Saturday, January 31, 2009

2009: Welcome to February

As the first month of this year 2009 comes to an end, the economic environment is no better (or no worse!). Stock markets are not bullish yet. Reading a number of blogs on Friday evening, here is a summary of my understanding on the market:

What happened ?
Banks, Brokers, Investment Banks in the USA developed a shadow banking system. What is this ? A system that is not regulated by the banking authorities. Why ? Because in an unregulated environment , the bankers could take on large amounts of leverage and invest. If the investments made money, bankers stood to make large profits. (The bankers borrowed 97 Dollars for 3 dollars of owned funds. In a bank, this was not permitted. So they set up 'shadow' entities, away from the regulated environment.)
Why no one complained ?
Because thanks to rising asset prices, everyone was happy.
What is this to do with India ?
Why do you think India enjoyed its biggest bull market in history ? Because of investments made by these shadows. These are the FII's.
So, what went wrong?
At some point, asset prices went sky high. The first problem started with 'sub prime'. Housing loans given to people did not get repaid. The shadows owned these loans. Their capital got wiped out. Then, their failures started causing price destruction in most classes. Whatever they had touched earlier had turned into gold. Now, that gold was turning into ashes.

The Future:
The shadows are gone. Governments (including the USA) are regulating the banking sector with strict rules. The enormous amounts of money (due to leverage) that was available in the past will not come in the market in the next few years.
Stock markets will fluctuate, but the next bubble is probably far away.

Friday, January 30, 2009

Before the Open

Thursday's Nifty refused to move above our resistance at 2875. It closed much lower, inside the 2700 - 2875 trading range.
For Position Traders: If you are short when the Nifty had broken down below 2700, then you should keep a stop losss on a close above 2875. And, wait.
If you are seeking a new position, there are little opportunities inside the range. You should wait for a breakout either side.
For Swing Traders / Day Traders: The Trend is not providing any direction because the Index continues in a range. (If we were in a confirmed up trend, for example, a day trading strategy will be : buy on dips. But that is not so.) Waiting for small intraday consolidations, then going with the breakout may be one way of trading this range.
Have Fun!

Wednesday, January 28, 2009

Trading is Fun!

Nifty Futures remained locked in a narrow 28 point range for the first 3:20 hours of trading. This was an indication of a narrow range that was probably ready for a breakout / breakdown. As it happened, at 13:15 PM, futures moved above the trading range, signalling an upside breakout.

That's the market for you. The market rewards traders who have the patience to wait or their trades.

For Traders:
The Index remains inside a trading range with 2875 as resistance and 2700 as support. We saw the Nifty breakdown below 2700 support. But, there was no follow through as the market rallied back all the way near 2875 resistance.
A close above 2875 will change the scenario from bearish to bullish. While it is still possible that the breakout could be a whipsaw (just like the downside breakdown), we still follow the market, accepting the whipsaws, if any.

Question: Why is program trading potentially harmful ?


Large trading houses run computer programs which trade large volumes of futures & options. Movement of large volumes creates sudden volatility in the market. Retail traders & investors cannot handle such sudden changes in volatility. These people then lose money, or simply move away from the market.

Trading provides liquidity to markets. But, markets were liquid without program trading. So, program trading serves no useful social purpose. It scares away retail traders / investors.

The key question is: Is the world designed for the rich, powerful and greedy ? Are they entitled to all the benefits of mankind without a thought to the other 99.99% of inhabitants ?

Are large traders destroying the market ?

Alan farley writes: (Full article here )
Machines. Finally, let's talk about program trading and the ultra ETFs. I'm squarely in the camp that believes these two factors, taken together, are destroying the fabric of the worldwide market structure. Beyond that, they've frightened away huge amounts of public capital that now believes they can no longer compete in the financial markets.

As far as I'm concerned, this is a clear case of manipulative activity that goes against overriding public interest. It's destroyed the auction place by creating synthetic market inefficiency -- i.e., the ability to control price direction through brute force. Sadly, I have little faith that our regulatory officials will ever comprehend the sinister power of these destructive bots.

My Notes: A few months back, with SEBI permission, the NSE allowed large entities to automate their trading process, providing for progam trading. Is this damaging the Indian market ? Most probably, yes.

One day rally ?

For Day Traders / Swing Traders
The Nifty rallied on Tuesday, justifying a buy suggestion given on Monday evening. On Tuesday, the Index opened at its lows and closed at its highs. This one day pattern is either (a) continuation signal in an uptrend, or, (b) likely resistance in a downtrend. Since we are in an intermediate downtrend, tuesday's price action suggests resistance is likely to come in on wednesday. The strategy should be to sell into strength. Strength may also be defined by a mildly 'overbought' position in intraday oscilaltors. Professional traders might like to develop this concept further.

For Everyone:
The Nifty has been making a pattern of lower highs, lower lows. The previous high was made at 2870. A close above 2870 will change the intermediate trend to up. Any rally will again face resistance at 3150. The target for the current down move is 2450.

Monday, January 26, 2009

Getting ready for tomorrow

As I write this, the American Markets are enjoying a decent rally, almost 2%. Indian markets are in an intermediate downtrend. Rallies should be short lived. The bigger gains should come from selling in these rallies. For day traders, it is possible to take trades on days when there may be the possibility of an upswing. The intermediate trend affects day traders, but less so.

The Nifty has seen four consecutive days with lower lows. The Index may now be ripe for an intra day rally. Any rally will face resistance at 2750.

When will the Nifty touch 2450 ? The answer is: Only the Market knows what it wants to do, and, when. The 2450 number does not emerge from any magical calculations. It is the arithmetic target of a trading range breakdown. Usually, trading range targets are met.

Sunday, January 25, 2009

Difficult Times - Continued

The good news.
Jeremy Grantham suggests:
Slowly and carefully invest your cash reserves into global equities, preferring high quality U.S. blue chips and emerging market equities. Imputed 7-year returns are moderately above normal and much above the average of the last 15 years. But be prepared for a decline to new lowsthis year or next, for that would be the most likely historical pattern, as markets love to overcorrect on the downside after major bubbles.

The Ugly:
Societe Generale strategiest Albert Edwards said on Janaury 15:

"Investors should now cut equity exposure ... and prepare for a rout.
He predicted that the S&P 500 index of U.S. stocks could be set for a fall of around 40 percent from recent levels."
Edwards also raised the danger of a global trade war with China.
"It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan. A subsequent trade war could see a re-run of the Great Depression."

The Excesses
In 2007 (the great bull market was continuing), Wall Street baron, Steven Schwarzman of the Blackstone Group, a private equity and hedge fund, celebrated his 60th birthday with 350 guests. To appreciate the degree of ostentation and taste, Rod Stewart was called to entertain, at a cost of 1 million US dollars.
Four months after the party, Blackstone went public.
Two years later, in 2009 January, Blackstone shares are trading 85% lower.

John Thain was treated as a wise man when he saved his company, Merryl Lynch by arranging a merger with Bank of America. During the process he took some hard decisions, including the retrenchment of thousands of employees. It now appears that he tried to give himself a bonus of $30 million during the same period, gave millions in bonus to his top ranking officers, refurnished his office by spending 1.2 million dollars, including a trash can costing $ 1405 (About Rs seventy thousand for a waste paper basket). Mr Thain, resigned last week, when these details emerged.

My Notes: What is the message ? A group of people have taken control of financial services in most countries of the world. This group has no morals, is pushed only by the desire to make money, by hook or by crook.

Difficult Times

The CNBC-TV18 Investor Camp at Kolkata on Saturday Janaury 24 was a big success. The large hall was filled up. More important, the people who came were cheerful, smiling and willing to listen. Cheers for Kolkata citizens.

Nifty Watch
Market loses for second consecutive week
The Nifty closed at 2672, the lowest close in 14 weeks. This is not good news. Lower closing levels suggest weakness in the market.
Possible Downside Targets
A trading range (3150 - 2800) breakdown suggests a target of 2450. Since this breakdown has occured in the direction of the primary trend, it is possible that the final target may be lower than 2450, since targets in the primary direction tend to overshoot.
Not the time to invest
The time to invest will come, but this is NOT the time. As the Market searches for a base, it is likely to see, sharp volatile down moves. Fresh investments should be made ONLY after the index shows signs of base bulding. This has not happened yet.
The banking sector has seen the biggest losses in recent days. This was the sector that was outperforming a few weeks back. There is a message here. No sector can be assured of better returns while the bear market rages on. Thus, we cannot say that this or that sector will act better. The sectors that will eventually lead the next bull market will be discovered only after the bear market shows signs of exhaustion.
As I write, the infrastructure sector has been out performing. This sector does suggest a buy strategy, whenever the current decline ends. Such a strategy is only for short term trading. Companies include GMR Infra, GVK Power, JP Assocs, ACC, BHEL, BEL, ........
Wait patiently for the selling to be over. Somewhere around 2450, we should see the first signs of market exhaustion. On every up move, the Nifty is likely to face resistance. Immediate resistance comes around 2875. Be prepared that there may be much more pain ahead. It is difficult to predict the end of the bear market now.

Thursday, January 22, 2009

The Swing may be up

Yesterday evening, before the U.S. markets opened, I had suggested that day traders may have a buying opportunity today (thursday) since the Nifty has already seen two back to back down days. Now, as it works out, the American Markets saw the bulls taking control with big gains in all the indices.

This cheer is likely to help the Indian market get off on a decent start. Today should be a 'buy on dips' day for day traders, or even a swing trader who accepts the risk of an overnight position.

One method to enter the market today is the 'morning range breakout'. You need to wait for 15 minutes to 30 minutes to let the market establish a morning range. Then buy above the high of this range, keep a stop below the low of the range. If you get stopped out, it is okay to make a second attempt if the markets do not fall much below your stopped out price. If you are stopped out twice, then you know today is not your day.

There are many ways to enter and exit the market. I just gave one example here.

The intermediate trend remains down, therefore the buy positions are essentially short term. Do not overstay your welcome.

The Other Side:

It is possible that the Indian markets may not respond to the American gains. Remember, the markets can do whatever theyw ant. On such days, I usually stay away if I do not get a trade of my choice. You have to develop your own ways.

Written at 9:19 AM before the open.

Wednesday, January 21, 2009

Intermediate Trend continues down

The Nifty continued moving down, as the intermediate trend asserted itself. The big push is usually in the direction of the intermediate trend, which as we know, happens to be down.

Day Trades

With a back to back decline lasting two days, the Index is probably ripe for an up move. Day Traders may like to look at the possibility of a buy on Thursday (This is written at 7:17 PM, without the benefit of knowing what the U.S. markets will do).

Swing Trades

These may last for a few hours to a couple of days. Here, traders may like to avoid a long position, waiting for a rally to go short. If the market does show signs of a rally, existing short positions should be covered (for a profit).

Position Trades

These trades last for a few days to a few weeks. The trader should go with the Intermediate trend, which is down. Look for rallies, then go short by selling futures, buying a put or selling a call. Only professional traders should trade in futures & options.

Missing in Action

I ama way from Delhi for a week, staying in and around Kolkata. At some adventurous locations I do not have access to the internet. This means no newsletter for subscribers and no blog posts either. Today, thanks to the TV-18 CNBC office where I am giving an interview for Awaaz, I am able to use the Net.

Can I imagine life without internet ? The answer is No.

A downdrift has started again in the market. This is not surprising.

First, the Nifty broke down from a trading range. This gives us a downward target of 2450.

Second, The primary trend is down. Therefore, the chances of the target getting realized are stronger since the breakdown is in the direction of the primary.

Third, this is a bear market affecting almost the entire world. We are coupled with the rest of the world.

How do you trade it ?

Thanks to the gaps, narrow ranges, day traders are not making any money. Position traders and Swing traders who have taken a bearish position are probably in the right place. Day traders may consider shifting some volume to a swing trade. Sell on rallies then wait for a decline of few days to cover. Then, buy on signs of strength and wait for a small rally, hopefuly.

Does this mean that day trading will no longer be profitble. The asnwer is: these are short term changes in the market. They will pass by. Maybe, even today, there could be handsome opportunities for day traders. maybe not.

For the Nifty, resistance now comes at 2800, then 2875, then 2975. That's a lot. Support comes at 2700. below 2700, we could easily see a free fall.

When should we buy ?

After the markets stop falling, there is a consolidation. Once this takes place, going long is also likely to give small profits.

What is a possible scenario ?
The Nifty could slide all the way to 1500 during the year. At this time, it is difficult to imaginve the Index above 3000, but times may change.

How about some optimism ?

Bloomberg says that the current decline in the American stock market between Mr Obama's election and innaugrationis the worst decline in American history. The second worst decline took place in 1933. The American markets gained 75% that year, after the decline were over.

Monday, January 19, 2009

Nifty trades in a Narrow Range

The Nifty moved in a narrow range today, just 48 points. The range contraction tells us that the market participants are confused. They are not sure of the direction in which the Index is likely to move, in the next few days. Now, this indecision has to end sooner or later. Therefore, a range contraction (as we have seen today) is an indication of big move to come.

Today's narrow range also gives a trading opportunity. The high and low of the range act as resistance (high) and support (low). If the Nifty moves above the high of 2689, there is a buying opportunity, below the low of 2819, there is a selling opportunity. Stop loss ? Use your discretion.

Wise After the Event

In my earlier post Did you buy ? I explained that viewers should have a strategy to follow the advice given on CNBC or for that matter from any source.

A comment said:
Quote you were on right side /direction thats why you are asking /saying in such tone.The question for retail investor is to whom he should lidten???

This is a relevant point to make. My suggestion was that traders should formulate a strategy to use the ideas given by analysts. The point I was making was that you should have a plan. Then, you do not have to 'follow' any analyst. You listen to their ideas, use their thoughts in your plan. All analysts will be wrong (yours truly is wrong more often than correct!). That's why you need your own strategy to enter / exit the market. This is not easy, but trading success comes with dedicated work. Make a start. Write down a plan. Then keep on modifying it /reading it.

Friday, January 16, 2009

Friday Markets, did you buy ?

I have a discussion on Stop Losses, here.

On Friday morning (January 16, today) I was on CNBC. Udayan asked me what my Nifty strategy for the day is ? I explained that as a day trade, I am looking to buy Nifty futures. The market has fallen 450 points in seven days or so. It is ready for a rally. We remain in an intermediate downtrend, but going long was the trade for today. After a few minutes into the open, he asked me: what is the stop and what kind of profits are you looking at ? The stops were around 4700, yesterday's low. There is minor resistance at 2800, so I was looking at a rally to this level. There was the possibility of a 50 point gain. (All levels are for January futures).

This did come about. Nifty Futures moved between 2735 to 2750 for an hour or so, before moving up. Eventually, futures crossed 2800, closing at 2816. This was a low risk, high probability trade.

Now, my question is: if you were watching CNBC, did you take this trade ? If not, ask yourself, what should you do after you hear out the morning ideas ? How do you integrate the CNBC suggestions into your daily plans ? This also means that you must have a plan. If you do not have a written plan, ask yourself, can you survive in trading without any clear ideas of what to do ?

Wednesday, January 14, 2009

Examples & explaination

A few examples of the RSI2 setup can be found here .

An explaination:
"you have to avoid taking signals when there is a strong trend."
This means that momentum trades should be considered only in the direction of the trend when there is a strong trend. This leaves open the question of what defines a strng trend.

"When you think about your trading strategies, you will realize that your primary effort should be towards planning your trades in totality. "
Now, suddenly, instead of worrying about what the Dow does, or what Operator Mr X is planning, you are thinking about what defines a strong trend. When should you avoid countertrend signals and so on. When you start thinking of the different aspects of trading, you are making a plan that includes all the components of successful trading. Trading is much more than getting a 'tip'.

This is an intermediate down trend

Today saw the Nifty rally by almost a 100 points. My submission is:

We have seen a breakdown from a trading range. Do not underestimate the power of trading range breaks. The target for this down move is 2450. While the target may or may not be met, the chances are that the down move may take the Nifty lower than 2450.

The entry rules are the starting point for a trading strategy. The strategy requires rules for catastrophic exits, trailing stops, profit targets, filters for trading or not trading.

What are 'filters for trading or not trading' ? If you are using a momentum driven entry system (like the RSI2, I explained in my previous post) then you have to avoid taking signals when there is a strong trend. (How do you define a strong trend ?). When you think about your trading startegies, you will realize that your primary effort should be towards planning your trades in totality.

Tuesday, January 13, 2009

Below 2800

A lot of thanks to readers. My post : How I trade for a living has attracted a lot of comments. Your views give me the inspiration to write better.

The Nifty fell below 2800. This was a signal of a downtrend. The first indication came when the Nifty fell from 3150 resistance. A confirmed down move has started once the Index moves below the support line which was at 2800. The trading range (2800 to 3150) was 350 points wide. A pattern target is around 2450. (2800 minus 350) . Since this is a bear market, the down targets can easily overshoot, meaning the Nifty can go below 2450.

How do you trade now ? The safest trades are selling after rallies. There are day trades possible, which is to buy after a day of sharp decline. The buying should be with stops as well as anticipation of modest profits. Please remember that the Nifty is already 450 points down from its intermediate top made just last week. The market can easily have a relief rally, or a minor uptrend.

Here is a simple trading strategy. Determine the market trend. Apply a 2 period RSI on the daily chart of near month Nifty futures. In a downtrend, sell after the RSI goes above 50, then turns down. Buy / Cover short position after the RSI goes below 5 then turns up. In an uptrend, sell/cover long after the RSI goes above 95, then turns down. Buy / Cover short position after the RSI goes below 50 then turns up. Always use stops. Always sell below the low of the previous day, buy above the high of the previous day. This simple rule will often keep you with a trend, preventing you from exiting on a failed buy/sell signal.

Monday, January 12, 2009

How I trade for a Living

How I trade for a living.

1. Develop systematic trading rules for short term trading (Day Trades & Swing Trades)

2. Implement these rules blindly during market hours. (No questions asked. If there is a signal, take it)

3. Review the performance of the rules every month.

4. Every day, work on new ideas, plans, meaning : the main task is research.

All trades have stop losses
Percentage winners are 40. Means 60% of trades are losers.
Profits must be run to the maximum possible.

What is the Arithmetic ?
What follows is a theoritical example. Say, there are 100 trades in a month.
40 winners make average 15 points each (after costs). Total 600 points
60 losers lose average 8 points each (after costs) Total 480 points
Net gain: 120 points

Why trading is difficult for most people ?
Not willing to take losses. Most will not be able to take 60% losers.
Not willing to understand that Market movements are unpredictable. Here is an example. There are 60 losers. But the losers are likely to be distributed un-evenly. Maybe 10 losers came in a succession (one after the other), then six winners came, then one loser, then one winner.....Most traders will not be able to handle 10 losers one after the other.
Not willing to take profits. Most traders will jump to cash in a few points. They miss out on the really big moves that can make a year of trading.

Why I can do this ?
First, I have given my dues to the market. This means I have made many mistakes that traders make. (luckily, I always kept my positions small, so I was saved from any 'wipe out' ).
Next, I have confidence in my trading methods. Why ? I spend a lot of time doing tests over past data. If the method has made money over the last two years, it should make money in the future. If the method has given 12 losses in a succession in the past, it is likely to do so in the future. And so on....

What are the basic principles of trading ?

Have rules.
Cut your losses short.
Let your profits run
Follow your rules

Going to Zimbabwe ?

Many manipulators trading in India must be wishing that India were Zimbabwe. Here is an excerpt from a paper issued by the Governor of the RBZ (Reserve Bank of Zimbabwe) that explains why:


The ZSE (Zimbabwe Stock Exchange) allowed some stock brokers to falsely bid up share prices, when in fact the same stock brokers had absolutely no money to pay for the shares. The end result has been that some counters grew by as high as 2 million percent in a single day;


There is more...


Some stock brokers were buying shares cheap in the morning call overs then drive up prices
before off-loading the same shares on the same day at inflated prices;


Hmmm.... This practice sounds familiar. Buy shares, then recommend them, cause an increase in prices and sell quitely.

Forecast 2009 - Deflation and Recession

Excerpts from John Mauldin's weekly e-letter giving his forecasts for 2009:

I think we could see a tradable rally in the next few months, but at the very least test the lows this summer, if not set new lows. Earnings are going to be far worse than any analyst’s projections I have seen. And earnings drive stock prices.
Further, this recession is going to be the longest in anyone’s memory. It is going to seem like it is never going to end (it will, I promise), and more and more investors are just going to give up on stocks. The buy and hold for the long run mantra is wearing thin. In inflation-adjusted terms, the stock market is about where it was in 1973!
It takes a lot of buying to make a bull market. It only takes an absence of buying to make a bear market.
I think the correlation between the US stock market, other developed markets, and emerging markets is close to one. I prefer to stand aside until the US economy has a clear direction and we can see whether the stimulus actually works. And then we can look at the world economy. I won’t embarrass them by naming names, but those who argued for “decoupling” between the US and the rest of the world are not looking good.
After a year of bouncing around, gold may be poised to rise against all major currencies. We could easily see new highs in the next year.
I think oil is going lower in the near term.
As for the other metals, I think it is quite likely copper and its industrial allies will fall in price at least for the near term, until production can be cut and demand in Asia begin to rise again. I would not be a buyer of long-only commodity funds for the near term. Someday the bull market in commodities will return, but not until Asian demand picks up.

The risks to my forecasts are quite clear. The stimulus could happen quicker and be more effective than I think, and the economy and the markets could surprise to the upside. On the other hand, and more scarily, the Fed could be pushing on a string in a liquidity trap and the economy and markets could get hit harder, along with most assets.


SHould you trade in Satyam ?

The answer is NO. I wanted to make this clear before discussing why this should be so.
Share prices have fallen due to 'News'. We will not discuss what the news is: it could be any piece of information that has surprised the markets, causing a decline in prices. When we have a news reversal, the Market has digested a peice of news and has put a share price based on the new information.

For Satyam, the price is Rs 40/- which is the close on the day of the 'News'. So far the share price remains below this value, the Market is giving a thumbs down to any subsequent rethinking.

If Satyam were to go above Rs 40/-, then you have a message from the market that maybe any declines below Rs 40/- were an overrection. There is a trading opportunity to buy above Rs 40/- with a stop below Rs 40/-. Remember, the stop is an essential part of any strategy. If there is a gap up open, which results in a wide stop loss, you should just leave the trade.

But, even if the price crosses Rs 40/- I do not recommend buying. Why ? Because of volatility.Volatility has shot up sky high which tells us: do not touch this share.

In a lighter vien:
Jayesh Bhope, in a comment given to my entry It happens only in America says:
"4500 shares (!!!???) that makes it a 7.6 lakh investment in 1 share>>??.....Are you sure you have typed those figures right>?? If Yes, then it is "Total madness", and nothing else..."

Then, he writes:
"Gr8 courage....In that much money you can employ 2-3 CNBC trading gurus..."
My thoughts: Maybe, maybe not!

Thursday, January 8, 2009

Placing Stops on Strong Stocks

Shishir Deshpande asks this question:


What should trader in individual stock do when index chart breaks down but stock chart holds ? Is the right strategy to exit with index stoploss or use the stoploss for that stock acording stock chart?(e.g. for say balrampur chini stock dropped only 2.5% where as index fall was 7% on wednesday).


When you trade a stock you should follow the levels identified on the stock chart. Thus, follow the Balrampur chart for deciding on an exit. There is an exception. If you have developed a strategy that uses the index to exit then you follow the index. You need to decide what exit rules to follow when you begin the trade. Do not change the rules during the course of the trade.

There are people who want your money

On the day that Satyam announced its plans to cancel the Maytas buyout, the stock price stabilised around 170 - 180. I was asked on CNBC-TV18 and Awaaz, many times if Satyam was a buying opportunity. My answer was: NO. I think the answer did not please the anchors (except Udayan who understands the markets in India far better than anyone else on business TV). My friends from different funds and brokerage houses were pushing the case for buying Satyam at 'bargain' prices. I sounded like a party spoiler.

There are two point here. First, why was Satyam not a buying opportunity ? When the news of the Maytas takeover broke out, Satyam was trading at 220. The news saw it fall to 170 and lower. Once the takeover plans were aborted, things should go back to normal. This means that prices should revert back to 220 (pre-announcement levels) . Therefore, individual traders / investors should be interested in Satyam only after prices reach 220 at which point the stock becomes 'normal' once again, and, we have proof that smart money says the stock price should be 220 at least. Since the stock price did not come even close to 220, my advice was consistent - stay away.

Second point refers to the relentless advice received by viewers on TV asking them to buy Satyam at 'bargain' becuase of 100 different reasons. Today, you know that this advice was worse than useless. Anyone who followed this advice has lost a lot of money. I am sure this happens innocently, but the advice has a hidden message - " give us your money -quick". Why should you ?

Wednesday, January 7, 2009

It happens only in America

As we saw the Americans grapple with issues of corporate governance (sub prime, hedge fund scams, bonuses....), we said to ourselves, aha... it happens only in America.

The scam in Satyam Computers has brought home the issues of fairly managed businesses. Only time will tell us if we will witness more of such revelations / confessions. But there is a serious issue already confronting us: can a management run a publicly owned company as a personal empire ? Think carefuly: you will find the best of families, running publicly owned companies, controlling them as if they were personal fiefdoms.

The Market:

End of the Trend

A sense of betrayal due to 'confessions from Satyam' caused a massive destruction of wealth in the stock market.

For two days, this blog has been suggesting that the Nifty is touching resistance levels, so profits should be taken. No one could have predicted today's decline. But prediction was not required. If the Nifty was at resistance, and, you took profits, you were safe from any declines. Of course, you were deprived of additional gains if the market continued to go up, but that was a risk that seemed acceptable.

With the Nifty falling 250 points (intraday), the minor up trend has come to an end. The Intermediate trend changes to down if and when the Nifty closes below 2813. This has not happened yet.

How will the minor trend change ?
Today was a range expansion bar. A close above the mid point of today's price bar should tell us that the minor trend has changed to UP. Thus, we require a close above 3020. This level will change over time.

Still in a trading range!
With all of the ups and downs, the Market remains in a trading range between 2800 to 3150. A move out of this range will provide a trend. The minor trend has changed to down for all indices / sectors. See Index watch, below.

I have long positions in the market. What should I do ?
If you are a swing trader, you were probably stopped out today. If you are a position trader you may like to keep the 2800 support level as your 'make or break' number. An intermediate down move starts below 2800. In any case, you do not need to keep long positions below this support.

Should I buy on dips ?
Yes. If the intermediate trend is UP then you may buy on a dip. Ideally, you buy above he high of the previous day with a stop below the lowest low of the last 3 days.

How do I determine the Intermediate trend ?
Many ways. One way is to use a moving average / linear regression with a period of 34 days. If the line is moving up, the trend is up. if the line is moving down, the trend is down.

Tuesday, January 6, 2009

Bullish at the Top

The Index continued its display of strength, falling 100 points in 15 minutes, then quickly recovering from the decline to close almost unchanged. Today's move reminds me of the bull market in 2003 - 2007 when a market correction could be measured in hours. Perhaps, the next bull run will see prices going up, only to correct for a few minutes.

Before readers get unduly excited at the idea of such a bull market, please remember what happened after the 2003-2007 bull move. If markets go up in a straight line, they usually fall in a similar fashion casuing a lot of anguish and pain.

A steady market is far better for traders than a market which goes crazy.

The Bank Nifty made an inside day yesterday, promising a lot of action. The action came today, with the Bank Index making an outside day. After an outside day, we expect the market to either reverse or remain choppy. Careful here.

The Nifty faces significant resistance at 3150. Once this resistance is overcome, we may see another up move in the market. Now, like all good things, there is no certainty that the market will breakout and that an up move will be sustained. I write this to make sure that we are prepared for whatever the market does. The Nifty could fall back to support, and, then who knows where ? For this reason, a wise method will be to wait for a breakout of the trading range, then buy on pullbacks / dips.

Monday, January 5, 2009

Short Term Trading

Many readers are serious students of technical trading. (Many are looking for tips, probably disappointed that these 'tips' are not available in the blog). For the serious student, here is useful information.

I have a review of Larry Connors latest book : Short term Trading Strategies that Work. You can read the review, here

Did you Buy at 2975 ?

In an earlier post, I suggested that aggressive traders should buy if the Nifty were to close above 2975. This was not a magic number. It was the mid point of the trading range. If the Nifty is closing abover the mid point then we get the first indication of a push to resistance. This seems to have happened.

My question is: If you considered to be an aggressive trader, did you buy ? Chances are you read it, thought about it but did not take any action.

Now, we are at a point of high risk. There is significant resistance around 3160. The Nifty has retreated back four times from this zone. Even if the Index manages to cross this zone, we can expect a correction to come in. Therefore, this is no longer a good time to buy. You should wait for a dip, however frustrating it may be (the waiting!).

I have a comment asking me to write about Gold. The yellow metal is in an uptrend, making higher highs and higher lows. At some point, there will be a correction in the up move. When ? Gold faces resistance between 13800 and 14000. But what if the US Dollar continues to strengthen raising the price of gold in India ? What if Gold itself moves up further breaking through resistance ? It is possible that the trader maye xit at the 'point of maximum pain' and prices start falling immediately after. When you are on the wrong side of a trend, the decisions are no longer about technical analysis, they are different, about managing risk and your capital. There are no easy decisions.

Sunday, January 4, 2009

Are the bulls coming ?

Sunday evening seems like a good time to visualize possibilities for 2009. While I prefer to follow market momentum (it is up, as of now), here is what investment wizards are writing:

The Santa Clause rally has come with gains in the last five days of December and the first two days of January. (the second trading day in January will be Jan 5 for European and US markets, so we have to wait for confimation on Monday). Quote: The absence of a rally – and one now seems highly unlikely – has often been the harbinger of a sizeable correction or a bear market in the coming year. Hence the saying: “If Santa Claus should fail to call; bears may come to Broad & Wall.” UnQuote

But risks remain plentiful and Bill King (The King Report) reminds us that “just as night follows day, international conflicts follow economic crises”.

Here is Richard Russel, Dow Theory saying : “It occurs to me that this is a good time to remember my old friend Marty Zweig’s classic warnings: ‘Don’t fight the tape, don’t fight the Fed’. Well, if you are bearish on 2009, you are indeed fighting the Fed and probably the tape".

David Fuller (Fullermoney) added: “The crucial missing ingredient for stock markets to date has been confidence. Nevertheless that could change in January, given the high levels of cash held by most institutional investors...."

According to Jeffrey Hirsch (Stock Trader’s Almanac). “S&P gains during January’s first five trading days preceded full-year gains 86% of the time.” He also draws attention to the so-called “January Barometer” which states “as the S&P 500 Index goes in January, so goes the year”.

Nouriel Roubine is pessimistic:
“The United States will certainly experience its worst recession in decades, a deep and protracted contraction lasting about 24 months through the end of 2009. Moreover, the entire global economy will contract. There will be recession in the Eurozone, the UK, Continental Europe, Canada, Japan, and the other advanced economies. There is also a risk of a hard landing for emerging-market economies, as trade, financial and currency links transmit real and financial shocks to them,” ...

Marc Faber says the global economy is going into severe recession and emerging markets will be hit the hardest.

So what's going to happen ? The best minds do not know what will hapopen in 2009. Remember, they could not imagine what happened in 2008. So, why not let the market tell us where it wants to go, and, when .

For January, here is a scenario suggested by Bill King: “..,. A year end rally appears. This usually extends into the first day or two of the New Year. But then January turns ugly on anticipated horrid earnings reports that will appear during the second and third weeks of the month. Finally there is a performance gaming rally over the last few days of January."

Saturday, January 3, 2009

Take it Easy

The Nifty continues to remain strong (while Friday did not see significant gains. Monday could be different with the Dow up 250+ points).
For short term traders, buying should be done on intra day dips. Profits must be taken, since the Index has come close to 3150 resistance. Now, as the talking heads talk about sudden optimism in the Market, traders should become ready for volatility + sudden declines. The Nifty has already gone up from 2800+. Thus, the enxt move of the market will be a consolidation or a decline. This is about short term traders.

For Position Traders, the Index remains in a trading range. An aggressive buy positionw as suggested at 2975. This position should be protected with a break even stop - if the Nifty falls back to 2975, then get out. The aim of this position is to be in place if the Index breaks out above 3150. For conservative traders, buying opportnities will come on (a) breakout above 3150, and, (b) a dip that comes after the breakout.

Wha about selling ? The trend is up so there should be no selling. In any case, trend traders should never anticipate turning points in the market. This means we sell only after seeing market weakness. This has not happened yet.

Friday, January 2, 2009

The Bulls are returning!

As the Nifty notching gains every day, the sentiment is turning favorable to the bulls. Please remember that it is the nature of trading ranges to be bullish for a few days, then suddenly become bearish. That's how a range is made - up, then down, then up.... If and when the resistance is broken at 3150, the Nifty will move in a uptrend.

Art of Trade writes:
Balrampur chini and L & T making head and shoulder bullish pattern? nifty too making abouve 3150? pls guide me>>

Here is the chart for Balrampur. We will dscuss the Nifty over the weekend.