Market contrarians tend to believe that it is always darkest before dawn. Historically, markets of various genre have bottomed at times where is maximum pessimism. While it is difficult to believe that the last word on the Eurozone crisis has been spoken, it may be profitable to look at what the chart patterns seem to indicate, at least in the short term. An overivew of some of the long-term chart patterns in the Indian equity market seems to indicate that there may be a phase of corrective upmove over the short-term. The nature of markets is such there is a plausibility that short-term trends may morph into significant uptrends over a period of time (remember the "Green Shoots" interview of Bernanke and its aftermath in 2009)!
An attempt is made to reproduce some of the long-term chart patterns that may have a significant bearing on the view that I have held for the last one month that the equity market is not as bearish as the bond market. This optimism may be a temporary phase, but it has a decent profits for people betting in a bounce. I would think that individual stocks may give a return of about 20% (from their October-November 2011) bottom before the next down move is triggered, as usual, by the lack of policy traction amongst the Eurozone policy makers.
Bank Index
A look at the CNX Bank Index (traded on the National Stock Exchange, India) seems to indicate that the banks are due for a short to medium term bounce. This could be due to plausible monetary loosening over the short-term. While the Kagi Chart on a price basis has made new lows, the Relative Strength Index (lower pane) has been making higher lows: a text book case of positive divergence, a bullish sign. The fac that it has crossed an important trend line from its 2009 lows is sufficient reason to be slightly more optimistic about the next 1-2 months.
BEML
The other very interesing chart pattern is one of Bharat Earth Movers Limited (BEML) a public sector infrastrucutre equipment manufacturer. It is clear that infrastrucutre sector is in deep trouble due to high leverage and the problems in raising cheap financing. As a natural corollary, it is natural to expect the manfucturers to suffer quite heavily. BEML has been mauled by the bears over the past year. But interestingly, it looks like the stock can survive the carnage as it has taken support on a very long-term trendline. Once again, the positive divergence seems to be extraordinarly exceptional.
That is interesting as signs that the infrastrucutre manufacturers are stabilising may be a harbinger of better news for the infrastrucutre stocks. Once again the good news may be in the form of a decline in interest rates or monetary policy easing. It could also be because the stock has been so badly beaten down that investors now consider them to be at attractive valuations.
Only time will tell which side is correct.
ABAN OFFSHORE
Personally, I find this to be one of the most interesting stocks at the present juncture for a number of reasons. If there is a credit crunch, this stock should be on the verge of bankruptcy. The simple reason being that it has debt of nearly Rs.13,000 crores (nearly US$2.5 billion dollars). That kind of debt is difficult to service even for a sovereign. The reason why the stock is interesting is due to the fact that the positive divergence is remarkable. One could only speculate on the causes for such buying, but nevertheless it is imperative for investors to keep a close track on the stock.
The reason why we have cited individual indices and stocks is because at times, they may exhibit some early signs of investor interest. The fact that Banking, Infrastructure equipment manufacturers and even highly leveraged companies in the resource sector drawing investor attention should be sufficient reason to be careful and reason to be agile when investing.
It is pertinent to note that as I have constantly emphasised, I continue to be extremely pessimistic about the macroeconomic outlook for the global economy. I do not think that we will witness a roaring bull market on the back of a bouyant economy for a very long time. But, if we have another round of Quantitative Easing then there is no reason why we should not have another sharp rally. The larger the size of the easing, the larger the short-term rally.
There is however, one catch: Positive divergences are rare patterns that take long time to build. Due to the time that they take to develop, they are considered to be important patterns in technical analysis. Any failure of the patterns would be disastrous and is often associated with new lows. Hence, there is need for prudent investment strategies based on an individual's risk profile.
NOTE: As a matter of policy, we do not issue any buy/sell recommendations. The above charts have been provided in order to make a larger point.
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