Tuesday, September 30, 2008

Oversold markets will bounce back

The Nifty had witnessed five days of declines in the last six days. The nature of markets is mean reverting, to some extent. After substantial declines, a rally of some kind was expected. This rally came today, on the back of the largest ever decline in the American markets.
Markets will continue to surprise us. There was no impact of the American meltdown. Instead, what we saw was a classic bear rally, sharp and swift, taking most participants by surprise.

Does today's rally change the picture ? This question comes up rather quickly. The answer is, NO. Markets will go through cycles of optimism and pessimism. Today's rally, surprising as it was, may be taken as part of a reaction to a lot of pessimism.

The Nifty faces strong resistance around 4150 approximately. The Index should close above this level to start the process of a possible bull market. Let this event happen, then we will review the position afresh. Till then, we assume that any upmove is a bear market rally.

The Morning After Dow's Plunge

Readers should be aware that short selling is banned in 975 financial stocks in the USA. Yet, the Dow fell by record percentages (so did the S&P and Nasdaq). Then, who was selling ? The nswer is obvious: markets decline when investors / holders of stocks decide to sell while there are few people left to buy. Short selling is a convenient scapegoat.
It seems fair to say that the Nifty will open today, below 3800 support. Below 3800, there is no technical support till 2000. I am not suggesting that the Nifty will fall to 2000. It should not, and will not. My point is: now the market will have to determine its support levels on its own. It can stop wherever it wants.
This is not a good time to trade. Wait for stability, for volatility to come down. Support must emerge.

Monday, September 29, 2008

Protection of capital - useless assurance ?

From www.bloomberg.com :
Lehman brothers, recently in August 2008, issued notes/bonds that promised 100% protection of capital. In the worst case, borrowers would get back their $1,000-per-note investment in three years. Only the last in a list of 15 risk factors mentioned the biggest danger: ``An investment in the notes will be subject to the credit risk of Lehman Brothers.'' Lehman's Sept. 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money. The assured protection of capital has vanished in thin air.

Now, in India, our good friends from the US of A have set up many offices as banks and mutual funds. Some of them have started offering exotic options to retail investors in India. A plain vanilla option is the FMP - Fixed Maturity Plan. This plan offers higher interest as compared to bank deposits, with the added attraction of tax benefits (capital gains). I did not go for this plan since I am comfortable with nationalised banks. I also have some doubts on how these funds can offer higher interest than banks. If anyone has invested in these plans, perhaps they may like to read the fine print. If there is a fine print, please share it with me so that I can share this information with all the readers.

Sunday, September 28, 2008

Another Day, Another Week

I was in Chandigarh for a presentation at the CNBC Investor Camp. I did have access to broadband as well as my laptop but could not get the time to write the blog.

Friday saw the Nifty move below 4070 thus cancelling any possible buy signal. The trend remains down. The Nifty has recorded its lowest weekly close since the bear market began. This is not a sign of bullishness. There were some signs of possible support, but finally this did not happen, so we wait for Another Day, Another Week.

The Trend is down in all time frames. The primary trend remains down - this is a bear market. The intermediate trend is also down, so is the minor trend.

When will this change ? A close above 4150 will be a sign that the minor trend is now up. This level will change over time.

If the Nifty continues its decline, there is support at 3800. This support has held twice earlier, but may not hold again - meaning, a sharp decline is possible if 3800 breaks. In fact there is a vacuum between 3800 and 2000 - the next significant support. This does not mean that the Nifty will go down to 2000. My point is: there is an absence of reliable technical support below 3800 therefore the Nifty will have to find its own support. This may be anywhere - 3600, 3300 or whatever else you like.

How do you trade ? All analysis must lead to actionable ideas. For swing traders, a close above 4150 is a buy signal. Buying is also possible if the Nfity were to close above the previous day's high. While the markets could continue going down, short selling is a bit of a risk as the Nifty has already seen four lower close in the last five days.

Thursday, September 25, 2008

Ready for an intermediate up trend ?

The Nifty was fairly volatile on the FNO settlement day. The Index fell to a low of 4078 before recovering to close at 4107.

While the market remains inside a range, there is a suggestion that the Index finds support at lower levels. These levels are somewhere around 4070. The Nifty did go to touch this support today, but rallied to close higher.
If 4070 support holds, then we could be looking at a rally that touches the 4300 - 4400 zone. Assuming that the support breaks down, we are faced with another decline to 3800 where support comes in.

The scenario then is:

Assume the intermediate down trend is getting over. Look for a rally to 4300 - 4400 levels. If the support at 4070 breaks down by a close below it, then stay away from long positions.

With all of this analysis, the Nifty remains inside a large trading zone - between 3800 and 4650. Eventually, a move out of this zone will determine the long term trend for the Market.

Panic in America : Effect on India

A large US $ 700 billion payoff is under negotiation in the USA. Most economists / financial analysts are opposing this payment to big banks. President Bush has said that this needs to be done urgently or 'America will face a painful recession.'
While the Americans will finally decide on what they will do with their financial institutions, the entire world will be affected by the events in the USA. India will also have to face the fallout, if any, of the ongoing crisis.

The Coupling of economies.
No, we are not decoupled. Stocks will be adversely affected if the US markets fall. if the US Markets rally, we should go with them.

End of the Broker - Dealer
In the USA, the Investment Bank model has abruptly ended. In my blog, I have warned earlier of the risks associated with brokers who trade on proprietory accounts. I will explain in some detail.
The Brokerage business will see a major change. Two different segments will survive.

First, the Broker - Banker. This includes all brokerages sponsored by banks. HDFC , ICICI and so on. They have to be sponsored by a Bank. The Broker - Banker will become increasingly important.

Second, the boutique brokerage. This is the small brokerage where all clients know the broker. They have the broker's cell number. The Broker knows them by their first name. This segment will survive and prosper. The Broker offers top class brokerage services and does nothing else.

The Segment which will NOT survive is the broker who acts like an investment banker. (remember Lehman Brothers ..). This group is in proprietary trading, branch expansion, wealth management, .. You name an activity, they have their fingers in it. If you have a broker who resembles this profile, you may like to shift to any of the two segments described above.

Wednesday, September 24, 2008

Warren Buffet : Trader

Warren Buffet, the legendary investor has put money in Goldman Sachs (GS). Here are the terms:
1. Mr. Buffett’s stake is in perpetual preferred shares, which pay a whopping 10% dividend.
2. Berkshire, Mr Buffet's company, also receives warrants giving it the right to buy $5 billion of common stock at $115 a share. (current price $131).
This is a good deal for Mr Buffet. He gets an assured dividend of 10%, and an opportunity to buy shares at a low price. But, there is a risk. The preferred shares will be worth nothing if GS becomes bankrupt.
Mr Buffet, trader, has put up this trade:
Risk: GS goes bankrupt. Current probability is low.
Reward: 10% assured return plus possibility of buying shares at low price.
It’s a classic Buffett deal: he's buying into a great company at a distressed price, with unbelievably good terms.
What Mr Buffet is NOT doing: he is not buying Goldman’s “bad” assets. He is NOT buying into any of the other financial services companies - there are hundreds! He has chosen the number one - GS.

Tuesday, September 23, 2008

Panics should be trading opportunities

The past few weeks have seen many panic like situations in the stock market. We have seen sharp sudden declines, as also sharp, sudden rallies. These panics have turned out to be decent trading opportunities.
After a sharp decline, the market stabilises. This is the first sign that the decline has been excessive, at least in the short term. There are buying opportunities here, for the trader, as well as the investor. The reverse happens when the market suddenly moves up, giving the impression of urgent buying. Soon, the buying fizzles out. The first sign of weakness is a selling opportunity. Investors should take some profits.
One reason why such panics have turned out to be reversals is the current nature of the market. It is a tarding range market. A range defines the maximum and minimum limits of prices. When prices, pushed by panics come near these limits, a reversal seems possible.

All good things must come to an end. The panic trade will also end when the Nifty moves out of the trading range between 3800 and 4650. For now, such trades can be safely taken with Nifty options which have acquired a lot of liquidity.

Monday, September 22, 2008

Is the Bear Market over ?

Many readers are asking this question. The answer expected is : yes, it was completed on Thursday, Sept 18, when the Nifty touched 3800 support, then bounced back.
With some regret, I am unable to make a call on the end of the bear market. The Nifty seems to be back in the all too familiar trading range. This time it is the wider range between 3800 and 4650. The Index went down to touch the lower end of the range, then bounced back. But, the nature of the market remained the same - range bound.

At the same time, there is the possibility that the Nifty may have made a significant low around 3800 which it touched for the second time. We could well see the market stabilise around 3800, eventually leading to some base building, then to a new up trend.

My suggested course of action, then is:
Assume that a significant low has been made. Look to buy stocks on declines. (Only on declines). Keep such buying within limits (small volumes). Keep stop losses for ALL positions.
Expect the trading range to sustain, meaning resistance will come near 4650 or lower. Then, take profits on all buying if the Nifty moves up by 200/300 points or so from your buy levels.
Short selling ? When the Index gives sharp, sudden rallies, the chances are there will be a reversal. Professional Traders may like to short sell only on signs of weakness after big rallies.

A move below 3800 will suggest that this large trading range has broken down. Do not buy if this happens. (If the Nifty does fall below 3800, you should be stopped out much earlier! Pro traders are likely to be short. )

Sunday, September 21, 2008

A Low in place: Possible.

The Nifty finally closed the week at 4225, up 17 points from the previous week.
Read this again. The market was almost unchanged at the close of of the week. Traders who have gone through five days of tumultous trading may not believe that the markets remained where started.
The Nifty now remains inside a trading range. Still there!
A larger range between 3800 and 4650 holds strongly, providing substantial support around 3800. There is strong resistance at 4650. Then, nothing has changed.
Trading should continue to follow the trading range pattern. Short selling is best avoided. If you do get a sell signal, consider using options rather than futures.
Plan a strategy that buys on dips. The dips have to be defined in relation to your time frame - day, swing or position trading.

There is no such thing as a free lunch

An interesting view on the current crisis comes in this blog :

During the stock market crash of 1929 and the ensuing Great Depression...at least the CEO's whose abysmal decision-making led to those financially catastrophic events had the decency to leap from the windows of tall buildings to their certain death.

Today's criminally guiltless CEO's are rewarded for similar failures with golden financial parachutes guaranteed by the American taxpayer which they happily accept with open arms.

The land of opportunity has "spawned a whole new breed of men without soul"

My View: Leaping from tall buildings will solve nothing. The greed masters should work in the interests of the common man, and, by doing this, compensate society for their earlier acts. Unfortunately, all acts have to be paid for, eventually. A big mess in the American Markets is not going to go away by declaration of a bailout. The cleaning process has just been postponed. The entire world will be affected by the cleansing of the western financial system. There is probably more pain ahead.

Friday, September 19, 2008

A short term low may be in place

The NIFTY may have made an intermediate low, a bullish bounce back is possible. This is the message of many days of volatile trading, culminating in a big selloff in world markets on wednesday, and, a large gap down to 3800 in India (and subsequent recoveries in all markets)
The Nifty may have made an intermediate low as it bounced back from 3800 levels to close above 4000. While the index remains inside the larger trading range between 3800 and 4600, it does give the impression that the short term trend may be up. The long lower shadows in the Nifty on three different days including today suggest an upbeat market.
Traders and investors should make attempts to buy on dips. Always keep stops. Resistance will come in at 4200, and support comes in at 4000. The larger trading range between 3800 and 4650 is intact.
A new trading range may be developing if 4200 resistance holds. Then, we will be looking at a range between 4200 and 3800.
This is not the end of the bear market. We are looking at a possible intermediate up trend like the one we saw in late July - early August. These are rallies in a bear market.

Rules to survive in the volatility.
Trade less. If you have the capacity to trade 500 Nifty, then trade only 200. Never think that you are going to 'recover' any losses made earlier. This leads to overtrading.

Wednesday, September 17, 2008

The Morning Review: Trading Ranges Confuse

As the Nifty fell to 3930 on Tuesday (yesterday) there was a sense of panic. Yet, the Index recovered all its losses to close higher than Monday. As I write this at 7:58 AM, Asia is higher, with the Dow having closed 140 + points up.
Now, a breakdown from the trading range is a signal that the Market has decided to move to the downside. Within this action, there will be many days of counter trend moves, as yesterday, and maybe today. Not just this, it is always possible that the breakdown was false, with a new up move starting again.
Then, what should traders do ? It is possible that a technical move may go wrong (example: a breakdown from the trading range may have been false). Yet, the safest method of trading is to follow the chart signals. Even after accounting for the wrong trades, the net result is a profit. Ask yourself: what is the other method of taking trading decisions ?

It is the nature of the trading range to ignite optimism when the prices are at the top of the range (maybe they will break out!) and pessimism when they are at the support levels (maybe they will break down). Once a move ouf of the range takes place, it is wise to accept it unless proved otherwise.

Tuesday, September 16, 2008

Simple Ideas: Prices fall in Bear Markets

Volatile conditions continued in world markets including India. The Nifty opened almost 130 points lower, then staged a decent rally to recover all its losses and close absolutely unchanged. As I write, the European markets are down almost three percent. In that respect, the Nifty is certainly outperforming the rest of the world. For how long ?

My Analysis
The Index has broken down from a trading range that lasted almost eight weeks. Such breakdowns / braeakouts have a lot of significance. The market is giving a message: After many weeks of confusion, one side has won the tug of war.
In this case it is the people who think that share prices continue to be high and will move lower. Like today, we will see many intra day rallies, but the net result will still be a market decline. At least that is what we should expect. The markets can always surprise us, by doing something different. That's fine.

The Million Rupee Question:
How should we trade this market ? This is a fair question. I hope to provide my answers over the next few days.

From www.expressindia.com:
ADB lowers India’s growth forecast to 7.4%
Prompted by ongoing global financial turmoil and weakened investment outlook, the Asian Development Bank on Tuesday lowered India’s economic growth forecast for the current financial year (2008-09) to 7.4 per cent from earlier projection of 8 per cent.

My Notes: This is not good news. The market may take its time digesting this piece of information. Now this is disturbing in many ways.

First, in the growth pie, the rich make the maximum claims. Whatever is left is given to the middle class and the poor. This is the trickle down theory, ably practiced for past few years. (give the rich, maybe something will trickle down to the others). Thus, a slow down in growth will affect the needy much more than it will affect the few hundred thousand rich in india.

Second, slowing of growth is likely to have an adverse affect on the stock market, sooner or later.

Morning Views: What lies beyond 3800 ?

The morning is not good for the bulls. The Dow is down 500 points, while AIG - the large US insurance group has been downgraded, requiring more funds which they may not have.
Let us go through some scenarios.
First, the Nifty continues to fall, touches 3800 or whereabouts, then finds support. It builds a base here.
Second, the Nifty rallies before it touches 3800, goes back into the trading range.
Third, the Nifty continues to drift down, then breaks 3800 decisively, trading lower. This is the scenario we are discussing here.
If 3800 is broken, the Nifty finds support at two different levels, 3650 and 2700 where minor support exist. Strong support comes at 2000. Now I do not believe that the Nifty will fall to 2000. This is not my suggestion. My point is: charts will not provide any technical support below 3800. There is a free fall, the Nifty can stop wherever it wants. We do have 3610 which is also the 50% retracement of the bull market that started in 2003. Then, we may be looking at the Nifty finding support around 3600. This is the best case scenario if 3800 gets broken. The worst case scenario is that these minor support numbers do not hold, the Nifty begins what may be a free fall.

The purpose of such scenario building is to face reality. If we are mentally prepared for a situation we can adapt to changing circumstances. We can go with market flow instead of fighting the market.

Monday, September 15, 2008

Bear Hug Again

Wikipedia tells us:
A bear hug is a strong, hearty embrace, as if being hugged by a bear.
While the world is not collapsing, the financial environment is certainly getting worse. Investors are naturally becoming more 'risk averse'. Equity which carries high risk, is no longer the flavor of the season. This period is going to last for some time, till equity investment becomes more attractive than debt (and less risky). Yes, be assured, such a time will also come.

How do bear markets end ? This is a repetition of a theme discussed earlier, but here goes:
Bear markets end when the 'public' gets pessimistic enough to forget about shares. This has not yet happened.

What can happen to the Nifty ?
The Index has broken down from an eight week trading range, setting a target of 3800 - 3850 for itself. IF, and, this is a big 'IF' - the 3800 support breaks, then we have a free fall to whatever number the market likes. There is no support below 3800.

The preservation of capital is much more important than trying to make a few points in the market. Take care.

When will a time come to buy ?

As I write this post at 8:57 in the morning, Lehman brothers is expected to file for bankruptcy, S&P Futures are down almost 3% and the Nifty is trading lower by 130 points at 4085, in Singapore.

There is a temptation to buy. After all, how much lower can it get ? Remember, this is dangerous thinking. What stops the Nifty from breaking below 3800, and finally reaching 3200 or even 2650 ? I am not suggesting this will happen. My point is: never go against the market. If this market is ready to move up, then there will be signs : support will emerge, momentum will slowly change in favor of the bulls. The correct way to think this is: At 4000 levels, the Market is attarctive, therefore I will buy whenever there are signs of favorable momentum.
Any given level is NOT a buying or selling opportunity. Market action at that level creates the opportunity.

Sunday, September 14, 2008

Difficult times probably not over

Writing on the morning after bomb blasts rocked Delhi, it is not easy to be optimistic. Of course, this is not a good approach to trading. We really need to rely on the charts for our road map. But, with charts, the trader should consider the environment in which the charts are developing.

For the Nifty, Friday's decline was not bullish. The index has broken down from the 4250 - 4650 range. Depending on how you define the range, the best we can say is that it is on the lowest support line of the range, at 4200. There is a clearly visible bearish head and shoulder pattern in the Nifty. A close below 4225 (approx) will confirm this pattern. If confirmed, we have a target of 3800 approx - whch happens to be significant support. Now, a pattern does not have to go down to touch its target. But the probability of doing so is quite high.
More worries about the head and shoulder. Reliance & Bharti Airtel have already broken down from similar bearish H&S patterns.
The Environment. Almost all world markets are in a bear phase. Thus, the intermarket relationships are quite bearish. In India, there is likely to be poltiical upheaval in the next few months. This weekend, a firesale is going on in the USA where one of the largest investment banking firms, Lehman Brothers has to get financing or face difficulties. If financing is available, then Monday may again see a relief rally in Asia (maybe not since the Asians are slowly getting wiser than the West). A relief rally is not going to change the down trend. Difficult times are ahead.

Thursday, September 11, 2008

What lies beyond the trading range

Readers must have had enough of the talk about a trading range in the Nifty. The Index has been inside this range for over seven weeks. The boundaries are between 4250 and 4650. This means, support comes in around 4250, and, resistance at 4650. Remember that support and resistance numbers are just indicative of the probable zones of support and resistance. If the Nifty comes close to 4250 (It already has done so), then consolidates, and finally rallies, we will say that support around 4250 has held.
Will support hold ? There is no way we can asnwer this question now. The trading range has been in place, and every time prices come near 4250, they bounce back. This should happen again. Then again, there is always a point at which the range will end, with either a breakdown or a breakout. Maybe, the Nifty is ready for a breakdown. Maybe not.
The only way to find out is to let the market either break down, or find support. If the Nifty breaks down, there is more downside, probably all the way to 3800. if the Nifty finds support, there should be some kind of a rally, at least near 4500. So, either event should be tradeable.

Wednesday, September 10, 2008

Did the Japanese get it right ?

Japan has not been growing for the past many years. It saw a stock market bubble in 1980's and has never seen those highs again. It has also gone through a real estate bubble.
The Nikkei, its market Index closed at 12346 today. This is down from a high of 18270 recorded in July 2007, 14 months ago. So, what did the Japanese get right ?

TIME magazine, in its issue dated Sept 15, 2008 writes:

Consider Japan by any standards that count - public safety, widely shared prosperity, quality of infrastructure, health and education indicators, family stability - a remarkably well governed society. Its best companies set standards for innovation and efficiency. .......

What should India become - Japan - which is an ocean of peace and calm, or America - where you get paid hundreds of million to create a sub prime crisis.

What is the difference between Japan and USA ? The difference lies in the importance given to financial wizards. In Japan, the people who build industries, services, businesses are given importance. In the USA, people who create financial wonderlands are the most important of the business leaders. Unfortunately, India seems to be going the US way.

Why is this relevant in a trading blog ?
First, Trading requires a calm mind. The Japanese pursuit of Zen in their lives provides this calmness.
Second, Success in trading requires single minded dedication to the pursuit of excellence. You improve your skills as a trader every day. The money comes when the market wishes to give it to you. This is the Japanese way of life.
Third, all traders are equal. In a Japanese company, there will be only a small difference between salaries of the lowest worker and the highest paid official. All employees are considered equal. In the same way, you - a trader are as good as any other trader in the world. Just do your duty, then leave the fruits of your labor to the almighty.

Socialism for the Rich ?

Indians should take note of big changes taking place in the world economy. After the collapse of the USSR, capitalism of the American Variety became the popular method of economic policy. Now, the strongest advocate of capitalism, the USA, has done the unthinkable - Nationalization.
By taking over the two housing finance companies, America has made Nationalization, acceptable once again. But, blogs say that this move to socialism is really to protect the rich - since it protects the large investment banks which created the sub-prime crisis.

Kenneth Rogoff , a senior economist, writes in the Gaurdian : (Full article here)
There is also a fairness issue. The financial sector has produced extraordinary profits, .... Why, then, should ordinary taxpayers foot the bill to bail out the financial industry?

Nouriel Roubini, now world famous for correctly predicting the sub prime crisis, writes here:
This is the biggest and most socialist government intervention in economic affairs since the formation of the Soviet Union and Communist China......
(Bush, Paulson, Bernanke) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected.

My view: Lessons for Indians:
India has followed a model of extreme capitalism in the last four years. The poor and the middle class watched as the rich grew richer. This model is likely to end in early 2009, and a more equitable society will emerge. Investors should focus on PSU shares, as this segment will carry the least risk of uncertainty. Avoid brokerages, privately owned financials, real estate.
For Investors: There is likely to be more pain in the stock market. Rallies should be considered as bear market up moves, unless proved otherwise.
The FII's - in big, deep problems of their own, should not be expected to invest in India, in large amounts, in the near future.

Tuesday, September 9, 2008

Road to Nowhere

The Market continues to remain in a trading range, giving little indication of moving out one way or the other. A broad range betwen 4250 and 4650 has locked the Nifty inside it for over seven weeks. We have seen many small ranges develop inside the larger range. Anoher one of these small range is visible now, enclosing the last five days in its boundary. This small range is between 4350 and 4550. A move out of this small range will probably give a small trend, maybe down to 4250 and on the upside to 4650. This is not much to go by, but the Market is in a choppy, directionless mode. We have to follow market momentum. The momentum is confusing.
For short term traders, the best way is to trade these breakouts from the small ranges. For position traders, the circumstances are quite frustrating. There is no clear trend. The advice to go with the trend, is therefore of not much help. Traders should attempt to catch extremes, sell on signs of weakness after a rally, buy on signs of strength after a decline.A description of strength & weakness is found here.
So, where are we now ? Looking at the sharp rally in the Nify, we are probably on the rally side. Then, look for signs of weakness to go short. Those who do not like to take short positions, should take profits/ Cover any long positions, and step aside.

Monday, September 8, 2008

Still in a Trading Range

On the back of 'good' news, the Nifty rallied with an opening gap, closing 130 points higher. Today's market action should be a bit of a disappointment for the bulls, since the less than 3% gains are lower than the gains recorded by the Asian and European Markets. Also, the Nifty drifted down to close at the lows of the day.
Too much should not be read in intra day movements. Maybe, tomorrow could be different. The facts are:
The Nifty closed 130 points higher. Short term momentum is up.
The Index remains inside a trading range with boundaries between 4200 and 4650.
Movement inside the range can often take the shape of a drunkard's walk, meaning the moves are random, with no pattern. This seems to be happening now.
Inside this trading range, a smaller four day range is now visible, with boundaries between 4330 and 4530. This smaller 200 point range will determine the next move of the market. A close above 4530 calls for buying, below 4330 calls for selling. Inside this range, there will only be minor day trading opportunities.

Never Fight the Market

This is a pre-market post (7:54 AM) on Monday. I received many comments on the Saturday post where I suggested that the Nifty could touch 4650 now, and, 5200 maybe. Some comments have been published.
The underlying theme in most comments is: : "This is a suckers rally". "The Nifty will face resistance ". There is even a suggestion to go short at higher levels.
In my humble opinion, this is the wrong approach to trading.
Never fight the trend. An individual trader may not be in tune with the current momentum. Often, the best traders devlop mental blocks. This is always possible. But, going against the momentum or trend is almost like financial suicide.
What is the evidence ? The Nifty is likely to see a big rally today. Probably touch 4600 easily. This is not just the Nuclear Deal, today morning, the USA has nationalised two of its housing finance companies. This news is giving a 4% rally all over Asia.
But, the reasons for the rally are not important. The evidence is that the market will rally. We should let the market eventually decide what it wants to do. Meanwhile, either we go with the flow (which is Up) or stay away. Going short is not a good idea at all.

Saturday, September 6, 2008

It is a 'Nuclear' Deal

The Nuclear Supplers group has finally agreed to sell nuclear supplies to India. This will enable us to utilize our nuclear reactors to the maximum capacity, as also expand our nuclear power generation capabilities.
The deal itself has two aspects for the Markets.
First, the Euphoria. The stock market may well decide to use this as a trigger for a large and substantial rally. A rapid fire move to 4650 is possible. This move will not require the assistance of international markets. We can do this on our own. Once the Nifty reaches the outer edges of resistance, a breakout from the 4200 - 4650 range will take place if world markets turn bullish. If this happens, we can be looking at 5100 / 5200. Lot of "If''s, but it is possible.
Second, the Reality. The deal itself is just a small help to the massive task of uplifting Indian poor to a better standard of living. In fact, the deal itself is likely to play an insignificant part in the removal of poverty. This realization will also come to the market, although the period of euphoria could last long enough for a decent rally.
How should we trade this news ? First, avoid taking short positions. Traders should never fight the trend. Second, go with the flow, which may be up. It is possible to buy on breakouts / on dips. Third, allow for increased volatility, by widening your stop loss. To control possible losses, keep volumes smaller than normal. Fourth, look for tell tale signs of trend exhaustion. Since the trend has not even began, this is a little premature. My point is, remember that the best of moves will get exhausted at some point, so do not get carried away.
It does appear that September might be fun !

Thursday, September 4, 2008

Why we cannot talk up the Market

Markets will go up when the buyers are stronger, more persistent than the sellers. This will happen when the buyers want to buy. Much as we like bull markets, we cannot push up the market simply by talking about it.
Remember, in January 2008, the Nifty was at its highs - 6300+. The market was talking of higher and higher levels, but we know what happened. The Nifty went into a bear market, reaching 3800 in just seven months.
My point is, there is a difference between talking about a market and what the market actually does. If the Market wants to go up or down, its direction will be visible on the charts. If the market has more determined sellers than buyers, it will fall, even if all the speakers on different channels suggest a rally.
What are the charts telling us ? The Nifty continues to be in a range. Last month, we saw the Nifty breaking down to make lower highs. In the past few days, the index has broken through resistance. By doing so, the short term trend has turned up. But, the Index continues to remain in the range.
The Nifty is enclosed in a fairly large trading range between 4200 and 4650. Inside this large range, currently, I see the Nifty inside a smaller range between 4400 and 4500. When the market is inside a trading range, the best trades are the breaks from these ranges, small or large.

Morning Call - What The two days of trading could bring

I write this post at 7:19 AM, so it is almost like a morning call for Thursday (today) and maybe Friday. Yesterday was a holiday in India.
Short term traders should begin by looking at the market environment.
US Markets S&P - down on Tuesday, on Wednesday.
Asia - Down on Wednesday, down as I write.
SGX Nifty - Down 58 points at 4460.
Nifty on Tuesday - Big surge leading to a breakout from two resistance levels - 4400, 4500
My Expectations for day trading/swing trading - Choppy market possible. This often happens after a big range expansion day (Tuesday). Keep volumes half of normal. A dip to 4400 is possible.
Strategy - This is an example of many strategies that can be used. Look for direction after first half hour of trading. If Nifty trades above the high hour range, then look to buy on small consolidation. If it trades lower, look to sell on consolidation. Stops may be at the other side of the range, or just beyond the consolidation.

Edited at 7:51 AM. Stocks to watch for a swing trade lasting few days - Hotel Leela, Indian Hotels.

Wednesday, September 3, 2008

What I am reading today on a holiday

Behind the Headlines gives some humor to market terms:
Daytrading: - an activity that takes place in between meaningful periods of employment.
Fundmental analysis: – a method of analysis that provides compelling reasons for why a stock shouldn’t fall in price when it does.
“Fundamentally sound”: - the condition in which an economy finds itself immediately after a stock market collapse.
Market report: - a concise explanation of why a market traded up or down. 99% of market reports are drawn from other market reports. The remainder are whimsical.
For more such insights, read the Blog mentioned above.
The Aleph Blog says:
During crises, assets shift from weak to strong hands, from the weakly capitalized to the strongly capitalized. .... (Warren Buffet) was prudent during the boom phase, and let others do deals at imprudent levels while he watched, sat on cash, .... Sitting on financial slack (cash) is tough during the bull phase. You look dumb when other seem to be making easy money.... But, if you have excess purchasing power in the bear phase, how delightful it can be.
My Notes: This is a principle that applies as well to trading. If Markets are in euphoria, the trader has one more option. He can stay away, keep his cash to himself. Many a time I say on CNBC, "Wait patiently. Buy only on a dip". If you miss the move, so be it, there will be hundreds of such moves every year. The electronic media creates the impression of 'Now or Never'. But this is only an impression, the reality is quite different. Investors and traders who take care of their money without getting swayed are big winners in the long run.

Tuesday, September 2, 2008

Planning your Short Term Trades

The Nifty moved up by 155 points today, a gain of 3.57% over yesterday's close. Yesterday's post had this suggestion:

The second range is between 4360 and 4200. This is the range which can easily be broken out from, tomorrow. If this happens, traders should go long, with proper stops.

The Nifty moved around 4360 in the morning, then took off to close at 4508, a big gain. As the Nifty was trading above 4360 in the morning itself, what did you do ? Did you buy ?

Traders can take a trade with confidence when they have a complete trading plan. Buying on a breakout of 4360 was a significant part of today's plan. Yet, there were other components.

Where should the protective stop be ?

For a day trader, the stop should be below a three standard deviation of the ATR. This was around 25 points. If you had entered at the open, you would be stopped out duirng the period of drift, just before the market took off. There is no way to avoid such a stop loss. The correct approach is to renter if and when the morning highs are broken.

For a swing trader, who is tracking the market with 60 minute charts, the 2 standard dev stop ws 80 points. An early morning trade lasted throughout the day.A t the close, the trader could take profits on whole or part of the position.

My point is: There was a sense that a move aboe 4360 should be used to go long. Yet, even with this widely available idea, traders could have made mistakes and actually lost money on such a trending day. Why ? because they did not have a plan.

Always have a trading plan, written down, that will act as a guide during trading hours.

Monday, September 1, 2008

Volatile Nifty: Just one more day in the office

First, information on other posts.
I have discussed the concept of Strength and Weakness in a post called 'Signs of Stength & Weakness' .

I have also given a brief explaination of My Blogs - Personal Note on My Blogs. This one is just below the current post, you can scroll down and read it.

The Nifty
The trading range was narrow, suggesting some indecision. The Index found support at lower levels bounced back to close at 4360, the top of the day's range.
As the Index continues to move in a narrow band, there appear to be opportunities for buying on breakouts and selling on breakdown.
The Nifty has two distinct trading zones. The first is a larger range, between 4200 and 4500. A move out of this range will offer a significant trend.
The second range is between 4360 and 4200. This is the range which can easily be broken out from, tomorrow. If this happens, traders should go long, with proper stops.
Inspite of small daily ranges, volatility continues to be at the higher end. Current 10 day historical volatility is 85% of 'normal' long term 100 day volatility. I say that this is at the higher end, because a low volatility situation develops when current short term volatility is 50% or less than long term V. Therefore, it is possible that the market may continue to move in a narrow range for a longer period.
The trading idea from this information is to accept that a strong trend may not emerge soon. Trading should be focussed on small profits.

A Personal Note on my Blogs

This blog is my way of saying thanks to all the affection that I have received from traders & investors.

The Dalai Lama says: "Share your knowledge. It's a way to achieve immortality."

I wish to share whatever knowledge I have gathered over the years.

This Blog is written to share my ideas, thoughts. I do not wish to make this into a chat session. For this reason, I do not reply to comments, although I read them carefully and really look forward to reading them.

Different Topics on Trading have been put in seperate blogs. There is a Blog List visible to the left of the blog notes. This list contains the names of the Blogs and the latest article for each. As time goes by, it will be easier to keep different topics in different blogs.