Monday, June 30, 2008

In Praise of Mumtaz

In the recent IIFA awards in Bangkok, star of the yesteryears, Mumtaz was honored with a life time achievement award. Those of us who remember her were delighted at this honor.
Here is a YouTube link for one of her earlier songs:
http://www.youtube.com/watch?v=E9VKlgnWmQo&feature=related

This is my third blog entry for Monday. there are two more,. Please scroll down to read them.

BIS Warns of deepening contraction

Not exactly bed time reading. The topic is written in the Blog - "Naked Capitalism" - http://www.nakedcapitalism.com/2008/06/bis-warns-of-deepening-contraction-not.html
Here are selected lines;
A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate.
........
"The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point," it said.
"These fears are not groundless. The magnitude of the problems yet to be faced could be much greater than many now perceive," it said. "It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels."
Cheers!

Panic in the Stock market

The Market continued its decline today, with the NSE Index falling by another 94 points to close at 4040. Today's low was 4022. The last time the Index made a low below 4050 was inA ugust 2007 when it touched 4002 - which was the lowest point before the final bull market rally to 6350.
The Nifty is now testing the August 2007 lows. There seems to be a sense of panic in the market. July futures were trading at an 80 point discount, closing the day at 3960 ( cash index at 4040). Are the futures telling us there is more downside coming, hence the discount ? Or, was there a panic in the market causing this large gap between cash and futures ? There is no clear answer, since only time will tell us what the reason was.
The intermediate trend of the market is down. The minor trend is down. The deep discount in futures does suggest that the market is 'oversold' and waiting for a relief rally. The start of a rally should be good reason to take profits on existing short positions. Any signs of exhaustion in the uptrend (the one that may start) will be good reason to enter new shorts.
The bear market will end when the lows made are not broken. This will be happen when the Nifty rallies, then falls again to make a higher low. As of now, with new lows made every day, there is no evidence of the market bottoming out.
There is a band of support in the 4200 - 3600 zone. It is possible that the Index may find support as it drifts towards 3600. Much will depend on International markets, the politics affecting the stability of the central government and inflation rates that come in every friday.
Traders strategy should be to go with the intermediate trend - this trend is down. If a minor rally starts, take profits on any short psoitions then wait for (a) the rally to end which will signal the start of another round of down moves, or (b) higher lows to be confirmed which will signal the start of a new bull market.

Sunday, June 29, 2008

Back to the great depression ?

I just have to continue writing this blog. Scroll below to see My Blog List in the left hand column. This list contains a link to "The naked Capitalism" blog. Search for the article - Back to the great depression ? and read it. Scary.
Here is the first paragraph:
A story in the UK's Times give a recap of the gloomy forecasts for the US and world economy, including a particularly cheery prediction by a SocGen strategies that foresees that the Dow will drop to 4500 and the S&P 500 to 500. Not included in this forecast is a grim warning from Barclays and a forecast of a US financial meltdown in the next few weeks from Fortis.
Cheers.
P.S. I now have three blog posts for Saturday and Sunday including this one. Scroll down to read the other two.

Is a falling stock price a bargain ?

In India, the bear market has caused havoc in the price of real estate stocks.
Sobha developers has fallen from a high of 1250 in December 2006 when it listed to 296 on June 27, 2008, Parasvanath from 600 to 132, Unitech from 560 to 182, Omax from 620 to 139, DLF from 1250 to 425.... I think you get the idea.
At this point, it is fair to wonder if these stocks are buying opportunities. After all, stock prices are unlikely to become zero. (see may earlier post below: How low is Low).
The question is: Should we buy real estate stocks now that they have fallen so much ?
The answer is: NO. In a falling market, trying to buy a bargain is like catching falling knives (you must have heard this on CNBC - this phrase is a favorite with analysts). After all, When DLF fell from 1250 to 600, it was a bargain, wasn't it ? But the price continued to fall, reaching 425. How do we know it is a bargain now ? Maybe, the final low will be 250. maybe not.
We should not try to forecast the lowest possible price in a bear market. We should let the market decide where the final lows will be made.
For traders, watching market movements will give a signal that a final low may be in place. How ? When a stock makes a higher low, this gives us the first signal the the stock price is finding support. This is the time to consider buying the stock. We may still go wrong since the price can fall again, but at least we have some basis for buying. Real Estate Stocks continue to make new lows, therefore they are not buying opportunities yet.
Patience. This is the biggest friend of the Investors & trader.

Saturday, June 28, 2008

Markets fall Again: How low is Low ?

Well, this reads like a deliberate tongue twisting line: How low is low. But it was not written to test your clarity of spoken English. I just thought about the idea that markets will continue to fall indefinitely, then penned this headline.
I have good company on CNBC as fundamental analyst after fundamental analyst appears on their shows and then says with a poker face: this is not the time to buy. They are quite correct, but I never thought I will see the day when a fundamental analyst actually gives a call to stay away from the market. The idea that all of the public money is staying away must be quite horrifying for them. But, they are bearing the pain with great fortitude.
Now, the above lines have been written in a light vein. Please do not take it seriously. All of the analysts are good friends and fine people.
Did I write: the markets will continue to fall indefinitely ? Dont you think so, given the absence of optimism ? Fortunately for us, stock markets represent an asset class that is not going to become zero. Individual stocks can become zero or almost zero, but not the market. This means, the bear market will end before the Nifty reaches zero. While not very comforting, at least it gives a starting point on where the bear market could end - above zero. Let us carry this reasoning further. Not just zero, stock markets will have a value. The top of the market before the 2001 - 2003 bear market was 1818 in Feb 2000. This level should provide support on any new bear market decline. We now have a number - the Nifty is likely to find support at the highs of the 2000 bull market - at 1818. I am not suggesting that the Nifty will fall to 1818 - I am just saying that this level provides support and the Index is unlikely to go below it.
The Nifty has closed at 4136, down from the lofty highs of 6350 seen just five months ago in January 2008. We are down by 2214 points. Now, if the Nifty were to fall all the way to 1818 we would decline by another 2318 points. Thus, in the most terrible scenario, the next leg of the decline will be equal to the decline of what we have already seen.
This becomes better. It is fair to suggest that the Index may not go down all the way to its year 2000 highs. Since then, positive fundamental changes have taken place in the Indian Economy. Thus, the Index is likely to find its bear market bottom at a level that is higher than 1818. This means, the next leg of decline in the ongoing bear market is going to be less than the decline which we have already seen in the past five months.
We will not go into the forecasting business. We are traders, not fortune tellers. Let the market falls wherever it wants to. For us, the larger part of the decline is probably over.
It is difficult to suggest that the decline is over and done with. We have no evidence till date. On Friday, the Nifty hit a 10 month low - this is not the sign of a new bull market. Therefore, investors must stay away fom this market. They should also treat all rallies as deceptive bear market rallies unless the first sign of a bull market emerges - a higher low.
To our original question: How low is Low - the answer is that it is probably higher than 1818.

Thursday, June 26, 2008

Go with the Trend

Just to cheer you up:
from www.marketwatch.com
Stocks in Europe ended Thursday at their worst closing levels in over two-and-a-half years.
Dow Industrials at nearly two year intra day low.
In India, if the Nifty were to reach its lowest level of the last two and a half years, it would be trading at 3000 (Today's close: 4315). This tells us that Indian markets continue to outperform, and, if our market does decide to follow its European and American counterparts, there is a lot of room to move down.
Traders should ignore these warnings of doom and gloom. they should go with the flow of the market. In simpler language, go with the trend. The trend is firmly down for now, so either go short or stay away.
This is my third blog entry for the evening. two more are :
Brokerage Stocks are out of fashion
Bear market rallies; What did you Sell today ?
Just scroll down to read these entries.

Brokerage Stocks are Out of Fashion

http://www.marketwatch.com/, reports today:
Brokerage ratings cut
The Goldman analysts said in a research note that fundamentals for the major brokerages continue to deteriorate, adding that any recovery will take longer than originally anticipated.
....
"The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we would have thought," Tanona wrote. "With client activity trends likely to slow down over the next couple of months, we felt a less aggressive stance ... was warranted."
While the USA has finally woken up to the risks associated with owning brokerage stocks, the Indian Investor has not yet become aware of the possible scenario in which brokerage stock prices can come tumbling down like Humpty Dumpty.
As an example, India Infoline is quoted at 550. The stock had started its bull market from 80 in July 2005 to touch 1975 in Janaury 2008. The share price remained above 550 for just 13 months, while it remained below 550 for 26 months - during the period when the bulls were in control. Support for the stock comes at 400, then at 225. Take your pick.
The next two years may well see a big carnage in the brokerage business, with just five major brokerages finally controlling 95% of the business, while many small boutique brokers will share the rest. This has happened in the USA, so it is not soemthing unusual.
Cost cutting, Cost cutting, Cost cutting ...... brokerages which understand this concept may survive to see another bull market.

Bear Market Rallies - What did you sell today ?

This is not quite an original title, since a google search for 'bear market rally' threw up 3,62,000 links.
But that's what the Indian Stock market is currently going through. After a low at 4100, yesterday, the Nifty moved up to a high of 4330 today, a rather dramatic up move of over 5% in two trading sessions. That's five percent in a benchmark index - quite remarkable. Now, here is the disturbing news:
In a bear market, every decline is interrupted by sudden but all too brief period of optimism, known to traders as "bear market rallies".
It is fair to suggest that the two day rally which the Nifty has just seen is a correction in a down trend. Just as corrections in an up trend bring prices down, so the corrections in a down trend take prices up. In an uptrend, corrections are low risk buying opportunities. Then, in a downtrend, corrections are low risk selling opportunities.
So, what did you sell today ?

Wednesday, June 25, 2008

Trading with Discipline

Michael Bryant in http://www.breakoutfutures.com/ says:
Quote:
To be profitable in the futures markets, you need an "edge," a trading method that gives you an inherent advantage over the markets. A mechanical trading system is the best way to get that edge. With a trading system you can:
Back test the system to evaluate its performance over a wide variety of market conditions.
Paper trade the system in real time to get a feel for how it works and how to trade it before putting real money at risk.
Trade based on objective trading signals without emotional bias.
Automate the order placement and execution to reduce errors and eliminate the fear of "pulling the trigger".
Among professional money managers who trade the futures markets, known as Commodity Trading Advisors or CTAs, those who trade with mechanical trading systems outnumber so-called discretionary traders by a ratio of six to one (source: SafeMoneyMetrics Stark Managed Futures Indexes). The pros use trading systems because they work.
UnQuote
My company offers a day trading system to trade Nifty Futures. The market opens at 9:55 AM and closes at 3:30 PM. All trades are taken after market opens and closed at 3:15 PM. There are no overnight positions, hence there is no overnight risk.
While it is easy to backtest a system and provide attractive profit numbers, real time performance is what matters. When you actually started trading the system, did it make money ? Now, The system was offered for public use in April 2008. Here are the performance numbers for April, may & June 2008. These are actual trades, not just simulation.
April 08 Number of trades: 54 Gross Gain + 276.6 Net Gain + 114.6
May 08 Number of trades: 55 Gross Gain - 142.9 Net Gain - 307.9
June 08 Number of trades: 44 Gross Gain + 625 Net Gain 493
(upto June 25)
The net gain is calculated after deducting Rs 3 per trade for slippage & commission.
Net gain in three months: 299.7 points
This works out to 1200 points for a full year. What was the simulated performance ? It was 4100 points for 11 months. Thus, there is a strong possibility that the system may perform better in the coming months as reversion to the mean kicks in.
But, let us assume that the full year will provide 1200 points. What are the financial returns on such a performance ?
Margin for One Nifty : 700
Reserve to take care of losses : 800
Investment required to trade 1 Nifty : 1500
return in one year: 1200
There is 80% return on capital if current three month performance is extrapolated.
Now, remember that past performance is no guarantee for future results. But it helps to know that the system made money on simulated testing, then it made money in actual, real time trading. Surely, it is better than a method that has no track record ?
System trading has many advantages. It also has one disadvantage: systems will decay as market conditions change. The way to overcome this drawback is to continually test new ideas & strategies.
More information on the Nifty trading system is available at : http://www.technicaltrends.com/ . The system is called Day-Vinayak, or Day-V.

Tuesday, June 24, 2008

New Lows in the Nifty: What Next ?

The NSE50, India's benchmark stock market index hit a new 10 month low by closing at 4150, down from the lofty highs of 6350 recorded in January 2008, just five months ago.
The Market is in a bear grip, with lower highs & lower lows recorded at periodic intervals.
"I told you so"
Sorry about this, but the current leg of the down move started when the Nifty moved below 4950, a minor low. This down move was highlighted in my newsletters (http://www.technicaltrends.com/) and on CNBC India, many times. Since this down move started, I have consistently maintained that we remain in a bear market. The reasons are based on simple technical analysis. The Nifty continues to follow a pattern of lower highs, lower lows. So far this continues, the intermediate down trend remains intact.
New lows are bearish. Following this principle, every move by the Nifty to lower levels causes a ripple effect by which further declines are initiated.
How will this process of lower levels, end ? After all, even bear markets will come to a termination, some time or the other. After a 35% decline, the Index will eventually have to start a process of 'base building' or consolidation at the final lows. This process could take months. In this period the Nifty will try to test the final lows recorded and will eventually have a successful test of the lows - meaning that the Index will remain above the last recorded lows and withstand selling pressure. This is how the next bull market will start.
As I write this today, the index is making new lows therefore the process of base building has not even started. While the decline continues, it is not possible to call the end of the bear market. The Nifty could stop right here, or go down to 3600 or in a worst case scenario, go down to correct all the way to 2600. It is not possible to forecast the point at which this decline will end. My own guess is: the broad support zone between 3600 to 4200 will probably be the point at which the bear market ends. It could be 3600 since we have already broken down below 4200.
All of this is just guess work.
Yet, fortune favors the brave. With every new decline in the Nifty, the market comes closer to its eventual lows. Some buying in strong sectors may well be done, if you have spare money. With the disclosure that I am myself buying these sectors: fertilisers (Nag fert, Chambal) and Natural Resources (Neyvelli, Cairn) are currently under focus.

Denial: If I refuse to see it, it does not exist

Financial Analysts will often go into a state of denial: If I refuse to see it, then it does not exist. This happened in the USA when the start of the sub prime crisis was promptly followed by cries of "nothing to worry". All the leading perpetrators of the crisis intially claimed that things were just fine. Later, we realized how little these people knew about their own businesses. But, ignorance came later. Denial came first.
In India, we are confronted with a simiar story of denial by the leading financial analysts who come on CNBC.
The Nifty has been in a bear market since Janaury 2008. This fact is apparent with the Index falling from 6350 to 4150 (today). Nothing to worry, say our 'fundamental' friends - economy is good, earnings are robust, the fundamentals are strong, growth propects are wonderful...... Now, this is denial. The stock market has fallen by 35% and threatens to fall more, but the analyst insists that things have never been better. Sure. The nice thing about India is that we are a free country. Freedom of speech is guaranteed by the constitution. So you can pretty much say what you want. But listeners should take all of this talk with more than the customary pinch of salt. Since most fundamental analysts are fund managers or portfolio managers of some kind or the other, there is a conflict of interest involved. Remember, these people get paid when they receive funds from the public. You do not get money when you say that we are in a bear market. Therefore, when all other explainations fail, you start saying, the long term picture is excellent. Translation: give me your money otherwise I will lose my two crore (twenty million) rupee per annum job. I call it denial.

Monday, June 23, 2008

Oversold. Is this a valid technical indicator ?

In just four trading days, the Nifty has fallen from a high of 4680 to a low of 4226 (today, Monday). That's a 454 point decline, or 10% from the high to low. The current down move started on May 2, when the Nifty peaked out at 5300. Since then, the Nifty has seen four down swings (including the current down trend) with small up moves or trading ranges in between. The current 10% down swing is the sharpest decline of the four down swings. Going by these simple numbers, it is possible to suggest that the Nifty may be ready for a sideways consolidation or even some kind of relief rally.
When there is a high probability of a reversal, Swing Traders should take profits on existing positions by closing the position or taking partial profits. This step is neccessary to protect their equity. But, taking of profits is not a signal to take a reverse position. Our charts have not signalled a reversal. The charts suggest that the risk of reversal has increased so profits should be protected. For short term traders, the protection of existing open position profits is sensible strategy.
Now to our original question: Oversold. Is this a valid technical indicator ?
www.traderslog.com defines oversold as a technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors.
Now the problems start. Who determines the underlying fundamental factors ? This is quite subjective, isn't it ? It is possible that prices are catching up with poor fundamentals. Worse, maybe, fundamentals and prices are going down the drain, together. Therefore, the concept of 'oversold' is flawed when it is evaluated in relation to underlying fundamentals.
In the classic example of a stock getting oversold, buying is justified since the stock price has diverged from its fundamentals. In real trading, there is always a good reason why stock prices have diverged. We want to listen to the voice of the market which is reflected by price action. Fundamentals are usually a view of the fundamental analysis community. This view is often flawed since it carries a large amount of self interest with it.
Oversold then as we understand it is not a valid technical indicator.
But protection of positions when risk of reversal is high is a valid trading startegy. The reversal may never happen, and certainly there are no signs of reversal when we begin our profit protection program. For Swing Traders, oversold is not a signal to go long. It is a signal to protect profits from short positions.

Sunday, June 22, 2008

The mother of all losses

Jack Schwager's book "The New Market Wizards" starts with a chapter titled "Hussein makes a bad trade". The story is of Saddam Hussein who took a calculated gamble by capturing Kuwait, but did not know when to get out by accepting that the trade was not paying off. In the end, he lost the war.
Schwager finds a moral in the story: If you can't take a small loss, sooner or later you will take the mother of all losses.
Good traders know this principle. In fact, taking small losses is the foundation stone of trading.
Let us look at the Indian Markets. The Nifty has fallen from a peak of 6350 in January 2008, to a low of 4345 on June 20, 2008. This is a bear market by any definition. Many traders who try to fight the down trend by retaining long positions are losing a lot of money. One reason they cannot close their positions is this: Suppose I sell today and close my position, then it turns out that today was the final low of the bear market. In this case, I would have capitulated at the worst possible time.
This reasoning ensures that a small loss becomes the mother of all losses.
One simple trading pincinciple that emerges is: always cut your losses.
The second question is: Should I sell today ? An asnwer to this question will help the trader to take a decision. The asnwer in fact is already available in the opening paragraphs of this column, where I state that this is a bear market.
But, the real question is something else. It goes like this: Sudarshan, I trust you. I listen to you regularly on CNBC-TV18 and I appreciate your straightforward comments. You tell me that I should sell out, and, I will immediately do so.
Implicit in this question is: Give me an assurance that prices will fall further after I sell.
Now, this is not possible. No one can forecast the future with a guarantee. This is a decision that traders have to take on their own.
I can again state the basic principles:
If you have trading positions that are losing money, you should get out immediately.
For your investments: Switch from low grade, momentum stocks to high grade blue chips. If you have any loans on your investments, sell out to the level where your investments are made with your own money. Do not carry leveraged positions in your investment portfolio. Take the loss.

Friday, June 20, 2008

Catch me if you can

Catch me if you can
In this 2002 film directed by Steven Spielberg, An FBI agent tracks down and catches a young con artist who successfully impersonated an airline pilot, doctor, assistant attorney general and history professor, cashing more than $2.5 million in fraudulent checks in 26 countries. The young impersonater is Leonardo DiCaprio, while the FBI agent is Tom Hanks. It is a fine movie, which I have seen more than once.
The Nifty seems to have seen the same movie.
The Index fell below 4400 on Friday - the last day of trading for the week. On the charts, there is no support below 4400. The absence of support is worrying as it suggests here may be a free fall sooner or later. Let's look at the weekly chart.


I define significant support as a large area of consolidation. For the Nifty, such an area comes in the wide zone between 4200 and 3600. Thus, below 4400, the Nifty can fall and find support anywhere between 4200 and 3600. This is not comforting, since the support may well come near 3600.

Well, we will let the market tell us where it wants to go. As traders, the intermediate trend remains down. This is the trend that should control our trading direction.



Thursday, June 19, 2008

Trading the Opening Gap

The Nifty opened lower today, with a gap of about 50 points from yesterday's close. How do we trade this gap open ? Let us see what some of the technical analysis masters say:
Victor Sperandeo, trader & author says:
If there is a gap, and it is going to reverse, it will do so 10 to 15 minutes after the opening 95 percent of the time.
Larry Williams has a day trading pattern called Oops!. It requires a gap above the previous day’s high / below the previous day's low, that can’t hold. In other words, it fails soon after the gap is made.
The general idea is that a gap begins to get filled soon enough, or not filled at all. I do not think that the gap itself has to get filled in 15 minutes. What Victor probably means is the market should start making an effort to fill the gap, by slowly moving up.
The 15 minute rule.
I follow a simple 15 minute rule in my trading. When there is a gap open, I wait patiently for 15 minutes. Then, if I wish to buy, a buy stop is placed above the high of the first 15 minutes. Or, if I wish to sell, a sell stop is placed below the low of the first 15 minutes. This simple method will keep me away from trouble many times. The idea is: let the market tell me it wants to move in my direction.
Today's gap down
A gap down in the Nifty did not move above the highs made in the early minutes of trading. As the day progressed, this was a message that today's trading would remain under bear pressure. of course, there is no guarantee that prices will remain down. In the markets anything can happen. But the probability is that prices are likely to remain below the highs made early in the day. At least for today, this is what happened. Nifty futures quickly went below 4500, and remained below this level for the rest of the day.
How do we trade the gap open ?
As the day progressed, the highs of the early morning become resistance. This becomes a stop loss for any short entry that is planned. When the market falls sharply and begins to recover, a long position may be taken only if there is some profit possible by selling before the resistance.

Wednesday, June 18, 2008

A Game Plan for Swing Trading

For Swing traders as well as day traders, the question : What is my plan for today ?, should be answered before the market opens.
For the day / swing trader in the Indian Stock market - the NSE, the key questions are:
1. What are the index / stock futures that I will be trading in ?
This list should be ready before the market starts trading. Traders should not search for futures to trade in while the market is open. The list should consist of liquid, low spread, high volatility stocks. In an uptrending market, search for strong stocks, while in a bear market search for weak stocks. It is possible to have a fixed list of favorites irrespective of the market. This list should be made once every week, with minor changes during the week.
2. What is the likely outlook for today ?
The answer is not as difficult as it may appear to be. If yesterday was an NR7, then expect a breakout in either direction. If the two period RSI was below 10 and the market is NOT in a strong downtrend, look for a buying opportunity. If yesterday was a trend day where the market or stock opened at one extreme and closed at the other extreme, look for a reversal in the short term trend. If there is a strong trend (ADX > 30) then look for a 15 minute breakout trade. The list goes on.
3. What is the mximum drawdown that you are prepared to accept for the day ?
The answer could be: Rs 15,000/- or Rs one lakh or whatever is your comfort level. If by chance, your losses for the day touch this level, stop trading immediately.
4. What will be your entry rule, exit rule & profit taking rule ?
You may have more than one rule for each of these tasks, but decide which rule you will follow for the day, then follow it with discipline.
Now that you have read this, take a paper and pen, write down the answers to the four questions discussed here. review your notes every day. After 15 days, you will feel the difference in your trading.

Tuesday, June 17, 2008

Range Expansion is a time to take profits

This quick entry is to update readers on my Nifty trading positions.

I was long in the Nifty since yesterday. Today, in the last hour of trading, a sharp up move saw the Nifty jump all the way up to 4662, a gain of 80 points. This sharp, sudden move in one direction is a range expansion (RE). For me, an RE bar is usually the signal to take full or partial profits.

Just before close of trading, I have taken profits (lucky!) on all my futures & options positions.

A trade that should be closed - close it now!

The Thief's Sacrifice - A Story from the Panchtantra

Long ago, there were three friends - the son of a king, the son of a minister & the son of a rich merchant. The three were always together. They took no interest in their studies and did not want to do any work either. Tired of getting admonished by their fathers, the friends took off to earn their fortunes.

Across a forest, each of them found a gem of high value. Worried that the gems could be stolen, they decided to swallow the gems on their return journey. A thief heard them, and joined them while they were returning. Halfway through the forest was a village. The village headman had a parrot which always spoke the truth. The parrot started saying "The travellers have gems". But, the headman could not find any gems, so he let them go. Soon, the parrot started with the same words "the travellers have gems". The friends and the thief were again caught by the headman. Now the headman thought, "My parrot is never wrong. So, the young men must be hiding the gems in their stomach. In the morning I will rip open their stomach and find the gems".

The thief sat thinking. "There is no gem in my stomach," he said to himself. "If I ask the headman to cut me open first, he will not find any gem. He will then think there are no gems with any of us. So he will let the other go. In any case I have to die. I might as well save the lives of these three young men."

The next morning, the headman got ready to cut open the stomachs of the four travellers."Please sir," begged the thief. "Let me be the first. I cannot bear to see my brothers die." The headman agreed. The thief's stomach was cut open. There were no gems inside. "Alas!" the headman cried. "I have killed this man for nothing. My parrot has really made a mistake." So he set the others free.

The three friends continued their journey, sold the gems and became rich. But they remembered with immense gratitude the man who gave up his life to save them.

Moral of the Story: To sacrifice one's life for others is a great deed.

While the story is worth reading for its own sake, there is a lesson for traders. Sometimes, it is wise to let go of a trade (losing or otherwise). Maybe the particular trading position was a favorite. But, if there is reason to close it, do it immediately. Traders have to sacrifice some of their trades to ensure a long trading career.
.

Monday, June 16, 2008

Trading Decisions - the refined art of taking a chance

When all is said and done, more is said than done
Lou Holtz

It is easy to write about the markets, to discuss a point of view, or to point out the errors in thinking by fellow traders & financial market participants (not me, everyone else!).

As traders, we also have to take buy and sell decisions. Such decisions are unlikely to be perfect. Technical Analysis forms the basis of my decision making. On Friday, the Nifty made an NR7 (Please see earlier post). Today, the Nifty opened with an up gap. An intra day dip was a buying opportunity. Now, it is decision taking time. Should I go long, or procrastinate ? It is so much easier to "watch" the market, waiting for additional cues. But, trading is about waiting for your setup to come in place, then pulling the trigger. Therefore, I am long in the Nifty, as well as in individual stocks. My volumes are much lower than normal - this is because I am trying to catch a short term up trend in what is an intermediate down trend. I also have in place an exit strategy - my stop loss, a profit target zone & a trailing stop.

Is this trade going to make money ? I really have no way to answer this question, nor do I wish to. If I follow my rules, then my trading is going well. As the Bhagavad Gita (The Song Divine) tells us: "Do your duty, then leave the fruits of your labor to God".

Here is a brief description of the trade: The Nifty fell to its January / March lows at 4400. During the past week, it touched 4400 twice, then bounced back. On Friday, the Nifty closed at 4500+ also making an NR7 in the process. The NR7 is a trigger to enter a reversal / continuation trade. In this case it is a reversal from down to up.

The trade is assumed to have gone wrong if the Lows of the NR7 day are taken out on a closing basis. This will be a whipsaw, but that's what trading is all about.

I am a short term trader, mainly into swing & day trading. I have explained a swing trade that I have taken in Nifty Futures.

Saturday, June 14, 2008

On your marks, get set, Go... upswing begins ?

Is the Nifty ready for an uptrend ? Chart signals suggest this may well be so. We have two NR7 days in the Nifty, then long lower shadows, finally all of this happening after a sharp down move, at January - March lows. The stage seems to be set for a short term up trend. The market will eventually tell us if this uptrend is a rally in a bear market or the start of a new up move. But, short term traders do not have to worry about this. The signs indicate an up move, therefore they should position themselves to buy in intra day trades, or in swing trading.

The Daily chart for the Nifty given below highlights NR7 days. Note how these NR7 days identify the reversal of trend. Some NR7 bars also mark continuation. The NR7 on Friday, suggests reversal of the down move, for reasons explained above.


How do you trade the possibility of an up move ?

1. Identify a maximum of 10 stocks with high relative strength + high volatility.

2. Set up your Live Grid with these 10 stocks. During the trading day, look to buy new highs in the stocks, as also buy when the tm Trend indicator signals a correction in an uptrend.

3. Same principles should be applied to swing trading. Do this on end of day charts, or 30 minute charts if you can track the market during trading hours.

You have to make a complete trading plan with rules for Entry, Stop Loss, Profitable Exit & Trailing Stops.

Thursday, June 12, 2008

Remarkable rally affirms 4400 support in Nifty

A remarkable intra day rally saw the Nifty close higher than yesterday, inspite of opening a 100 points lower. The Nifty closed at 4530.80, up 7.20 points. This is only part of the story, as the Index had made a low of 4392, thus the final gains are that much more significant.

For the second time this week, the Nifty moved down to test 4400, and found that this support was holding. Does this mean that 4400 may well become the final low in this bear market. Now, this could well be so, but much more consoldiation is required in the 4400 zone to confirm that a low is in place. Meanwhile, we must remember that today's rally could easily be a bear market rally. In fact, we will assume this is so since the market remains in an intermediate down trend.

When will the intermediate down trend change ? There is resistance in the 4700 area. If the Nifty were to cross this resistance, we will have to assume that the down trend is over.

It is possible that the Nifty could move above 4700, then again start a down move ? Yes, of course. This is what whipsaws are all about. But we cannot get frightened of whipsaws. We have to follow the simple rules of identifying intermediate trend. If that results in a whipsaw, so be it.


That PE Ratio again:
The NSE web site says that the current PE ratio for the Nifty is 19.25 This is NOT low by any standards. While we look almost entirely at the charts to determine our trading strategy, it helps when valuations support the formation of an intermediate low. This does not seem to be the case now.

Wednesday, June 11, 2008

Choppy Market with bear pressure

Investopedia.com tells us " The Choppy Market is a stock market condition whereby prices swing up and down considerably but with no resulting overall price movement in either direction. " Helpfully, it adds that "the term is derived from the phrase choppy seas, where a boat will move a lot but not over any large distance as waves prevent it from moving any meaningful distance. The DJIA, for example, may start a six-month period at 10,500 and over the six months move all over the 10,000 to 11,000 range but end the period at around 10,500."

Today's Nifty trading saw a choppy market with the Index moving up 25 points, then down 25 points throughout the day. After the initial euphoria when the Nifty was up a 100 points, the trend was down, although conditions remained choppy (see above).

Once it is clear that the Market is moving sideways, the wisest course of action is to stay away. The only way to trade in a trading range (which is what a choppy market really is) is to anticipate tops and bottoms. This is easier said than done, because it requires us to call a turning point on intra day charts - after all one of these tuning points could well be a breakout / breakdown point, causing a great deal of discomfort.

But, what of the Nifty itself ? The Nse50 closed at 4534, up 85 points from its previous close. The Index closed near the highs for the day, which was at 4541.05. There will be many days when the market moves up (like today), but such rallies do not make a bull market. So far, the Nifty has been making a pattern of lower highs, lower lows on its daily chart. This is a classic bear market pattern. Ideally, the Index will come out of this bear move by a process of base building. The key question is: between what Nifty levels will this base be developed ? Between 4200 and 4800, or maybe between 3500 and 4000, or, who knows, between 2600 and 3000. The answer to this question is easy: wait for the market to tell us when it is likely to stop falling. Till then, follow the intermediate trend, which is down.

In the near future, the Nifty could slowly and stadily see a rally to 4700 where substantial resistance exists. A failure to reach 4700 or closeby should be viewed as a sign of weakness. Traders should expect resistance to come in, in the next 2 days, as the Nifty has already seen a 200 point rally in just one day (from yesterday to today).

Tuesday, June 10, 2008

Bear Market Rally ?

A last hour intra day rally saw the Nifty move up by almost a 100 points from its intra day lows, closing with just minor losses at 4450.
Marc Faber wrote:
"For a market, which has become very over-sold, it is only natural to rebound, but frequently these rebounds are merely bear market rallies, which are subsequently followed by vicious declines."
In 1930, after the famous 1929 market crash, stocks were trading at low levels. Irving Fisher , the best known economist in America, thought that stocks were 'ridiculously low' (subsequently they fell another 80%). In between, there were sharp rallies but these rallies eventually fizzled out.
When we encounter a big up move, we must be aware that bear market rallies are often sharp and sudden. They give the impression that the down trend is over, but this is often a deception. On the other hand, a new bull market will eventually start with a rally of some proprotions. We simply do not know if a rally after the sharp decline is a bear market rally or a resumption of the bull market. With this imperfect knowledge, it is wise to follow the existing trend. The current intermediate trend is down. Thus, rallies are assumed to be bear market rallies until proved otherwise.
Change of leadership. After a bear market, leadership among sectors usually changes. Earlier, it was IT, then Banks & Capital goods. Now, we are in a bear market, but which sectors are likely to lead once the decline is over ? While there is no clear answer to this question, some possible leaders are: Pharma, Cement, Natural Resources (Cairn, Neyvelli).
(disclosure: At the time of writing this, I have recently purchased stocks in Pharma, Cement & Natural Resources.)

Monday, June 9, 2008

Bear Hug

Thanks to a 400 point drop in the Dow on Friday evening, the Nifty was all ready to open sharply lower on Monday morning. This came about with a 100 point fall at the open, which eventually became a 200 point decline by mid day. After a low at 4412, the Nifty began a slow process of recovering some of its losses, finally closing the day with a loss of 100 points (better than the 200 point decline intra day).
Here is a Zen story that should be related to today's decline.
Two monks were once traveling together down a muddy road. A heavy rain was falling. Coming around the bend, they met a lovely girl in a silk kimono and sash, unable to cross the intersection.
"Come on, girl," said the first monk. Lifting her in his arms, he carried her over the mud.
The second monk did not speak again until that night when they reached a lodging temple. Then he no longer could restrain himself. "We monks don't go near females," he said. "It is dangerous. Why did you do that?"
"I left the girl there," the first monk said. "Are you still carrying her?"
Well, today's decline is done and over with. Do not thnk about it, or brood over it. Plan for tomorrow. The Intermediate trend is down in the Nifty. Yet, if the US markets remain in the positive, a relief rally could easily start tomorrow morning. Swing traders & Day traders should plan to go long on signs of strength on Tuesday. Remember, this will be a quick, short term trade.
But, the daily charts are not exactly bullish. If the January support at 4450 breaks decisively, we could easily see a free fall since there is no visible support in the Index after 4450. As we are close to the start of such a decline, do not buy for investments.

Friday, June 6, 2008

Big Picture Chart Patterns

Does the title read a bit confusing ? I am referring to multi month chart patterns which give pricce targets widely different from current price levels. Are these patterns and their target implications, relaible ?
My answer would be, not really. Chart patterns will often have measuring implications that set a target for a possible price move. In a head and shoulder pattern, you can measure the distance between the neckline and the head, then subtract this distance from the breakdown point, and thus arrive at a downside price target. This method works for traders, giving an indication of where prices may go to. But, what happens when a chart pattern like the head and shoulder develops on a monthly chart, giving targets that are far away from current price levels ? Should such targets be considered at all ? I would avoid using these targets. Now, a chart pattern forecasts what may happen in the near future. Once the forecast moves beyond the near term, then the pattern loses its forecasting ability since no one can say predict the future with any certainty.
Vikas Sharma, in his blog ( http://surakshit.blogspot.com/2008/06/how-low-can-markets-
stoop.html ) refers to a head and shoulder in the Nifty which gives a downside target of 2600. He emailed me asking for my opinion on this pattern. The Nifty is currently trading at 4635. Now this is a target far away into the future. I do not think that chart patterns have this kind of forecasting ability. Therefore, beyond the near term, stay away from price forecasts made by big picture chart patterns.

Thursday, June 5, 2008

Rally in a Bear Market

The Nifty rallied today, to close at 4677, higher by almost a 100 points. But before this rally, in early morning weakness the index had fallen to 4536 almost touching the march lows of 4450. A fair question is: Was today's decline a test of the march lows, and, does the subsequent rally indicate that the test was successful ?
One day's bounce back should not be taken as a successful test of an earlier low. It may well be, but we will cannot be sure until there is confirmation. This confirmation comes when the Index makes a pattern of higher lows, or, moves into a consolidation (base building). Given today's big rally in the Dow also, we may be seeing a V shaped recovery in the markets with another up day tomorrow. This up move should be taken as a rally in a bear market unless proved otherwise.

For day traders, today's dip to 4536 was in fact a test of yesterday's lows. The test was successful, with an excellent buying opportunity coming in after the Nifty begain a rally from 4536. This rally took the Nifty up by a 100 points before it went into a consolidation. What may be an uncertain event on the daily chart was a successful test on a lower time frame, with a profitable trade.

Wednesday, June 4, 2008

Market Crash: And then there were none

'And Then there were None' - is a fanous detective novel by Agatha Christie published in 1939. It is Christie's best-known novel. It has sold 115 million copies to date, making it the world's best-selling mystery.
Well, this is what is happeneing to the perennial bulls in the Indian markets. Starting from a confident "This time it is different" to "markets are consolidating" to "Buy for the long term" to "Please help me...", the bulls have been vanishing from the scene, one by one.
On monday (June 2) afternoon, I was on CNBC-TV18 at 3:15 Pm when the Nifty was falling like nobody's business. I was surprised to hear Udayan asking my fellow guest - "What can be done to help the market?". This assumes that the market needs help. Why ? After all, markets move around in cycles, just like human emotions. We have peaks and troughs, which are as natural as day and night.
As I write today, the Nifty closed at 4585, very close to the 4450 lows made in March. What we are about to see is a test of the March lows. If support comes in then we may see a process of base building in the region of 4200 to 4800. If however, the 4450 support is broken, then the markets could go in a free fall (another one!).
What is a 'test' ? When a significant support or resistance level is challenged, the market is undergoing a test of strength (previous support challenged) or weakness (previous resistance challenged). If the test is successful, in this case the support levels hold, then the message is that a process of trend reversal may start soon. Now, a test could easily be a protracted affair. Also, the exact level is not significant. It is the zone which should hold. Thus, the Nifty could fall below 4450, even to 4350 then find support for many weeks. In this scenario, the test would be successful, paving the way for a new up move. Patience then is the correct way to determine the success or failure of such moves.

Tuesday, June 3, 2008

Destroying the Enemy

"How many enemies - boundless as the sky - might I destroy," wrote the Buddhist poet, Santideva. "Yet when the thought of hatred is abolished, all enemies are destroyed."
Dear Reader, do you hate the bears ? Those unknown, faceless people who are driving the markets down. Well, do not indulge in this silly past time of hatred. Because, You are the Bear. In fact, in bull markets, You are the bull. The Market consists of thousands of people like you, who together determine the direction which the markets will take.
When you are bearish, you stop buying. Thousands others like you also stop buying. The absence of buyers causes markets to fall. Then, panic sets in and investors and traders begin to sell. In absence of buyers, sales of small lots can cause disproportionate declines. This is the way of the markets.
Ino.com has a blog where many traders write about their trading ideas and experiences. On May 29, Corey Rosenbloom is the guest, at http://club.ino.com/trading/2008/05/the-four-main-types-of-trades/ . Corey explains there are four diferent types of trades:
1. Breakout/Breakdown
2. Retracements
3. Reversals
4. Rangebound Fades
This classification of trades are similar to what I follow. Based on ideas given in StreetSmarts, a book by Connors & Raschke, I divide trades into four categories:
Breakouts
Tests
Retracements
Low Volatility setups

Monday, June 2, 2008

Markets will fall in an Intermediate down trend

Much to the surprise of traders, the Nifty continued its decline on Monday, June 2, falling by 125 points. I am surprised because everyone is surprised. Too many surprises!
The Nifty is in an intermediate downtrend. The basic idea of any trend is the movement of prices in the direction of the trend. If the trend is down, then prices should move down. This is easy to understand, logical and reasonable. Yet, everybody is surprised by the reasonable.
The classic definition of an intermediate downtrend is lower highs & lower lows. The Nifty has already confirmed this pattern ten days ago. Since then, it has been expected that the pattern direction - down - will continue. And it is moving down, rather strongly today.
What is then the target for this down move ? Now, this is a difficult question. Target setting is never a good idea. Sometimes, it is possible to define a possible target based on patterns. But these numbers are just guides for us. It is safe to expect that the Nifty will test the lows made in January - February of this year - about 4450. As the Index stands at 4715 today, the next leg of the decline should easily see it test the 4450 levels. Tests are significant technical actions. A successful test will give an early indication of a new bull market, while a breakdown will tell us that there is much more downside to come.