Saudi Basic Industries Corporation (SABIC)

SABIC (Last: SAR 87.75, up SAR 1.0)

The stock is in the middle of a severe downward trend. SABIC is approaching SAR 85 level, which is two years low. Though the long term downtrend remains, in our view, probability of further decline from current levels are low and there are certain technical factors which may help arrest the decline in prices for the time being.

The stock is showing mega oversold readings after a straight line decline from SAR 110 levels. We are basing our view mainly on the emergence of divergence pattern on the 14 day RSI (see details of the pattern on the chart). This is a very reliable pattern and mostly appears after an extended rise or decline in prices. Expect modest rise in prices if everything goes well otherwise prices will show a sideways trend around current levels.

Our view may also get support for the fact that SAR 85 is very important support point. We expect accumulation cum short covering activity to emerge around this level which may keep the decline in prices under check.

Trading Strategy

In the short term, we expect modest rise in prices due to oversold readings, however, it will have a little impact on the long term trending profile. In our view, the stock will resume its downward trend once this counter trend movement gets over. Thus we recommend a sell on rise strategy till the moving average setup indicates a reversal. Major support levels are SAR 85 and SAR 70 while major resistance levels are SAR 90 and SAR 95.

ENGRO Chemicals

ENGRO (Last: Rs 101.26, down Rs 0.93)

Avoid for passive long only investors. Sell on rise for traders.

ENGRO is making lower tops since early 2008 and recently it has started underperforming the KSE-100 Index. At this moment, the stock is showing downtrend on all three counts (short, medium and long term basis) as the two weeks moving average is trading below both 12 weeks and 52 weeks moving average. We have seen some choppy trading pattern in the recent past mainly due to the flat price action exhibited by the stock for the past six months.

In our view, for a sustainable rise, the stock must clear its major resistance zone at 115-120 level. As the moving average setup is indicating, ENGRO will resume its long term uptrend only after clearing the 115-120 resistance level.

Long term investors should avoid this stock till it declares either a long term uptrend signal or sells off to recent lows. However, for short term traders, the stock is a sell on rise till it clears Rs 120 hump. Major support prices are Rs 95, Rs 85 and Rs 70.

NIFTY Trend Score

NIFTY (Last: 5216.30, up 23.45 points)

After five negative closes in a row, NIFTY managed to finish the day in the positive territory. Despite the rise, the short term trending picture is still under cloud as the Index is trading below its 2 weeks moving average (5232) and RSI is just hanging above the 50 line. However, the Index is maintaining the uptrend on medium and long term basis.

  

Today, we expect the Index to move higher and challenge its five days old highs at 5267. We may see this uptrend extending to 5300 if NIFTY manages to fill the gap between 5267 and 5300 level (See the Trend Score Table below)

Practical Investing

Investment in equity market is all about stock selection. People spent a lot of time finding the best stock at the best possible price without knowing the fact what makes a certain stock a good investment. Any stock, at given point in time, can be a good or bad investment depending on the market environment. From the hindsight, we can say that the safest stocks one can find at the Karachi Stock Exchange are Fauji Fertilizer Company (FFC) and Hub Power Company (HUBC). Both companies are backed by strong groups, financially sound and are recession proof. However, the stock price charts shown below exhibit wild swings divergent to the actual financial performance of the company during certain periods (see circles on the charts). Therefore, it proves the point that financial performance (fundamentals) alone does not guarantee positive return on investment and overall market environment (sentiment or investor perception) does affect the price.

Fauji Fertilizer Company

Hub Power Company

Does that means, investment in stocks is a bad idea or is this loser’s game? The answer is NO. However, there are certain pre-requisites. For example, to become a doctor, one needs to study every part of the human body to understand its working. To become a successful investor, one needs to have proper knowledge of fundamental and technical analysis because both are necessary to understand the working of stock market and interestingly both disciplines are intertwined.

Hardcore technical analysts may not like my idea of joining both disciplines together but, I firmly believe, fundamental analysis provides basis for the prices to move and technical analysis catches those swings. Price alone cannot move unless there are reasons for it. One may not bother to find or agree with the rational of price move but it is wrong to assume that it went up because RSI was oversold or it crossed a certain average. Price, for the sake of breakout, cannot move from one place to another. Events create swings.

Though price fluctuates daily, fundamentals do not change so often and so are long term trends. A case in point is The Resource Group (TRG) and Muslim Commercial Bank (MCB). The fundamentals of TRG are weak so is the long term trend. The fundamentals of MCB are good and price is showing a consistent uptrend (see charts). See the behavior of price and 52 weeks moving average. In fact, technical analysis is the shadow of fundamental analysis. Technical analysts should be grateful to fellow fundamental analysts who provide fodder to the price swings. God forbid, if all the fundamental analysts go on strike or resign en masse what will happen to the technical analysts?

Muslim Commercial Bank

The Resource Group

In my view, to become a successful investor, one needs to study the general market environment (politics, economic factors such as inflation, interest rates etc) and form a list of stocks after taking into account fundamental factors such as product of the company and it’s positioning in the market, pricing power, management integrity, profitability trends, dividend history and ratios such as ROE etc. One must use long term trend detecting tools such as weekly bar charts and 52 weeks moving average to understand the dominant trend and use the short term indicators such as 14 day RSI and MACD to spot entry and exit points within the broad trending framework.

Using one method alone as the basis of investment is a fallacy and best avoided. I understand this issue is debatable and you can share your opinion at this email address: ravikaml@gmail.com

The article was written on 4th January 2012.