Tuesday, March 31, 2009

Stop Losses for Position Traders

AnshulTPT Writes:

I normally follow EOD CHARTS as Im not a day trader.
Therefore logically my stops should be placed on a closing basis.
However this becomes too risky as nifty is a wild creature.
HENCE Im forced to place stops on an intra day basis.
Many a times these stops get hit on an intraday basis but the closing price turns out to be far away from the price.
This causes great frustration.


My Notes:

Traders who trade off End OF Day charts should try to place their stops on a closing basis. This ensures that intra day volatility does not affect the trade. The closing price represents the final convergenc of views, therefore it is the best measure of deciding to stay in the trade or exit.

The risk is that by the time the close is reached, the market may have moved significantly away from the trade, causing large losses.
But there are rewards also. First, intra day volatility is avoided. Second, sometime the close may provide a more favorable price to exit.

There is a trade-off. You should examine your charts for a number of months and ascertain the type of stop loss which provides superior results. If the close only stop loss is superior then you have to sacrifice the gains that may sometimes be possible on intra day stops.

It's not easy. But, if your concepts are clear, your volume is within limts then you have to condition yourself to accept the whipsaws that every strategy will cause.


Monday, March 30, 2009

Short term trend turns down

I have a small slide show on 'Price leads Momentum' Here.
My blog 'Practical Technical Analysis' now has the subscribe to buttons for RSS feed. Right sidebar.
Today morning, Asia was down. the Nifty opened down with a gap. What was the possibility that the gap will be filled ? Not much since this decline came after a 600 point rally. After the first 15 minutes, it became clear that the Nifty did not have the energy to rally. The trades if any have to be on the short side. As it worked out, today's trades should have made money. But, that's not important. The approach should be to trade well. Leave the results to the markets.
After a rally from 2540 to 3130, a decline to 2985 is a correction. Or, was the entire rally a correction of the onging bear market ? This chicken and egg discussion can continue for long. So, traders should go with the short term trend which is down. Investor should wait patiently for a deeper correction. Even if this is a sideways market, a deep correction should provide profitable opportunities to buy.

Have Fun!

Sunday, March 29, 2009

Sunday Afternoon

In response to comments by Karthik, I have a case study on HDFC here .

With the Nifty now at significant resistance, (the 3150 - 3250 zone) , traders must be wondering on how to trade in the coming week. Just as the Nifty faced repeated resistance when it started moving up, it is likely to see support if it begins a correction. Initial support may come in around 3050, then 2935, then 2850. If the Index does continue to move up, crossing the 3250 threshold may be slow and troublesome.

This is a time to avoid trend trading, and, use momentum to go with the market flow. in choppy conditions, buying / selling at momentum extremes may be a less risky trade. This means, open up your intra day charts apply some momentum indicator like RSI, Stochastics, or similar, then buy/sell at extremes. Trendline breaks can also act as entries / exits in a non-trending environment.

Have Fun!

Blog Readings: generally bearish

What I read Today on blogs

Double Digit unemployment rates in America. Seven states in the USA have more than 10% unemployed, while the rate for the country reported by the government is 8.1% but a far better approximation is 14.8%.
My Notes: Since we do not have such number for India, it is difficult to say how bad the situation is.

Wage Deflation sets in
Facing a steep drop in revenue, The New York Times Company plans to cut the pay of most employees by 5 percent for nine months, in return for 10 days’ leave, and will lay off 100 people and make other budget cuts, executives said on Thursday.

Paul Krugman writes: Was I being unfair ?
A reader writes in to complain about today's column, in which I compared the supposedly productive activities of financial wizards to the sleight-of-hand of stage magicians. As a magician, he resents being compared to investment bankers.

My Notes: When you listen to the 'advice' of fund managers & brokers on TV, always ask yourelf who benefits the most by following that 'advice'. You may be surprised to realize it is not you!

We're not quite as healthy as we thought we were. Oops.
J.P. Morgan Chase Chief Executive James Dimon said...that March was a little tougher than the first two months of the year....Bank of America...CEO Kenneth Lewis also said that March had been a tougher month for his bank. [Convenient that they decided to dump this information on Friday afternoon, and at the close of a very good week].
Readers may recall that a few weeks ago, those two CEOs---along with Citi's Vikram Pandit---said the first two months of the year had been very good:

Contractions: Roubini is not bullish. He thinks US stocks will continue to fall (and that the current rally is but a passing phenomenon), US banks (including some major ones) will fail, and the economy will continue to deteriorate through the end of 2009.

Green Energy:
After several gloomy months, experts say that the stimulus package is beginning — just beginning — to revive interest in wind and solar power.
My Notes: Suzlon is a wind power company. Track it.
Mustafa, thanks for your help. I did manage to put the subscription links for posts and comments in the right sidebar. If you can write a brief comment on how to use RSS readers to enhance your blogging experience, most readers will benefit. Thanks, again.

Friday, March 27, 2009

Bear Market Rally is over ?

As the Nifty continues its up move, there is a sudden rush among retail investors to participate in the bull market. Easy money is here again!
Investors must remember that this bull move started three weeks ago. The Nifty has gained 20%+ since then. Surely, the market can gain more, maybe 30% or even more. But, investors must understand that the risk reward ratio no longer favors them. If you invest now, you may earn money, and, then again, you may not.
For traders, the decision is easy. Buy on dips. When these buying positions begin to lose money, the bear rally may be coming to a pause.

Mustafa asked me to switch on RSS feeds for comments. This option is already switched on. I need to provide a link to subscribe to comments, which I could not manage to do. (Not Yet!) I did provide a section where the last five comments are displayed. Look in the right column!

Thursday, March 26, 2009

The Trend is your Friend

The Market continues to go up. We go with the flow, which is UP.
The Nifty touched 3100, which makes this rally gain 560 points, 20% in a few weeks. Now, markets do not go up forever. (Niether they go down forever..) With 20% behind it, the Market is ripe for a period of consolidation / correction. But, such corrections do not take place on our demand. We may feel that the Market is overextended, but the Market may continue to move up, making it even more extended. Finally, when we give up, begin to buy, the market crashes. Sounds familiar ?
While day traders or even swing traders should take long positions, position traders who plan to keep positions for more than 2 days, should wait for a correction. The risk reward ratio is now skewed against buyers. Reward is unlnown, but risk is known and high.

Tushar writes:
"This is the first time since November 2008, that oscillator signals are not working properly.I mean various oscillators are overbought now since 2830 levels, but still nifty is rising. Why? "

When the market begins a trend, the oscillaltors fail to keep up with the new momentum. Therefore, they become 'overbought' while the strong trend continues to push up the market. That's why, always follow the market first and keep the oscillaltors as a secondary signal. If the market is going up, then ignore the oscillators. There is likely to be two or even three divergences before price and oscillator begin to move in the same direction.

Tushar continues :
"Sudershanji you might have seen such moves in past. Tell me what happens next?"

My Notes:
Markets go thorugh periods of irrational exuberance. Such periods can last longer than we initially imagine. Inevitably, there is a day of reckoning and markets will eventually go through a process of massive correction. But we do not know when that will happen so we stay with the flow.

Finally, Tushar says:
" I think today we will get a strong SELL signal provided Nifty doesn't breach 3100.But is it worth to play on the short side against the tren"

My Notes: NO. Never go against the trend. A sell signal needs to be convincing. There must be a black candle, lower close, breakdown of intra day support. Only then can a short position be considered.

Have Fun!

Wednesday, March 25, 2009

Invest or Wait ?

Tajinder asks:
"i want to know that is this a bear mkt. rally or now the time has come to invest the money in to the mkt. I am wonder to see the behave of the mkt. because many large cap stocks are still stands on 2550-2600 level like L&T, SBI and some more, Those stocks which are heavily shorted by the traders that moved up from theirs lows. So please tell me i should invest now or should wait to next dip."

My Notes:
How I approach the investment cycle.
1. Identify a stock I want to own if price was much lower (fair price)
2. Wait for a dip, as deep as possible. Sometimes I wait for many years.
3. Buy half of the planned quantity.
4. Wait patiently. if the stock falls and becomes half, i will buy the balance quantity provided nothing else has changed.
5. Stock selection: good managements, share price falls due to business cycles and not due to 'news'.

While Tajinder may not be aware, my feeling is that the desire is for trading in the market, because investments do not need market timing with any kind of precision.
To answer the questions, is this a bear market or new bull market ? I cannot say. We will all be wise after the event. If you wish to trade, this is not a good time. Nifty is up by 450 points (almost 18%, I think). You have to wait for a dip.
My sense is that this is a bear market rally.
What is the difference ? In a bear market, new lows will / may be made. That's possible even now.

Monday, March 23, 2009

Roaring Markets

A 5 percent gain in the Nifty has set the markets on fire today. These gains have come together with up moves in world markets, all over.
Is this a bear market rally or the beginning of a bull market ? The answer is not relevant to traders who should follow the trend. The trend remains up, so go with it. For Investors, buying should always be done on dips (when there is a perception of value). Buying now, after a 400 point (15%) rally may not be a good idea. Investors should now wait patiently for a decline. It will come.

My response to queries:
Chandu said: "we rally today we will come in to overbought zone, can we sell there "
My notes: No. Markets can stay 'overbought' or 'oversold' for many days. Selling is done only after clear signs of weakness. i have noted such signs in the blog section "Practical Technical Analysis".

Neel said "If it is at all bear market ,what wil be the possibility to nifty touch below 2500 and at what point it wil get support"
My notes: If the Nifty does break out of the 2550 - 3150 trading range, then the possibility of coming back to touch 2500 will diminish.

Rakesh asked: "So sir, What should be the strategy, Can I go long on Bharti?"
My Notes: You buy when the trend is UP. You can trade in the Nifty, or go for individual stocks. I cannot comment on any one stock, but traders should go for momentum stocks which are performing well currently.

Sweety has a problem, that many of us have faced. This is what the comments say:
am writing this during market hours (Monday 1.27pm) - as i have a serious dilemma.
(1) I did not have any open position and i had to start afresh during this morning.
(2) Nifty opened up at higher level.
(3) I use 5 minute chart - RSI & BB . So, as per my trade rule I will initiate trade only when the price crosses RSI 50 and also BB mid-price; whether it is short or long depends upon from where it is crossing.
(4) To day morning there was a gap up - and till now I am unable to initiate any trade on nifty, because my trade set-up does not allow me to do so.
(5) Due to this i am missing some good gains.
My query is: U must have also met with such situation many times in the past... and what did you do?

My Notes:
You may not realize it, but you are among the few traders who will be very successful in this market. You have a trading strategy. That's good. Then, you have the discipline to adhere to it. Excellent. So what if you could not participate in today's move. There are and will be hundreds of other moves where your strategy will enable you to participate. Your discipline will also protect you from many losses.
There are two ways to approach this issue: First, You can modify your rules to take care of gap open. use the 15 minute rule or extend it to 30 minutes. Second, you can keep your system as it is. It is your choice. In either case, it is your discipline that will win, not the actual tactics.

Strange but True

While the American markets fell on Friday. Monday morning is a different story. Asia is up, while the SGX Nifty suggests a strong rally is coming in the Nifty. A decisive close above 2800 will suggest a breakout from a trading range, leading to 3000 or even 3100. Short term traders should not fight the trend.
Is the bear market over ? This knowledge comes much after the event. I assume this is a rally in a bear market.

Friday, March 20, 2009

Till Sunday!

I will be away to Varanasi on Saturday morning, for a CNBC Investor Camp. I am keen on replying to a number of questions / requests received in comments. I hope to do so on Saturday afternoon, and again on Sunday evening.
Meanwhile, have a good weekend!

Thursday, March 19, 2009

Signs of resistance ?

1. A significant resistance level continues to hold, pushing prices down whenever it is challenged. This may be happening in the Nifty where the 2800 resistance seems to be strong.

2. After a sharp up move, prices start moving sideways. Again, the Nifty is moving between 2750 - 2800 for past four days.

3. Price bars show decline in volatility - Narrowest Range in 7 days and / or Inside Day. The Nifty has both, today. This reflects uncertainty in the market. Now we have to ask ourselves, what is the market uncertain about ? The answer should come from price action. If the market feels there should be no dip, it will start another up move above 2825. If it is uncertain about continueing the uptrend, it will drift down below 2750.

4. Momentum Indicators reach extreme levels. This is the least important of all signals, but it does have value when used in conjunction with other patterns. tm Stoch, a modified stochastic used in Trend Mechanic (www.technicaltrends.com) has reached 100, suggesting an extended market on the upside. We may expect a dip or a period of consolidation.

5. Put Call Ratio. Bikramjeet Singh points out:
"While markets are going up, the PCR is inching down. Usually I have seen the reverse. What does it imply ? Please plot a comparitive chart of NIFTY PCR and NIFTY and give your views."

Unfortunately, I do not track the PCR or corelate it with the Nifty. Perhaps, readers who do so may like to offer their views. Thanks.

Wednesday, March 18, 2009

One step forward, one step backward

The Nifty failed to hold its head above 2800. This, inspite of support from international markets. We are in the process of moving one step forward, and then retracing that step to end up at the starting point.
The Nifty has significant resistance around 2800. It needs to cross this level to make an attempt towards 2950. For the past week, we have strong support from international markets. Now, this support will wane as these markets begin a correction / consolidation. With every passing day, the odds are getting stacked up against a thrust towards 2950.
A trading range market causes sudden mood changes - as prices move up from support, there is euphoria that this is it, and when prices retarct from resistance a sense of pessimism comes in. So we should view the market as a range. The range boundaries are about 2550 to 2800. Inside this range, the Nifty will have its little games, but a trending move is expected on a breakout.

I hope to add more notes, by the morning.

A Successful test ?

With the American markets rallying nicely overnight, we can assume that India will not be left behind. Then, the small dip yesterday (Tueday) was a pullback in the ongoing uptrend. The dip was in fact a (successful) test of the up move.
If the Nifty is able to close above 2800 resistance, we may see it advance slowly to the next resistance level at 2950. But, for traders, there is no need to do such forecasting. Just follow the market momentum, which happens to be up.

Remember, the long term trend is down.We are in a bear market.

Gary Shilling, who correctly forecast the housing bubble has this to say: (courtesy John Mauldin, Investorinsight.com)
The deepening recession and spreading financial crisis is the beginning of the unwinding of about three decades of financial leverage and spending excesses. The process will probably take many years to complete as U.S. consumers mount a decade-long saving spree, the world's financial institutions delever, commodity prices remain weak, government regulation intensifies and protectionism threatens, if not dominates. Sluggish economic growth and deflation are the likely results.

Monday, March 16, 2009

Close to the stock market botom ?

The Nifty starts yet another up move, which most technicians (including me) are calling a bear market rally.
Please remember that we trade the market, not the terminology. A rally is when prices go up. That's happening now. So, we buy. On dips and on breakouts. Now, there will come a trade that will not work out, where we will buy and the market will fall. Till that happens, traders should ride this small rally. After all, all big moves start in a small manner.

The Nifty has moved above its 20 period MA today. If the index were to rally towards the upper bollinger band, that gives a target of 2900 for the Nifty. A failure to touch the upper band will be a signal that the bear market is alive and kicking.

The next resistance for the Nifty is 2800. Traders may wish to step aside and let the market decide if it wants to move above this resistance area. if it does, then buying is suggested.

Have Fun!

Flat Market - how do you trade it ?

The US markets wre flat on Friday closing with minor gains. As I write this, the SGX Nifty in Singapore is up 1 point, suggesting a flat open in India.
On some days, the market is ready for a trend. Pre market indications of trend can come in many ways:
The previous day was an NR7 (narrowest range in 7 days) - market ready for a breakout
US and Asian markets are showing a strong trend in the same direcion
A piece of news, not known earlier is likely to influence the Indian market,
and, so on.

On some days, there is an indication that the market may remain in a range. Today, Monday March 16 could be such a day. How do you trade such markets ?
Range days should be traded with the concept of support and resistance. You buy near support, hoping that a bounce will see the price move towards resistance where you sell it, or even go short.
Pivot Levels, S1, S2, R1 and R2 are useful to identify support and resistance.
Bollinger Bands on five minute charts can also be used to identify S/R. When prices touch the upper band, we are at resistance, when they touch the lower band, we are at support.
The important point in range trading is to focus on an area which represents the market consensus (for that day). This could be the previous day's close, or today's open, or the opening range of the first 15 minutes. When prices move significantly away from this consensus, a trading opportunity emerges.
what can go wrong ? Well, the market may decide to trend. If your trade is on the verge of being stopped out, this means there is no reversion to the mean. Revise your strategy.

Sunday, March 15, 2009

Bull market or dead cat bounce ?

What the blogs are saying:

Calculated Risk quotes Nouriel Roubini as describing the latest rally as a dead cat bounce or bear market sucker's rally. Mr Roubini has come out as the perfect economist correctly forecasting the sub prime crisis, then the market crash, and now a possible depression. Mr Roubini says: "And now many emerging market economies – as argued here for a while- are on the verge of a fully fledged financial crisis starting with Emerging Europe."
My Notes: Surely, even Mr Roubini can go wrong in his analysis. For traders, when momentum is up, go with the flow. If Mr Roubini is corrrect (he should be, since he has done rather well recently) then there will be plenty of signs that this dead cat bounce is coming to an end.

Paul Krugman says that European countries are in a bigger mess than the USA. "In the face of a depressed and possibly deflationary European economy … this is going to be ugly."

Richard Wilson tracks hedge funds, says it would be hard to raise assets for almost any type of investment right now - but many professionals believe that hedge fund capital raising will now always be harder than it was before. "Hedge funds expect 2009 will be a difficult year for the industry with many looking for a dramatic increase in competition for scarce new investors according to a report by the accounting firm Rothstein Kass."

And, the other side (Half full glass) :
The WSJ blogs quote this: “It’s very encouraging that the news has gotten so much worse between November, December, January and February, and here we are at roughly the same level on the S&P at the November low,” says Alan Skrainka, chief market strategist at Edward Jones. “I think that says clearly that a lot of bad news in the economy has already been built into stock prices.”

My Notes: The Nifty is in a short term up trend. Expect sideways moves or rallies. A trend change is required to go short. Or, a bounce against 2800 resistance. Meanwhile, buy on dips. Remember, the markets can surprise you!

The Golden Rule - 1 in Video


I am experimenting with small video clips in the blog. Here is the first one. Okay or terrible ? Speed ? Feedback please.


Friday, March 13, 2009

The Real Thing

A second day of follow through is likely in the Indian Markets. With resistance in the 2700 - 2800 area, there should be 'buy on dips' opportunities in the Nifty as well as individual stocks.

This is a short note. More, later.

Wednesday, March 11, 2009

Now for the Short Term

Three days of US market action will influence the market's open. Monday was a down day, Tuesday was a big gainer in America, picking up almost 6% gains. Today, wednesday seems to be consolidation.
We can assume that the Nifty will open with a big gap up tomorrow. The Index has resistance at 2700, and, then at 2800.
Should you buy on dip or fade the gap ? The answer depends on your trading style, & the patterns that develop on intra day charts tomorrow.
The Intermediate trend remains down while the Nifty stays below 2950. Thus, any up move should be taken as a sell on rally. Just dont sell blindly. You need a setup (a technical reason to sell), proper stops, then a trigger. (A trigger is a technical event that confirms the selling, i.e. price falls below the previous hour's low, or closes below support,....)
A setup is a sign of weakness (in this case, when we want to sell on rallies). This could be a double top, a bearish indicator divergence or resistance that holds out.

Time to buy stocks ?

Bloomberg reports : Jeremy Gratham who has been bearish on the stock market for 11 years says: “Typically, those with a lot of cash will miss a very large chunk of the market recovery” because they are paralyzed by fear, Grantham wrote in a March 4 commentary posted today on the Boston-based firm’s Web site. “Remember that you will never catch the low,” wrote Grantham, one of the co-founders of GMO. He expects stocks to return 10 percent to 13 percent after inflation in the next seven years. Grantham told investors to make the shift from cash to stocks in a “few large steps” instead of all at once.

My Notes: For investors, the expectation of a low is enough reason to begin accumulating. I had earlier explained that I purchased Hindalco at 42, with the full understanding that the stock can go down to 30 or even 20 when I will be glad to buy more. (When the price was 170 and charts were terrible, I thought, I will buy at 100. Then around 140, the chart suggested 40. So I waited). Now, such investing can only be done with spare money, sinc the time for frution may be quite long.

Tuesday, March 10, 2009

Swing Trading revisited

I am overwhelmed by the response to my swing trading presentation. While I will answer many of the comments in subsequent posts, here is some quick response.
The purpose of the presentation was to quickly explain what Swing Trading is all about. This was in response to a request by Mustafa. I gave four different examples for swing trading setups. There are hundreds of setups which traders can use. So, the presentation was only an introduction.

Nitin wrote "you have many times told that ride with trend in this presentation your ideas to buy after 5 days fall is it contradctary staatement". This is a valid statement. I should explain my views. The idea of swing trading is to capture small moves usually when the market is at one extreme. Now, you should always go with the trend. Therefore, you can filter your setups to say: "If we are in an uptrend, then I will buy after a 4 day decline". The filter is a a question of personal preference. After four days of declines, even in bear markets, many stocks may be ripe for relief rallies / bounce. So, it is your choice if you wish to take such trades. Please understand that trading is a very personal activity. That is why you cannot copy or mimic another person blindly.

For gaps, you should consider the market environment. If the market opens with a gap, supported by external factors, it is possible that the gap may be a continuation gap. Our own tests suggest that reversals and a move to fill the gap are much more frequent. A trading strategy based on this principle makes fair amount of money even when traded as a mechanical system.

For Bollinger Bands, 95% of all price action will remain inside the bands. But what about the rest 5% ? Sometimes, prices touch the bands, and then do not reverse, instead they continue to move up or down. John Bollinger calls it 'walking the bands'. You have to keep exit strategies that protect you from such events.

Then, the three bar and one bar exit. If you are long, identify the low of the previous three bars. For short positions, identify the high of the last three bars. If you are trading on end of day charts, then three bars are the past three days. If you are trading on 60 minute charts, then three bars are the last three 60 minute prices. Suppose you are long, and the lows of the last three bars are: 2531, 2542 and 2554. The lowest of the three is 2531, so this becomes the low of the past three bars. In the same way, if you are short and the highs of the past three bars are: 2548, 2544 and 2565, then the high of the past three bars is 2565.

I will add to the clarifications.
Have Fun!

Monday, March 9, 2009

Breakdown ?

Political events over the weekend tell us that we are in for some very exciting times. The 2009 May election has become absolutely open and unpredictable. Not just in the results that may come out, but also in the new alliances that may be formed after the polls. A third front govt has emerged as a distinct possibility. While all of this lends to good TRP's and entertainment, the markets may possibly take it in the chin. Let us be optimistic. Who knows that a decline leading to the elections may actually become the last leg of this bear market ?
For day traders, sell on rallies, sell on an opening range breakout. Do not go bottom fishing if you are an investor. Swing traders have it difficult since overnight positions with short selling may be difficult and there is no setup that offers buying. Why not keep your money with you ?
Have Fun!

Saturday, March 7, 2009

Swing Trading Presentation

In Comments, I was asked to provide some inputs on Swing Trading. Here is a slide show on the subject. This is the first experiment with a slide show. Please give a feed back.

Click Here to see slide show. Opens in new Window

Friday, March 6, 2009

Why you are paying for dalal street greed ?

What did you do to deserve this ? As a responsible citizen, family head you invested in buying insurance for your family. The investments were made in insurance funds. Now, the funds NAV is barely 40% of your investment. Your family protection is lost thanks to the misdeeds of a few. Why ? The issue is not the decline in share prices. The issue is the absurd rally in share prices during the last bull market. This rally was designed to put your money into overvalued shares. Now, the penalty for greed is paid by millions of middle class savers.

The same question is asked by many community banks in the USA. A Bloomberg news says this : Minnesota Bank Asks Why It Pays for Wall Street Greed . Somewhere, something has gone wrong.

Well, some people are getting it right.
A New Zealand firm has decided to close its Hedge Fund after it made 236 percent in the last 12 months. The Black Swan Fund profited from bets on interest-rate cuts in Australia and New Zealand, and the purchase of put options on major stocks around the world, including the so- called BRIC nations of Brazil, Russia, India and China, Haworth said. The manager also bought put options on commodities.
My Notes: And, what are they doing now ? Start a fund that wagers on inflation. This means, they are betting that inflation will rear its ugly head again. That means, rising crude, commodity prices but big squeeze on financials including banks. Worse, if inflation comes into play without growth, we may again have 1970's style stagflation -w worst of both the worlds.

In Comments, Sweety wanted to know about day trading plans. The questions were relevant, so I have a new article which try to provide an answer.You can read it here .

Wednesday, March 4, 2009

Depression & Revulsion

The Wall Street Journal ( read it here ) quotes James Montier, strategist at Societe Generale, that the last stage of a “de-bubbling” process is revulsion. “The speed of the market’s unravelling means that we are now rapidly approaching levels of valuation normally associated with revulsion,” he writes, noting, however, that “cheap stocks can always get cheaper, and more expensive stocks can always get more expensive.”

Replies to Comments

Bikramjeet Singh refers to the Nifty weekly chart given in our newsletter for clients, and says: "A similar pattern is there in DOW daily chart too, see (http://www.cnbc.com/id/29474078/). The combination seems deadly......"
My Notes: Yes, I saw the Dow chart. The pattern is the same. The Dow has broken down. We assume that the Nifty will do so. The resistance levels at 2700 and 2800 offer short selling opportunities.

Sunil Malhotra writes: "I could not understand why the banks stocks have fallen so much in last week. Can anybody explain this and if this is buying opportunity in Banks or they are likely to fall further."
My Notes: The Banking Sector has been underperforming. Banks have broken down. I had warned of a rising flag (bearish!) many weeks ago. Much lower levels are possible. For the question: why did they fall ? I really do not know. Talking heads on TV spend all of their time answering such questions. Please listen to them. It will not add value to your trading, but maybe you will know the answer.
Sunil again says: "But a weblink http://www.utvi.com/stock-market/stock-market-news/19592/icici-bank--ranbaxy-in-oversold-zone.html is saying the these four stocks has RSI below 30 = 1)ICICI Bank 28.9, 2)Ranbaxy 28.4, 3)SBI 30.0 4)Tata Power 30.0. So, i want to know if RSI goes below 30, the stocks go in oversold zone and can be brought for short term gain."
My Notes: No, you cannot buy. An RSI below 30 does NOT assure profits. If it was so easy, then why not just buy stocks with RSI below 30 and laugh your way to the bank. In fact, in strongly trending markets, the RSI may fall below 30 and remain there for many days. When it recovers, the prices may simply consolidate before starting another round of declines. Also remember, UTV is a media company, not traders. One more point, I assume that you have a charting software where you can actually apply the RSI and see its behavior.

Chandu writes: "Today on CNBC u shared a thought about nobel winner on FII'S and his blog.can you please share once again his views."
My Notes: Krugman, Economics Noble prize winner in 2008 and an adviser to President Obama referred to capital account controls. He did not write about FII's in India. My point was: if the USA considers some kind of controls, then FII flow to India will be adversely affected. You can read the capital control ideas here - Paul Krugman's Blog .

Tuesday, March 3, 2009

Sharing a good idea

In comments to this post , Krishna has given a remarkable insight into the use of easy and simple ideas to develop great systems. The system is explained, so go ahead and read the comments. (opens in a new window). Thanks, Krishna.

Krishna's system is a variation of the 'opening range breakout' idea. Day traders will wait for the opening range to be set up. (First 5 minutes, or first 15 or 30 minutes ). Once the high and low points of the range are established, day traders will only go long if prices move above the range high. They will take only short positions if prices move below the range low. Inside the range, generally there is no trading. The core idea here is to set up a benchmark for deciding the direction. The benchmark is the high - low range of the open. Traders should focus on a number or range to improve their decision making. There is no 'magic' number. The numbers are useful only in context of what we want to do - buy, sell, stop loss.

On a weekly, monthly or yearly time frame, using the close alone is a sensible idea. The range may be too large to be of any value, so the bechmark for taking decisions is the closing price. Traders who trade this concept will slowly become experienced. Then the shifting of time frames will allow participation in most trends. As an example, Krishna explains that the benchmark for Nifty Futures is the 2008 close - 2959.15. So far 2009 trades below this number, there is no buying opportunity. Fine. Now let me add more. Suppose the Futures fall to 1800, eventually during 2009. Then they start a rally. Perhaps, at some point the trader should shify the time frame from yearly to monthly. Otherwise the rally from 1800 to 2915 may be missed.

Traders should read the comments, this post and then think about what's going on. It is a trend following system. Thats' what makes money in the long run - Trends.

Monday, March 2, 2009

The Dow below 7000

Below 7000, the DOW is trading at a 10 year low. That's not good news. This bear market has been vicious and unkind. It is not going to go away in a hurry. The world is changing, moving away from a pure capitalistic form to a new unknown model . While this change will certainly benefit mankind, in the short run the turmoil can continue to hurt markets.
The best case scenario is for stocks to begin a process of consolidation. The sooner the better!

Breaking below the narrow trading range, the Index signals there is more downside. There are minor support levels at 2635 and 2500. These levels may or may not hold. Below 2500, we have the possibility of a free fall.
The year 2000 bull market topped out at 1818. A new bull market started in 2003 which saw its first high at 2014 in January 2004 before seeing a sharp correction later in May. Previous highs become important support. Therefore, we can say that the 1800 - 2000 zone can be the area in which this bear market may end. Maybe.
February 09 saw the Nifty trade in a narrow range with the monthly range enclosed within the January range. Thus, feb saw an inside bar. Today, the first trading day in March has seen the inside bar break down, moving below the feb as well as the January lows. This does suggest that the consolidation in feb was a period of rest before another bear move starts.
All the usual caveats. This analysis is based on my perception of the charts. I do go wrong, often.

Sunday, March 1, 2009

Sunday evening replies to comments

Manohar asks: "what is the meaning of buying on dips ? "

Buying on dips is a trading strategy that looks for pullbacks in an uptrend. The pullbacks are defined by chart patterns and NOT by a percentage. I have written a brief article today, which can be read in Buying on Dips - Practical Technical Analysis .

Piyush Sharda writes:" A lot of times i have sat in despertion when i see a profit turning in a loss."

My Notes:
True. Trading and human psychology can sometimes go in different ways. In extensive back testing for intra day systems, we find that the systems make money when they are able to capture large trending intra day moves. Similar findings have been made by traders in the USA. Such moves may come only once or twice in a month. But we hold on to positions, waiting for a move like this. Therefore, a number of winning positions turn into losses, waiting for more thrust that does not come about. The big profits more than compensate for these losses, but the waiting for the profits can be frustrating. (No one said trading is easy. My own experience suggests that gains come to people who can take the pain!)

Now, the problem is that traders can abandon the trading methods out of sheer frustration because the waiting can be very difficut to do. To take care of these issues of psychology, we suggest that traders follow the "2 for 1" money management method. Take positions in two contracts. If you see a decent profit, take the profits in one contract, while let the second contract work according to the trading system. This will provide a lot of psychological comfort and also ensure that on many days, the profits in one contract will more than compensate for any adversity in the second contract.

Saket says: I am new at trading and would want to know the differnce between swing and positional trading n also which charts to use i.e 5min,60 min daily etc for which trading(intraday,swing n positional)

My Notes: Swing Trading tries to capture reversals after the market is overextended on one side. Typically, trades last for 1 to 5 days. [An example: a dip in an uptrend is a swing buying opportunity. The idea is to capture some part of the upward rebound]. You carry overnight positions. Position trades look for a trend and the positions can last for many weeks.
5 minute charts are used for intra day trading. 60 minute and EOD charts can be used for swing trading. For position trading, EOD charts are used.