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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I Think The 'Bulls' Have It, The 'Bulls' Have It

The Nifty moved down in the first half of the day but in the second half it moved up to gain all that it had lost. This volatility may have been because of the F&O expiry today. There were a lot of short positions built up which had to closed/carried forward today. Maybe this upmove was because of that short covering. If it was only because of the short covering that the market went up then it may soon find resistance and come back. That will be known only after the event happens.

We have a very interesting pattern on the 30 minutes chart of the Nifty today. The pattern looks like an inverted head and shoulders pattern which is yet to be confirmed. A move above 4915 (ignoring the movement in the first 30 minutes) should confirm that the bulls are in control of the situation. Not only that, it will also confirm this inverted head and shoulders pattern (incidentally, this H&S pattern gets confirmed above 4900) and that will give us a target of 5350 on the Nifty. Talking of patterns, there are a number of occasions when the patterns fail too. This failure could be in terms of the pattern not getting confirmed, the pattern giving a false confirmation or a failure to reach the price target. The bearish H&S pattern in the RSI formed a few days ago turned out to be a failure.


But, it is quite clear by now that we are in a short term upmove. Signs of an intermediate term upmove will come when Nifty crosses 5370 and will be confirmed when 5550 is crossed. In a short term upmove when bullish patterns come, we should position ourselves on the long side. Well, if this pattern turns out to be a failure, we shall be stopped out. But not attempting an entry now is not advisable because to earn profits one has to take risks too. If you are not willing to risk a failure of the pattern, indirectly you are not willing to make profits. Remember, only those people are rewarded who have the heart to take risks. A strong support comes in at 4750. Below 4750 we may expect a retest of the earlier lows.

ABB has made a double bottom, more commonly known as the ‘W’ pattern and is now ready to move up. It may be worth buying it above 1190 for a target near 1300. One could maintain a stop loss of 1150 for this purpose.


BHEL has a chart exactly like Nifty. An unconfirmed head and shoulders pattern which should get confirmed above 2040. A buy above 2040 with a stop loss of 1920 should give a target of around 2270.

This is the 30 minutes chart of Divis Labs. It seems to have broken through its downtrending line with a slight increase in volumes. At current levels it seems to be a good buy with a stop loss of 1225 for a target of 1430.

On the 30 minute chart of HDFC Ltd. we have yet another similar pattern. As you must have noticed, in all these patterns, the first shoulder and the head are quite well defined whereas the second shoulder is very small, almost like a deformity. Yet the fact remains that it is a shoulder and a head and shoulders pattern has a target which, under normal circumstances, the stock should be able to achieve. Let us, for a moment, assume that we have made a mistake in calling it a head and shoulders pattern and the second shoulder that we are seeing just isn’t there. How do things change then? Well, even if the second shoulder is not there, the neckline will still be the same (even though it will then be called a trendline and not a neckline). And the target? That remains the same too. So, whether, or not, the second shoulder exists, things don’t change for us as long as the neckline (or trendline) is crossed. Consider buying above 2720 with a stop loss of 2600 for a target of 3250.

Till a couple of days back, Ranbaxy was looking like one of the strongest stocks in conditions prevailing at that time. This is a perfect example of how fast things can change. It was making a pattern of a symmetrical triangle, which, technically, can break out in either direction but is normally considered bearish. Once the price has broken out on the downside, things have become clearer and I am afraid, things are looking bad for Ranbaxy. A target of 400 is quite likely, at this point of time. Be careful at around 415. In good conditions, it might reverse from there too.

Fan lines are visible in this 30 minute chart of Reliance Industries. Like always, in the beginning, a stock finds resistance near a particular trendline. Once that trendline is crossed, it does not change its trend immediately but now starts finding resistance near another downtrending trendline. When this trendline is crossed, it yet again finds another trendline. These are called fan lines. In technical analysis, it is usually said that once a stock crosses the third fan line, it should get a good and a quick move. Maybe, Reliance is ready for just that. Consider buying above 2340 with a stop loss of 2240 for a target of 2510 (conservatively) and then 2600.

Apart from these stocks the cement sector is also looking good while the banks seem to be week.

Happy investing!!!

Update: This article was also published on the website of Chicago Sun-Times.

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Many Blue Chips Showing Strength

Looking at the last 7 days chart of the Nifty on this daily chart, we find that there is one blue candle, one red candle, one blue, one red and so on. This, along with the narrow range trading, indicates confusion and indecisiveness in the market. The green line just below today’s candle is the 200-day moving average of the Nifty. A close below that would be dangerous. Fortunately, it recovered before it reached there and closed the day about 80 points in the green. While the Nifty is expected to remain in this broad range of 4800-5500, there is support at the 200 day MA at 5030 and resistance, near the previous pivot high formed last week, at 5368.

On the daily chart of Larsen & Toubro, the stock has made a higher low yesterday and is now near its resistance line. With a stop loss of 3385, it seems to be a good buy if it crosses 3520 and it looks good for a target near 4000. Notice the RSI also turning back upwards after touching 40.

Ranbaxy was recommended in the newsletter of 22nd Feb. Unfortunately, on that day because of weak markets it didn’t cross our recommended level of 425. Today again it has knocked against its resistance line. The levels, now too, remain the same. Buy above 425 for a target of 500. However, we have now modified the stop loss from 340 to 390.

Look at this daily chart of Reliance Communications. Two doji days (days having open and close at almost the same level) now with today’s doji with a long lower shadow should be a good bet. Also notice the positive divergence (price going down but RSI going up) between the price and the RSI. Also the RSI fails to breach the 40 level this time around. All these are positives for the stock. Look to buy above 600 with a stop loss of 550 for target prices of around 700 and then 800.

This is the daily chart of State Bank of India. The trendline seen on this chart has been drawn from the lows made in April 2007 at a level of 915. It has been 10 months now and the stock is still finding support near this line. Touching of the trendline today and a doji day with long lower shadows with RSI above 40 are positives for this public sector bank. One could buy it above today’s high of 2140 for a target near 2600. There may be some resistance near 2280 so be careful around those levels. Keep a stop loss of 2050 for this purpose.

We again have a chart with a trendline drawn from the lows formed in April 2007 (of course, that time it had a face value of Rs.10/- as compared to the Rs.2/- now). The price of Suzlon Energy today touched this trendline and is currently trading below its 200 day moving average at 319, with today being the 4th consecutive close below it. Stay away from it for the time being. All long positions should be closed on a close below 290.

Happy investing!!!

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Pharma and IT Sector Good to Invest Into

The Nifty opened on a positive note today, found resistance immediately near 5240, came down in the mid afternoon session to reach yesterday’s lows of 5120 and in late trade again showed a good recovery to close at a level of 5210.

What we are seeing here is a 30-minutes chart of Nifty along with its RSI (Relative Strength Index) at the bottom. This chart has been shown with a number of trendlines, arrows and numbers. Try not to get confused with so many of them. If you want, you can right click on the chart with your mouse and select – “open link in new window”. That will open the chart as a larger image in a new window and toggle between the two windows to read in one window and to see the chart in the second. Let us look at the most recent set of arrows and trendlines (marked by 1). In this you can see that the price has made a bottom at the same level as yesterday whereas, correspondingly, the RSI has made a higher bottom. This is known as a bullish divergence or a positive divergence. This gives an early indication that the downtrend may soon be over. The actual confirmation comes when the price breaks the trendline, which it did in the last 30 minutes. This suggests that we should see the price going up tomorrow onwards. How long this new uptrend will last, only time will tell.

Let us go a little earlier in the chart, say the period between 14th and 19th Feb (marked by 2). We can see in this that the price continued to make higher bottoms while the RSI, at the same time, continued to make newer lows. This is known as a bearish divergence or a negative divergence between the price and the RSI. This means that this uptrend may soon be broken but a confirmation will come only when the price breaks the trendline. So even though the divergence came on 15th and 18th but it was not confirmed until late in the afternoon on 19th. Going a little earlier in the chart between 11th and 13th, another bullish divergence is visible at the place marked 3.

A technical analyst should realize that visibility of a divergence is not a signal to buy or sell, it is only an indication that the trend may change. A divergence has the same relationship with price that dark clouds have with rain. Visibility of dark clouds is only an indication that rain will come but it is not certain that it will rain till it actually does rain. For all one knows, the dark clouds may be blown away by the wind before it rains. Similarly, a divergence is an indication that the trend may change but till the price actually breaches a trendline, there is no certainty that it will. Divergences also do get ‘blown away’ occasionally. Fortunately, today it has made it certain that we may see a new uptrend now. But, since we are looking at 30 minutes charts, the trend may last for a very short period of time.

Divis Labs is also showing a bullish divergence with the RSI on its daily charts. But a confirmation from the price is yet to come. One could consider buying Divis Labs above 1450 with a stop loss of 1310 for a target of near 1650.

GMR Infrastructure seems to have broken through its resistance line while the RSI has been making tops at virtually the same levels. This seems to be a good time to buy the stock of this infrastructure company. One may look to buy above 185 with a stop loss of 164 for a target of 220.

Hindalco Industries has broken out of a W pattern (alos commonly known as a double bottom pattern, apparently, with low volumes. But these low volumes could also be attributed to the weak sentiments in the markets. Buying above 191 with a stop loss of 174 may give us a target near 220.

Infosys Technologies, and all other software services stocks have shown some good recovery in the last few days, which could be attributed to the fact, that the rupee has gone down versus the dollar. Infosys is still looking good on the charts. It seems to have broken out of a downtrending pattern and looks all set to go up. A noticeable fact is the, not so encouraging, volumes. But, a trade can be taken because of the low (comparatively) risk-reward ratio. Buy above 1650 with a stop loss below 1470 for a target near 2000.

Ranbaxy is also showing a bullish pattern. We have already mentioned Divis Labs in this newsletter which is looking good to buy. Other pharma stocks like Aurobindo Pharma and Dr. Reddy are also showing strength but because no particular buy signal has come in them, therefore, they are not discussed here. This suggests that the whole pharma pack is looking strong. The thing to consider here is that since the whole sector is looking attractive, hence buy signals in this sector may be more reliable than the others. Ranbaxy, if it is able to cross 425 is looking very attractive and is showing a target of around 500. The only negative in this pharma giant is that it has a very wide stop, at least at the moment it does. The stop loss is at 340 right now but if the price were to cross 450, we could increase the stop to 415-420. But, be sure that you buy only if it were to go above 425.

Steel Authority of India (SAIL) is very close to its resistance line. It may find resistance here, or it may breach the resistance. If it does breach it, then it should be a good opportunity to buy. One may buy it if it goes above 240 for a target of 290. This also has a problem of a wide stop of 180, to start with, but risk averse investors may keep a stop below 219 to protect heavy losses. Indications are that it should be able to breach its resistance this time. Yet, the reader has to ensure that she buys it only when it crosses 240. Ignore all price movements in the first 30 minutes.

I’ve never seen a more interesting chart than this. Sasken Communication Technologies. Notice the decline with very low volumes in mid December and mid January. Notice the volumes now. Notice the series of doji candles (doji candles are those candles having the open and close at the same level) in the last 10 days. What does it indicate? Accumulation? Distribution? It is down 70% from its top and still showing dojis? There is something serious going on in this stock. I would say that, at the risk of putting my foot in my mouth, it is a wonderful stock to buy at current levels. The stop loss, technically, is below 119 but one can keep a wider stop also to suit one’s risk appetite. Worth a mention here is that like Infosys, even Satyam Computers, Tata Consultancy and Wipro are also looking good, though they are not discussed in this edition of the newsletter. Due to space and time constraints, they are not discussed today but one can pick them up at current levels and we will discuss them tomorrow.

Happy investing!!!

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