Tuesday, June 30, 2009

Proof that Markets do what they want

TOOCOOL7610 asks "how to book profits in carry forward position and how to trail stop losses if trades move in my favour"
I have two posts that discuss exits:
Buying on Dips - How to Exit
tighten-your-stops
If you need clarifications, please drop a comment.

I keep on saying "Markets will do what they want". Today's market action is proof of my hypothesis. Everything was ready for an upmove, which did not come. A gap up was the end of the bullishness. After that prices went downhill. Today was also a classic example of why mechanical systems are often superior to discretion and judgement.
In my office, all our systems went short at decent levels, around 4380. Now, the systems work only on price behavior. They are not influenced by perceptions. On the other hand, I was upbeat and kept on trying to time the market (searching for a bottom) - with rather dismal results. All discipline was abandoned as I decided again and again that the brief correction will end. Fortunately, my own volume is a very small percentage of the volume allotted to systems, so the only damage done was to my ego. But the experience of trying to trade without a basis, was unnerving.

Tuesday morning outlook

With the American markets closing in the green, Asia seeming upbeat, we should expect gains in our market. The theme is to look for a rally, since momentum in the Indian markets supports the world moves. A bullish head and shoulder pattern confirmed on Friday gives an upside target of 4500 - 4510. We should see the Nifty trying to touch this number, maybe today.

There is a direct relationship between capital employed and gains. The less risk you have, the stronger your chances of making money. if you trade 50 Nifty (1 contract) on an investment of Rs 2 lakhs, your chances of making money are almost certain (almost, because there is no certainty). Start your trades with 50, then see if you need to add a position, in that case add another 50. Stop right here. Your maximum exposure is not to exceed 100 (2 contracts).

Have Fun!

Monday, June 29, 2009

The thundering herd

An informative article in Bloomberg is summarized here:
Investors are moving together as a herd, investing in stocks, commidities, & emerging markets and risking a replay of last year, when they all plunged the most since World War II. The herd mentality threatens to leave investors with no refuge amid signs that the worst U.S. recession since 1958 isn’t abating.
Harry Markowitz, who won the Nobel Prize for economics in 1990 for his work on portfolio theory, says that last year’s collapse reinforces his view that even the most unlikely outcomes are possible in any year.
“The thundering herd is still with us,” said Markowitz, a professor of finance at the Rady School of Management at the University of California, San Diego. “Nature draws into a bushel basket full of returns and finds a next return every year, and I believe there’s another 1929 somewhere in that bushel basket. 2008 was not a refutation, it was a confirmation.”

My Notes: Understanding of risk, uncerainty, probability are critical for the long term success of traders. Please do read as much as you can on these subjects.

Nifty with a lot of thoughts

On Friday, June 26, the Nifty futures broke out of a classic bullish head and shoulder pattern, giving a pattern target of about 4510. Given the overall bullishness, the target seems to be reasonable. Often, such patterns in the direction of the trend, exceed their targets.

Solo asks: "what should i do to become a pro. chartist on some news channel?"

My tongue in cheek answer: Pray for a lot of good luck.
A more serious response is: become skilled in your work. Get certifications, practice, read, trade 12 hours a day. Surely, the media will come to you.

Utopia asks "Dear Sir...I am sorry for deviating the topic but please tell me how can and where I can learn technical analysis? can you please also tell us about your background and how is started your career?"

My response: This is a serious, well thought out question. How do you learn technical analysis? My suggestion is: read books, browse as many TA websites as you can, work with a TA software, practice , practice, practice. Finally get a certification. To get an accepted professional certification, you need to wotrk for 3-4 years as an analyst. This part is difficult. But you have to find some way of doing it.

Pi asks: "question just came to my mind.. over the years from what you've seen of our markets - have our markets become more efficient or less efficient."

My response: I would think they have become more efficient as compared to the past. Probably they are much less efficient when compared to the S&P market (for example). That's why it is still possible to make money in India with relatively simple methods. As time goes by, this will become more difficult.

Have Fun

Thursday, June 25, 2009

Trading for the next big news event - the budget

Expectations from the budget can be on two counts:
(a) There may be policy actions and steps that will benefit market participants, and,
(b) A theme for growth may benefit the economy and therefore benefit the market in the long run.

Direct benefits includes (a) 'tweaking' the STT (this is the term CNBC is using) which ,means reducing the rate , (b) Giving direct tax benefits to infra or similar companies. (c) Allowing majority control in Insurance (d) Allowing FDI in retail (e) Channelling public provident fund savings in the stock market, and, (f) announcing sales of PSU shares.
I do not feel that the market is going to get (a). Why should the govt reduce STT ? Money from STT is used to provide employment to millions of rural poor. This step will benefit only a few brokers who have large proprietory trading operations. (b) is possible. (c), (d) and (e) are extremely unlikely. That leaves sales of PSU shares which are likely to take place.

Long term gains for the market will flow from improved health of the economy. The market does not get excited about such steps, because they do not carry glamour. With many financial constraints, the Govt is unlikely to reduce tax rates for companies. More likely, some kind of long term capital gains tax may come in.

These are my assumptions, on which a budget scenario can be built.
For investors, buying is possible in Infra, Large PSU and Private Banks. Long term investors can buy for short term capital gains. I still plan to keep the 4200 levels as a stop loss. (Note how the market found support, then bounced back from 4200).

For traders, wishing to take posiyions in F&O, it is too early to devise a strategy. Pehaps we should review the budget theme again on July 3 or 4.

Wednesday, June 24, 2009

Trading Scenarios

Almost all the reading that I do suggests that the Green Shoots coming in the USA may not be so 'green' after all. An oversold market led to a sharp rally, but the new up move cannot still be classified as a bull market.
What is the difference between an uptrend and a bull market?
Well, these are terms that I use for my understanding. In a bull market, buying can be done with the assumption of almost certain rewards in blue chips. If the timing is wrong, the investor may have to wait more, but at some point prices will cross their previous highs.
An uptrend is a momentum driven rally. So far it goes up, it goes up. If it stops going up, we have no way of saying when the next up move will come. It could be in a month, or after six months or an year.

Just as the continuation of the uptrend is not certain, continuation of a downtrend is also not certain. Therefore, buying on panic declines, sharp corrections will reward investors, because at such points, we may well be near the lows.

How do you determine if a buying opportunity has arisen? The question is: when is the correction deep enough to justify buying? The answer will be different for each investor / position trader. It also depends on your deep pockets and risk ability. Let us discuss some scenarios.
1. Stock specific. You wish to accumulate a stock, say Suzlon. At 105, you are not keen, but if it were to reach 80 or closeby, you will be a buyer.
2. Index levels. At 3800, you are comfortable accumulating stocks for trading. You understand there may be more pain left, so you invest 50% of your planned outlay, willing to buy should prices fall further. The additional buying will be done on base bulding in the index.
3. Momentum. You plan to begin buying once the RSI14 on the Nifty falls below 40, then rallies to cross 50. (In such cases, you need plan B to do something else if the RSI does not fall below 40).

The theme that really works wonders is Patience! Wait for the market to oblige you. It will do so, if you show your willingness to wait.

Swing Trading Short Positions
Bramesh said "Today we moved below 4200 but not able to sustained market again fooled the traders adn many are stuck with short positions"
Chandu says "Great analysis,But we may find support @4090.If we break 4200 tomorrow.May be we will go to 4100 and bounce back to 4500.And only close below 4100 will take us to 3800."

When you are in short term trading, the tactics are different. Scenario building is essential, as these commments show, but eventually we have to follow the market. Random noises in the market can spoil our scenarios, stop us out or worse put us against the trend. The link here https://sudarshanonline.com/2009/06/what-is-bear-market.html has a comment by 'A Student for life....' which explains how we need to respond to market action. I recommend you read this excellent analysis.

The comments mentioned above also answer men's question :"After getting knocked down from 4700 you are now saying it is not a buy on declines, just think what if one shorted before the election, bot on declines as suggested earlier, and now after everything is over you are saying it is not a buy on declines? I am unable to understand, may be it is my limitation, could you please clarify, just where I am missing you"

I will add my view: When does a correction become a downtrend? For me, if it goes below 4200. Then, we wait for consolidation - signs that the down move is ending. I can buy whatever I want, provided I exit below 4200. That's how I will do this.
I did not understand the reference to 'shorted before the election' ? Why should we short before the election ?

Have Fun!

Tuesday, June 23, 2009

Why 4200 and the angry trader

Rohit asks a very fair question:

"Sir lot of analyt are saying 4100 as benchmark for support,but according to it is 4200,so please tell us why 4200 ,because 4100 was low after election result so that is considered as support ,but abt 4200 pleae tell the reason"


My Notes:

True, 4100 was the post election low, therefore the logical place for identifying support. However, If I can locate a cluster of values, I usually use it as S/R. I am giving a chart below that explains this idea. I should also point out that all said and done, support and resistance levels are personal numbers, used to determine risk. We can have different levels and trade successfuly. (If you click on the chart you should be able to see a larger image, I hope)



I received some comments from traders who seemed to be angry (a) the market did not go down, and, (b) on my suggestion that below 4200, we should not buy on dips, not until the market shows signs of stability.


Easy does it. Anger hurts only the angry person. It certainly destroys your trading.



Monday, June 22, 2009

What is a bear market?

What is a Bear Market? This question is crazy after we have seen our market almost double in three months. Well, Russia is having one, right now. Bloomberg.com reports that Russian stocks have fallen 20% from their highs, starting a bear market, the first one among important indices since March 2009.

With a high made at 4700 approx in the Nifty, we will also have a bear move if the Nifty trades below 4700 - 940 = 3760. I think it may trade below this level, but I would not call it a bear market, just as I do not think that we are in a bull market - it is an uptrend.

I am looking at 4200 as the dividing line for a dip or a deep correction. My charts suggest a lot of support around this level. If the Nifty breaks below this support, I have to accept that much lower levels are possible.

For me, the actionable ideas that emerge from this analysis are:
Below 4200,
I will not plan any investment buying. Buying is no longer on dips. Buy on panic declines ( a little) and after signs of a base (will take time).
Long only Swing trades should be avoided since momentum is no longer in favor of bulls.
Sell Calls on rallies in Nifty , actively traded stocks.
Day trades can be on both sides, avoiding selling after one down day, avoiding buying after one up day.

Now we know it: The Boom that we saw was not the result of intelligent policy making - It was -Good Luck . This is what probability is about. Sometimes it works against you, sometimes in your favor. The boom was a set of circumstances that worked in our favor. If you want to find more, read the link.

Quick market review

As I wait for my CNBC interview to begin, here are some thoughts on the markets.

At 4200 in the Nifty, there is considerable support. That support showed up on Thursday and Friday. There is a buying opportunity for swing traders with a stop below 4200. If the Nifty moves below 4200 (does not have to close below it) exit all long positions.

Once you take the view that the uptrend resumes, you shouldbe looking to buy on dips. We have to remember that this is a mature uptrend. It started from 2500 and touched 4700 in just three months. Therefore, the possibility of a failure are high. Breaking below the 4200 level defines a failed rally for me.

Friday, June 19, 2009

Mr Obama - Game Changer ?

Major changes are taking place in the USA and Europe. They are likely to affect our markets significantly. I do not know if Indian business media is paying attention to these changes.
In the USA, President Obama has called for greater regulation over the hedge fund business. The funds will have to deleverage. They will be required to maintain higher capital for derivatives. The funds will come under the control of an existing or newly created regulator.
In Europe, the European Parliament is debating much stiffer control over hedge funds. Current leverage is likely to become history. More 'real' capital will be required to maintain a derivatives position.

What this means for us is the fact the FII's will be required to arrange more capital to invest the same amount of money. This will affect emerging markets more mainly becuse these markets are volatile and respond quickly, either way - up and down.

In India, the growth of local insuance companies and domestic financial institutions will replace at least some of the hot money inflows that may not come. But, all of this so called liquidity may be affected by the new regulations.

My Notes: This is all for the good. In the long term, unregulated financial institutions should be unacceptable. Just see how these greedy, immoral people brought the entire world on the brink of disaster. If the froth and bubble goes out of the market, so much the better.

Thursday, June 18, 2009

Bubble of Belief

In a well thought out report, Albert Edwards, a strategist at Societe Generale says:
"Rallies in commodity prices and mining-company shares stem from a “bubble of belief” in China’s economy that is likely to burst"
“I believe we will look back on the Chinese economic miracle as the sickest joke yet played on investors,” Edwards wrote yesterday in a report. To support his argument, he cited falling earnings at the country’s industrial companies.
“The bullish group-think on China is just as vulnerable to massive disappointment as any other extreme example of bubble- nonsense I have seen over the last two decades,” his report said. “The fall to earth will be equally as shocking.”
Full news item at Bloomberg

My Notes: That is exactly my problem with the rally in India. In last three months, suddenly the economy has become "This time it is different" . It is never different. A slow, steady rally with lot of base building may have set the foundation for a multi year bull market. Instead, all over the world, we had a rally driven by "liquidity". That is why, I call this move an "up trend" and not a bull market. This one will end, we just do not know when. It could end at 6500, 5500 or even has done its bit at 4700 - no opinion yet.

Comments
Gulshan asks:
"I am regularly reading your blog and tying to follow the same.Now I have a doubt and I think you can answer my question.My question is whether today, the nifty has breached swing low of 4365 or not?Please reply as your Yes or No will certainly help me a lot because I don't have enough experience in trading."

My Answer: YES

I mention this one because reading this early morning has made my day.

Vipin says:
Dear Sir,Your early morning positional call on CNBC gave superb returns intra day.Excellent analysis.

My notes: Thanks for taking the time to write. I appreciate it.

Head and SHoulder or Cup and Handle?
Vinod D writes:
In the monthly Charts of Nifty Iam seeing an inverted Head and Shoulder pattern in the making...with the neckline around 4700 and bottom of right shoulder at 3800. So Iam expecting nifty to go to 3800 in the coming months and to break 4700 after 3 to 4 months...If that happens then nifty could head towards 6500. Is my analysis correct...Iam a novice in tech analysis....If iam wrong please teach how to identify the correct H&S pattern if you have time..."

My Notes:
Yes. This is the same pattern which has been referred to as "cup and handle". The difference will be: the cup requies a shallow retracement to complete the handle. The H&S pattern should ideally see the Nifty slide down to 3800 - in symmetry with the left shoulder. So far I agree with your analysis. But what about the rest of what you write? You expect the Nifty to go down to 3800, why? Why 3800 and why not 3500 or 3150? or, why not 4330? The H&S pattern is relevant only when the right shoulder is complete, and price break out above the neckline. Till then, we watch it with academic interest. My point is: An incomplete pattern does not tell us what the market is likely to do.

Gofi has some interesting numbers:
"1. Nifty has gone UP for 8 months from october lows.
2. Nifty has gone UP for 34 Weeks since october lows.
3. Nifty has gone up for 144 days since october lows to 4600 levels.All the three numbers 8, 34, 144 are fibonacci numbers.
Based on these data, is there any to predict for how long nifty will correct ?"

My Notes:
Sorry. I am not into this kind of analysis. If some readers can answer this, please drop a comment.

Tuesday, June 16, 2009

How to build a trading system

Devesh dikshit asks
"i have cap of around 3 lk and i want two trade in nifty futures so what should be my voloume should i trade 10 lots in intraday"

You should keep enough capital for the margin (assumed at a higher side) and at least two times the expected loss. If the expected loss is 10% of the face value of futures, then the loss reserve should be 20%. Assuming margin to be 20% maximum, you should have 40% of the face value as your capital.
One Nifty futures contract is 50 units. At the current price of 4500, it is valued at 2,25,000/ Now 40% of this is 90,000. With three lakh rupees, you should trade 3,00,000 / 90,000 = 3 lots. If you follow this capital allocation rule, I would feel that your chances of success are almost 100% (nothing is perfect!).

Scunge asks:
Suppose I have a trade which drops after I enter, and it reaches my stop-loss but is still giving a "Buy" signal under my trading system.With discipline I will then sell, but then should immediately buy back in (since there is a "Buy" signal!). However, if I save the sell-and-rebuy trading costs and simply hold instead, I am risking more of my capital than the stop-loss intended and so what's the point of having the stop-loss in the first place?So I have a contradiction and am unsure how to best handle this situation.My question is thus: in this case do you abandon your discipline by overriding your stop-loss signal and holding (up to what point?), or do you sell as per the system and so at which signal would you start considering buying back in?

My Notes: Interesting, valid question. I appreciate the effort made in developing the trading system. Such sensible questions emerge when you do it yourself with sincerity.
I will explain with an example what Scrunge is saying.
I have a moving average system which says I should buy when the moving average is moving up. I will sell when the moving average is moving down. (Moving up means, the current average should be higher than the previous average). To protect from unneccessary losses, the system has a stop loss.
Now, I am long because the moving average is rising. Unfortunately, there is a sudden volatile move and I am stopped out. On the next price bar, the moving average is higher than the previous average. So, I should buy again. I end up buyng after I got stopped out. This process could continue many times, till the volatility ends or the average turns down cancelling the buy signals.

One you understand the problem, finding the solution is much easier.

What you need is to define your trading sustem to take care of such possibilities.
Option 1. Once you are stopped out, there will be no reentry in the same signal. (Remember, the buy signal continues )
Option 2. Renetries are allowed after getting stopped out.
Option 3. Once you are stopped out, reentry in the same signal is allowed only on additional conditions getting satisfied. In the moving average exmple, after getting stopped out, you now require not only the moving average direction, but also that the price bar should record the highest high of last 5 bars (as an example).

In my systems, I follow Options 1 & 3, but never 2.
I hope I have understood the question properly and given a satisfactory answer.

Monday, June 15, 2009

Disciplined trading : Do exceptions prove the rule

Pi asks:
a. while looking at levels or charts, should one look at spot levels or futures levels. quite often they would be in tandem, but not so at time. i mean what is the technical analysis theoretical view on this.

My notes:
Always look at the spot levels when doing analysis. If you trade futures, then use the futures levels when determining actual entry and exit signals. As an example: today, June 15, my Nifty end of day chart has given a cycle turning signal suggesting that the up trend may be changing into a correction / consolidation. Now, attempts to go short / buy on dips / sell on rallies, will be made with 60 minute futures charts.

There is one more question:
b. if one is trading a quant system, is 100% discipline must or can one in limited circumstances use one's discretion based on levels or charts or market conditions? If so, when ?for example in a trend following system i was long on friday, but having seen that mkt reversed twice earlier frm arnd here i booked and took a short. that infact was a deviation from my quant system, but a very good call to take. later in the day the system itself turned short.

My Notes:
The correct answer should be: Man's brain is still superior to the machine. Your perception of external conditions will usually be superior to the system, as you found out now and probably many times again. The problem lies elsewhere. Suppose, you exited and then the trend reasserted itself. Then the trend picked up and the system went on to make a 200 point profit. Remorse and decision regret will take over. Worse, if you went against the system signal, now you find yourself losing while your system is (theoritically) making money. Now, how do you get out? Believe me, when I override my system, 8 out of 10 times my sense is correct. The other 2 times, literally kill my performance compared to the systems.
Therefore, let your system trades be. Take an independent discretionary trade. Apply exit rules and trade it seperately. Those 2 out of 10 times, you will hav the courage to take a loss and get out becuase you know that your system trade is making up. This is what I do.

Rishi asks:

If I buy 500 BEEs @ 460 = 230000/- &
SellJul 4600 Call @ 255/-
Case 1 if nifty closes at 4600 on ExpProfit/Loss = ?
Case 2 if nifty closes at 4800 on Exp Profit/Loss = ?
Case 3 if nifty closes at 4400 on Exp Profit/Loss = ?
Of-course wot will be Break-Even-Point (BEP) (BEP) (BEP) (BEP)?

My notes: many readers here will be very good at these calculations. if I get it wrong, please leave a comment.
case 1: nifty closes at 4600. You make 255 points.
case 2: if nifty closes at 4800. You will still make 255 points. (Surprise!)
Case 3: if nifty closes at 4400. You will make 55 points.
Break even point in all scenarios emains the same: 4345
Now I can suggest one more possibility. What happens if the Nifty closes at 3800? Think about it.

Analyst comments on TV

Gurvi says" surprised by your comments on Friday.You said to go long on this market....but from last few days you're saying to go short(every rise is an opportunity to exit)."

My Notes:
This was on Friday morning. The Nifty had opened at 4650 and number of technical inputs suggested a rally to 4700. The question on CNBC was: what should the trader do now: I said, buy. We saw a 50 point rally to 4703. The question was for an immediate day trading strategy. Also, sometimes it works, and, sometimes it does not work. In earlier posts, I have explained why following analyst comments may not be the ideal day trading strategy.

CNBC Awaaz has started a new show. On thursday, at 2 PM they asked me: give a Nifty strategy. I said (all numbers for June futures): go long now (4655) , keep a stop of 4610 and look for a target of 4700 - 4710 tomorrow. Now, the Nifty touched 4703. Did the strategy make money for the trader or did he wait for 4710 only to be stopped out at 4610 later in the day. So, these ideas are just that = ideas. If the trader does not apply his common sense, he is not going anywhere.

Frankly, if the trader practices, gains experience, he / she does not need any analyst inputs.

Friday, June 12, 2009

Risks in Trading

Brett Steenbarger, Ph.D, in his excellent blog writes:

"A while back, a trader told me he was doubling his money each year in the market and asked if I wanted to invest funds with him. I immediately declined. My rule is that, over time, a trader will always draw down at least half of his or her targeted return rate. Anyone who guns for 100% returns annually will surely, at some point, experience a 50% drawdown. That's not for me.

Risk and reward are always proportional. Those who understood that did not invest with Madoff.

I know from experience that, at some point over time, I will draw down 10 times what I'm willing to risk on a single trade. If I risk one percent of my capital in a trade, I'd better be prepared to endure a 10% drawdown in capital at some point in the future. If I risk 5% of my capital in each trade, I'll eventually lose at least half of my money. Probability and psychology guarantee slumps; wise traders plan for them.
So much of trading success is knowing how to lose."

My Notes: If you want more rewards, you have to take more risk. A desire for large returns invariables leads to big losses and destroys your trading capital (and your mental peace). But novices never believe this because they have not seen this process in action.

Traders should look at the percentage return they receive from trading. If they are getting 20%+ per annum they are doing well. Looking at percentages keeps expectations at a realistic level and avoids unneccessary risk.

I have an example from my own business: We have a service called Day Vinayak which provides day trading signals. All trades are closed at the end of the day. The big advantage is: no overnight risk. This also means that margin requirements are low, so capital requied is less. Sounds like a dream? Not really. This Monday when the Nifty fell 170 points, Day Vinayak had a dream run. Since then, in the past three days it has given back 35% of profits made on Monday. Maybe it will give back more. For traders it is disturbing to see big profits come in and then maybe 80% of it go away. But that is the way a long term approach to trading works. The fact is that the 20% that remains is also a handsome return on capital invested. Now comes the main point. Chances are that the service may earn 50% (after costs) over a one year period. But if you start with Rs 2 lakhs and want to use the profits as a source of meeting your family expenses, then the annual income will be Rs 1 lakh which is not enough. If you start with Rs 5 lakhs, and, this is your spare money meaning you do not need the money for your personal expenses, you may end up with a gain of Rs 2.5 or Rs 3 lakhs - an excellent return on capital.

I have given a lengthy example from a real life trading scenario to share with you what short term trading gives you.

Tuesday, June 9, 2009

The Nifty takes a U-Turn

Today On CNBC, I suggested that the correction has more downside and traders may look to go short below 4450 (rather with 4450 as resistance). I have recieved some comments on my suggestion to go short, as well as an enquiry on how I did trade with the up move.

First, I stay with my suggestion that a deeper correction is likely.

Second, I had a bearish view. Thus, a short position was justified when the Nifty faced initial resistance around 4450. The trade was quickly stopped out. Finally, our systems went long at 4495, then added positions at 4532. All in all, a neutral day. Here is a chart showing the bearish view.



Monday, June 8, 2009

Intra day trading on June 8, Monday

Junaid asks:

"can u plz share about how you traded todays 150+ fall. What type of signals u traded with. That would really help in understanding about how do our mentor take short positions in Intraday falling market...? "



My Notes:

Currently, we are trading three intraday systems for Nifty futures. A system is a disciplined method of trading. Buy and sell rules are predefined, based on backtesting. All systems will close their positions by 3:30 PM. System logic includes an entry rule, a stop loss, a trailing stop, an exit rule - some or all of these rules will be active.

Today, two systems gave short signals around 10:30. Both systems went short around 4565 - nifty futures. The systems have tight stop losses. Now what follows is luck, or rather the benefits of probability. Almost immediately, futures fell by 15 points. Then, there were many attempts to rally, but prices did not cross 4570, and stops losses were not triggered.

The third system went short a bit late, around 4545. This was a trading zone. The result was that the system was pushed about inside the zone, resulting in many whipsaws.

I am giving below the trades taken by the three systems today. These are actual trades. Our trading desk as well as clients have taken these trades.


My point is: we follow our discipline. It is a matter of chance that two out of three systems were in sync with the market today. Sometimes all three or four go out of sync, sometimes all work well. We make money because we remain consistent, therefore allowing the laws of probability to work for us. The numbers on the right are the gain/loss for trading 100 Nifty futures. Note what system A14 did (this is the best performing system, but doesnt look like that today!)


The Nifty gets a cool shower

A dramatic 170 point (4%) decline in the Nifty today cooled down the over-enthusiastic segment of the market. If you were a day trader, you should have received a number of short selling signals today. It was a good day for traders.

I have received a fair number of comments, and I really want to reply to all of them. Where do I start? In Alice in Wonderland, the suggestion was: start at the beginning. That's what I am doing. If I have missed replying, this means I will reply in the next post.

Krishna asks:
I wish to learn technical analysis,would like to know if you conduct courses/seminars or else i request you to please suggest an institution where i can learn the same..your suggestion will be very significant for me to decide...

My Notes:

I cannot recommend any private institution. This is how I would go about it, taking one step at a time.

1. Self Study. Follow the IFTA syllabus which we will publish this week in the taindia.org website. Buy books published by Vision Books. These books are low priced editions of expensive American editions. Search for material on the web. Become an expert in using google. have a broadband connection & 24 hour access to computers
2. Browse through free charts available on Yahoo.com and perhaps other web sites also.
3. Buy a technical analysis software.
4. Open an account with a broker and trade in very small quantities.
5. Experience: Join an established trader who uses TA for his trading. Be a trainee and learn the tactics of trading. This is possible if you wish to learn rather than to seek a job.
6. Get Certification.

Now for the next post!

Sunday, June 7, 2009

Three days After

Well, these three days mean the gap between my last post and this one. Usually I write every day, so this has been an unusual gap. No big reason - the market was choppy on Friday, then we have this weekend, so whatever we share could wait till Sunday. Sorry about the delay!


For five days now (all of the past week), the Nifty has been moving inside a range between 4500 to 4600. This range is defined by the real bodies for each day, the range between the open and the close. If the Nifty were to close above 4600 on Monday, this will be a sign of breakout from the trading range. An easy strategy is to buy the Nifty at the close and exit on a move above 4700 which is the target on such a breakout.


The Nifty faces significant resistance in the larger 4500 - 5200 zone. I assume that the strong momentum seen in the past few weeks will now reduce and stocks will be much more rangebound, even if the Nifty were to slowly move up.



A longer picture

The 30 week moving average is roughly equal to the 200 day MA. The weekly average is preferred because a weekly chart allows me to view more data. I applied the 30 period MA to the Nifty weekly chart. The difference between the closing price and the MA is around +1500, meaning the price is about 1500 points higher than the average. Once earlier when the Nifty touched a difference of 1500, it went into a trading range for many weeks wgich was an intermediate top. Have a look at the chart here.

Thursday, June 4, 2009

Cup and Handle in Nifty examined again

wildeazoscar said:

"the bottom of the cup is never found at the left but at the centre of the cup(here the 2250 low of nifty)....rather it was a adam and steve reversal, followed by liquidity madness, and once over, the market is likely for an unprecedented low followed by at least two more years of bear bear cold"

I have given below the weekly chart of the Nifty which has the possibility of a cup and handle pattern marked on it. Two problems that arise in the pattern are:

1. It is not exactly a rounding bottom.

2. Volume did not increase during the base formation.

wildeazoscar mentions another issue - that the final lows were made at the start of the base, rather than at the center.

Fair enough. This may be an imperfect pattern. If the Nifty were to correct and make some kind of handle, then cross 4650 on at least 50% higher volume than average, what should we do?

A breakout above 4650 after (a) a correction, and, (b) on above average volume will qualify as a buying opportunity. The pattern can be called cup and handle, or head and shoulder (inverted) but the message is the same - it should be going up. Now, this breakout may never come about, that is always possible.

wildeazoscar describes the lows made in 2008-09 as an Adam and Steves reversal. I think he is referring to an Adams and Eve reversal. The Adams low is sharp narrow and deep (Oct low), while the Eve bottom has a more gentle rounded appearance (March). This is a good decsription, although the lows in a cup and handle base can be made of an Adam and Eve combination.
wildeazoscar says that the market is likely to make new lows. I assume this is his/her opinion, since there are no patterns provided to support this statement. Again, the markets can do anything.

PS: I enjoyed responding to wildeazoscar's comments, which you can guess from the time stamp on this post.

PS again: The cup and handle has nothing to do with the short term moves in the Nifty where the futures has support around 4450 and suggest a breakdown below it.

Wednesday, June 3, 2009

Enter the Trading Range

As the Nifty drifts into a trading range (boundaries 4450 to 4585) day traders and short term traders will find it difficult to catch tradeable moves. This is the nature of the trading range. For the Nifty, the small 135 point range is unlikely to hold. This suggests that the range will expand to become larger by either moving up to establish new resistance, or moving down by establishing lower support. We will let the market decide it.

The theory of trading inside a range is fairly simple. Apply a bounded momentum indicator like the RSI, CCI, Stochastics on an intra day chart. Day traders should use 5 minute or 10 minute charts. Wait for the indicator to reach 'oversold' area. Then go ahead and buy above the high of the previous bar. Keep a stop a little below the low of the recent move. You exit when the indicator begins to touch the 'overbought' area.

Is there a risk in such trading? Not in the way you think. Since the trade has stops and an estimated location for taking profits, the trade works well in trading zones. The risk lies elsewhere. At some point, prices will move out of the trading range. Since you have taken profits or have been stopped out, you will find that a trending move has started while you are out of the market. That's the risk! Now, a solution to this is to wait patiently for the first pullback and get into the trend. yet, there is a psychological setback on having missed part of the trend. Tradrs have to face such real life situations every day. When you are able to find your way through the maze of such circumstance, you will become an efifcient, profitable trader.

I received a comment today which roughly said "Nothing new in this analysis. This is a copy of what vivek patil said...... " The comment was accepted, but now I cannot locate it. If you have RSS readers where you get this comment, please tell me where it is. Sorry for this lack of knowledge!

My Notes: Much to my regret, I do not read any Indian analyst. I have a reading list of blogs mainly in the USA. Often, I quote from them and give links. Thus, whatever I write is not copied.

Tuesday, June 2, 2009

Nifty still at significant resistance

The NSE Index stands at 4500, a zone of strong resistance. Now, this fact by itself does not imply that the market should now stop rising. Strong resistance means - If the market is getting ready for a correction or dip, then the 4500 location is a good place for the dip to begin. So we understand that momentum is currently controlling the scenario - if there is sufficient momentum the Nifty will simply cross the 4500 zone and continue moving up.

Emerging Markets:
Bloomberg has a news item which says "The four-week flood of money into developing-nation stock funds that drove the MSCI Emerging Markets Index to an eight-month high is sending the strongest sell signal since equities peaked in October 2007."
Why?
“Fund flows at their extremes are contrary indicators,”

Now, we all hear that liquidity is driving the markets up. This is good news. But, liquidity has limits, since it is based on the 'greater fool theory'. Traders should continue to ride this market with stop losses. Investors can as well wait, because liquidity has never been a good reason to invest. Value is a much better option for investors. An overheated market is not the ideal place for value. Wait!

Replies to comments:
Manu asked :
"there are many technical analyst Service provider, one of them is Snpnifty.com, which is linked to sudarshanonline.com"

My Notes: I provide google ads in the blog. Perhaps some ads have given this impression. We do not have any links with any provider. (I own a service company: http://www.technicaltrends.com/ ). If you note, I have removed the ads to avoid any confusion.

Bhupesh asks:
"can we see a 4672 level before we get into a good correction."

My Notes: I really cannot say. The reson is simple. This market is not driven by fundamentals or technical patterns. It is now working on liquidity (the greater fool theory), so anythin can happen.

Manish asks:
can we see inflation as a indicator in stock markets . When inflation goes really does , we can buy some stocks ?

My Notes: stocks and gold are a hedge against inflation, but gold is probably better because stocks may also be influenced by current economic environment which may be good or bad.

Krishna asks:
What are SEBI norms to qualify as a professional Technical Analyst?Which certification/qualification is legally required to take technical analysis as a profession .

My Notes: SEBI does not provide any norms for a professional technicl analyst. Our new association The Association of Technical Analysts will offer the CFTe certification in India, starting from Octobe 2009. This certification will confirm that the holder is a qualified technical analyst.

Rajneesh asks:
"sudharshanji-- this may be a stupid question-- but which trading software are available for the indian market? please help since i am lost."

My Notes: There are many technical analysis software available in India. I can direct you to a company that I own - http://www.technicaltrends.com/ (This is a bit embarrassing,....)

Stop losses for 'running' stocks
Mem says:
Now that most stocks are >200dma's by 5-20%, what should the stop loss for these stocks, and how should we go about it?

My Notes: Search for the shortest moving average below the stock price, maybe 5 or 8. Use this average as a stop loss. You need to decide if the stop loss will be intra day or on a close. I prefer a close only stop, meaning the stop is triggered if the stock is closing below the average.

And..
Secondly when using RSI, what gets precedence the stock price or the RSI? For eg. price goes up and RSI comes down and vice versa.

My Notes:
Price always gets precedence. If price goes up while RSI goes down, we simply say that the stock is losing momentum. Maybe it will begin a consolidation, maybe not. The trend does not change even if the RSI is going down. Trend changes only when the price goes down.

Monday, June 1, 2009

Just one more day in the office - Nifty up

Cup and handle in the Nifty

I received an excellent email two days ago. I could not post it beause the sender created an email identity that should not be published. Today, I copy/pasted the contents:

"do u see cup and handle formation in the making...?? if so nifty shud retrace a bit in june....i.e formation of hadle which takes 1-4 weeks....and then a huge breakout on the upside...this is a very bullish pattern....if nifty manages to break 4650 which is the right side of the peak of cup with gud volumes(heavy volumes a prerequisite in this pattern).......typically in this period of handle formation volumes would dry down......what do u say"

My Notes: I say your analysis is very good, and, a likely scenario. With every passing day, it appears that this market will go up with a big bang, higher than we imagine. We would like to hear more from you, but, please have a printable email identity.

Master of the markets

Ajay Singh wrote about a likely scenario for this market in end of april. Here is his post: https://sudarshanonline.com/2009/05/sell-in-may-not-this-may.html
He seems to be getting a perfect 10/10 in his analysis of the market and his prediction of a big move in the Nifty going all the way to 6000. Great, Ajay. All of us look forward to hearing from you soon.

Here is a message for 'men':

I welcome all comments. I read them, I try to answer at least some of them. Please continue to write.
Meanwhile, mem in comments says:
"JUST GIMME A DIP LEVEL TO ENTER THAT IS ALL"

My Notes: the purpose of writing this blog is to share my experience with fellow traders. Going by the comments that come in, I think many of us share the same concepts about the market. Markets are dynamic. They do not provide 'levels'. I think this is the message I have been trying to spread around since I started writing this blog. So, how do you enter the Market? You can enter now, hoping that this momentum will continue. Or, you can wait for correction, and the correction can start now going down to 3800. OR, the correction can start at 5500 and go down to 4800. It is your decision.
Dear mem, the markets do not work in the fashion of 2+2 = 4. You have to understand the flow a well as the behavior of the market. The market will corect when it wants to. Who am I to say what and where it will go. This is what I said on CNBC, in the blog and I am repeating it again.

I am responding to mem's comments since it is important to understand what the market does and our own limitations in what we can do. Most readers, I feel, are now understanding it. But repetition is always good.

BRIC Stock Markets - how high is high?

A review of BRIC stock markets at Bespoke Invest points out:


BRIC (Brazil, Russia, India, China) countries continue to surge higher in 2009, as they've far outpaced stock markets of so-called "developed' countries. Below we highlight their year to date performance compared to the S&P 500. As shown, Russia is up a whopping 72.1% this year, followed by India at 51.6%, China at 44.6%, and Brazil at 39.7%. The S&P 500 is up 0.22%.




online day trading

This remarkable rally invites the question: How high is high? There is really no answer, except to keep on moving with the trend. The trend is up, which is all we can determine.

Together with Stocks, gold and crude also continue to rally, suggesting that the markets are anticipating inflation. Maybe, the current rally in stocks may continue since stocks are a hedge against inflation.