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[jlfmi]

Nifty Pattern Forming In This Foreign Market

The chart of India's Nifty 50 Index is potentially forming a bullish "cup-&-handle" formation.

While the U.S. stock market spins its wheels, it is appropriate to look around the globe for other potential opportunities. One such opportunity may be arising once again in India. Indian stocks have been had a particularly strong decade, especially since a key breakout about 5 years ago. Then, about 2 years ago, India's stock market broke out again, this time completing a bullish pattern on the chart called a "cup-&-handle" (C-&-H).

As a refresher, the “cup-&-handle” is historically a pattern with very bullish implications. It involves 2 parts, generally showing the following characteristics:

The Cup: This phase includes an initial high on the left side of a chart, followed by a relatively long, often-rounded retrenchment before a return to the initial high.

The Handle: This phase involves a shorter, shallower dip in the stock and subsequent recovery to the prior highs.

The bullish theory is predicated on the idea that after taking a long time for a stock to return to its initial high during the “cup” phase, the “handle” phase is much briefer and shallower. This theoretically indicates an increased eagerness on the part of investors to buy the stock since they did not allow it to pull back nearly as long or as deep as occurred in the cup phase. Regardless of the theory, the chart pattern has often been effective in forecasting an eventual breakout and advance above the former highs.

In India's case, it has had a recent penchant for forming C-&-H patterns -- and following through. Here is a chart we posted a year ago demonstrating the series of C-&-H patterns on India's S&P BSE SENSEX Index over the past decade.

Well, we might just be able to add another cup-&-handle to India's chart. Here is the action in India's Nifty 50 Index over the past 12 months.

To us, it looks like a cup formed in the Nifty during the August 2018-April 2019 period. And over the past month, it appears as though a handle has been added to the pattern. If this interpretation is correct, Indian stocks may be poise for yet another breakout and up-leg.

In a Premium Post at The Lyons Share, we’ll take a look at the best way to take advantage of this potential opportunity in Indian stocks.

Want to know what investment moves we are making in India and around the globe? We invite you to check out The Lyons Share, a daily “all-access” pass to our research and investment moves. Given what may be a treacherous emerging market climate, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Indian Stocks At A Crossroads

The resolution of the Indian stock market’s current test of resistance could set the stage for either a run at all-time highs, or a test of the 2014 breakout area.

On March 7, 2014, we highlighted the fact that the Indian stock market was breaking out above a 6-year series of peaks to an all-time high. It would proceed to rally more than 40% over the next 12 months. In February of last year, we noted that, based on various charting analyses, the rally in “Indian Stocks May Be In For A Breather”. Indeed, on March 4, 2015, almost exactly 1 year following the breakout, the rally ran out of gas. The Indian market would proceed to trend lower for the next 12 months before bottoming (at least in the near-term) on February 29, 2016 -- almost exactly 1 year after it peaked.

Fast forward to today and we see that the Indian stock market has bounced along with most of the global equity markets. Also like most markets, the Indian market (as represented by the Nifty 50 Index in the charts below) has reached an area on its chart containing multiple levels of potential resistance. Among others, these potential areas of resistance include:

The underside of the broken post-2009 up trendline

The post-2015 down trendline

The 200-day simple moving average

The 500-day simple moving average

A closer look:

The reaction of the Nifty at this juncture could determine whether this post-February bounce has any more legs to it -- or whether it has run its course. We never want to anticipate a breakout so the benefit of the doubt should go to the bears and this resistance holding. However, should this convergence of resistance be overcome, the bulls would quickly regain the ball.

Lastly, we do not want to overstate the importance of this current test of resistance. However, the  decision at this crossroads could set the stage for the next move of an even greater magnitude. We have mentioned a number of times the not unlikely chance that, at some point, the Indian stock market will return to test the 2014 breakout levels. There certainly is no rule that price has to test that breakout point, but these levels tend to act like a magnet, often inviting at least one test before a more durable advance.

Therefore, should the Nifty fail at current resistance, that may put a test of the breakout level in its sites. And while that may seem like a dire outcome, the breakout level is only about 5% below the February lows. So it is certainly a conceivable destination.

On the other hand, should prices surmount these areas of resistance, not only are the short-term rebound prospects enhanced, but the bigger picture improves greatly as well. We view the Indian market as being in a secular bull market and merely undergoing a post-breakout breather. It wouldn’t be a sure thing, but a breakout above resistance here may suggest that the breather is over. And in that case, an assault on the all-time highs, and beyond, may not be far behind.

For now, we’ll just take it a step at a time. A breakout above nearby resistance and the bulls have the upper hand. A failure here, and the bears still have the ball.

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Photo of Grand Trunk Road, Kolkata, India from Steve McCurry’s Blog.

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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

India’s Bull Market Threatening A Key Support Level

The Indian stock market is threatening a support level key to maintaining its uptrend.

On September 11, we wrote a post titled “Indian Stocks Ready To Resume Bull Market?” At the time, the Indian S&P BSE Sensex Index was hitting what we determined to be the first critical support level since topping out in March (see our February 24 post “Indian Stocks May Be In For Breather After Banner Year”) The support consisted of 3 key Fibonacci Retracement levels from the major lows in 2009 and 2012 as well as from the 2014 breakout level. Each of the levels lined up in the same vicinity near 24,700:

23.6% Fibonacci Retracement of 2009-2015 Rally ~24,755

38.2% Fibonacci Retracement of 2012-2015 Rally ~24,571

61.8% Fibonacci Retracement of Rally from March 2014 Breakout Level ~24,756

As it happens, the Sensex did in fact bounce near the support level identified -- at least for about 5 weeks.

If you can see in the chart, the Sensex managed to rally about 11% off of the early September lows. However, as you may also notice in the chart, the index is again pulling back in the direction of those lows. Typically, this would be a normal, and even welcomed, development as a re-test of the initial low could provide for the placement of a stronger bottom. The only problem in this instance is that should the index continue all the way down to the previous low around 24,800, it would necessarily break another key level of long-term support.

As the next chart shows, since 2003, there has been a well-defined UP trendline supporting the Sensex (on a log scale). The latest test of the trendline was at those early September lows. After the intermittent bounce, the index is again testing the trendline now.

By our calculations, the post-2003 UP trendline presently sits at around 25,590. The Sensex closed today at 25,483, so the trendline is squarely under attack at the moment.

One factor working against the trendline holding this time is the frequency of recent touches. Prior to September, the Sensex had not touched the trendline in over 2 years. That fact increased the likelihood of the trendline holding. However, with two touches now in close proximity, there is greater danger of the trendline giving way. One way of looking at it is that the September touch of the line was only able to spur a shallow and short bounce. That suggests the trendline’s support influence is waning.

Should the trendline be broken, there may be a few mitigating factors in its negative connotation. First off, the Fibonacci support mentioned above now lies just below the rising trendline. Thus, there is support not too far away should the trendline give way. And, as we mentioned, a retest of those September lows would not be a terrible thing.

The other potential mitigating factor is that another (probably more) popular index -- the Indian CNX Nifty Index -- has a roughly 3% buffer before it hits its post-2003 UP trendline. By the way, that is close to the same distance that the Sensex is currently above its key Fibonacci support. Therefore, it is possible the Sensex could break its trendline and retest its September low while the Nifty simultaneously hits its post-2003 trendline -- and then be on its way higher again.

That is not a prediction but one possible scenario. The point is that, while the trendline is key, there is a reasonable scenario whereby the trendline breaks but does not result in significant damage. Should the September lows and Fibonacci support give way however, the next support would be the subsequent sequential Fibonacci support levels in the lower 21,000′s. That is also the level of the 2008-2013 Sensex peaks that begat the early 2014 breakout to all-time highs.

Should the Sensex break the post-2003 UP trendline, it would certainly be a negative for the Indian bull market. However, with additional support not much lower on the index as well as on the Nifty Index, a trendline break may be short-lived. If those additional levels also break, a test of the 2014 breakout level may be in store for the Indian stock market. Such a test is likely an inevitability anyway at some point. But this would probably bring it about more quickly. Should that occur, the odds of a hold should be good -- and perhaps provide the springboard to the next big up-leg in the secular Indian bull market.

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Photo of a bull on the tracks in front of an Indian Railways train from YouTube (he was fine).

More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Indian Stocks Ready To Resume Bull Market?

After consolidating their big run, Indian stocks are approaching a potential significant support area.

Our choice for country stock market of the year for 2014 was India. With all due respect to China and its flashy, parabolic rally during the latter half of the year, the Indian market was much more our cup of tea as investors. After an initial secular bull market rally from 2003 to 2008, the Indian stock market consolidated those gains into 2014. On March 7, our Chart Of The Day revealed the breakout of the Indian S&P BSE Sensex Index from this long base formation. Unlike many of the breakouts in recent years, this one held and the Sensex went on to rally for roughly the next 12 months.

In January to March of this year, Indian stocks encountered an area of potential pause that we had identified on the Sensex charts around 30,000. We targeted this area due to a confluence of Fibonacci analyses. As you probably know, we find much value in Fibonacci tools, especially when various levels line up in close proximity with one another. This was indeed the case with the Sensex Index based on various Fibonacci Extensions and Projections derived from prior rallies and ranges. We detailed these in a February 24 post titled, “Indian Stocks May Be In For Breather. Here is the chart from that post:

From February 24:

The Sensex did indeed run into resistance in the identified area, topping out on March 4 at 30,024. Since then, it has fallen as much as 17%, as of this week. So it would have been a good call to trim some exposure, or avoid the market altogether, back in the 1st quarter. The good news is that the Sensex is now approaching a potential level of support, based on an assortment of analyses.

First off, we have another one of those Fibonacci clusters. This time, it consists of 3 key Retracement levels from the major lows in 2009 and 2012 as well as from the 2014 breakout level, all lining up in the same vicinity near 24,600:

23.6% Fibonacci Retracement of 2009-2015 Rally ~24,755

38.2% Fibonacci Retracement of 2012-2015 Rally ~24,571

61.8% Fibonacci Retracement of Rally from March 2014 Breakout Level ~24,756

Here is the chart showing the Sensex approaching this confluence of Fibonacci levels.

The 2nd piece of potential major support comes from the long UP trendline from the kickoff of the Indian secular bull market in 2003. Using a logarithmic scale, this trendline precisely connects the 2003, 2009 and 2013 lows. And it is fast approaching current price levels now.

Considering the state of affairs in most global equity markets, i.e., working off the recent post-crash cobwebs, a retest of this week’s lows in the Indian market would not be surprising at all. Even a new marginal low would be unsurprising, and perhaps even expected. On such a retest, however, the Sensex should hold the Fibonacci levels mentioned above if the market is to resume its bull market in the near future.

Additionally, a temporary break below the post-2003 UP trendline would not necessarily equate to the demise of the Sensex’s bottoming chances. However, any break would need to recover the trendline in very short order. Failing to hold, or quickly regain, these key levels would open up the breakout level around 21,500 to a potential test. And while that will likely be in the cards eventually, the Sensex does stand a good chance of bouncing from the nearby area first.

In Indian culture, it is common practice to worship the “bull”. Should the level mentioned above be successful in supporting the Sensex, the country’s investors may well be worshiping a different kind of bull for some time to come.

(No disrespect meant by the analogy.)

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“Bull.” photo by Prabhu B Doss.

More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Indian Stocks May Be In For Breather After Banner Year

Almost 1 year ago, we issued a Chart Of The Day on India's main stock index, the S&P BSE Sensex. After topping out near the 21,000 level in 2008 and 2010, the Sensex returned to that level in late 2013 and early 2014. In the post-2008 process, the index formed arguably an ascending triangle or perhaps a variant cup-and-handle formation (or maybe even some alternate pattern). Either way, the pattern was a bullish one in that it was setting parallel highs, yet higher lows. This combination typically resolves itself to the upside and indeed the Sensex broke out to new highs in early March 2014 (incidentally, we have posted recently regarding similar chart patterns involving Asian Tiger Cubs Indonesia, Thailand and the Philippines).

Aided by a favorable election of a pro-business prime minister a few months afterward (at least that was the popular narrative), the BSE Sensex never looked back following its breakout. The only better breakouts than those that test the breakout point and immediately bounce are those that never even test that breakout point. They just run immediately, refusing to offer those who missed the breakout a discounted entry point. This was the case over the past year with the Indian stock market. From the breakout point to its recent high, the Sensex has rallied as much as 42%, earning our equity market of the year award for 2014.

Another key characteristic of the breakout over the past year is that it has validated the hypothesis that a secular bull market began in the Indian market in 2003. The new high above the 2008 and 2010 levels suggests that perhaps over the remainder of the decade or so, the market should be able to continue to make new sustainable highs. That said, no market goes straight up forever (notwithstanding U.S. stocks over the past 2 years). And just recently, the BSE Sensex Index has entered a zone that we identified as a possible first area of resistance.

The rationale behind potential resistance near here is a cluster of key Fibonacci measurements stemming from the index's price patterns from 2003 to 2014. The close proximity of each of these levels reinforces confidence in their potential impact. Specifically, the levels stem from the following analyses, as laid out on the chart:

38.2% Fibonacci Projection of 2003-2008 Rally ~28,250

61.8% Fibonacci Projection of 2009-2010 Rally ~29,000

161.8% Fibonacci Extension of 2008-2009 Decline ~29,350

261.8% Fibonacci Extension of 2010-2011 Decline ~30,500

By no means are we putting the nail in the coffin on the Indian rally. To the contrary, we don't think the significance of the breakout of a year ago can be overstated. It is our view that it validated the presence of a secular bull market in Indian stocks. We are simply saying that, particularly given the close proximity of the 4 key Fibonacci resistance levels, the nearby area may present a challenge for the market in the intermediate-term. Whether that means taking profits, putting off adding new exposure, selling some option premium, etc. is up to each individual. We would not be surprised though to see the Indian stock market take a bit of a breather near here within its very bright longer-term picture.

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"Jai Hind" photo by Cajetan Barretto.

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[bencarlsonyahoofinance]

The Most Exciting Stock Market in the World

Emerging markets have been a disappointment to stock investors the past few years. Through yesterday, the Vanguard Emerging Markets ETF (VWO) is up less than 3% per year over the past three years and less than 4% per year over the past 5 years. In 2014 VWO was basically flat.

But there was a bright spot in an otherwise underwhelming 2014 for emerging market performance -- India. The iShares India 50 ETF (INDY) was up almost 30% in 2014 and it's already up another 10% so far in 2015. And while the recent performance has been impressive, since the launch of INDY in 2010, the ETF is only up 21% in total or around 4% per year through the end of 2014.

The case for investing in India comes from a combination of demographics and political reform. By 2020, the median age of the more than one billion people in India will be just 29 years of age, making it the youngest country in the world. As this large demographic becomes more educated, the working population of the country is going to explode, making for a huge new class of consumers.

Prime Minister Modi has also shown strong political leadership by making it a point of his agenda to create market-friendly reforms. This includes making structural changes to the country's banking system, allowing more foreign investment and removing regulations that hinder industrialization.

Many emerging countries are heavily reliant on commodities. This is not the case with India as they import many natural resources, including oil. This means lower commodities prices should help the country and their citizens by offering more disposable income.

With the latest surge higher in prices, India's market is by no means cheap. The BSE Sensex trades at roughly 20 times earnings. So the stock market in India will likely cool off at some point, but the future of the country remains bright.

Photo: Trey Ratcliff

[allstarcharts]

The Nifty 50 Hits All-time Highs, Now What?

What a run it’s been for stocks in India over the last few years. I really love everything that we’re seeing out of that country. A year ago I was pounding the table to get long India though some of the more liquid US ETFs (see: Not All Emerging Markets Are Created Equal). While the other BRIC nations were breaking down to new lows, Brazil and Russia specifically, India was somehow breaking out to new highs. Relative strength like that simply cannot be ignored. It would be irresponsible to. Sure enough, look at India a year later and look at these disasters in Russia and Brazil. What a joke they’ve both become….

Anyway, India is our main focus today as the Nifty Fifty hits all-time highs. Here is the long-term chart showing the beautiful uptrend over the past few years within the context of a much more massive run up:

Today I simply want to point out the consolidation over the past 6-7 months since the initial explosive rally in India early last year. We’re looking at a daily bar chart of the Wisdomtree India Earning Fund $EPI which includes holdings like Reliance Industries, Infosys, Tata Motors, some Indian Banks, etc. etc. Excuse all of the spacing between the bars, but a global ETF like this that trades opposite hours to its U.S. ETF will gap up and down almost daily. With that said, look at this thing breaking out:

Notice how in December, prices briefly broke down below the bottom end of the range, only to quickly bounce back into it. That, in my opinion, was the catalyst to finally break this out to new highs. When people talk about “Emerging Markets”, it tends to be all of them as a group with different, random weightings. I do this myself. But I think that some of these are so different than others, that not only should we look at them and compare them as a group, but looking at each one on its own is important as well. For example, India looks nothing like Russia….

Based on the size of this base I think there could be a lot of upside in this name. The old saying is, “The bigger the base, the higher in space”. The measured move target alone based on the vertical length of the base takes us to 26. But I think the fact that we are talking about such an obnoxiously extended base (where I have been waiting so patiently for a resolution), can take us much much higher than 26. The 261.8% Fibonacci extension of the base is around 28.50. That looks to me like a reasonable target.

From a risk management standpoint, this is only something we are willing to be long above the highs from the past 6-7 months. Below that and we are back into this range that we do not want to be a part of. So the most important thing, to me at least, is the risk/reward. In this case, it is obviously very much skewed in favor of the bulls.

From a sentiment perspective, I think there is just way to much hate towards India right now. Our data suggests that we had historic bullish sentiment last May, which is typical of market participants being too late to the game. They loved it most at the worst possible time; at the top. They didn’t like it anywhere near as much when it first broke out in February/March (see here). So now that the India ETF has done nothing since then, they are starting to hate it again. How do you not love to see that? We are actually coming off bearish extreme levels that haven’t been seen for years. I think this breakout could be for real. I don’t hear anyone talking about. They’re too busy with the ECB and deflation and other things that don’t matter to us.

We’ll stick with price and sentiment. And this one tells us the risk/reward favors the bulls.

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