No Change in Chart Patterns - Wait and Watch

Not much change in the Nifty chart patterns today. The Nifty traded in a very narrow range today - a total movement of only 33 points between the high and the low - not even a movement of 1% during the day. After a whole day of trading, the Nifty managed to close in the green but did not make any change in the chart patterns. Individual stocks, however, showed some interesting movements, some of which have been analysed below.

Attached above is the daily chart of Nifty. As seen above, the chart looks exactly similar to the one shown yesterday, except for the last blue candle seen today. Today, as seen, was a narrow range day and also a harami, which after an upmove signifies that a short term reversal may be coming. So, nothing much to comment there on the Nifty and our view still remains the same that it should come down to the trendline before we think of buying again.

Attached above is the daily chart of Ambuja Cements which showed a decent increase today. As seen from the chart, the price came near the trendline which was providing support near 200. The stock made a low of 201 today and reversed from there and made a high of 207 before ending the day at 206.10. This candle signifies that the short term downtrend in Ambuja may have ended for now. It may be a low-risk buy at the current levels with a stop loss of 195 and a target of between 220-225 can be expected in the coming days.

Pasted above is the daily chart of Sun TV which showed a big downward movement of more than 6% today and closed the day at 343.45 against yesterday's close of 356.60. This movement comes after a small double top formation which will be confirmed below 338. Also seen on the chart are the RSI and stochastics indicators which show a bearish divergence along with the corresponding highs on the price chart. I expect Sun TV to move down to the trendline between 323-325 before any fresh buying opportunities may exist.

On the daily chart of Havell's, as seen above, a large candle showing a downwards movement, and the kind of pattern seen seems to suggest that there is more to come. The stock may find some support between 607-610 but eventually will have to break that support and may go right up down to the trendline to find support between 550-560. Stay short on Havell's below 600.

This is a pattern which I love to see, as seen on the daily chart of Oriental Bank above. This is called a Flag pattern and is so called because it looks like a flag, as can be seen from the trendlines drawn. A flag pattern is a continuation pattern and the confirmation of this pattern on the OBC chart means that the stock may continue to go up and it may have a target of 350-355 on the upside in the days to come. The only thing that scares me is the bearish divergence seen in both the RSI and the stochastics.

Seen above is the daily chart of IRB. As seen from the chart, the price of IRB showed a big downwards movement today closing Rs.22 in the red at 119, a movement of over 15% in a single day. Not only did it show a big red candle, it also closed below the good support of the trendline at 123. It now has a target of between 85-90 in the coming days. It may either go there directly or it may show a bounce-back back to the trendline at 123 in next 2-3 days. The RSI also going below 40 signifies that there is no support expected near the trendline at 123.

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Happy Investing!!!

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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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'Boom, Doom and Gloom'

We have a new widget added on the world markets page today which gives the latest market prices of Indian ADRs listed on the American Markets. Click on the World Markets link to see. We are adding new content to our other pages every now and then. Please keep visiting them to see what's new. Very soon we are going to have a page on IPOs and on Futures and Options too.

Anyway, back to the markets. It’s all looking gloomy right now. The intermediate trend of the Nifty has been down for the last three weeks now. The short term trend had turned positive for a short period of time but that also has become negative now. The Nifty has now confirmed breakdown from two patterns. One is the channel breakdown, the one which is represented by the smaller circle or by the two uptrending

blue lines. This was a 450 point wide channel and it broke through the channel at a level of 5170-5180. Considering that the breakdown is also of the same magnitude it gives us a target of 4720-4730. The green lines shown here at 5035 and 4900 are just minor supports inbetween.

The second pattern that we are talking of is much larger and much more ‘horrifying’, to say the least. This pattern is the inverted flag pattern and is shown within the larger circle on the chart. In this sort of a pattern there is a clear trend in place (could be an uptrend or a

downtrend) and then prices consolidate within a range (which could be a straight or a rising or a falling rectangle or could be a rising or a falling wedge) and then the prices break out of the consolidation and continue the previous trend which was in place. The ‘horrifying’ thing is that such patterns are formed approximately half-way between trends. And if this indeed is half-way then the target for the end of the trend is, hold your breath, 3820.

We have been saying that we are in a long term bull market and that we should be buyers on every dip. The definition of a bull market is that we (rather, the chart) should be making a pattern of higher highs and higher lows. And the converse is true for bear markets. We have three trends which we usually talk about, namely the short term, intermediate and long term trends. Generally, we watch short term trends in the 30-minutes charts, the intermediate trend on daily charts and long term trends on weekly/monthly charts. We are already in a short term and intermediate term downtrend because a pattern of lower highs and lower lows is visible both on half hour charts and on daily charts. We have a very good support at 4600, which is from an upward

sloping trendline drawn on the weekly charts. The moment this trendline is broken that would be the first signal that a long-term bear market may be approaching. The actual confirmation would come when the previous low (which is at 4002) is broken. That is why we say that till the time 4600 is broken, we should remain buyers on dips.

But this may call for a change of strategy now. We are predicting the target for the flag pattern to be near 3820 which is well below both 4600 and 4002. If this target is achieved, we would no longer be in a long term bull market. That is why, we should now modify our strategy. Our strategy should be that “I am in a long term bull market which is true as long as Nifty is above 4600. I will assume that the long term bull market will continue to be a buyer on dips, but with a stop loss of 4600.”

We should not take any positions against the trend, which is why we are not talking of any buying opportunities right now. Life is full of ups and downs and so are the markets. Like in life, markets also see successes and failures (of patterns). Patterns do fail occasionally and this is one occasion where we would like it to fail. We would define failure of this pattern as a failure if (a) it fails to reach its target or (b) if it crosses 5650 on the upperside or (c) it comes back in the range of 5200-5650, in which case we can again wait for a pattern breakout/breakdown. As much as we may hope for a failure, one should be cautious as hopes rarely turn into reality in the markets. And the markets have their own minds. It may decide to go where we expect it to go (3820) or it may still decide to convert our hope into reality. Let's see what the market decides to do.

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Happy investing!!!


The following article has been written by Col. Mahesh Sharma of Surakshit Securities who shares his view on the markets.

IS IT REALLY ALL DOOM AND GLOOM???

All markets, particularly the Stock Markets, run on sentiments. In the middle of January this year history was made when the largest ever IPO by an Indian company (Reliance Power) was fully subscribed in less than a minute. By the time the issue closed it had been oversubscribed 70 times, which itself is a record for an issue of this magnitude. Yet, just three weeks after that we have had two IPOs, including Emaar MGF, which had been floated by a large Gulf based developer in collaboration with an Indian company, being withdrawn from the market. Such is the effect of sentiments in the market.

When the sentiment is good markets tend to ignore bad news and when the sentiment turns negative even the good news is overlooked. In today’s newsletter, we have seen the technical view of a chartist. Markets have a habit of over-reacting. In a positive sentiment there is irrational exuberance and we look for means to justify the extended valuations by discounting cash flows of future years and talk of embedded values getting unlocked. And when the sentiment turns negative we have a scenario of excessive pessimism with analysts calling it ‘doom and gloom’. The reality lies somewhere in between these two. And sooner, rather than later, the market will revert to the mean.

Let us take a rational view of what is happening today. Between 18 Jan, when there was almost a mad reaction of over 10 lakhs new demat accounts opened in a few days so that people could apply for Reliance Power IPO, and last week, when there were no takers for the IPOs of Wockhardt Hospitals and Emaar MGF, all that has changed is the sentiment. Yes, the market has lost nearly 1300 points on the Nifty, but, has there been any change in the fundamentals of the market?

We have, perhaps, a little more clarity of the American economy and it is likely that they are heading for a recession. However, the US Administration and Fed Reserve are fully alive to the situation and will do their best to ensure that suitable remedial measures are taken to protect the US economy. We have seen aggressive rate cuts by the Fed Reserve in January and there will be more to follow. Our Reserve Bank has refused to follow suit and is adopting a policy of status quo as far as the interest rates are concerned. This has led to a sharp differential (475 basis points) in the interest rates of the two countries. This is only likely to increase further when the FOMC meeting takes place next in Mar.

Water tends to flow where it has least resistance. Similarly, money tends to flow where the returns are better. The returns in Emerging Markets are likely to remain better than in US. And, within emerging markets, India, which is less dependent on exports to US and is growing largely on domestic consumption, is likely to continue to grow at over 8.5% in the next two years, at least. So, whether they like it or not, there is no choice for the US funds and institutions, but to invest in India. And, once the liquidity returns, one can imagine what it will do to the stock market, which after the recent correction is at a much healthier valuation. We have all seen what liquidity did to Indian markets in 2007, where even at a PE of 25, analysts on the media were crying hoarse to justify the rich valuations. And now, when we are down to a more reasonable PE of 17-18 times FY09E earnings, the analysts are predicting as if there is no tomorrow. All one has to do is to have conviction and start buying into fundamentally good companies, which are more oriented towards domestic consumption. So, all those retail investors and even some institutions who felt they had ‘missed the bus’ can safely think of ‘boarding’ the bus now that the valuations are more attractive.

Can the markets go down further? Yes, they can. I am not saying they will not. But then, we do not have to buy at the lowest. When the markets turn around, they may again lead to a sharp recovery. Though, I must admit that we are more likely to have a slow and gradual improvement rather than a V-shaped recovery. Nevertheless, there is not going to be too much of a difference between buying now and buying then. So, looking at things in a different light, this seems to be the best time to buy.

Good Luck!!!

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Is the Consolidation Over?

There was a comment posted on the site yesterday that the Nifty is more dependent on the Dow these days rather than the technicals. I fully agree with the point and probably it would make more sense tracking the Dow rather than all these technicals. But I feel that this is a temporary phenomenon. After all, our markets and our economy has its own fundamental value and what happens to the Dow or in the US will not have any bearing on our markets or even if it does, it will be short-lived. Indian markets do take a cue from the US markets and other Asian markets and open in a similar manner but ultimately during the day their own fundamentals (and technicals) drive the market. This is why I, generally, suggest that all signals mentioned herein should be taken only after the first 15-20 minutes are over so that the initial euphoria/panic of other markets settles down.

The Nifty remained in a very narrow range today. A movement of just 87 points in a day is nothing for the Nifty, especially when you compare it with the average range of 240 points for the last 10 days. A narrow range suggests indecision, as does a doji. A doji is when the closing price and the opening price is exactly the same or almost the same. A typical doji will have a candle which has an upper shadow and a lower shadow but no (or a very small) body. A narrow range day will have a small body but also small upper and lower shadows. These periods of indecision come generally at the market tops or market bottoms. The blue arrows on this daily chart of Nifty shows the dojis and narrow ranges and one can see that they have, generally, been formed near the tops or near the bottoms.

While the short term trend of the Nifty is up, the intermediate term trend still remains down. The pattern shown in this chart is a classic example of a rising wedge (though, it is more of a rising rectangle than a wedge). One could also call it an inverted flag. Such patterns are bearish in nature and suggest that the market could continue the previous trend before the pattern started forming. While this would be confirmed only when the Nifty comes below 5200, but a narrow range today near the top of the range suggests that we may see a down day soon. These are the early indications that we get from charts and they could always go wrong. A move above 5590 will prove this pattern wrong. We’ll have to wait and see what the Nifty decides to do.

DLF is touching its resistance near 900. While there is nothing to tell us that it might go through its resistance but the very fact that it has tested this resistance 9 times in the last month and the fact that resistances do get broken sometimes, it may be time for it to go through it. On breaking out, there is evidence of it having a target of 1120 but we should be happy with a more conservative target of 1000 in this range bound market. Consider buying above 900 with a stop loss of 858 for a target of 1000. Avoid doing anything in the first 15-20 minutes of market opening.

Financial Technologies has been consolidating in a range for some time now. Again, like DLF, there is nothing to suggest that this consolidation phase may be over but when the stock is near its support or resistance, we have to be prepared that if the stock does break out then what? Seeing the stock chart we see that it has some resistance near 2282. We should prepare ourselves to go long if the price were to go above this level. So, what do we do if it does not go above 2282? We wait till it does go through or we don’t take the trade till it remains below 2282. It has been making higher highs and higher lows and seems to be in a consolidation cum uptrend or an uptrend within a consolidation. So, with a stop loss of 2200, we go long if it crosses 2300 and we may well get a target of 2600. Avoid touching in the first 15-20 minutes.

Jindal Steel also has a chart similar to Financial Technologies. It has been showing a pattern of higher highs and higher lows within this long consolidation pattern and now seems to have broken out of it, as looks evident from the increase in volumes on breakout. It can be bought above 2630 with a stop of 2300 for a target of 3100. But what does one do if the Nifty continues with the consolidation or breaks down? What happens to all these stocks? Well, they may still go up even if the Nifty remains down. This is why individual stop losses for all these stocks are taken into consideration.

Bhagwan jab deta hai, chhapad phaad kar deta hai. That is true for chart patterns too. We again have a similar pattern in this 30 minutes chart of Neyveli Lignites with the volumes also increasing considerably on breakout. If one buys above 171 with a stop loss at 150, I don’t think a target of 210 will be too far off.

It is all becoming a little monotonous by now. RNRL again has the same pattern so wont go into the details of explaining the pattern but just notice the increase in volumes on breakout. Buy above 155 with a stop loss below 142 and a target of between 200-210 should be achievable.

Happy investing!!!

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