inflation of 5%? It will be almost Rs.152,000/- and Rs.246,400/- 40 years from now.

You spend Rs.40000/- a month now and you think after retirement you would reduce your monthly expenditure to Rs.20000/- and for 20 years after retirement you would probably need Rs.50,00,000/- at today’s prices and probably Rs.80,00,000/- assuming inflation. If your retirement is 40 years away, you would need Rs.65000/- a month to buy what costs Rs.20000 today, assuming only 3% inflation. And to sustain through the 20 years after retirement you would need a corpus of Rs.2.1 crores. Do you ever do the calculations and plan how to meet the shortfall.

It is better to start saving early. I would say, as early as today. Every day of delay costs you. I read a very nice article by Mr. Gaurav Mashruwala, a Certified Financial Planner, who says that Vikram started investing Rs.10000/- every month in an instrument giving 8% guaranteed returns per annum in Jan 1991 while his friend Rohit started investing the same amount in the same instrument in Jan 1992, exactly one year later. In Jan 2001 when they saw their corpus, Vikram had built a corpus of Rs.18,29,460/- while Rohit had only Rs.15,74,295/-. His one year delay cost him Rs.2,55,165/- whereas his investment was only Rs.1,20,000/- less than that of Vikram.

That does not sound too grave a mistake. Let us take another example. Let’s say there is a girl who is 21 years old who started investing in a retirement plan that gives her 10% return per annum. She invests Rs.10000/- every month till the age of 36. At 36, she stops investing and lets her money lie in the retirement fund till the age of 60. Her friend, who is a boy, started working at the same age as her but then he first bought a music system, then a bike and then a car. He started investing at the age of 35, which means 14 years later. To make up for the delay he starts investing Rs.25000/- every month and he continues his investment till the age of 55. At 55, he stops investing and leaves the money in the retirement fund till the age of 60. By this time the girl has invested Rs.19.2 lakhs while the boy has invested Rs.63 lakhs. Who do you retires with more money? Well, the girl retires with Rs.4.67 crores while the boy gets only Rs.3.4 crores.

That’s what an early start can do for you and that’s how grave a mistake you can make by delaying your investments. So, start investing now. It is not advisable to waste even a day to invest.

Happy Investing!!!

As mentioned, I am currently out of town and there will be no newsletter for Monday. I'll try and post a newsletter for Tuesday on Monday night. Else it will be Tuesday night for Wednesday.

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Nifty Reverses From Resistance

The Nifty was expected to go up today too and a target of 4990 was expected but it was mentioned that there is a fair bit of resistance between the 4935 and 4950 zone. That was exactly what happened today. It kept moving between 4920 and 4950 in the first half of the day before the bears took control and pushed the markets downwards. The crash was sudden and sharp but was expected. We also saw the end of the F&O (Futures and Options) month today.

Seen above is the 30 minutes chart of the Nifty. This chart has got 2 colours of trendlines – light green and dark green. The light green trendlines show why the Nifty found resistance near 4950 today. On the other hand, the dark green trendline shows where the support is – near 4830. You can notice how the last candle went all the way down to 4804 and then closed above our support at 4830. This small breakdown of prices below the trendline and then bouncing back above it does not signify a break of the trendline. A breakout or breakdown is significant if the prices penetrate the trendline decisively and with high volumes. It will usually be a large blue/red candle depending on which side it breaks out on. We still have support at 4830 and resistance at 4950. Tomorrow being the first day of the new F&O month, the market may, I repeat – may, stay within this range for sometime before moving below the 4830 trendline.

Looking at the bottom half of the chart, which happens to be the Relative Strength Index (RSI) of the Nifty, we can see that within the green rectangle the RSI found resistance at 60 and turned down from there and that does not give a very bullish sign. As of now the RSI has not broken the upward sloping trendline below it and that is the only thing which shall decide whether the Nifty will find support at 4830 or not. If the RSI holds on then the Nifty should also hold on to 4830 but if the RSI breaks through the trendline, I’m afraid, so will the Nifty.

More on Monday/Tuesday. Happy Investing!!!

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Small Uptrend Could Continue Upto 4990

We were expecting the Nifty to bounce back a little today as it had reached its short term support and also there were other short term positive signals available. It opened about 20 points higher, came down, went up again then lost about 40 points from there before it went in a small 20 point range for about 3 hours and it was only after 1:30 in the afternoon that the Nifty started obliging us by moving in the direction we predicted. The move up was sharp, rapid and almost correction free.

I had a meeting with a client today evening, which then got converted into a dinner meeting and came back late and am not in a position to write too many things right now. Am already dozing off. Please excuse me if this newsletter is a little incoherent today.

Seen above is the daily chart of Nifty. As expected in yesterday’s edition, the Nifty did give us a blue candle today. This rally was expected to last upto 5000 levels with some resistance between 4935 and 4950. As mentioned earlier too, one should not be tempted to take any long positions there as we would expect the markets to come down again. I’ve mentioned earlier too that a trend is our friend and we should follow it till it ends. When it ends, it will tell us so. As of now, we are in a short term and intermediate term downtrend and we shall follow it till we get a signal that it has ended. That signal will come if the Nifty were to cross its previous pivot high which is at 5168 in the intermediate term and it is surprisingly close at 4932 in the short term, though, I would take the high before the last one which is at 5058.

Have got lots of other ideas to talk about as well, specially about the RSI finding support at 40, but will probably do so in tomorrow’s newsletter. And I’m not expected to be in town over the weekend so tomorrow is the last day that I’ll be writing for the next 3-4 days. I shall be back Monday evening so expect the next newsletter (after tomorrow’s) on Monday night or maybe Tuesday night. Of course, I’ll try and keep something ready which I can shoot on Saturday or Sunday to keep my readers occupied, but, at best, it will be another lesson on investing and no charts. Hope that should be okay with you.

Happy Investing!!!

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Short Term Technical Rally/Bounce Back Possible

The Nifty, boosted by strong Asian cues, opened in the positive today and stayed so for the first half of the day. It was probably the weak European markets, though they have also recovered by now, on opening that triggered the fall in our markets. And the fall was strong enough to bring the Nifty down by 80-85 points from its highs, thus giving us the fourth consecutive day in the red.


Seen above is the 60 minutes chart of the Nifty. While, the downtrend is clearly visible with lower highs and lower lows in place, yet there are some short-term positives visible on this short term chart. First of all, the price has now reached the downward sloping trendline which has provided support to the prices 3-4 times since the last one month. Not only that, it also reversed from the line and has shown one blue candle at the end. If we concentrate on the price movements in the last two days, 26th and 27th, we can see that the price has been making lower lows while the Relative Strength Index (RSI) during the same period has been making higher lows, thus creating a positive divergence between the price and the RSI. The same has been emphasized with the downward and upward sloping arrows. Another positive which is not visible on this chart, but is there on the daily charts, is that the RSI has found support at 40 and has flattened at that level.

An upward move could find resistance near 4900 and above that it could go on upwards to 4935 which will confirm a short term uptrend. This uptrend could take the Nifty between 4990 and 5010. A move to these levels could be used as a shorting opportunity. I think taking naked short positions is a risky game which risk averse traders should not enter into, but low risk shorting opportunities like buying puts (one could go for 4800, 4700 or 4600 June puts) or bear call spreads (e.g. buying 5000 call and selling 4600 or 4500 June call) is definitely a good opportunity. For reference sake, the 4800, 4700 and 4600 puts were available for Rs.156, Rs.118 and Rs.88 respectively at the end of the day while the 5000, 4600 and 4500 calls were available for Rs.93, Rs.320 and Rs.395 respectively.

Once again, do not be tempted to take long positions if the market does go up tomorrow. It makes sense to create long positions only if 5070-5080 levels are broken on the upside.

Uma, a small time trader herself, writes about her trading experiences in the form of a personal stock diary on her blog and it happens to be a good read. Incidentally, she also left a link to my blog on her blog. Thank you, Uma.

Well, that’s all for today. Happy Investing!!!

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Another Day in the Red, Technical Bounce Back May Come

It was another red day for the Nifty and the last three candles have been pretty large which suggests that the prices are coming down without finding any support inbetween. The trendline that was in place since the low formed on 18th Mar 2008 was easily broken through yesterday. Till a support is found at some level, it may continue to fall at the current rate of 70-80 points in a day.

Seen above is the daily chart of Nifty. Besides the upward sloping trendline, also seen are the Fibonacci Retracements of the rise from 18th Mar 2008 to 2nd May 2008. We have seen that the 23.6% and 38.2% retracement levels were crossed without any hassles and the same seems to be the case of the 50% retracement, though, that still needs to be crossed decisively. The next support comes in at the 61.8% retracement level near 4785. Let’s hope that support is found there or else there may be further downside involved.

In this post I had mentioned that I am trying to develop a trading call system which gives me small profits but gives me profits 85-90% of the times. Let us name it as ‘System A’, for convenience sake. This system had given me a long entry for Nifty Futures at 4998 with an exit at 5100 and a short entry at 5036. Thus, I made a profit of 102 points on the long position and am gaining 150 points on the short position. Before that I was given a short signal in the beginning of the month at 5178 which was eventually covered at 5010, a profit of 68 points, which means a total profit of 320 points in a month which is not yet over. A profit of 320 points on even one lot of Nifty works out to a profit of Rs.16000/- by paying a margin of only Rs.35000/- which means more than a 50% return on investment in less than a month. Of course, this has been a good month for ‘System A’ and future months may or may not better the current performance.

Update: There is a calculation mistake above. Shorting at 5178 and covering at 5010 gives a profit of 168 points, not 68, which takes the net profit to 420 points which works out to a total of Rs.21000/- in profits and gives a return of 60% on investment.

By going below the previos low of 4913, it has been confirmed that Nifty is now in an intermediate term downtrend according to the Dow Theory because a lower high and lower low are already in place. The target, as mentioned in the previous edition, could be as low as 4500 but there are supports available at 4800, 4630 and 4470. While the Nifty remains in a downtrend we can just wait and watch where the decline will end. No buying is recommended for now. After five days of lower lows and lower highs, there may be a small bounce back which could go upto 5020. This should not be mistaken for an end of the downtrend but should instead be used to exit from long positions or to go short. There is more downside possible.

Happy Investing!!!

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Nifty Breaks Important Support

Before I start this edition, I must apologize for not being able to post my views on this blog on Thursday night for Friday due to some personal problems. Rest assured, I’ll try to be as regular as I’ve been in the past. I’ll continue with my plan to post a newsletter for every market day and an extra on a weekend. The Nifty, on Friday, did open slightly in the green but soon started losing ground. It managed to hold on to the support between 5000 and 5050 for a couple of hours but soon after noon it started slipping quite heavily and from there it was a unidirectional decline for the Nifty.

The chart of the Nifty has suddenly changed in the last two days. If we ignore the last two candles in the chart, we can see that we were pushing against the resistance line and the blue candle had a long lower shadow which showed that the price did go down but buying came in at lower levels and that actually took the price past the day before’s close. Suddenly, that day was followed by two red candles which changed the chart completely. Now we have broken through the support line near 5000, as signified by the solid green line, which is highly negative. A lower high is now already in place and below 4913 we will have a lower low too, thus signifying the start of a new downtrend according to the Dow Theory. According to the trendline theory, we have now entered an intermediate term downtrend. The target for this downtrend may be somewhere between 4500 and 4550. However, support also comes in at previous lows of 4913, 4630 and 4470. There is a reasonable good support at current levels near 4950. It is important that the previous low of 4913 is not broken if we are want some stability in the markets.

A lot of the current fall in the markets has been attributed to inflation which has been on the rise due to the jump in prices of crude oil. Crude Oil has almost doubled in the last 10 months and the jump has been exponential in the last two months. What actually has been happening in crude oil? Is it likely to come down? Well, some people say it is likely to come down now and there are others who say a price of $150 per barrel is likely in the next few days. Who do we believe? The best thing, I would believe, is to look at its chart and decide for ourselves.

Given above is the daily chart of crude oil futures as traded on the Multi Commodity Exchange (MCX). The price is in Rupees but the chart, whether in Rupees or in Dollars will remain the same. As seen in the chart, the thick red line is the line chart (close) of crude oil and we can see that it has now found some resistance near 5650 near the blue line. We can see that the support trendline is too far down near 4800 (which will reach 4900-5000 by the time the price comes down). A fall to 5000, though, may not be possible but a fall to 5100-5150 is likely. 5150 also happens to be the 23.6% Fibonacci retracement level of the rise seen from the February lows. That would correspond to roughly $120 per barrel. Also embedded on the chart in the gray line is the chart of Gold futures on MCX (the scale for Gold has not been shown). As seen by the chart, the price of both Gold and Crude is moving in tandem and a fall in crude could also make the yellow metal cheaper.

Buying should be avoided for now since the short term trend is now down and it is likely that the intermediate trend may also turn to down, if it already hasn’t. Keep strict stops on all open long positions.

Happy Investing!!!

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The Probability of Profitability

Let us understand technical analysis in a different way today. We always knew that technical analysis is the study of charts and trying to predict the future. But does it work? Is it accurate? How often does it work? What is the probability of making a profit every time? What is the probability of being profitable after a year? Well, we have all the answers here. Come, let us understand probability in very simple terms.

We all have been studying since grade 6 that probability means the likelihood or chance of an event happening or not happening. We all know the example of the flipping of a coin and throwing a dice or drawing a card. For those who don’t know, here it is. When we flip a coin, only two possible things can happen. Either we get a heads or a tail. Since there is one chance of getting a heads out of 2 outcomes, the probability is ½ or 0.5. Similarly the probability of getting a six on the throw of a dice is 1/6 or 0.1667, the probability of drawing a card of hearts from a pack of cards is 13/52 or 0.25 and the probability of drawing an ace is 4/52 or 0.0769.

But, have we ever thought what is the probability of making a profit if we pick up a stock at random? Let us see what the possible outcomes are when we buy a stock. It can either go up or come down. Which means the probability of making a profit is ½ or 0.5 or 50%, which is a very high probability. Then why do we do so much of research and ask people to give us tips or spend hours looking at charts? Just for a simple reason that we want to increase our probability of making a profit to 0.7-0.8 or 70-80%. But, does it help us? Are we able to increase our profits? Actually speaking, no. Believe me, we are still better off picking up stocks at random and let the probability remain at 50%. I will give you a very simple formula. You pick up any stock at random, have a well-defined exit strategy and an equally well defined profit booking strategy. Let us say that our rules are that we will pick up a stock at random and book a profit if the price goes up by 10% and keep a stop loss 5% below our purchase price. Believe me, with such a strategy, you will never never make a loss.

Is the above system acceptable? It is not very difficult to follow. All we have to do is to book our profits and losses as defined by our rules. I am sure, we can all follow these simple set of rules to make profits. But, before you go ahead and implement it, let us talk about the drawbacks also. Over the years that I have been involved in the stock markets, I have not only studied technical analysis, I have studied human psychology too (as it works in the stock markets). I have learnt that the drawbacks lie in your mind. Firstly, you will never be able to come to terms with the fact that you have made money. You will always be thinking that it was this system that made money. The thrill of investing in the stock markets will be missing because the decisions are automatic and not your own. Secondly, you will be tempted to book profits at 9% (or lower) instead of 10% while when it comes to executing your stop losses, you will be reluctant to do so even at 8%. Thirdly, the returns are too low – only 2.5% on your total investment. You get more in a savings account. And last, the system will work well in bull markets and will be terrible in bear markets. God save you from the bear markets if you follow this system.

So, is fundamental option the best option? Well, it does help. But it has its own drawbacks. Fundamental analysis tells you whether to buy or not to buy a stock. But it has no clearly defined entry and exit strategies. So, you may never know when to book profits and when to cut your losses. The human psychology is such that it forces you to take your profits quickly before your profits turn into losses. And if you are in a loss, you will keep riding your losses because you are thinking that you had done proper research and that sooner or later the price should follow the fundamentals, so you keep holding on to your losing positions. No doubt, on some stocks you can get profits many times your investment but in some you could lose a lot too.

That leaves us with technical analysis. Technical analysis has well defined entry and exit levels and with proper discipline you can continue to ride your profits and cut your losses early and you can make a lot of money. But like any other method, this has its own set of drawbacks. The hit rate is not very good. If you choose 10 stocks, it is likely that only 3 or 4 calls out of those 10 will come out to be correct. But the advantage is that those 3 or 4 calls give you enough profits to cover not only all your losses from the remaining 6-7 calls but also gives you enough profits to give you a good return. Many technical analysts keep trying to develop methods which will give maximum profits. I am currently developing a system which will give me small profits but the hit rate would be between 85-90%. The details of the system are ready and I am currently testing it with my own money to fine tune it a little and it can then be given to a few selected subscribers who are disciplined enough to follow it and once they have also tested it for sometime and some more fine tuning is done, it can be shared with all others. This system, for convenience sake, shall be referred to as 'System A' from now on.

We should consider our trading to be a business. The objective of any business is to make money and that’s what will be the objective of our business. Like in any other business you will have some centers which will be your profit centers (which give you lots of profits) and some as your cost centers (which earn no profits but only cost you money). The objective is to maximize the profits from your profit centers and minimize the costs in your cost centres. Similarly, in this trading business there will be some stocks which will give you a lot of profits and some which will only give you losses. So, as long as you maximize the profits and minimize the losses, you will end up in a profit. And that is what technical analysis helps us achieve. Helps us to ride our profits and minimize our losses.

We have learnt today that there are many methods which help us to make profits. But all of them have their own advantages and disadvantages. Within Technical Analysis (which I consider to be the best, though this is a debatable topic) too, there are many methods but the Dow Theory is the oldest and the easiest method of technical analysis. According to Martin Pring, as mentioned on buddycom, if an investor had invested $44 in the Dow in 1897 and liquidated his position after 93 years in Jan 1990 (pure buy and hold strategy, as happens in fundamental analysis), he would have got $2,500 after 93 years i.e. 56.82 times his investment, while another investor who invested and liquidated at the same times and who sold on every sell signal and bought on every buy signal would have got $51,268, a whopping 1165.18 times of his initial investment. That is the power of technical analysis and that shows how our probability of profitability increases with technical analysis. And technical analysis requires only one skill. Discipline.

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Bulls At An Advantage

This article on moneycontrol gives the view of their Technical Analysis expert, Ashwani Gujral, who recommended Tata Steel with a target of 950 and Sterlite Industries with a target of 1070. These stocks were already recommended on this page with a target of 1050 and 1040 in the newsletters for 15th May 2008 and 30th April 2008 respectively.

The Nifty today opened with because of weak global cues but kept rising through the day to close the day slightly in the green. The Asian markets ended on a mixed note today with the Hang Seng closing green while Nikkei was in the red. European markets are now (at the time of writing the newsletter) more or less flat while the Dow is still losing 70 points after a loss of about 200 points yesterday.

Looking at the chart of the Nifty today, I find no difference in the chart since yesterday except that the support near today’s low at 5050 becomes a little stronger. So, I might as well copy and paste what I wrote here yesterday. In fact I’ll do better than that, I’ll just add a link to yesterday’s newsletter and you can click here to read what I wrote about the Nifty yesterday. We still have resistance near trendline 3 and trendline 2 and support near 5050 and then trendline 1. RSI has yet to cross 60 to give us bullish signs.

It is all becoming a little confusing now. We made a low of 1292.20 in the now infamous decline of May 2004 (when the BJP government fell) and a high on 8th Jan this year at 6357.10. The decline in mid Jan and then through February and March made is correct 38.2% of the move from May 2004 to Jan 2008. I think a 38.2% retracement in a secular bull market (what most market participants have been claiming to be in since the last 4-5 years and which is expected to last another 8-10 years) is quite enough. A decline deeper than this should not come about. We should probably just do some base building here (which, I personally think, is in progress now) and move on. But the signals from the western world and the investment gurus are not very positive. According to Eric Roseman, George Soros, the hedge fund manager of the Quantum Fund and one of the best investors, has gone on to say that investors are now participating in a bear market rally. Warren Buffett, nicknamed ‘The Sage of Omaha’, in this article, says that the end to the credit crunch is still not in sight and that the stocks could be heading still lower. I tend to agree with Haresh Soneji, CNBC TV 18’s Research Analyst, who says in this article, that investors the world over may be hoping that both Soros and Buffett are terribly wrong this time around but given their history, it seems unlikely. They may turn out to be right but one of the advantages of blogging is that I could disagree with them if I want to and I am disagreeing. I feel that we have already seen an intermediate term low and that we should not be going below that for a long time to come.

Hmm…., disagreeing with George Soros and Warren Buffett, what am I doing? In fact, it is a win win situation for me. If I go wrong, I’ll be expected to, because where do I stand as compared to Soros and Buffett, but the technical signals now do not show that the markets have anymore downside and I have Ashwani Gujral agreeing with me. And if I do turn out to be right, I can always turn around and say that I could foresee what George Soros and Warren Buffett could not. This is why I love blogging. I can never lose. I would appreciate your comments too on how you expect the markets to behave now because as I said, it is becoming a little confusing now and I would like to know what all of you are thinking.

Alstom Projects, with its Relative Strength Index (RSI) crossing 60 during its last peak and now finding support near 40 before turning back, seems to have given a good sign of turning around from the current levels. The stock may go up to its trendline near 720 from the current levels (which itself is a return of about 12-14%) and if it is able to cross the trendline then could continue to go up to a target of 950-1000. Buy now with a stop loss of 580 for a target of 720 and then between 950 and 1000.

Siemens seems to be getting support near 550 and 560 since a month now and with the downward sloping trendline coming so close, it is left with no option but to break out of the pattern. It now has to go above the trendline or may choose to come below the support. This is a perfect opportunity to buy it. If it goes up, it is in our favour and in case it comes down below the support, the stop loss is so close that we’ll hardly lose anything. Consider buying above 600 with a stop loss of 560 for a target of about 770.

Happy Investing!!!

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Resistance Found! Where Do We Go Now?

The Nifty opened on a weak note today because the Asian markets were down and even the American markets despite good gains last evening, lost strength in the later half of the day. This was not taken kindly by the Indian markets and after three blue candles, it decided to show a red one before deciding upon its next direction. But as per our analysis, the markets were in a strong uptrend and were likely to find resistance near 5300. So, what went wrong, why did the market come down today? What is the possible direction of the market now?

Attached above is the daily chart of Nifty. I know there are too many things drawn on the charts and the idea is not to confuse you. The idea is to do a little bit of analysis. And not too much of analysis too because we don’t want a situation of analysis paralysis. But just enough analysis to weigh the strengths against the weaknesses in this chart of Nifty. You can click on the chart to open it in a new window so that you can see a larger image. Let us take each point one by one. We were within a clear well-defined range between the two trendlines marked as 1 and 2. What did us in was this third dashed trendline marked as 3! Were we expecting it to happen? If yes, why wasn’t it discussed here? The answer is no, we were not expecting resistance here. We were expecting a little bit of profit booking soon but not exactly here. Why? Firstly, we were in a well defined range between the two trendlines and we weren’t expecting a third one to interfere in between. Secondly, have a look at the Relative Strength Index (RSI). The RSI has been respecting the trendline since 21st Jan 2008 and had gone well over 60 in the end of April and was clearly showing signs of bullishness. We were not expecting it to find resistance at 60, like it did this time around (as marked by the circle). One reason why the price found resistance here is because it reached the 38.2% retracement level from the 8th Jan 2008 high to 22nd Jan 2008 low. This level too was not expected to be too much of a resistance because this too has been breached a number of times since 22nd Jan 2008 without any real support/resistance. It was probably the combined effect of trendline 3, the 38.2% Fibonacci retracement level and the RSI at 60, all at the same levels, that did us in.

We now have two possibilities. The Nifty may ignore this small resistance soon and continue to go up to trendline 2, in which case the RSI may also cross the resistance at 60 and we could then expect the Nifty to cross 5300 soon too. Another possibility that may happen is that the Nifty continues to respect this trendline and starts coming down in which case it would find support near trendline 1 near 4950. In that case the RSI would also fall. And if it falls too much so as to cross the trendline, we can probably expect the Nifty too to break 4950. Another remote possibility is that this may be a small consolidation and could find support near 5000. Let us wait and see what the market decides to do.

No stocks discussed today.

Happy Investing!!!

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Target of 5300 Visible

The Nifty, on Friday opened in strength on Friday and remained range bound in a range of 40 points for a better part of the day and it was only in the afternoon session when the European markets opened that spurred a rally which took it past its highs of the day. A little bit of profit booking was seen near the end of the day which saw the Nifty losing about 15 points. On the whole, it was a green day with a gain of about 42 points.

As seen on this daily chart of Nifty, it has been rising since the last three days now and currently finds support at around 4950 and resistance near 5290. A move above 5290-5320 should be decisive for the markets. As seen from the charts, such a move will confirm a possible bullish head and shoulders pattern on the Nifty which could give us a target of around 6100. However, that is only a possibility and should not be acted upon till it happens. We cannot buy now on the assumption that a bullish head and shoulders pattern will be made. It is also quite possible that the market may go on to make another shoulder before actually crossing through 5300. One thing for sure is that we are in a short term and intermediate term uptrend (not to forget, that the long term uptrend was never broken) and that any dip in the markets should be used as a buying opportunity. Also shown in the chart is the 14 day directional movement ADX indicator which is currently around 18. A value below 20-25 suggests that the market may be going into or is currently in a sideways movement and it is not wise to take a position till the ADX crosses 25 or is at least 4 points above its previous lows. A move above 35-40 suggests that the trend may come to an end or slow down soon. A move above 5300 may probably also make the ADX go above 25.

The global signals are pretty positive today. The Asian markets were good on Monday and at the time of writing the Dow Jones is about a percent up i.e. 130 points in the green while the FTSE-100 closed 85 points up with a gain of about 1.3%.

I thought it might make some sense to look at the chart of Dow Jones also. As discussed in an earlier issue, the 9 month old trendline and the top of a 4 month old rectangle near 12740 was crucial and a cross above that would give us a target of 13700. This resistance was crossed on 21st Apr 2008 and has since gone through a pullback too and is now inching its way up. The downward sloping trendline at 13010 is providing resistance but at this moment, the Dow Jones is trading at 13132, much higher than this trendline. If it manages to close above this level (still about 3 hours of trading left in the day) today, it is on its way up to 13730 and then 14650. A close above 13010 will signify the end of the intermediate term downtrend in the Dow too.

Seen above is the daily chart of Aban Offshore and on it are seen three trendlines marked as 1, 2 and 3. Let us discuss each one in detail. The first trendline marked as 1 is the downward sloping trendline from the highs made on 29th Feb 2008 and Friday’s price movement confirmed that this trendline was broken. The second trendline, marked as 2, shows that the price has been finding resistance whenever it went to 4000 since 23rd Jan 2008, except for two exceptional days in February. The price did go above this trendline on Friday but closed well below it. The third trendline, the dashed one marked as 3, is an extended trendline starting from the lows made on 19th Mar 2007 (not shown on this chart). This trendline has been respected throughout except for the two areas marked by circles. A break of these three trendlines will be significant for Aban Offshore and the high volumes on Friday along with a large blue candle seems to suggest that this may soon be a reality. It may make sense to buy above 4000 with a stop loss of 3500 for a medium term target of around 5170.

Steel Authority (SAIL), if it manages to go past the trendline marked 1 on its daily charts would suggest an uptrend in the stock, which could take it to the next resistance near the trendline marked 2. The large blue candle with huge volumes on Friday seems to suggest that the price could go past this trendline on Tuesday. Consider buying above with a stop loss of 165 for a target of between 215 and 220. Revise the stop loss to 190 if the low is above 190 for two consecutive days.

Happy Investing!!!

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The Technical Analysis Game

Are you interested in technical analysis? You think you can see charts and forecast the future movement of prices? You think you want to test your technical analysis skills before risking actual money? Well, I’ve found just the thing for you on Inspectd.



Inspectd provides you with a free simulated technical analysis game in which it will provide you with a real chart from the past. You have the option to add one or two moving averages to the chart and you have the option of holding your trade for 1, 2, 3, 5, 10, 20 or 40 trading days and you can view a candlestick chart, a line chart or an open high low close chart. Based on the chart you have to take a trading call which can be a buy or a sell. If you want, you can also skip that chart and go to the next one. You also have the option of investing only 10% or 25% or 50% or 75% or 100% of the money available with you on each chart. The only thing that remains constant is the time frame of the chart, which remains 6 months. After you take a call, the game will calculate your profit or loss based on what actually happened in that chart in the days to come. You can either double your money in 15-20 trades or blow it all in the same number of trades. The best thing is that the game provides you with an opening balance of $100,000/- which you can replenish anytime you want and any number of times. So, you can lose a billion dollars in stocks and still not feel a pinch about burning your fingers.

But before you go on to the site to play the game, you must be forewarned of the risks involved too. The first is that you are only allowed 5 free trades after which you will be asked to register. But don’t worry, the registration is free. The risk that comes with registration is that your mailbox may be spammed with junk mails. But don’t worry about that too. They assure you of a no spamming policy. And finally, the riskiest of all things. The game is highly addictive. You could spend hours playing this game. Don’t let your boss or colleagues catch you playing it, the reason being that if everybody starts playing, who will work?

You think you are ready to play? Go to Inspectd.

Happy Playing!!!

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Back in an Uptrend, Target of 5180

As expected and as seen on this 30 minutes chart, the Nifty moved up today, thus accomplishing two major achievements on the short term charts. First, it signified the end of this fortnight long downtrend and second, it confirmed a double bottom pattern and gives us a target of 5180 on the Nifty. During the day the Nifty did face some selling pressure but then found support at the neckline and immediately changed its direction.

While a target if 5180 is there but in an uptrend the Nifty can go much higher and on the way up may encounter some areas of resistance near 5200, 5230, 5250 and then 5300. A move above 5300 should be relatively smooth till it reaches between 5440 and 5500. Support on the downside is now at the neckline of the double bottom pattern at 5060.

Hindalco Industries has been moving inside a large contracting triangle since the beginning of the year. The price now seems to have broken through the triangle and with huge volumes too, leaving little doubt about the genuineness of the breakout. It is easy to say that it is a good buy with a stop loss of close to 190. What is difficult to say (and to predict) is the target. Seeing it as a traditional triangle pattern, we get a target of about 270. 270 would be a 35% jump for the stock, which seems unlikely, if not impossible in such a rangebound market. Taking a very conservative and cautious view, we get a target of 230 and a more daring view would give us a target inbetween of 245-250. I would probably stick with a target of 245.

Happy Investing!!!

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Support Found, Double Bottom Possible

So, the global cues didn’t seem to matter today. Dow Jones was marginally down, Asia was mixed. Our markets bounced back from the technical support levels and kept going up through the day. Even in the last 30 minutes it just lost about 10 odd points. No big profit booking or selling on rallies seen.

I have got a very interesting 30 minutes chart of the Nifty today. As seen from the thick green lines, the Nifty seems to be making a double bottom pattern which is also known as a ‘W’ pattern with the neckline at 5065 as shown by the dashed green line. This means that this double bottom pattern will be confirmed if, and only if, Nifty were to go above 5065. If this were to happen then the next target on the Nifty will be 5180. But, that is not all that there is to it. There is another downward sloping trendline which might (and probably did today) provide resistance to Nifty. We will assume this resistance to have crossed if the Nifty were to go above 5030 tomorrow. Luckily, it is not very far from the current levels. Just about 20 points away. On the downside support is at the same levels, between 4910 and 4930.

Ranbaxy has been inching upwards within this 50-60 points wide channel since the last three months. An interesting observation that can be made from this chart is that the channel may be rising but the RSI has been making lower highs during the same period, thus showing a negative divergence between the price and the RSI. This is bearish for the stock. I may have mentioned this before but a divergence has the same relationship with the prices that dark clouds have with rain. Dark clouds do not necessarily mean it will rain similarly a divergence does not necessarily mean that the prices will move in the direction expected, provided there is no break in the trendline. But as soon as the trendline is broken the price starts moving in the expected direction. This means that in this case, there is a slight weakness in the stock but it is not a sell, definitely not a short sell, until 465 is broken on the downside. Another negative sign that can be seen in this chart is that this time around, the prices failed to reach the top of the channel. When the prices are moving in a channel, they are expected to touch alternately the top and then the bottom of the channel. A failure to reach either the top or the bottom is known as a return line failure.

This is the daily chart of Tata Steel. It seems to have gone through a double resistance line between 850 and 860. One is a downward sloping trendline almost 7 months long and the other an upward sloping a month longer. The breakout comes with a large blue candle and that makes it all the more simpler for us to identify whether the breakout is genuine or not. I would have been happier with heavier volumes but today’s volumes were just a little better than average. Buy with a stop below 830 for a target near 1050.

Happy Investing!!!

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To Fall or Not to Fall, That is the Question

The Nifty on back of strong global cues like good American markets and good Asian markets, though crude still remained a worry, opened up and continued its way up through the day. All remained well till the European markets opened. The European markets kept slipping because of lower first quarter earnings, inflation at the highest since 2002 (3%) and fears that the banks may be understating borrowing costs. The FTSE-100 lost almost 100 points during this time. Then a US report came out that Americans are still shopping more despite rising energy bills and a faltering labor market. This made the FTSE-100 rise 70 points to come back to yesterday’s levels thus recovering all its losses. The irony was that the Indian markets had closed before this report came out.

As seen on this 60 minutes chart of Nifty, the price has just reached its support level again. Whether it will find support here or not is difficult to say. It will all depend on the global cues early in the morning and by that time if we are already not below 4900 then a recovery may be possible. Resistance is near 5065 where it was found today as shown by the dashed trendline. The target below 4900 would be somewhere close to 4650.

At the time of writing of this edition, global cues were not very impressive. FTSE closed flat while the Dow was down about 75 points. A massive earthquake measuring 7.8 on the Richter scale in the Sichuan province of China left tens of thousands dead yesterday and a series of 7 serial bomb blasts rocked the pink city of Jaipur which left more than 50 dead and hundreds injured. While the earthquake was God’s wish and we have to accept what He wanted but the Jaipur blasts were an act of terrorism which I totally condemn. I’m sure God won’t even grant a place in Hell to those who were responsible. I wonder why these people don't follow Mahatma Gandhi's principles of non-violence which have proven to be so effective. Let us all pray for the souls of the departed.

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Markets Recover from Expected Support Levels

The markets started on a weak note today and had lost about 60 points on the Nifty within the first half an hour and then started making a slow recovery from 4920. It took almost two hours for the market to recover all its losses for the day and just when it managed to reach yesterday’s prices at 4983, the industrial production data was announced. According to the data India's industrial production growth sunk to 3 per cent in March 2008 from 14.8 per cent a year ago and Index of Industrial Production grew at 8.1 per cent in FY 2007-08, down from 11.6 per cent in 2006-07. It took all of ten minutes for the markets to lose everything that it had gained in the last two hours, and even more. This time it made a low of 4915 and started its recovery from there.

This time around support was found at 4915, between our support levels of 4910-4930. And this time the buying seen seemed genuine because the Nifty recovered 97 points from the lows of the day and closed almost 30 points in the green. What triggered the buying is unknown. Maybe it was the technical support (between 4910 and 4930), maybe it was value buying (seems unlikely), maybe it was bottom fishing or bargain hunting (again unlikely because one doesn’t bottom fish when the sentiment is weak), but it definitely wasn’t the sentiment that had changed. A few days ago, in this column, I had mentioned that “technical analysis does help, but sentiment holds the key”. Is it time to change the phrase to – “sentiment doesn’t matter, only technical analysis helps”?

The Nifty is currently standing at resistance at 5020 as shown by the downtrending line. If it were to remain/go above 5020 after 10:30AM then its next target would be close to 5150.

On the daily chart of DLF, we can see that it has made a series of three doji candles (candles where opening price and closing price are the same or very close to each other) and suggests that the short term down trend may be over in this stock and it should see a reversal from these levels. Another positive in this chart is that the RSI is still above 40 and if DLF reverses from here then the RSI will also reverse and a reversal from 40 for the RSI is a good sign. The only negative that can be seen is that the RSI reversed from 60 when the last high was made and that means that it is still not in an uptrend. So, this time we should be careful when the RSI reaches 60 and should maintain a long position in the stock if the RSI were to cross 60. For now, it seems to be a good buy above today’s high of 640 with a stop loss near 607 for a target between 720 and 750 (and more if the RSI were to cross 60). Do not buy if the price doesn’t cross 640.

HDFC Ltd. rose from 2300 to 2900 levels, a move of over 25%, in just a matter of 10 days and then went through a brief consolidation, which has already lasted 8 days. A move above 2750 should confirm that the consolidation is over and it can give a move of another Rs.450/- in a matter of two weeks. If you can see the three trendlines on the chart, you can notice that it looks like an ‘F’ or a Flag complete with the staff. Look to buy above 2750 with a stop loss of 2600 for a target near 3200.

IDBI, after a sudden downfall, went into a phase of consolidation for over 3 months and finally broke through the trendline, only to see a pullback back to the trendline. It has support at the trendline at 98 and today’s doji suggests that the support may have been found. Look to buy above today’s high of 102 with a stop below 95 for a target of 130.

Happy Investing!!!

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Webinar on Fibonacci Series

After the terrific response that I got to my first webinar, I have produced another one and this one is on Fibonacci retracements or the Fibonacci Series. Fibonacci series is a series of numbers obtained by adding the previous two numbers in the series. Surprisingly, Fibonacci numbers or ratios are used everywhere, intentionally, unintentionally or just naturally. It is there in the pattern in which plants grow, the numbers in which rabbits or bees reproduce, our human body, architecture, music, stock markets, astronomy, just about anywhere. You can see about it in this short video before you view my webinar.

Please leave your comments on the webinar and whether you would like more webinars to be put up in the future or are text newsletters just fine?

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Further Slide in Markets

We are fine as long as a trend is in place. As soon as the trend changes, we start looking for supports/resistances. Usually, we will be able to find multiple supports and resistances below or above the breakout points. But the markets have a mind of their own. They will choose one of those multiple levels as a support or a resistance and we don’t know which one. We can only guess where there is a maximum probability of finding support.

One of those high probability support levels was available yesterday near 5070 but the markets crossed that without a second thought. The markets became weaker through the day, probably, because the inflation data did not show any improvement. This is the 60 minutes chart of the Nifty and we find from the two trendlines visible here, that support is between 4910 and 4930. According to the pattern breakout, the target for the downmove is approximately 4920. Today again we have multiple supports available between 4910 and 4930 and there is a high probability of the markets finding support. Now, whether the Nifty does find support near these levels is up to the market to decide. We can only take action based on what the markets are telling us. As of now, they are telling us that we are in a short term downtrend and short term long positions should be avoided for the time being. A move below 4890 will give us a signal to close intermediate long positions too. Long term long positions should be maintained till 4500 is crossed on the downside.

Continuing the webinar on Fibonacci retracements posted earlier in the day, we can apply the Fibonacci retracement levels to this chart and see where support is likely. I suggest, you right click on the chart to open it in a new window so that you get a clearer picture and can read and see side by side by toggling between the two windows. Now, I have drawn two retracement levels here, one in green for the low formed on 18th March to the high formed on 2nd May (let us name it as ‘A’). And the second one is in black for the low formed on 7th Apr to the same high on 2nd May (let us name it as ‘B’). As can be seen from the chart, we are currently very close to the 38.2% Fibonacci retracement ‘A’ at 4980. Very close to that is the 50% retracement ‘B’ at 4965. The markets may find support at these levels or may decide to find support where there is a cluster of Fibonacci ratios, for example, at 4890 where the 50% retracement ‘A’ and 61.8% retracement ‘B’ are together. Or, it may decide to go further down where the ‘A’ 61.8% and ‘B’ 76.4% retracements are at the same levele at 4790. Where the markets will find support is for the market to decide.

We shall wait on the sidelines without holding any long positions and buy when the market gives us a signal that support has been found. The long trades that we have entered into in the last few days are all intermediate term positions and should not be closed unless 4890 on the Nifty is broken, unless the stop loss is hit first. If the stop loss has not been hit and the Nifty does go below 4890 then one has to take a call whether to sell there or still wait for the stop loss to be hit. I would, personally, prefer to wait for the stop loss to be hit.

Let us wait and watch where the markets find support. Happy Investing!!!

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Mutual Funds - Do's and Don'ts

In the past few weeks I have written two posts on mutual funds, namely “Mutual Funds – What Are They?” and “Mutual Funds - Part II”. After those two posts I felt as if there was still a lot more that regular investors need to know about mutual funds. And that is why I am here. I will be writing about some things that an investor should remember/know before investing in a fund. Also, I notice, that there are a lot of myths associated with mutual funds which I would like to clear here.

Things to Remember

Diversify: Remember to diversify your portfolio. Invest in 3-4 different funds out of which at least 60-70% of your money is in well diversified funds. DO NOT put all your eggs in one basket. Do not invest all your money in only sectoral/thematic funds.

Portfolio of the Fund: Before investing your money, see the portfolio of the fund you are investing in. Make sure that about 80% of the fund’s total corpus is invested in fundamentally strong blue chip companies and only about 20% is invested in opportunistic/risky stocks. Once you have examined the portfolio, you should have conviction in it. Growth can sometimes be painfully slow but over the longer term, blue chips are more likely to outperform than any other class of stocks. All information about mutual funds is available on the internet and a screenshot of the portfolio finder section on one such site is given here.

Past Performance: While past performance is no guarantee to future performance, it acts as a good indication. A fund which has consistently performed well in the past is also likely to do so in the future. Odd spikes like an annualized return of 70% in 15 days or 30 days is not a very reliable indicator but a return of 30% annualized in a period of 3 or 5 years is usually a good indication. Invest your money in funds showing good consistent growth rates. A screenshot to check the past performance is shown here. Also important to look at is the rating of the fund given by various rating agencies.

Choose Undervalued Funds: Mutual Funds can also be overvalued or undervalued and NAV is not the deciding factor. A fund may have an NAV of 20 and still be overvalued as compared to another fund which may have an NAV of 200 and be undervalued. The important factor is the Price to Earnings (P/E) of the fund. Funds also have P/Es and a fund with a lower P/E will be considered as undervalued as compared to a fund with a higher P/E. Compare the fund’s P/E with the P/E of the benchmark index, namely Sensex or the Nifty. P/E of a fund is nothing but the weighted average of the P/Es of all individual stocks in the fund’s portfolio. If you go to this site you can see various attributes, of any mutual fund in India, like the rating of the fund, fund facts, NAV, risk and return and the portfolio of the fund. The P/E of the fund can be found in the portfolio section, as can be seen in the screenshot with the portfolio write-up.

Monitor Your Performance: Once you have done the above things and have invested the money into mutual funds of your choice, just sit back and relax. All you have to do is to come out of your slumber at least once a month and see the performance of your funds. If your funds are not giving you any returns or have returns much lower than the broader market then it may be time to change your fund. A good way of comparing the returns of your fund is to compare it with the returns of the Nifty or the Sensex (if your fund is an equity fund).


Some Common Myths

Dividends Give Extra Money: All dividends are tax free. So, all the money that you get from dividends is tax free. That is good, but then why do I say that dividends giving extra money is a myth? Let us understand with a simple example. I have invested Rs.20000/- in a fund at an NAV of Rs.150/- and the fund has now declared a dividend of 20%. Since the dividend is on the face value, which happens to be Rs.10/-, I would get a dividend of Rs.2/- per unit. I had only 133.3333 units with me (20000/150) and I would get a cheque of Rs.266.67 as dividend, which works out as 1.33% of Rs.20000/-. At the same time the NAV would also come down by Rs.2/-. So, effectively I’m withdrawing a small amount from my own funds, contrary to the notion that I had that I was getting something extra. I can’t put these Rs.267/- to any productive use. Had I left them in the mutual fund and withdrawn after 20 years, they probably would have become Rs.10000/- which would both be substantial and at the same time could be put to some productive use too. Some people instead opt for dividend reinvestment option so that the dividend amount can be used to purchase additional units in the same fund so that the money remains in the fund. But on this purchase you have to pay an entry load of 2.25% again thus paying Rs.3.55 as charges. So you end up withdrawing Rs.266.67 and reinvest only Rs.263.12. In my opinion, it is anyday better to let your money stay invested in the growth option.

NAV is Immaterial: A lot of people I have come across prefer to invest in funds whose NAV is lower, rather than investing in high NAV mutual funds. That is a myth. They do not want to invest in a scheme having a history of 8 years and whose NAV is Rs.200/- per unit but they don’t mind investing in a similar scheme with a similar portfolio having an NAV of Rs.25/- per unit with negligible history. The NAV, as mentioned in the earlier post, is calculated as the Sum of the Value of all stocks held by the fund and then divided by the total number of units issued by the fund. Thus, two fund schemes having exactly the same portfolio with equal weights will deliver exactly the same return. Let us assume that both the schemes talked about above earn a return of 28% in two years. And if Rs.20000/- were invested in both today then we would be issued 100 units in the first scheme and 800 units in the second. The NAV of both schemes 2 years hence would be 256 and 32 respectively. The value of the first scheme would be Rs.25,600/- (100*256) two years from now and the value of the second scheme would be …. Any guesses??? Yes, Rs.25,600/-.

NFOs Give Better Returns: NFOs mean New Fund Offers. All NFOs are priced at Rs.10/- and that is an arbitrary figure. They could have very well priced it at Rs.1/- or Rs.100/- or Rs.1000/- and it would have made no difference to them. As mentioned in the point above, the NAV does not matter but it is the performance of the fund over a period of time that matters. And why would anyone want to invest in a fund with no history rather than in a fund having an excellent three year track record? In the 1980s and early 1990s, all shares in the equity markets were also issued at Rs.10/- or Rs.100/- depending on the book value of the shares. Irregular pricing (at discount or premium) or via the book building route was not there. So, it used to make sense in those days to buy shares in the Initial Public Offer (IPOs) at Rs.10/- and sell it in the markets when they listed for Rs.50/-. Nowadays, most IPOs are so heavily overpriced that it does not make sense to invest in them at all. Holders of Reliance Power IPO shares would vouch for it. These days almost 90% of the IPOs do trade below their issue price within 6 months of listing. An NFO at Rs.10/- is neither overvalued nor undervalued. In fact it has no value at all till the time the NFO closes and it constructs a portfolio. This is exactly the reason why the NAV is declared 30 days after the NFO closes, because till that time there is no portfolio, hence no change in value and hence no NAV. It is a total myth that at Rs.10/- the NFO is highly undervalued.

Timing the Market Can Save Money: This is, probably, the biggest myth of all times. It is impossible to time the markets. You may be successful in catching the exact highs or the lows one or two times but will be wrong in the remaining 8-9 times. If you have conviction that markets will do well in the next two years then today is the time to invest. The key point is the ‘time in the market’, not ‘timing the market’. This article will help you more to understand about investing for the long term. And since timing the markets is impossible, the best route to invest at the cheapest rates is to continue investing small amounts for a longer time, in short – follow the SIP route.

I hope that clears all doubts regarding mutual funds. In case you still have any questions, you can post them in the comments section and I’ll answer them there. And if there are too many questions, I’ll probably write another post answering all the questions.

More tomorrow.

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Markets Tumble as Crude Advances

The US markets (Dow Jones) was down over 200 points last night (Thursday) on concerns of crude oil reaching a record high of $123 a barrel. Even the Asian markets were weak this morning and we were bound to go down with weak global cues. It was because of this reason that the Sensex opened more than 200 points down while the Nifty opened about 50 points in the red and then stayed down all through within a range of only 30 points throughout the day.

We have the 30 minutes chart of the Nifty with us today and there are some observations that we can make from it. The support trendline on this chart is lower than it was on the 60 minutes chart. Here we have support from the trendline at around 5070, which has not been broken as yet. The highs made between 5065 and 5070 on 22nd, 24th and 25th of April also provide support at these levels, which has been signified by another trendline. And then we have another trendline, and this time a downtrending one, which signifies that prices should go up if they cross this trendline at 5100. This last trendline, if seen in conjunction with the RSI signifies a positive divergence, which means that while the prices have been coming down during this period, RSI has remained more or less stable. There is another trendline, which connects the high made on 7th April and the lows made on 15th and 16th April, which also provides support at 5070 but that has not been shown here to avoid two things – firstly, and more importantly, confusion, and secondly, excessive analysis, because excessive analysis leads to paralysis, also known as analysis paralysis, says Chris Garrett.

The price of crude oil has more than doubled in the last year and a half, has become six times in the last six years and has become eight times in the last nine years. Some of the causes of rising crude oil prices have been discussed in one of my previous posts titled “Renewable Energy”. Incidentally, this article has also been published on Reuters.

This article on Bloomberg writes that countries like China, India, Russia and the middle east may be responsible for the rising crude oil prices. A few days back President Bush too attributed the rising food cost to China and India. While that may have been a little far-fetched to swallow, Bloomberg (rather, the International Energy Agency in Paris) may well be right about its claim, though if we compare the per capita consumption, US is still consuming 10 times the energy than India does.

Dance with shadows says that The burden of the rising crude price has a huge bearing on the profitability of many industrial units in India. Commodities such as aviation turbine fuel (ATF), naphtha and bitumen have witnessed a huge price increase during 2007-2008. These products are selling at market-determined prices. Their prices are up by 27-39% year-on-year. It is expected that the rising price would have a huge impact on air travel, power and polymers sectors directly. We need to prepare to pay more for most manufactured products in the future.

This clearly shows that these increasing crude prices will have an effect on the inflation in our country and CRR hikes and interest rate hikes may not be the only solution. Maybe that is why the markets went down today, fearing the worst. It could very well be the same tomorrow, depends on global cues. Plus, the inflation data is also due out tomorrow. Let us cross our fingers and hope for the best. Technical Analysis does help buy but sentiment holds the key.

Happy Investing!!!

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All Set to Go North

If you remember yesterday’s edition, I had mentioned that the Nifty may touch the 1 month long trendline and bounce back from there. That is exactly what happened today. The Nifty stayed within a narrow range throughout the day, but did go low enough to touch not only the trendline but also the support provided by the 23.6% Fibonacci retracement at 5102.25. We had also mentioned that Fibonacci retracements are sometimes pretty accurate. Talk about accuracy and we see that the Nifty made a low of 5101.50, accurate upto 1 point.

Other signs of support being provided are that even though the Nifty came down about 50 points today, the RSI kept hovering around the same levels and did not break 40. Both the price touching the trendline and the RSI finding support at 40 has been marked by blue circles. While the Nifty still did close in the red today but a bounce back from 5101 to 5140 in the last hour is a pretty good indication that the correction may be over.

I am a firm believer in blue chips. Over the years, I have seen lots of ups and downs in the markets and it is always the blue chips which have the power to surpass their previous highs, no matter what they are. I know there are many buyers out there with purchases of L&T above 4500 and Reliance above 3300. They may be sitting on a loss today but with just a little patience I’m sure they will end up in a profit.

Mid caps and small caps have their advantages too. We can take advantage of the momentum and speculation in such stocks. The only problem comes when we are holding these stocks and the market crashes. Technical Analysis gives us clear targets and stop losses. And without fail one of these levels is touched before the other. While we are better at closing positions near the targets (though, greed stops us sometimes), we are horrible at booking losses. This is where the third biggest enemy of ours (after greed and panic), hope, comes into play. It stops us from booking losses because we have seen on a number of occasions when the prices bounce back after our stop loss is hit. But when following technical analysis, discipline is very important. It is only the disciplined trader who wins over the others. But I know 80-90% of traders are not disciplined. And they always get stuck with small caps and mid caps during market crashes. And which is why I try recommending only blue chips. It is only during times like today when there are no blue chips available, that I take the help of other stocks. But it has to warned that discipline is very important when taking such trades.

Larsen and Toubro seems to have broken through its downward sloping trendline and seems to have completed a pullback to the trendline too. The doji day today (open and close at almost the same levels) suggests that the price may start going up tomorrow onwards. It seems to make sense because the RSI too has broken through its trendline and has gone through a pullback after the breakout so it has been moving in tandem with the price. It looks set for a target of around 3600 with a stop below 2890.

Gokaldas Exports, a midcap stock, but a market leader in its industry of readymade apparels, also has made a bullish pattern on the charts. With the volumes not showing anything except the breakout volumes today, can’t say whether it is a true head and shoulders pattern or not but it definitely looks like one. With a stop loss below 204, one can buy it above 235 for a target between 290 and 300.

Happy Investing!!!

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