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.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Is That It? Is It Already Over??

The Nifty came down as expected and found support at 5110, very close to our expectations of 5102, and reversed from there to close near 5150. The question to be asked now is – “Is that it?” or “Is the correction already over?”. Well, let us look at the 60 minutes chart of the Nifty below and try to analyse.

5102.25 happens to be a Fibonacci retracement level, which in most cases, provides a pretty accurate support/resistance to the stock. This need not be a 23.6% retracement always, but can be the 38.2% retracement or the 61.8% retracement but in most cases the reversal point is a Fibonacci ratio. So, the price reversing from close to the 23.6% retracement level suggests that it may be over. There is one more thing visible from the charts. The solid brown line happens to a trendline connecting three lows in the last one month. This line should provide support to the prices between 5090 and 5100. This level is likely to increase by roughly by 3-4 points every hour. So, hopefully, during the day tomorrow this line may be touched and Nifty may bounce back from there.

That is not the end of it. There is the Relative Strength Index (RSI) also, which touched 40 and then went back to 44 in the last hour. While it is difficult to say whether 40 will be tested again or not, but it seems likely that 40 will not be breached. This is a bullish sign and again signifies that we have already seen the end of the correction, or will see it tomorrow. So, as of now all things seem to be suggesting that we should be looking at our next target of 5441 soon.

The Nifty has lost almost 200 points (190, to be precise) from its high, yet we feel as if correction has not taken place. There are two reasons for that. One, we have got used to bigger corrections, which may not come when we are in a bull market. Maybe these are the signs we need to look into at such times. Secondly, in the last 3-4 days there have been spikes for very short time both upwards and downwards. If we take only the closing prices then we are down only 100-120 points from the top. But is a 200 point correction big enough. It does not seem so and because we have got used to bigger corrections. But this 200 points is a full 23% decline from the last big rally, which is quite significant. We may think differently but the markets have a mind of their own. If they decide, it is over then IT IS OVER, no two ways about it. No stocks discussed today.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Markets Move in Expected Direction

As expected, the Nifty did come below the upward sloping trendline and is now ready for a (hopefully, small) downmove. As discussed yesterday, the Relative Strength Index (RSI) of the Nifty has also now confirmed the bearish head and shoulders pattern. We can hope for the Nifty to cool down for sometime but upto what level that is a little difficult to say.

Hopefully, we can come to know about the possible levels with the help of the chart below, which is the 60 minutes chart of the Nifty. If we see the chart we can see that this upmove started on 18th March 2008 from a level of 4468.55 and the high was made yesterday at 5298. If we apply the Fibonacci Retracements to it, we can see that the 23.6% retracement is at 5102.25 and the 38.2% retracement at 4981.15. At the moment we are not looking at a move below this level, though, I feel 5100 should be a good level to bounce back from. Of course, conditions may change, circumstances may change.

Note: I still remember about my promise about writing more on Fibonacci in one of the weekend posts. Let me finish with my series on the Mutual Funds first and then I’ll do it. Maybe I’ll do a webinar on it.

No stocks being discussed today. Let us wait for the market retracement to finish and see where support is found.

Okay, and just before I sign off for the day, a small quiz for you. Do you know why we keep using the terms ‘Bulls’ and ‘Bears’ in the stock market? I found the answer at Digital Inspiration, which says that “According to Motley Fool, a bear market earned its name because bears tend to swat at things with their paws in a downward motion (as in "the market's going down"). A bull market, on the other hand, got its name because bulls swing their horns upward when they strike (as in "the market's going up").”

More in the next newsletter.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Some Resistance Likely for Nifty

The Nifty, as expected, remained above our trendline on the 30 minutes chart. There are no signs of a downtrend coming right now except for a few areas of weakness seen on the charts. Ignoring the big blue bar, which was more because of global reasons than anything fundamental/technical, we can see that all other candles are finding resistance near the 5230 mark. It would, probably, need a very good push now to go past 5230.

The Relative Strength Index (RSI), though, still above 60 is also showing some signs of weakness. The Nifty opened in the morning to make a new high and remained above the trendline throughout the day (in spite of the negative news of inflation measuring 7.57%), yet the RSI has not been able to cross its earlier high of 78. This clearly shows that the strength of this upmove is reducing. Looking more closely at the RSI, if it were to go below 50, it would confirm a bearish head and shoulders pattern and the price, sooner or later, would have to follow suit.

If we take a look at the daily chart of the Nifty, here too, we find that there is a lot of resistance near 5300 and there may be some difficulty crossing it. If the price does decide to come down, we have a good support near 5100 too and, personally, I am not looking at the market going below 5100. As far as the RSI on the daily chart is concerned there seems to be no weakness of any sort visible as of now. All trendlines are intact, higher lows and higher highs continuing, no bearish divergence visible and the most definite sign of bullishness is that it is still above 60. Incidentally, the price is managing to trade above its 200 day simple moving average and in the event of the price coming down we have another support at this level of 5165. Keep stop losses below 5100 for long positions.

Financial Technologies has now broken through its downtrending trendline which was providing resistance near 1775. This breakout has been confirmed by the RSI with it crossing the barrier at 60 and signifies that it is now in the bullish territory. The volumes were not convincingly high but were the highest in the last 10 days. I would say it is good buy setup at current levels with a stop loss of 1700 for a target between 2400 and 2450. There might be some resistance near 2000 levels too.

GMR Infrastructure is still below its resistance line near 169. A buy signal has not come as yet but indications are that it may come tomorrow. We shall take the trade only if a buy signal does come about. That will come, if and, when the price is able to sustain above 172 after ignoring the movements of the first 30-45 minutes of the morning. If that happens the RSI would also be able to cross above 60 and the volumes have been remaining high since the last 3 days suggesting that a breakout may happen. Buy above 172 with a stop loss of 150 for a target of near 220.

Mahindra and Mahindra also has an interesting chart. It has not yet given a buy signal but would give if it were to go above 720. The risk to reward ratio for this trade is quite high and the reader should use her own discretion whether to take the trade or not. It was only on the basis of other auto stocks showing strength that I selected Mahindra and Mahindra. Buy above 720 with a stop loss of 640 for a target of 800. This means one would take a risk of Rs.80/- to get Rs.80/-, which is why I say that the risk to reward ratio is quite high.

Maruti Udyog seems to be a good buy above 800 with a stop below 720 for a target of near 1000. If it does cross 800, it would give a buy signal confirming the breakout from the downtrending line, the volumes already high giving an early signal of an impending breakout. The only thing that is not yet suggesting bullishness is the RSI being sub 60 but it is certainly moving in the right direction.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Mutual Funds: Part II

Last week I had written a post on mutual funds titled "Mutual Funds: What They Are?" Since that post had become very lengthy I had promised to add more to it. So, here I am.

Types of Mutual Funds

There are, essentially, and broadly, the following types of mutual funds:

1. Debt Funds
2. Equity Funds
3. Balanced Funds

Debt Funds: Debt Funds are those which invest a major portion of their corpus in government securities, bonds having varying durations, company fixed deposits and call and money markets. Between 90 to 95% of the total corpus is invested into such instruments. Since these are considered as safe instruments, therefore, the returns from such funds are also low but capital, in most cases, is protected, unless the investor stays invested in them for a very short period of time and there have been violent interest rate fluctuations in that period. One can expect a return of about 8-10% from such funds. One should stay invested in such funds for a minimum of 1 year for capital protection.

Equity Funds: Equity Funds invest a major portion (80% and above) in direct equities. Since the equity class is considered to be risky and returns are highly volatile, only those should invest who have the risk appetite to pass through volatile phases. There is a possibility that some investors may lose a part of their capital if they stay invested for a short period of time or if they invest in a bear market. To reap maximum benefits of an equity fund, one should plan to stay invested for a minimum of 4-5 years. One should expect a return of 18-20% from such funds.

Balanced Funds: As the name suggests, such funds invest about 50-60% of their total corpus in debt instruments and the remaining in equity instruments. This is done to reap advantages of both types of funds and to better the return as compared to debt funds and to reduce the risk which is there in classic equity funds. To lower the risk, one has to compromise on the returns, which are usually between 12-15% in such funds.

Loads

To run a Mutual Fund, there are costs and these costs are ultimately recovered from the investors in the form of loads. While most of the debt funds are no load funds, most equity funds have entry loads. In general, all equity funds charge an entry load of 2.25 to 2.5% while debt funds do not charge any. Both equity and debt funds are exit loaded on an early exit. While an equity fund charges 1% load on an exit within 6 months, a debt fund charges 0.5%. Debt funds are load free after 6 months whereas equity funds charge 0.5% if withdrawn between 6 and 12 months.

What Funds to Invest In?

Each investor has to see her own risk appetite. If you are the kind of person who would not like to take any risk whatsoever, then debt funds are the right choice. A person with a high risk appetite can go in for equity funds for higher returns while one can follow the ‘middle of the road’ approach by choosing balanced funds.

Equity funds come in different styles like thematic funds, sectoral funds, funds based on market capitalization etc. An investor should choose to invest a major portion of her portfolio in funds which are ‘evergreen’ like large cap funds or blue chip funds or well diversified funds. A part of the portfolio can go into other funds to take advantage of the ‘flavour of the season’. Keep your funds portfolio well diversified to reduce risk and get reasonable returns. Divide your money into 3-4 different funds but not so many that it becomes difficult to keep a track.

Today there are various funds like mid cap funds, small cap funds, power sector funds, media funds, banking funds, infrastructure funds and various others. All these concentrate on stocks of a particular sector or a particular capitalization and leave a lot to be desired from the power of diversification.

SIP is the Way to Go

Since timing the markets is a futile game (as one can never be right all the time), the best way to invest is to invest systematically. SIP is an acronym for Systematic Investment Plan. Under this plan, you set aside a particular amount (which could be as low as Rs.500/- with no upper limit) every month for investment in a fund. That amount is used by the fund to allot units to you based on the NAV of that day.

As an example, let us say you invest Rs.2000/- every month on the 15th. On 15th of last month, the NAV was Rs.20/- so you were allotted 100 units. On 15th of this month, with the improvement in the markets, the NAV increased to Rs.25/-, thus allotting you only 80 units. Then we witness a heavy crash and on 15th of next month the NAV falls to Rs.16/- which would then allot you 125 units. This means that you are buying lesser units when the price goes up and buying more when the price is low, thus decreasing the average price of holding. This way you acquire a total of 305 units for Rs.6000/- thus bringing your average to Rs.19.67/-. Alternatively, if you were buying 100 units each time, you would have spent Rs.6100/- and still bought only 300 units giving you an average cost of Rs.20.33 per unit. Thus, SIP helps you in bringing your average lower, which is also known as Rupee Cost Averaging.

Another advantage of SIPs is that you automatically save a small amount every month rather than a lumpsum every year. It will be easier for you to save Rs.5000/- every month rather than Rs.60000/- every year.

You can read more about SIPs on this page.

There is still a lot I need to talk about mutual funds but I guess I need one more post for that. Will upload it sometime next week.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Prudent to be Cautious at Current Levels

The markets opened with a small positive bias near the highs of the day but could not sustain those highs and it wasn’t very long before they started slipping down. They made some attempt to recover in the mid-afternoon but failed and closed at the lows of the day.

Above is the 30 minutes chart of the Nifty. As seen from the chart, it currently stands at support at the blue trendline, which has been providing support to the prices for the last fortnight. There is nothing bearish about the prices as of now. What is worrying is the bottom half of the chart. That is where the bearishness is visible. While the price has gone on to make a higher low, the Relative Strength Index (RSI) has actually gone below its previous low, which is giving a bearish signal. One must be careful at these levels as the markets can come down because of this bearish divergence between the price and the RSI.

There are two things that can happen now. Either the Nifty can decide to break the trendline by going below 5150 and come down to test its lower supports (marked by the dashed brown lines at 5080, 5020, 4995 and 4950). Or, alternatively, it may move between 5150 and 5180 for a better part of the day tomorrow so that the RSI cools down some more and comes between 40 and 50 and then go on to resume the uptrend. What it will finally decide to do, we’ll only come to know by seeing the price movement tomorrow morning. If the market does decide to go up and crosses its most recent high at 5230, then we are looking at a resistance near 5300.

Divis Labs seems to have made a bullish head and shoulders pattern on its daily chart. The only hitch seems to be that the right shoulder is not very well formed. But what is heartening is, is the fact that the breakout was confirmed with a big spurt in volumes. This seems to give us a small confirmation that the breakout (and the pattern) may not be false. Consider buying at current levels with a stop loss of 1360 for a target of between 1750 and 1800.

A similar pattern seems to have been made on this daily chart of Praj Industries. Likewise, it seems to be a good buy at current levels with a stop loss of 165 for a target of near 270. Just like the chart of Divis Labs, this chart too has confirmed the completion of the head and shoulders pattern with huge volumes.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!

Webinar on Moving Averages and Trendlines

Below is embedded a video seminar (webinar) which talks about trends, trendlines and moving averages. In case you like this webinar, and want more to come in the future, please click on the comments form below and leave your remarks

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!