Thursday, April 30, 2009

Sell in May, Go Away

Udayan talked about this strategy on CNBC-TV18 : "sell in May, Go away", and, come back in November. I took a a close look at the "Sell in May, Go Away" strategy that Wall Street usually advises this time of year.
The strategy is:
Sell in May. Come back in November to buy. To computerize this, the rules have to be defined. I have changed the rules to determine the results of buying in may and exiting in Ocotber, and, buying in November and exiting in April. The rules are:
Test data: NSE50 Index from July 1990 to April 2009.
Test 1.
Rules
Buy on the last trading day in April
Cover the long position on the last trading day in October.
Number of Years: 18
Results
Winning Years: 10 (91,93,94,95,97,99,2003,2005,2006,2007)
Losing years: 8
Net Gain: + 319 points
Test 2
Buy on the last trading day in October.
Cover the long position on the last trading day in April.
Test Results:
Number of Years: 19
Winning Years: 13
Losing years: 6 (90-91, 92-93, 94-95, 2000-2001, 2002-2003, 2007-2008)
Net Gain: +2750 points

While buying in both time spans make money, The Buy in Ocotber, sell in April seems to be a viable strategy.

The message is: the period May to October is likely to be choppy, difficult for the markets, based on historical data.

Wednesday, April 29, 2009

Missing !

I was away from the blog for two days, deptived of the excellent comments that come after each post. I hope to resume my posts, starting now.

Sector Watch : Steel

The World Steel Association forecast on Monday that steel demand would tumble 15 percent in 2009, its steepest fall since World War Two, and one exacerbated by consumer destocking. Arcelor Mittal, the world's largest steel producer, announced results that had larger losses than expected. American producer, US Steel reported Q1 2009 results that were significantly below market expectations. The company said it also expected a loss in Q2 and that it was difficult to forecast further out.

Now, Tata Steel has reacted to the gloom in Steel, seeing its price fall from 299 to 238 in 15 trading days. This also tells us that the Indian markets are coupled with international markets. Steel, then is no longer a 'buy on dips' candidate. It should normally be a 'sell', but we are seeing strong upside momentum in the market, so we should avoid going short, just stay away.

Nifty

The Nifty remains inside a trading range between 3350 and 3500. After all the intra day action of going down, then going up, we are still inside the range. With four days of holidays, anything can happen when the markets open on Monday.

Monday, April 27, 2009

PreMarket views for Monday Trading

What I know at 7:22 AM
The American markets closed higher on Friday.
Asia is slightly up. The SGX Nifty is almost flat, at 3475. There is no news flow as of now that will become the central theme of today's trading.
The trend is UP. Above 3500, there is another breakout.

But Nifty could simply drift throughout the day. The 15 minute rule may be appropriate if prices breakout after a period of consolidation. A second method for tracking today's market is to use a momentum indicator on five minute charts. Take mometum buy signals near the lowest ranges of the oscillator ("oversold") and exit near the high ranges ("overbought").

The two suggestions will work only for traders who follow these ideas regularly. They get practice and understand the nuances of the market place. If you do not have years of practice, then get that practice, by trading in smallest possible volumes, and, trading with discipline day after day.

Friday, April 24, 2009

Markets at another inflection point

I am in Nagpur, for the CNBC Investor Camp. My trip required a fair bit of spare time since the only flights from Delhi to Nagpur are in the morning, requiring me to reach one full day before the camp. This caused some amount of disturbance in regular tasks, and, the blog could not be written.

The Nifty is now close to 3500 which has been the upper limits of a trading range that has now lasted for 10 days. A close above 3500 will justify a long position (buying) for traders a well as investors. For traders, the task is simpler. Buy with stop losses. For investors, the buying is probably high risk. The market is due for a correction. The dip does not come on demand (just because i say so), but on the market's own wishes. But, the risk does not go away. For investors, therefore, the approach should be 'long term' - I am buying now. I am buying because of a trading range breakout. I will ot worry if the Nifty were to fall. If the breakout is genuine, I will be able to make a paper profit. Now, for those investors who are uncomfortable with this thesis, my suggestion is to wait for a correction.

Thursday, April 23, 2009

Market Outlook

ONGC is referred in comments. Is it a selling opportunity ? My analysis suggests, it may be a sell. The stock has made bearish patterns at the top of the rally. But I do not give importance to such patterns since these can be false signals, easily fail. We have to follow momentum, which has beenup. Then, ONGC entered a small trading zone between 840 and 870. On Monday, we advised in our newsletter to clients to use ONGC as a leading indicator for the nifty. A close below 840 will be bearish for ONGC, and Nifty (since ONGC is an index heavyweight).

The Nifty has been making long shadows every day, suggesting confusion in the market. A small trading range between 3350 and 3500 was broken yesterday when the Index closed below 3350. A decline is expected. The key question here is: Is this a correction in an ongoing up trend, or the beginning of a new leg of the bear market ? A 'normal' pullback can take the Nifty down to 3150 support without changing the intermediate up trend. Therefore, at some point, when charts begin to give 'buy on dips' signals, we will take them.

Wednesday, April 22, 2009

Guest Post : Market heading or beheaded

I received this email, found it worthy of being reproduced fully.

Quote

Sudarshanji NAMASKAR !

I am reading your blog,watching and try to understand your comment from CNBC. I am appreciates your efforts to give right direction to miniature(smallest) traders and investers( Some times not commenting ,you say too much)

since 17th April It is hard to believe that market is not falling.
Reason:-

Technicals:
(1) As on 15/April 09 RSI (9) & (11) is 85.80 & 83.09Next day market corrected sharply 114 points,( I am sure it is calculated move to adjust TA criteria)
(2) Nifty as on 9,13,15,16,17,20th April not holding 3400,and closes below 3400 (except 15 April).
(3) Since 15th April 09,STC also giving negative signal.MACD is also in downward trends.
(4)Fibonacci Retrachment level (bear) prior to up trend(low 2524 as on 27/Oct and 3148 high as on 10 Nov & 4 Nov) 38 % is 2762, 50 % is 2836 and 62 % is 2910

Fundamentals:-
(1) As per government recession/slowdown is not over,even not in USA/UK
(2) "India need some bosster package in 2010 too." MontekSingh Ahuvalia
(3) before few day of market rally Economist worried about excessive borrowing of Govt.
(4) All Other markets fall during this up trend our market buck this fall.(then why we see US& Asians Market daily)
(5) As per analyst,Infosys guidlines is not as per expected.Infosys see tougher Q1 2010-11 than Q4 2009-10
(6)Crude fall during this up trends. (Is RIL affected/benefited ? stock Price ?)
(7) There is no sign of Auto sectors revivals.(which sectors reviving ?)

This all factors show us Mirror infront of us. Is there some Satyam Way in Corporates Or Akruti way in the market ? Market goes up and down that is their character but after 2 failed attempt to cross 3400, it is eminent that market not going up than who is interested and wants that market have to cross 3400 levels? ( Is someone there behind the wall ? I strongly feel so.)

Why government gives approval of write back of MTM rules( I think it is AS11), and instead of punishing those companies market flowered them with handsome gain in their stock price,so I think traders/market do not wants true BALANCE SHEET ?

(CHHOTE or MAZOLE share ki to baat hi nirali in BEAR market, If any buddy don"t belive it see all recomondation on TV. )
I request you to give some guidlines on the above points for general investors.(Data collected from webs so may have some variation)

with regards & great respect.
M.K.Sanariya Junagadh(Gujarat)

UnQuote

Getting ready for Wednesday Morning

This is my third post after Tuesday market hours. An earlier one discussed refinements in the 15 minute rule, and can be read at more-on-15-minute-rule.

At 7:00 AM, I hope traders have woken up, getting ready for the trading day. Some walking, jogging, Yoga or other exercise is required to face the ups and downs of trading during the day.

A review of the American markets tells us there were gains in the Dow, S&P, Nasdaq. A quick look at http://www.bloomberg.com/ will tell us how the Asian Markets are doing, but as I write, it is a bit early for that.

What is your market view for today ? I always have a view on the market. I am wrong, sometimes I can change my views to go with market flow, sometimes not. But, a view is essential.

Brett Steenbarger, Trading Coach, says in trading-by-themes
Quote
One of the most important calls an active trader can make is the dominant theme of the day's trade. Sometimes a news or earnings report will set the theme of the day. Other times, we will see themes carry over from trade in Asia and/or Europe. For instance, we may see strength in oil and other commodities overseas, and that will carry over to bullish trading among materials and energy shares.
Traders who become caught up in the tick by tick action of their particular stocks or indexes often miss these themes--and shifts in themes during the day. Much of the financial world is trading globally, following intermarket relationships and macro themes. Knowing those themes can help you anticipate ways that your particular stocks, ETFs, and indexes are likely to trade during the day.
Unquote

Tuesday, April 21, 2009

Interesting!

The LKAdvani campaign office forwarded a summary of the BJP manifesto to many email addresses. I also received it. If other political parties send similar emails, I will publish their manifesto summaries. (Only economic points are given here)

QUOTE

Dear Friends,Following are the Key Points of BJP's Manifesto for the ongoing General Elections to make India a Prosperous, Developed & a Stronger Nation.


PUTTING POOR FIRST:


1. All BPL families to get 35kg of rice or wheat every month at Rs 2 per kg.

2. Ensure farm loans at a maximum interest rate of 4 percent.

3. Initiate special schemes for the urban poor, such as loans at 4 percent interest to poor vendors.

ECONOMY GROWS, INDIA PROSPERS:


1. Generate employment through massive public spending on infrastructure projects. Complete the implementation of Shri Atal Bihari Vajpayee’s dream projects: National Highway Development Project by building 15-20 km of new highways every day; and Pradhan Mantri Gram Sadak Yojana, to link all villages with over 500 people by all-weather road.

2. Exempt personal Income Tax for those earning up to Rs 3 lakh per annum. For women and Senior Citizens, the exemption will be Rs 3.5 lakh per annum. This will benefit over 3.5 crore people.

3. Take firm steps to identify and retrieve Indian money stashed away in foreign banks. Estimated at Rs. 25 lakh crore- getting this amount back through international cooperation will be enough to complete road and power connectivity throughout the country; ensure setting up of quality schools in all villages.


JAI JAWAN IN ACTION:

1. All members of the armed forces and the para-military shall be exempted from payment of Income Tax. This will benefit nearly 20 lakh Jawans who guard our Nation.

2. Implement one-rank-one-pension.

ENERGY SAVED, ENERGY GAINED:

1. Generate an additional 120,000 MW of electricity in 5 years through speedy conclusion of ongoing projects while sanctioning new power plants. 20% of this will be through harnessing non-conventional energy sources.

WOMEN EMPOWERED, NATION STRENGTHENED:

1. Introduce the Madhya Pradesh BJP Government’s highly successful ‘Ladli Lakshmi’ Scheme throughout India to directly transfer funds to the school going girl child to encourage education and secure economic self-sufficiency for young women. Rs. 1.18 lakh after completion of 12th standard.

2. Pave the way for nationwide implementation of the Bhamashah Scheme proposed by the erstwhile BJP Government in Rajasthan to directly pay Rs 1,500 to open a bank account for every adult woman.

3. Provide bicycles to every school going girl child from BPL families throughout India.

4. Salaries of 28 lakh Anganwadi workers and helpers, who are the backbone of the Integrated Child Development Scheme (ICDS) will be doubled.


YOUNG INDIA, NATION’S PILLAR:

1. A network of National Knowledge Incubation Centres will be set up throughout the country to identify and groom young talent for every sector of the economy.

2. Study loans will be made cheaper and more accessible by fixing student loan interest at 4%.

3. BJP will create 12 million IT-enabled jobs in rural areas. Computer prices will be drastically cut to make it affordable to every section. All educational institutions will have internet facilities within 5 years. Broadband connectivity to every village.

4. Launch an aggressive project to groom young sporting talent by allocating Rs 5,000 crore for creation of sports infrastructure especially in educational institutions Appoint trained coaches; secure employment for international medal winners. Sport will be a compulsory subject in school curricula.


NATION’S WEALTH, PEOPLE’S HEALTH:

1.BJP is committed to making the right to clean water a fundamental right. A massive programme will be launched to provide clean, drinking water to every citizen.

2. A regulatory authority to be set up for private hospitals and nursing homes to monitor unfair practices.

3. A comprehensive project to bring health-for-all by 2014.

4. Introduce a mandatory ‘Dial 108 for ambulance at your doorstep’ scheme throughout the country.

5. Revive the creation of new AIIMS, originally initiated by the NDA Government but neglected by UPA. All six state-of-the-art hospitals will be rapidly constructed over the next 5 years.

6. Janani Suraksha Yojana to care for delivering mothers and infants will be strengthened.


SENIOR CITIZENS:

1. Recognising the importance of Senior Citizens in nation-building and inculcating civilisational values, BJP commits itself to reducing the age for receiving travel benefits from 65 to 60 years. 2. Complete tax exemption to senior citizens in respect of pension income.


CREATING THE RIGHT ENVIRONMENT:

1. Combating climate change and global warming through non-polluting technologies will be prioritized.

2. Importance given to programmes to arrest the melting of Himalayan glaciers from which most major rivers in North India originate.

3. Take all appropriate steps to save Tiger, the National Animal, and safeguard critical habitants of all wildlife. Emphasis to be laid on protecting India’s resplendent but endangered bio-diversity.


UNQUOTE

More on the 15 minute rule

A few days ago, Solo asked:

"Would you please explain what is that 15min. rule exactly?"

My Notes: Please check up the post http://practical-ta.blogspot.com/2008/11/fifteen-minute-rule.html

1. What should be the price and volume action which we should look out for in this trade?

My Notes: There is a 15 minute range. Thus, there is a high point in the range and a low point. An ideal condition for buying will be for prices to remain close to the high point for the past few minutes, making some kind of a consolidation. When prices breakout from the high of the 15 minutes, we will also have a breakout from this consolidation. This is better than one breakout. The reverse is true for breakdowns. Volume should exhibit similar action, increasing near resistance and falling near support (for a bullish breakout). Now, all of this defines an ideal condition, but real life is different.

2. Can we predict some target for this trade?

My Notes: We should not try to predict what the market will do. Instead, we can say, this is what I, the trader will do. So, an up breakout should move up by the same amount of points as the 15 minute range (high - low). The trader can plan to take partial profits at this level. A lot of innovation can be done with levels, R1, R2, prior resistance and support.

3. Where should we keep our stoploss?

My Notes: On the other side of the range. If you go long, the stop should be just below the low. As the trade moves in your favor, move the stop to the mid point of the 15 miute range. Again, you can do a lot of experiments with stops & exits.

4. Shall we trail in this setup?
My Notes: My research suggests that you try to have a breakeven trade after you see the trade move in your favor. But, beyond breakeven, let the market decide what it wants to reward you with.

Monday, April 20, 2009

Moving Averages in Choppy Markets

Mind Without Fear said :

"could you please comment on another aspect of strategies that are based on moving average cross overs? I find that there are inevitable periods of whipsaws that eat away profits. Typically, after a big move, there are a series of false signals generated by the cross over system. What filter can be used to not trade these false signals? I mean I know there will be false signals, I just want to avoid some of them, avoiding all of them is not possible. Will really appreciate your thoughts on this."


This excellent question really deserves an answer, as early as possible. Avoiding whipsaws while trading moving averages (MA) is a trader's dream. Why ? MA ensures that all big trends are captured by the trader. But, when the market does not have a trend, the MA casues a lot of trading with almost all of the trades losing money. We continue to trade with MA signals since one of these signals is likely to be the 'Big One'. Unfortunately, we do not know which one, so we take all signals. This becomes a vicious circle - MA trades are taken since one of them may be the big one - the trades keep on losing money since this is a choppy market - then even more reason to take the trades since the losses will be compensated by the big one - choppy markets continue.... Finally, the trader gives up and says "I do not want to take the next trade" - and the next trade happens to be the big one.


Is there some way that can reduce the number of false trades caused by choppy markets ? Before we discuss this, I must explain that trading is never easy. There are no mathematical formulas to get the right entry and exits. So, the pain really goes with the gain.


Now, for some ideas.

1. Trading Ranges. Many of these 'false' signals come inside trading ranges. Now the first one or two signals may come in when the range is under development, so you really do not know that you are in a trading range. Once or rather, IF, you can identify a range, then you can stop taking signals until prices move out of the range. Suppose the latest MA signal was a sell, then you wait patiently for prices to close below support. That is the point when you will take the sell signal. Once you take the signal, you should follow the MA trade .

2. Filters to entry exit signals. When MA signal is received, then buy only above the high of the last 3 bars or sell only below the low of the last thee bars. Many choppy signals will fail to cross this threshold. You can innovate by creating your own 'buy above' and 'sell below' levels.

3. Multiple contracts. If you can trade in multiple contracts, take profits on some of the positions on a big move (range expansion) in your favor. While this method does not improve the quality of your signals, it does ensure a smoother profit curve.

4. Pyramiding. Start with the lowest possible number of contracts when a new signal comes. As the signal becomes profitable, add more contracts. Therefore, the choppy signals will be stopped out with the smallest volume, while the winners will add profits on more contracts.

5. Higher time frames. if you are trading on 60 minute charts, use a daily chart to determine the trend. Then, on the 60 min, take trades only in the direction of the daily trend.

Think out of the box, and, you will find many innovtive ideas. Then follow a few, consistently.

Sunday, April 19, 2009

Moving Average CrossOvers - English

I received some comments from Varanasi - Mr Vijay who wrote his question using the Roman Script but in the Hindi Language. I have replied to him in Hindi, thanks to Blogger!
Here is the English translation of the question, and, my response.
Here is the comment - translated :
"You always say that everyone should have a trading strategy. I fully agree with you. Trading without a strategy is like catching birds in darkness.
I have a trading strategy based on Moving Average Crossovers. I take a 60 minute chart for the Nifty and plot 50 and 25 period crossovers on it. I trade based on the crossovers but sometimes I have to follow wide stop losses.
What should I add in my strategy that will reduce my stop loss. When the 25 period crossed the 50 period to give a buy signal, I went long around 2790, but if the market were to suddenly fall I may have to give up 150 to 200 points before I get a reversal signal.
Other than the crossover, I do not have any other way of taking profits. If I am long from 2790, then what should I follow to ensure hat my profits do ot wither away."

My reply, translated from Hindi:

Salutations to Vijay ji,

I am giving the reply to your question in Hindi. Often, prices move up rapidly so that the average lines remain far below. Then, suddenly prices start falling. But the averages take time to fall and cross each other. Often this leads to a wipeout of profits, and, sometimes, even a loss.

Now, we do not have prior knowledge of sudden decline in prices. If we knew about it, we could quickly cut our positions withut bothering about a crossover. Then, how do we protect ourselves ? You should keep in mind the fact that it takes time for the averages to cross each other and this slowness often gives an advantage. When there are small dips, our positions are not stopped out.

But, often when the market turns suddenly, we suffer monetary losses as well as psychological pressure. Therefore, we should have some way to protect ourselves.

First Method: Keep as top below the nearest pivot low. This stop should not be close by. If Pivot Low is nearby then search for a distant stop. It is possibl that a quick decline may stop you out and then the market resumes its advance. Theefore, decide beforehand, the level at which yu will reenter your position.

Second Method: If you see a big move in your favor then take partial profits. There can be many definitions of a 'big move'. One way is: multiply average true range by 3 or 4. If your profits are equal to this number, then onsider it a 'big move'.

Moving Average Crossovers

विजय जी को नमस्कार,

आपके प्रश्न का उत्तर हिन्दी में दे रहा हूँ । कई बार भाव बढ़ते हैं और एवरेज की लाइन नीचे रह जाती हैं । कभी कभी भाव अचानक गिरने लागतें हैं। पर एवरेज को गिरने और एक दूसरे को कटने में समय लगता है। इससे सारा मुनाफा लघभग ख़तम हो जाता हैं , कई बार अंत में घाटा रह जाता है।

अब ये तो पहले से पता नहीं चलता हैं की भाव अचानक गिरने वाले हैं। यदि पता चल जाए तो हम समय पर सौदा काट दे, और एवरेज की परवाह नहीं करे । फिर बचाव कैसे हो ? आप यह भी ध्यान रखे कि एवरेज को काटने में समय लगता हैं इसका हमको कई बार फायदा भी होता है। हलकी मंदी से हमारी पोसिशन नहीं कटती है।

पर कई बार जब बाज़ार घूमता है तो नुकसान के साथ मन भी घबराता है। इसलिए कोई न कोई बचाव का रास्ता रखना चाहिए।

पहला तरिका : सबसे करीब के Pivot Low के नीचे अपना स्टाप रखिये । यह स्टाप बहुत पास भी न हो । अगर Pivot Low नजदीक है तो दूर का कोई स्टाप खोजें । साथ में ये पहले से ही तय कर ले की अपना स्टाप लग गया तो किस भाव पर वापस प्रवेश करेंगे। ( आख़िर हो सकता है की बाज़ार वापस तेज हो जाए )

दूसरा तरीका : आपके हक में कोई बड़ा रुख मिले तो आंशिक मुनाफा ले लें। बड़ा रुख की परिभाषा कई प्रकार से हो सकती है । एक तरीका है - Average True Range को ३ या ४ से गुना करें। आपके इतना मुनाफा मिलें तो इसे बड़ा रुख मान लें।

Friday, April 17, 2009

Friday Readings cause worries

What should be a relaxed Friday evening is turning out as an exercise of 'glass half empty'. Todays' reading are sumamrised below.

The Financial Times talks about India's hype.
"A word about India hype. It highlights high-end services, and now manufacturing sectors, with their globalising, world-beating companies. But it overlooks reform deficits in agriculture, services and manufacturing. It talks of “Chindia”, the notion that India plays in the same league as China as an emerging superpower – which is pure myth."
Full article is here . It is a must read. The link opens in a new window. Go ahead, click it, read it, now.

The IMF says there are "worrisome parallels” with the Great Depression". There is much more pain ahead!
"… recessions associated with financial crises tend to be unusually severe and their recoveries typically slow. Similarly, globally synchronized recessions are often long and deep, and recoveries from these recessions are generally weak. "

Deflation has gone global, as "Japan wholesale prices log fastest drop since 2002 ". Mish's global economic analysis Here , adds "German wholesale prices see record decline in 22 years", "US CPI In First Year-Over-Year Decline Since 1955"
Finally, "The cause of the great depression is simple: There was a massive runup in credit, margin, leverage and speculation in the late 1920's. Does that sound familiar? It should."

Mr Advani, BJP leader demands the return of black money in swiss banks. Why did he not do this when he was Home Minister, asks Mr Kapil Sibal from the congress party. The answer lies in this article. You owe it to yourself, to your family to be well informed. This is your country.

Quick take on Friday Market

Okay, before the market opens.

What is your view ? With most world markets up, I am looking to buy, preferably on intra day dips. I have some stocks which are showing relative strength (HDFC....), and I wil be tracking these as well.


Also, my suggestion in my earlier post was that yesterday qualified as a dip. This idea did not come today morning after seeing world markets higher. It was written yesterday at 5 PM in our newsletter to clients, - "Is this a dip ? For traders, it is. If the Nifty begins to show strength on Friday, or Monday then buying is suggested only for trading. This means, you will exit on (a) Range Expansion in your favor, (b) if stopped out."

Fascinating reading. A successful hedge fund manager discusses his business style, market outlook, and more. Interview with hugh hendry


If you missed out, then :
Can the Swiss Bank money make a difference to the Indian Economy? It would seem so. Have a look at It is our money in Swiss Banks

Thursday, April 16, 2009

A career threatening problem

Nothing sows the seeds of doubt in the minds of money managers quite like a bear market rally. Thoughts like, “Is the bottom in?”, and “Am I missing a once in a generation buying opportunity at the beginning of a great new bull market?” cause institutional investors to reach for the antacid tablets. For many of them, losing money in a bear market is no sin, as long as everyone else is taking on water, too. But missing out on the gains of a bull market is a career-threatening problem. As such, large investors are all competing to identify the start of a bull market. They also rush in to buy just to ensure that they are not left out. If, the rally turns out to be a false awn, that's okay since everyone else will be in the same boat.

This means sharp sudden upswings when funds rush in to buy, fearing they will miss out on the 'real thing'. Such surges seldom last long, since there is no buying left to do once the funds have taken some positions.

The trader should understand the trend. This takes practice and effort. if the trend is up, we want to buy on dips, like yesterday.

Can the Swiss Bank money make a difference to the Indian Economy? It would seem so. Have a look at It is our money in Swiss Banks

Follow up days are difficult to trade

After a big move (an Range Expansion) the next day is expected to be a follow up day. But, the bulls need rest, and the day is likely to turn choppy. While a gap up is possible, pric es may ot be sustained at higher levels. At every dip there may be buyers while rallies could face selling. This may lead to some amount of choppiness.

The ABC idea. This is a political comment. As a citizen of India, I have a duty and responsibility to my country. The congress has ruled this country for 62 years. We have ended up with corruption, poverty for the masses and riches for the super rich. Not a good deal for 115 crore Indians. They (congress) really need some rest. The heavens will not fall if alternate govts are formed - third front or nda. Change is often good for the country. What is ABC ? Anybody But Congress.

How did you trade yesterday ? The Nifty opened with a gap down then rallied almost 170 points through the day. before the open, in this column I had suggested two methods : (1) buy after a big dip, or (2) sell only on a test.
There was no big dip, and certainly no test of earlier tops. So, as traders we understand that the market is not going to move in either of thse two ways. A breakout above the first 15 minute range is the first sign that the trend is UP. Go for it. Long positions created in early morning, lasted thoughout the day. A day traders dream day.

Wednesday, April 15, 2009

Pushing Against Resistance

There is significant resistance in the Nifty between 3400 and 3500. The Index is facing heavy weather, trying to cross this zone. The trend is UP, short term and intermediate. Therefore, short positions should be taken only intra day, that also on tests - when there is evidence that a resistance is holding.
If there is a correction, mild or otherwise, I will be taking it as a buy on dips opportunity. For me, as of now, the short term trend changes to down on a close below 3300. If short term trend is down, my trading volumes will be cut back because we are then seeing an intermediate uptrend and a short term downtrend - not a good scenario for traders.

The intermediate trend changes to down on a close below 3150.

Last week, I had written a post titled 'The Angry Investor' in which I had explained that many ivestors are angry with this rally. Today, Brett write on five things you never hear traders say when they are making money . These are:
Number Five: "Just wait 'til the bubble bursts"
Number Four: "It's a slow market"
Number Three: "This market is manipulated!"
Number Two: "I was early"
Number One: "That had to be the PPT (government Plunge Protection Team)"

Remember, traders should go with market flow. If it is going up, it is going up. Ours not to question why. Also understand that markets will give confusing signals at turning points. If you are unsure of the trend, cut down on volumes, trade less.

Have Fun!

Sunday, April 12, 2009

Monday Morning Strategy

Solo asks about a Monday morning strategy.

If a trader has no positions, what should he do ? How should one day trade ?


For day traders, there are two strategies: First, buy on dips. The Nifty is a buy only on intra day dips. You need to watch five minute charts to determine when a dip may have come. A pullback in a momentum indicator should qualify as a dip for tomorrow. It should be possible to identify such dips in a few stocks also. Second, if the Nifty opens with a very large upside gap (60 points or more ....) then dips, then rallies again but fails to cross the morning high (making some kind of a double top or lower highs), a short selling opportunity (only for day traders) may also arise. So, for tomorrow, have an open mind.


If you are a position trader and do not have positions in the Market, you should not run after a big gap up. You need to wait for a dip (on the charts, it could be two days of lower close on the daily, or a pullback in the 60 minute indicators), then consider buying.

The DOJI. Shaq asks:

"how do we define the range of trend then...if this trend can continue to 3800 then we might be in middle of range and then doji does not have significance?..whereas if market was to fall next week then trend was indeed in final stages..."

We can only identify the current trend. We know that we are in an uptrend. Therfore, the DOJI will have some reversal characteristics if the market starts to reverse. The Nifty should close below the lows made by the DOJI. If this does not happen, then the DOJI is just a pattern in an ongoing uptrend, of no importance. It also means that we will get a sense of reversal only when the Nifty breaks down below the DOJI lows. We will not be able to sell at the top. Do not think that candlestick patterns allow you to sell at the top and buy at the lows. They give earlier signals as compared to, say, moving averages, but never at the top or bottom.

Saturday, April 11, 2009

Is the Investor Angry ?

I receive a fair number of comments which say in effect "the rally is rubbish!".

Maybe. But who are we to challenge the market ? The Market says, I am going up. This message is coming clearly in the charts. Now, traders who are suspicious of this up move can stay away from the market. That's fine. But there is no sense in complaining about the rally. There is no sense in fighting the market. Believe me. I have been there and done this. At the end, the market will do what it wants. My complaints will not make any difference. Or it will make a difference, but only to me. It makes me angry (because the market refuses to do what I say it should) , thus blinding me from trading opportunities and losing my focus. Not good.



Now, I often publish news / comments from analysts which suggest that the bear market is not over. This is important because we should be aware of both sides of the picture. But awareness is one thing, we trade only on price.


Solo wrote:

"I have noticed a "doji" formation in the nifty daily charts,which all of us know that it is a trend reversal signal.I want to know that what type of confirmations are needed now to believe that the uptrend is over?Also is my eye catching it right to notice a rising wedge formation in "Nifty futures"chart and also in some global markets like "Nikkai" and "Dow"."

This was an interesting question. In reply I have a new post "The DOJI as a reversal signal". You can read it here. I have not answered the question because I hope that readers will be able to find their own answers with some help fom this post. If you need clarifications, please send your comments.

For the rising wedge: I could not locate this pattern on the Nifty futures chart. A rising wedge should come when the market goes through a rally after a steep decline. The narrowing of the range (through the wedge) tells us that this is a bear rally. While this pattern is not visible on the daily and weekly, such a pattern (wedge or flag - bearish) may be developing on the monthly. Too early to tell. Perhaps I missed the pattern ?

Have Fun!

Bear Market Rally or Something More ?

Every meaningful rally, and every bull market, starts with short-covering (which is why making short-selling illegal is counter-productive; without short-sellers, you have no buyers as no-one is there to take profits). Thus, explaining that the current rally as nothing more than ‘short covering’ may not be quite fair to the market.
The Nifty has gained 27% over five weeks, suggesting a "buying stampede". Such stampedes are only interrupted by 1 – 3 day pauses/corrections before resuming. This is what has happened this time around. We are having "running corrections" where the markets correct for just a few hours, intra day. Such moves should typically last about five weeks. With a number of trading holidays in the last week, maybe this will overrun into a sixth week. But, a process of consolidation seems likely.

Then, is it a bear market or the 'real bull' ? If the rally continues with more weekly gains without a consolidation, it is likely to be a bear market rally. If we see a deeper correction, we could easily be looking at 'something different'. Rather unuusal, but higher could mean lower, and lower could mean higher.

More later!

Thursday, April 9, 2009

Go with the Flow - Markets are UP

The trend is UP, world markets are rallying as I write this. Traders should stay with the trend. I receive many comments which has questions that I want to answer. I hope I can devote more time for this effort. Meanwhile, ....

Conclusions based on wrong data

There is a comment by "vasukrishn" which is not published because it forms a conclusion based on incorrect data for first 15 minutes. So, please if you email me at , I will explain why your conclusion was wrong and what the correct data is.

How did I trade today (thursday) with the 15 minute Opening range breakout ?

Tushar asks:

At the time of posting it's quite a choppy session.

You mentioned 15 minute rule.

Now for example - Nifty Apr Fut today : The low of 1st 15 minutes was 3374.

That broke on downside.Then did you short there?If yes, Then Where did you place your stoploss? else what was u r day trade today?

Tushar also says "I know it's hard for u to answer all my questions on your blog. In that case please mail me on xxxx @ xxx "

Tushar, If I can answer a question, I would like to do it on the blog so that everyone can share it. Now for my response. I need to explain a lot here, so please be patient. The 15 minute rule enables you to enter a trade after receiving confirmation that the trend is going in your direction. Now, you still have to decide the direction in which you wish to trade. Also, you do not have to trade every day. If you wish to take a trade in the morning, this rule helps you to stay on the right side of the market (hopefully!).

Today morning, I was away from my office on a half day leave for personal tasks. Thus I was not looking at trades. But, in my office, we run many automated trading systems for the Nifty. The 15 minute breakout is one such system. This system took a short position in the morning. The stop was above the high at 3400.60. Throughout the day, the market went on moving up and down, but the stop was not triggered. Finally at 3:20 PM the trade was closed at 3358 approx.

Not looking back, rally with strong momentum

The Nifty, as one comment says, pulled back for about one hour before continuing with its up move. The Index now moves into the 3400 - 3500 zone where it faces resistance. Given the strong momentum, these resistance zones may or may not offer resistance.
Traders should follow the up trend. It seems unlikely that this rally will end quickly. Go with the trend (up!).

Tushar says:
There are various questions I raise?
Q-1) What made you suggest @ CNBC today that go short on Nifty, while neither trend nor momentum has changed?
Q-2) Today's rally put's a question mark(?) on our coupling with the world markets.While other's were down we closed up.Just to clarify..

My Notes:
In the morning, all world markets were down. The Nifty opened lower by about a 100 points. Now when there is a gap, the two possibilities are: the gap is a trending gap, so go with it. Or, fade it, meaning that assume that gap will be filled. In the first few minutes of trading, when the interview was being conducted, the Nifty was trading at the open, giving no signs of a rally. Thus, it seemed that the day should be a trending day. The suggestion was given for day traders, I did point out that the trend is up and buying should be done on dips.
What happened later:
We were ready to sell on a break below the lows made in the first 15 minutes. That never happened! At 11:10 the Nifty crossed the intra day high and started moving up. All our intra day systems went long between 3185 and 3200. At that time it appeared to be a high risk trade. As events proved, what we think and what the markets do are different. My idea that we are looking for a trend day changed when the Nifty went on making intra day highs. This is a risk while giving 'calls' on TV. Markets can change quickly.
[If the 15 mnutes lows had been broken I would have gone short. A subsequent rally would have caused me to get stopped out, and maybe enter long positions. The fact that this did not happen is pure luck rather than skill. I have explained that probability is a friend of the trader. Sometimes market moves against us, sometimes in our favor. If we are consistent in our rules, the probability favors us in the long run].

Today's rally tells us:
(a) Indian markets are showing relative strength as compared to most world markets. They do not suggest that we are decoupled.

Wednesday, April 8, 2009

Dips in an uptrend

The short term and intermediate trend is up. Today's likely dip may change the short term trend to down if Nifty futures close below 3227, Monday's low.
Should this be a buy on dips opportunity ? Yes. But, you need to wait till you get a setup on your charts that says - "the dip may be over". This requires patience. Sometimes, you get it right, sometimes you enter late, sometmes you enter and the dip continues. I have a post on Buying on Dips, here.
Does the global market affect us ? Yes, very much. We are almost coupled with the world markets.

Tuesday, April 7, 2009

Day Trading with a View

I take day trades on most trading days. Every day, I approach the Markets with a view on the trend. This means, before the Market opens, I usually decide on the direction in which I wish to trade. Till Monday (yesterday, April 6) I was taking only long positions, since the short term trend was up and momentum was strongly on side of the bulls. If my intra day charts suggested weakness, then I closed my long positions and stepped aside. Tomorrow, Wednesday, I may have a bearish view, assuming the US markets close weak, and, Asia is weak. My bearish view is supported by Nifty charts where Monday made a long upper shadow, a potentially bearish pattern when it comes after a long up move.

When the trader has a clear view, trading becomes easy. If the view is bullish, you know you should be taking breakouts / buying on dips. On a bearish view, you can sell on rallies or on a breakdown. This allows you to trade in more than one instrument, since your focus is on only one side of the trade.

Your view does not assure a profitable day. Markets can and will go against you. If this happens, then your trades are likely to suffer losses. But, these losses will be controlled by proper money management. Also, there will be days when the markets will go in your direction. Even in choppy markets, by taking only one side, you may sometimes catch small but profitable moves.

Monday, April 6, 2009

Trading with probability

Aashish writes:
".....you project both sides of the coin and leave it to the readers to take a responsible call! . On the downside, newbies like me who cant make out wrong from right, are left confused :-P like in this case, I would feel worse in either case, if I sell and market shoots up or if I sell nothing and market crashes :-P"

This is a fair point. Thanks to a holiday tomorrow, and a rather relaxed evening, I am free to discuss this.
There are no straight forward answers in the market. I think all young persons need to understand this. The Stock market (and futures markets) must be the only area where 2+ 2 is not equal to 4. Sometimes it is equal to 1, sometimes 22 and each time the answer changes.
You succeed in the market when you understand that the market movements are unpredictable. Traders attempt to identify the broad moves of the market. They adapt themselves to market movements. The market does not change acording to the trader's wishes.
Specifically, the Nifty should move up after a trading range breakout. Now, the otehr side is that it has moved up 30% almost non-stop. Then, there is risk and a potential rewrad. Now, you have to balance the risk, the reward and your own attitude towrds risk and reward. if you buy now and the market falls, what should you do ? if you do not buy and the market gos up, then you go through regret. The answer is: understand this nature of the markets. Then, plan your trades. Finally, accept the outcome. Sometimes it will be favorable, sometimes it will not be so.

First Signs of Exhaustion

Strategist Teun Draaisma (from Morgan Stanley) is telling clients to take advantage of the recent rally to SELL.
Draasima says none of the signposts which will call an end to this downturn - US housing, banks’ balance sheets and corporate earnings - are flashing green. In fact the fundamentals are not turning at all, says the Morgan Stanley man.
So, where are the markets, now ?
Teun says "We are currently in one of those classical 20%+ bear market rallies on the hopes of successful policy action. For instance, in the US between 1930 and 1932, there were five 20%+ such rallies (up to 35%) lasting 35 days on average."

Now, I am writing this at 8:40 Pm when I know that the Dow is down 104 points. So, I have the benefit of some hindsight. But, to be fair to me, this view was formulated at 5 PM today when I wrote our daily newsletter to clients. I said, "A technically driven market instead of a bull market." Again, I wrote "Should we become cautious at the current juncture ? The answer seems to be: yes for Traders!"
How do you become cautious ? By not taking new positions on breakouts. Buy only on dips. Then, keep tight stop losses.

Kevin Lane is one of the founding partners of Fusion Analytics, says: From a trading perspective the best way to play this market, (especially for those investors who bought aggressively a few weeks) is to place tight trailing stops (such as a penetration of the 5 or 10 day simple moving average) on your positions and letting the stocks weakness take you out at a profit rather than trying to sell at the exact right market resistance level.
Based on his thoughts, I have formulated a view on the Nifty: An alternative could be selling ½ of your profitable holdings @ 3400 (with trailing stops on the balance). A final alternative could be selling everything if the market gets to 3700 (or if it gets above 3400 but fails to stay there and then trades back below 3400). If you make strategic sales there will be a chance to buy stocks again, the question is will it be lower or higher than here ? The jury is still out. The question one has to ask is will I feel worse if I sell nothing and the market pulls back or would I feel worse if I make some profitable sales and the market goes higher after I sell. Depending on how you answer those questions will go a long way as to determining your strategy.

Suspecting...

Pawan Arora wrote:
"I suspect of this breakout and probably want to sell my longs at this breakout ...."

My Notes: It is the trader's decision to participate in a set up or to stay away. Taking profits is also acceptable. Please do not go against a setup - this means traders should not go short trying to fight the trend. You go short only when you have a sell setup which is not on the charts, as of now.

Anshul TPT asked:
"OVERHEAD RESISTENCE = PREVIOUS SIGNIFICANT BOTTOM AM I RIGHT. BLOGGERS PLEASE CLARIFY"

My Notes: Think of overhead resistance as a price zone which has a number of price rejections / acceptance. Then, a previous significant bottom becomes resistance. So does a top made in that zone earlier. Or, even a significant Fib retracement. What you should look for are more than two different points in that zone. The more points the better.

Sunday, April 5, 2009

Breakouts from Trading Range

When there is a breakout from a trading range, the point of breakout is also the point of maximum risk. This is because of the risk that the breakout may be a failure. If it is a failure then the trader has probably purchased the security right at the highest price. As prices continue to move in favor, the risk of a false breakout comes down, but the entry level has gone up!

It is possible to qualify breakouts by volume, overhead resistance, length of the trading range.
Volume: this breakout has moved up on relatively high volumes.
Overhead resistance: there is no immediate resistance beyond 3250. Thus the breakout is not likely to meet with quick resistance.
Length of trading range: This is a problem. The breakout has come from a trading range that developed from October 08 to March 09. So far so good. But, it is also true that the current rally has moved up from 2540 to 3200+ almost non-stop. A better scenario may have seen the Nifty consolidate in the 2900 - 3100 zone for maybe a month and then breaking out.
So, this breakout gets two out of three. Which means, like most trading setups, there is a risk. If you understand the risk of a failed breakout, then go ahead and buy on dips. markets can surprise us on the upside.

Markets Next Week

I have a new post on "It is experience" in the Practical Technical Analysis Section. You can read it here.
While India will have three trading days next week, the international markets are likely to be closed on Friday, so they will also have truncated weeks.
It seems fair to expect the markets to maintain their strength. A breakout above 3150 tells us that the Nifty may be on the move to touch 3700 to 3800 in the next few months. Will this happen ? We cannot say. But the trades should be mainly on the long side. This pattern is likely to fail if and when the Nfity closes below 2950. Till then, we assume that the intermediate trend is up.
Have Fun!

Friday, April 3, 2009

Tim Price - Dishonest Decade

Tim Price (PFP wealth management) writes in his weekly column, with the heading - "A low dishonest decade marches on". he says:

"elite business interests - financiers, in the case of the US - played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them."

What has this to do with lessons in Trading ? Read on.

I have never listened to the so called 'fundamental' experts coming on different TV channels. Why? Because they are fund managers, brokers, investment bankers who have their own personal agenda, which may or may not benefit the public (you and me). Please understand that this is not to suggest any dishonesy among these people. They are people of integrity, just that their business objectives are different from those of investors who listen to them.

These people have created the bubble, then the bear market, the crisis which has destroyed millions of investors, and now they are going to take the credit for whatever 'revival' takes place.

My point is: no one forces you to listen to them. Using your common sense, saying away from greed and fear is your responsibility.

Good News and Not so good News

A holiday allows me to browse the internet, reading all my favorite blogs. here is a summary:

The Good news

Lakshman Achuthan is co founder of the Economic Cycle Research Institute (ECRI) and he has been tracking leading indicators to identify the start and end of business cycles. When busienss looks up, the stock market follows. Today on CNBC (America) he says that the leading indicators may have bottomed out with stock prices likely to head higher in the next few quarters.

Bank of America Corp.'s chief executive says he expects the U.S. economy to bottom in the second half of this year.

The Not so good news comes next

Lakshman also says that the recessions will come faster and the time of 'buy and hold' may be over.

Bill Gross from PIMCO suggests that Equity may no longer be the favorite instrument for investment.

[My Notes: this means that returns from equity will be lower than seen in the previous bull market]

Merrill's economist David Rosenberg warns you again that this up move is all just a sucker's rally. In fact, he thinks the market is headed to startling new lows.

My Notes:

The successful trader should be, amongst many things, a dedicated student of history.

Bull Markets do NOT start with a big bang. Therefore, the curent rally may well be the beginning of a new bull market, but as of now, this is not confirmed. Most markets in history have rallied, then gone through a severe decline which was a test of the earlier lows. These tests were successful, meaning higher lows were made.

If a similar price pattern were to reemerge in the current market environment, it would imply a retracement from whatever top the Nifty makes in the current rally, to a retracement of 50% or more in the next few months. The market would then need to hold these lows and subsequently make a higher high. A lot can happen between now and then. Only time will tell. But a disciplined trader should continually anticipate various market scenarios so he or she is prepared for whatever plays out.

Cheers!

Wednesday, April 1, 2009

Easy Money

CNBC organized a meeting in the evening with Udayan as the Master of Ceremonies. I went to the meeting since I always like to listen to Udayan.

Rakesh Jhunjhunwala said he is bullish on the market. He expects the Nifty to remain in a trading range between 2750 and 4000 for the calender year 2009. He also expected a big rally before the elctions which could take the Nifty all the way to 3800 - 4000. He made the disclosure that he was long. He suggested that all positions should be closed on May 15, one day before the election results, for two weeks.

Now, 3060 to 3800 in six weeks is easy money.

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The Nifty is now in a trading range between 2980 and 3100. This range has lasted for five days. A breakout above 3100 could see 3220 or higher, while a breakdown below 2980 gives a target of 2860. The breakdown / breakout trade should be a high reward trade. All you need is patience!

Traders should go with market flow. With a clear, visible trading range, the short term trend is sideways. This means traders should sell at resistance and buy on some kind of support. If the Nifty were to breakout above 3150, then avoid selling.

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