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.

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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.

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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.

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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.

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