Friday, July 31, 2009

Big Bull or just a little bull

Hat tip to Saurabh for pointing out Mark Hulbert answering the question is-the-bull-market-cyclical-or-secular?
Mark concludes: The bottom line? Only one of the seven foundations of a secular bull market is in place. Three more are neutral, and the remaining three are bearish.
Davis therefore concludes that we are more likely to be in a cyclical rather than secular bull market.

It is wise to be aware about different view points. I am not referring to the current rally as a bull market. I talk about an uptrend, which it is. My concern is: bull markets start slowly, but this one roared ahead.

G S Dhillon provides a method of identifying targets for stocks making new highs. His comments can be read here . It is possible to make Fibonacci projections for targets when you have a swing low and high on a chart. But what happens when you have new highs, so there are no swing points to refer. Gurvinder suggests that you use the five day high and low as the swing points. Excellent suggestion. Thanks.

microashsish asks "i what know abt gann-square of nine how it works is it feasible in indian market"
My Notes: I think you shoould start with Google search. Many software packages provide this tool and their web sites may also have some help. I am not sure how it works. To the question: is it feasible in Indian markets: my answer is: everything works in all makets. You have to use every tool in alignment with the trend or momentum, understand price flow and practice strict money management.

What of the Indian markets today? Well, the US markets did not sustain their intra day highs. We may well open higher (as the SGX Nifty + Asia suggests), but at higher levels we could easily see the kind of profit taking that the US saw yesterday, so careful at the highs.

Tuesday, July 28, 2009

Too good to be true

(the date is Tuesday, but the post was written on Thursday morning!)

I have found that if something is too good to be true it usually is not true. This simple principle has helped me many times in my own trading and investing. The context in writing this today is an article in Bloomberg by Jeremy Grantham who says that the China story may well be flawed and in the next few quarters events are likely to take place in China which will scare away all the investors. It is quite possible that the much hyped China story may turn out to be a flop as the country could face setbacks not visible now.


This news adds up with the news item in FT which says: "Asia’s forever blowing bubbles" .

Gold may be forming a symmetrical triangle, says http://www.afraidtotrade.com/ in its analysis. The boundaries are between 920 and 980 dollars.

Nifty in trading range, may simply drift down!

As world markets begin a process of consolidation, the nifty may follow suit, simply moving sideways, not going anywhere. A small range in the Nifty is visible between 4500 and 4600. The next trade is liekly to come when the Nifty moves out of this range. Even a range breakout may not travel much, since there will be support at lower levels and resistance in the 4700 zone.

Buying New Highs

Saket asks: " have a query on how to trade in stocks making new highs,how can we work on targets for these stocks,what can be the stops,what can be the strategies on such stocks"

Stocks making 52 week highs as well as all time new highs should be tracked closely. These are shares you want to buy.

Trade these stocks based on a daily chart. You can enter part of your position on the breakout to new highs, and rest on a dip. Keep a stock below the last (or even the second last) swing low. But keep wide stops.

There are no targets for stocks moving into clear skies. If you are trading them, then consider exiting on a range expansion (Big move in your favor). If you are investing, hold on for a wild ride.



A fine Technician and R Squared

In comments, Anupam Mazumdar asks about the R-Squared indicator "how we can do it(i mean formula or set up) ourselves using excel or some prog language like c++ or java"

Tushar Chande has written two books on technical analysis and trading. His first book, "The New Technical Trader" is pathbreaking in many ways because it discusses new ideas. In this book he discusses the R-Squared indicator to identify trendiness in the market.
The calculation of RSquared is easy:
RSquared = Square(coeffR(Length));
The function coeffR is calculated as below (in Easylanguage, used in Tradestation):
{*******************************************************************Description : This Function returns coeffRProvided By : Omega Research, Inc. (c) Copyright 1999********************************************************************}
Inputs: Length(Numeric);Variables: R(0), X(0), Y(0), UpEQ(0), LowEQ1(0), LowEQ2(0), LowEQT(0);
X = CurrentBar;Y = Close;
UpEQ = Summation(X * Y, Length) - Length * Average(X, Length) * Average(Y, Length);LowEQ1 = Summation(Square(X), Length) - Length * Square(Average(X, Length));LowEQ2 = Summation(Square(Y), Length) - Length * Square(Average(Y, Length));
If LowEQ1 * LowEQ2 > 0 Then LowEQT = SquareRoot(LowEQ1 * LowEQ2);
If LowEQT <> 0 Then Begin R = UpEQ / LowEQT; If R <= 1 AND R >= -1 Then coeffR = R;End;

I do not use the raw R-Sq values. I smooth them with a short moving average, say 3.

And what about the markets?
The choppy conditons seem likely to continue as the markets go through August when there is no event to influence prices. (At least, no visible event!).
But, some stocks are likely to continue moving up, or even gain momentum. Trading strategy may focus on individual stocks rather than the Nifty.

Monday, July 27, 2009

A choppy, sideways trend

The Nifty topped out in June, and since then it has essentially been sideways. True, we saw a sharp decline, then a V shaped rally. But, at the end of it all, we are almost where we were in mid June, suggesting that the market trend is really choppy / sideways.



Indicators can help us in identifying the trend. Sometimes, the indicator will go wrong, and, you can end up on the wrong side. That's where your judgement comes in. But, often, an indicator will provide a sense of direction, answering the question: is it a trending market or a range bound market?



Three indicators normally used for this purpose are: ADX, VHF (vertical horizontal filter) and R-Sqaured. There are many more, and it is easy to create your own trend-notrend indicator if you have the appropriate software. Let us look at the Nifty with RSquared:




Examine the chart carefully. What happened after the indicator touched the lower levels of the 'no trend' area? Can you detect a cycle of contraction - expansion - contraction ? Currently, the indicator is at the lowest extreme suggesting that the process of contraction is now going to change into expansion.

Thursday, July 23, 2009

How to identify a bullish bar

Let us use some common sense ideas to identify what a bullish bar may look like.

When the market closes above the previous close the message is of strength.

When the market closes above the open of the day, again a message of strength comes in.

When the market makes an intraday low, recovers from the low to close higher, thus making a long lower shadow, the pattern would be considered bullish because a test of low probably took place.

A pattern that is not bullish is a candle with long upper shadows.

The best way to enter the market after a bullish candle is to wait for some sign of strength. When the market trades above the high of the bullish candle such a sign is available.

Wednesday, July 22, 2009

A lesson in markets are supreme

Today's market was a remarkable lesson in humility. The nifty went up above yesterday's high and then almost like a sudden cloudburst prices started falling, eventually going through yesterday's low. That means that the market today first crossed yesterday's high and signalled a new uptrend, then reversed back to give up all its intraday gains and then actually move lower than yesterday's low to signal a new down move. When an inside day is formed, the next day's market will either go up above the high or go below the low. Very rarely do they move above and below both levels, as they they did today.
I think what we're seeing today is probably a minor correction of the ongoing up move. What we may see now is a market that actually remains sideways for a few more days.
Despite the sharp decline that we saw today from intraday highs, the trend remains up. Therefore, traders should wait patiently for this small correction to end and then search for opportunities to go long. Obviously, then comes the question: what if this analysis is wrong?
The first question is: how will we know when the correction is over? The answer to this is: when we get a bullish daily bar. That will be the first signal that the correction which started today is complete.
The second question is: what happens if the correction actually turns out to be a new down move. The answer to this one is more difficult. Traders have to identify the ongoing trend. This will be done differently by each trader. Suppose you are using a eight period moving average to identify the short-term trend. In this case you will turn bearish when the moving average turns bearish.
The third question is: at what point does the trader give up the uptrend? This question is related to the earlier one. But here we can also use some chart levels. I would feel that there are uptrend is intact while the nifty trade above 4250.
Finally, the most difficult question: how do you trade now? This is difficult to answer because the trend is up but we are seeing a correction. A correction is always difficult to trade. while the market is in a correction trader who can switch to buying on dips and selling on rallies.

Nifty in narrow range

The Nifty took some rest, as it paused after five days of strong gains. Such a pause is natural in any trend.
The Nifty has made an Inside Day as well as an NR7 day.
(Hat tip to Rajesh Jain, Rohtak for pointing this)
The patterns suggest uncertainty. Now, the question comes: unceratinty about what? Since we have already seen 600 points of gains in the Nifty, the uncertainty is about continuing the winning spree.
What may happen next?
Scenario One: A move below today's low - 4436, will tell us that the majority of traders have decided to become safe. They are not buying. Then, a correction could easily begin taking the Nifty down to 4350.
Scenario Two: The Nifty continues its winning spree. A move above 4510 - today's high will suggest that bulls remain in full control and confidence. This should suggest a target of 4700 which is the next resistance.
Since the trend is up, there is more risk in selling than in buying. But, we have to follow the market momentum anyway.
For Investors, a corretion is not a cause for worry. After all corrections will come and go. The trend remains up.
For Traders, a move below 4436 i a warning to lighen up or maybe close long positions.

Tuesday, July 21, 2009

Strong Momentum

The Nifty has seen five days of back to back gains. This is NOT a bear rally. The gains are in line with what most world markets are doing. We are in an uptrend, and momentum is in the side of bulls.

Now, in an upmove, there will be pockets of resistance as well as correction (as in a down move). The first resistance comes at 4500 where the Nifty was standing yesterday. Then we have resistance in the 4700 - 4760 zone. A close above 4760 will tell us that a long term head and shoulder pattern is getting confirmed, promising prices we can only imagine. All of this is just probbaility and may not come about. That's a different issue.

My approach is to assume we are in a strong momentum driven market moving up. Buying should normally be done only on dips. I do think that patience rewards the trader. Dips will always come. Identify your trading time frame, then buy on these small moves against the main trend. Have Fun!

Friday, July 17, 2009

Another head and shoulder revisited

Almost all stock markets are showing signs of developing a bullish head and shoulder pattern. This is a pattern that is not ideal, because it has shallow shoulders, but then the markets are not expected to be perfect anyway!
The pattern is revisited everytime the Nifty begins a rally, because that is the time for optimism, and, soon enough, extreme optimism. For the Nifty the neckline comes around 4750 approx. The targets, if the pattern comes about will be 2500 points from the neckline. You can do the math.
Now, these patterns need not fulfill their targets. We had a bearish head and shoulder in the Nifty which has seen a sharp rally and gets cancelled if it trades above 4500 - right shoulder.

Trend Days
In a comment Pi said about wednesday's one sided up move "first a point - today was not a classic trend day - a classic trend would being with a decent size gap, hopefully after a day or two of range bound trading, and would see a smooth uptrend through the day. Today lacked all these characteristics - though the strength of the move was phenomenal, the candlesticks chart looked quite messy, but yes it took supports at the right place and kept breaking past resistances"

I have to differ. A trend day opens at the low and closes at the high with a larger than normal range. (bearish days will open at the high and close at the lows). That's it. We use gaps and prior range bound days to answer the question: Is today likely to be a trend day?". If the day opens with a gap after one or more days of narrow range, then the chances of a trend day increase. But it is not a pre-requirement.

Men has a question about calendr spreads on the mini, which regretfully, I have not understood. Does it mean mini futures or mini options? An example will help.

Sandeep asks: "sir please kindly sugest tradestation or metastock"
My Notes: Both are excellent pieces of software. I have used tradestation for over 12 years for systems development, so I am more comfortable with this one.

Thursday, July 16, 2009

Confusion in the U.S. markets

On the state of the American economy and stock market, there are completely divergent points of view in the blogs that I read. Here is a sample:

Forbes economist Gary Shilling says that the US stock market is going to crash. He says "For the next 10 years, we're going to have chronic deflation". He suggests buying the US Dollar and Treasuries (Govt bonds).
The-Market's-Going-to-Crash-Here's-What-to-Buy

Daniel Gross, writing in Newsweek says "But in this season of doubt, I'm prepared to declare that the recession is really, most probably over."
Because "two of the best and most objective forecasters, who are not connected to investment banks or to the CNBC noise machine, have recently called the upturn. ". They are (1) Macroeconomic Advisers, and (2) Economic Cycles Research Institute.
http://www.newsweek.com/id/206631

Bloomberg -- Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger. A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.
bloomberg.com

A long term bullish (inverted) head and shoulder pattern in th S&P500 with a neckline around 955. The blog says "This is the one the bulls like. It clearly supports the notion that most of the bad news has already been priced into the market, the rate of decline has moderated, comparisons against prior year are improving and that the effects of the economic stimulus package (a.k.a., massive government deficit spending) will start showing u"
Inverted (bullish) head and shoulder in the S&P500

The online edition of the Wall Street Journal says that "The Economy Is Even Worse Than You Think ".
http://online.wsj.com/article/SB124753066246235811.html

Wednesday, July 15, 2009

Day Traders delight!

The Nifty had a classic trend day, opening near the lows of what became a strong up move. For the short term trader, there were many signals for a long position. Once a position was taken, the stops were installed but never triggered. Such was the strength of the rally!

For short term traders, there are two issues to think about.

First, what should be the approach to trading? Do you wish to take small profits which assures a high percentage of winners. Or, do you wish to capture these trend days (like today and yesterday), which will give big profits but many small losses. All of us want the big profits, but these profits come with many days of whipsaws and losses.

Second, should a trader begin the day with a view or theme? I start the day with a view on the market - go long or go short. Sometimes, this changes during the day, but mostly I trade on one side of the market which makes life easy.

The answer to the first question is: Our system testing suggests that waiting for trend days makes more money as compared to taking small profits. But, this also requires lot of patience and the ability to take numerous small losses.

For the second point: having a view is really a personal choice. I think each trader needs to determine what suits best psychologically. But whanetever course is adopted, be consistent.

Tuesday, July 14, 2009

Worries on the long term

Earlier post today were:
first-pullback-today-is-example

I was reading a book in which the author had given a chart of the Dow Jones Index. In 1997 July it was trading at 8333. Today, I checked up and the Dow is trading at 8325. In twelve years, the Dow has not moved at all. True, it has seen highs, and some lows, but t the end of a journey it is where it was! From 800 in 1982 to 8333 in 1997, the Dow increased 10 times in 15 years. But, what happened after that? The Index remains where it was, now going back to its average return (reversion to the mean!).

All above average movements will eventually come back to the average. If this principle is accepted, then the Indian markets may also be getting inside a long trading range. We moved up from 920 in 2003 April to 6300 in 2008 january - about 6 times in 4 and half years. That's a lot! The Indian Market may now remain in a range for many years trying to reach the mean.

The first pullback - today is an example

Today morning before the Open, in my earlier post I explained how a trend day can be used to trade using the first pullback. Luckily, today's Nifty trading provides an excellent example of this concept. Here is the chart.


We must remember that real life trading is not perfect. In today's chart. the pullback went deeper than zero. But while it was going below zero, prices were flattening out. The first uptick in the Oscillator gave us a buying opportunity. Today's setup made money, but it is quite possible that another day, the market can keep on going down or up making the pullback into a new trend!

The way to successful trading is practice. Identify a few setups, then examine them every day and trade them. In the evening go back to your charts and try to learn what went right and what went wrong. Your practice will make you perfect.

A different day

Tuesday morning opens with optimism and hope for bulls. The Dow and the S&P were up big time overnight, while Asia is up and the SGX Nifty suggests a big gap up.

The short term outlook is for an uptrend. the Nifty seems to have made at least a short term low yesterday. Resistance should come first at somewhere near 4070 on the July futures. I will trade with a bias for long positions.

Was the decline just a correction or more? The answer will come much later - if the Nifrty were to cross the previous high of 4700 then this was just a correction. But at that point the answer would be academic. So, based on your time frame, identify the trend and go with it.

I should remind readers of a simple strategy : the first pullback. Once a new trend starts, the first pullback in the trend often provides a low risk entry. On charts, pullbacks can be visible when an Oscillator (momentum indicator) falls to the middle line. (This will be 50 for the RSI and Stochastics, zero for the CCI, and zero for the 3/10 oscillator). Here is a chart explaining this concept.



Monday, July 13, 2009

Markets are mean reverting in the long run

This is my fourth post for the weekend. The previous three posts are:
green-shoots-may-be-turning-brown
worries-about-proprietary-trading
closed-room-and-chart

I also have a new post in the 'Practical Technical Analysis' section :
lessons-in-technical-trading

This post on Monday Morning considers the nature of mean reversion. This theory says that prices eventually move back towards the mean or average. This mean or average is usually the historical average of the price.

I feel that mean reversion is justified in a long term scenario. But, momentum controls the short term. As an example, Nifty has fallen from 4480 to 3970 in five days, an outsized decline. Mean reversion may well say that a rally should come. That is dangerous thinking. Markets in the short term are controlled by momentum. If sellers dominate, this decline can continue for far longer than we assume. The same happens in runups when markets keep on going up, refusing to retrace.

Sunday, July 12, 2009

Green Shoots may be turning brown

Geithner Pushes Derivatives Plan
Treasury Secretary Timothy F. Geithner urged lawmakers yesterday to pass the Obama administration's plan to regulate derivatives, the exotic financial instruments that exacerbated the financial crisis.

My Notes: A curb on derivatives in the USA will reduce the flow of hot money to emerging markets including India. This will happen because the restrictions will reduce the leverage that derivatives traders enjoy.

China Panic!
Black Swain Capital says that China relies exclusively on exports to sustain its economy and exports keep falling. the Government is trying to keep the economy afloat by flooding the economy with massive amounts of capital, suppressing all dissent, propping the stock market. But these efforts will not succeed until the American consumer starts buying again.

My Notes:Better minds are working on this question "Is China leading a recovery?". So, I will try to work out the asnwer because I really do not know. I use the HangSeng Index to track what China may do. The chart suggests that the Index is topping out with a triple top (three drives) pattern with final support around 17400. If this breakdown actually takes place, then we are looking at major declines in China also. So watch this level.

When Will The Recovery Begin? Never.
This startling title belongs to a blog post by Robert Reich , former labor secretary. He says "The so-called "green shoots" of recovery are turning brown in the scorching summer sun."

Why? " In a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped."

What does he say about the future? "My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained."

Saturday, July 11, 2009

Worries about proprietary trading

My earlier post was Closed Room and a Chart.

The Americans are still the best defenders of people's rights. For investors and traders, this means, sooner or later the American public rises against abuses of the financial system. One such case is coming over proprietary trading.
Background: Goldman Sachs (GS), the largest US Banker/Broker files a complaint against a software developer who worked for them. GS says that the developer stole some computer code relating to "high frequency trading". The police took immediate action. Fair enough!

But media as well as bloggers started asking: what exactly was 'high frequency trading'? The answers were surprising. The Big Picture says that large institutions maybe taking advantage of order flow information and front running the retail traders. ".... recent revelations are forcing the Street to consider the possibility of automated front-running on an unfathomable scale."

My Notes: I am not surprised. In this blog, I have warned many times about proprietary trading by brokers. Why should brokers trade derivatives on their own account?

Bloomberg has a hard htting report which says the prosecutor (on behalf of GS) told a court that " The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”

"Meantime, it would be nice to see someone at Goldman go on the record to explain what’s stopping the world’s most powerful investment bank from using its trading program in unfair ways, too"

My Notes: I think, programs are now available in India which plug into the NSE and automatically trade for proprietory trading brokers. What information do these programs read? Trading is a zero sum game. This means the money that the brokers make with high technology software is coming from the pockets of retail traders who cannot have access to what the brokers have. This becomes an unfair match! SEBI may like to consider restrictions on proprietory trading by brokers when the world over this practice is being banned.

Update on 12/7 at 2050 hours.
“High-frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don’t even know it.” (Themis Trading)
The link to the white paper is http://www.themistrading.com/article_files/0000/0348/Toxic_Equity_Trading_on_Wall_Street_12-17-08.pdf. Themis Trading is at http://www.themistrading.com/.

Closed Room and a Chart

John Magee, co-author of the technical analysis bible, "Technical Analysis of Stock Trends" said that all he needed for trading was a closed room and his charts. The closed room would ensure that he was not disturbed by news and rumors. The charts will tell all that is to know, he felt.

Time changes and while the basic concepts of life remain the same, tactics have to change. Day trading and Swing Trading is far more prevalent now. There is significant impact of world markets, news in current day markets as compared to 70 years ago. Technical Analysis must be dynamic enough to adapt to new circumstances. Our tactics must adapt! That is why new concepts such as opening range breakouts, morning news reversals have come up.

Why am I writing this? Because I referred to Infosys results and suggested that the results may have an impact on the trend.

Should a technical trader consider news at all? Mohit Singhal asks "I am beginner in trading, but i have a small confussion... doing trading with technical why do we talk about news and events.. we should always talk about the overall setimaent and Chart.. in your previous blog i read you were talking about berish head and shoulder breakout and it was sucessfull so i took a short position in nifty with a SL. Is this not a mix of technical and fundamental.... ??"

My Notes: The environment affects sentiment, and short term traders should be aware of it. This was also the reason for considering Infosys results.

Viral Rajnikant sums up my thoughts correctly when he says: "Quite possibly, he(Sudarshan) might have been writing his posts based on SENTIMENTAL impact that the Infy results leaves via its Annual Guidance."

Friday, July 10, 2009

Trend day after Infosys results?

My earlier post for today was Is a short term low in place - ask Infosys? . You may like to read it to get the context clear.

Infosys reports at 9 AM today. The markets are likely to respond strongly to Infosys guiidance, moving up or down. This means we could be seeing a trend day today. What are the signs of a trend day?
1. Gap. Up or down. This is one gap that could be a continuation gap.
2. The trend day is usually preceded by a narrow range contraction. Tuesday was a narrow range day and Wednesday saw a big down move. Again, yesterday, Thursday, the Nifty traded in a narrow range. Therefore, this condition is met.
3. The trend day is usually caused by some event - world markets, or news. Today, we have Infosys guidance.

How do we trade such days?
Once you are sure that the day is developing into a trend day, look for pullbacks to a moving average (20 period is good enough), or to the middle line of an oscillator. (for RSI it is 50, for the CCI it is zero). A consolidation can sometimes replace a pullback. These pullbacks will offer opportunities of picking up some points in the Market.

Take care because the markets are not predictable. What starts as a trend day may eventually end up as a choppy range, or, even as a reversal day. Taking profits at some point is a good idea. If the trend pesists, maybe you can reenter.

Thursday, July 9, 2009

Is a short term low in place? - Ask Infosys

For two days, the 4055 level has been holding well for the Nifty (ignore the spike below this level for a few minutes). We have seen three days of lower lows and one inside day. The absence of any gains for four successive days in not bullish. But, all trends will be interrupted by counter trend moves. It does seem that the Nifty may be ready for a relief rally.

But, we have another big news day tomorrow, when Infosys reports its Q1 results, and, I presume, it gives a gudance for the rest of the year. So, what Infosys says will affect short term sentiment. If the market likes what Infosys says, then we can expect a big up move because the market is oversold. If Infosys somehow dissappoints, then markets are likely to continue moving down.

A rally should be a correction in an ongoing down move. the first line of resistance is 4250 which was support earlier. Another decline should see the Nifty touch 3900 or nearby. Tomorrow morning may well decide what the market wishes to do in the next few days.

Men asked a question was asked about the IT Sector: "On CNBC you said that if one had a 3 year view then one could buy IT stocks, could you please explain what one should look for a long term view, I track infosys and it has been making lower highs and the last 3 peaks are 2415(15-2-2007),2020 and 1850(ignoring the post election high of 1900+) though it has been maintaining 1050-1080."

My Notes: For a long term view, I ask myself: Which sectors are outperforming now? On a monthly chart, Infosys is showing relative strength when compared with the Nifty. So is Wipro, TCS and HCL-Tech. Therefore I assume that this outperformance may continue. I chose three years to suggest that the view needs to be long term. The period was chosen to denote the long term - it could have been 30 months or 40 months =- no rocket science here.

Early morning answers

My earlier post for today was breaking the markets neck

Here are some replies to questions raised in comments:

TOOCOOL7610 asks:
i read ur blog entry dated june 3rd{enter a trading range} there u have mentioned that any oscilator like , rsi, cci,stochastics, can be used to trade ranges on intra charts but one confusion is with which settings we shud use cci, and stochastics??? default?? as each day is a new day in markets and each day volatility is different in markets 2nd question is that to trade nifty futures i use nifty cash carts as i dont have access to future charts is it fine to trade range trading on cash chart???

My Notes: Ideally, oscillator settings should be half of the cycle length applicable for the instrument. But, most traders do not have access to this analysis. In that case, just use the defaults, it will give you a sense of 'overbought' and 'oversold' in trading ranges. For the Nifty trader, access to Nifty futures charts is essential. These charts are available free on yahoo.com finance site.
(For Nifty futures, cycle lengths currently are: 5 minute cycle : 93, 15 minute cycle 76, and 60 minutes: 76 and 131. These cycle lengths may be different depending on the software rthat you use, but not too different)
TOOCOOL7610 asks again: how to identify trading range and is it best to identify with 60 min chart?? you have mentioned a trading range breakout ie 4400 -4250 but recent high and low in which nifty was tradin was 4440 and 4250 but you saying it as 4400 and 4250

My Notes: Visually, you can identify the range when you start seeing a line on the charts. It takes practice. With indicators, an ADX reading below 20 with the ADX falling, suggests a trading range. An earlier post explains how I identify support and resistance. Read it here.

Continuing the indicator theme,
Men asks: For RSI, what is the value you use? Secondly does this value remain the same for the Nifty and other stocks which have a beta from 0.85 to >1 and is it the same for different time frames( intraday and positional)?

My Notes: I use the default RSI for all my visual analysis. This is 14, in all time frames, for all stocks. Andrew Cardwell has done a lot of work on the RSI and he says 14 is good enough. You may like to do a google search and get more information on Cardwell's ideas. But, if we use the RSI in a mechanical system, then the RSI value will be determined by system testing.

wildeazoscar asks: "am getting an EOD ADX(14) reading of 18.75, which is just above the +ve DI(14) at 17.61 and below -ve DI at 24.12Now, is it the inception of a new trend?"

My Notes: I think the key to identifying a new trend with the ADX is (a) see the ADX falling, preferably below 20, then (b) See the ADX begin to rise. I only use the ADX and ignore the +DI and -DI. This is a matter of choice, since I try to identify the direction of the trend visually by seeing a chart.

There is one more question: "would not it be better to assume a new trend once NIFTY breaks down from the rally from 3600 towards the neckline and ADX rises above 30?As far as my knowledge goes, one does not trade reversals all out, but as soon as the reversal is confirmed and trend sets in, one trades in heavier volumes."

My Notes: If you are a position trader, then the correct, conservative approach is to wait for the neckline to be broken on a closing basis. You can take short positions on a breakdown, or on a rally to the neckline or both. This is a sensible comment. There is a saying : "there are old traders and bold traders but no old bold traders" . So, being a conservative trader makes a lot of sense. Thanks for pointing this out. But do not wait for the ADX to touch 30. Because of the peculiarities of indicator calculation, sometimes it comes too late.

Wednesday, July 8, 2009

Breaking the Market's neck

This is the heading of an article in marketwatch.com , tracking the S&P500, the US Index. The summary is : The neckline of a head and shoulder has been broken in the US markets. " we arrive at a target for the S&P cash around the 822 level."
That's 6.7% below where the S&P closed on Tuesday, of course. An equivalent drop in the Dow would bring it down to the 7,600 level.

In India, the Nifty has seen the similar formation of a bearish head and shoulder. Now, even if this pattern works out as expected, every day will not be a down day. There will be rallies in between. But the trend is likely to remain down, with a possible target of a zone between 3600 to 3800. This target is not difficult to imagine. The mid point of this zone is at 3700, which is 380 points below today's close. From Monday to Wednesday, the Nifty has fallen 400 points from its intra day high to low. Therefore, the next leg of the decline may be similar in points to the initial decline, but may take more time.

What can go wrong in this analysis? Well, the market can prove us wrong. Resistance should now come around 4250 which was the support zone for the Nifty when it was in the trading range. A close above 4250 will require a relook at the technical position.

Tuesday, July 7, 2009

A Trend continues

One of the basic principles of technical analysis is: price moves in trends. The meaning is that once a trend started it is assumed to continue unless proved otherwise. To my understanding, the trend is now Down for the Nifty. The down move started when the Nifty broke down below the 4400 - 4250 trading range after the big news event - the budget.

So, we assume that this trend will continue until proved otherwise. How is the downtrend cancelled?
First, by actually moving down. At some point, maybe 3600 to 3800, the selling may stop and bullish patterns emerge.
Second, by moving up and going against the down trend. To me, a close above 4400 will be conclusive proof that the downtrend has failed. The 4400 number is taken because it was the top of the trading range.

What can happen?
Scenario 1: The Nifty can continue to move down, with the force of two different bearish patterns behind it - the trading range breakdown and a bearish head and shoulder. There are pattern targets as well as support in the 3600 - 3800 range. A lot of factors including Q1 earnings and world markets will influence the Nifty's final support.

Scenario 2: The election gap is not filled. Inspite of the bearish patterns, somehow the Nifty manages to stay above 4090 and slowly move up again, or move up sharply - take your pick.

Since the markets can do anything, both scenarios are possible. probability favors the first scenario, that is why we have to go short with stops.

Monday, July 6, 2009

Membership of ATA is now Open

My earlier post in the evening is about a breakdown from the trading range and can be read
here .

The Association of Technical Analysts, India is now accepting memberships. All persons interested in the promotion of technical analysis should consider becoming a member. Please visit the website http://www.taindia.org/ for more information and membership procedures. The next IFTA certification exm will be held in october 2009. Membership of the society is mandatory to appear in this exam.

For more details, please contact Vivek Rattan at or call him between 10 AM and 6 PM on 9350618090.

A breakdown!

After remaining in a trading range, the Nifty saw a breakdown on Monday. The Index moved decisively below 4250 to close much lower.
[On Friday, the Nifty closed above 4400 resistance, but a big news event was ahead, so it was neccessary to wait for the event before making a call on the move out of the range. As it happened, after the news, markets fell.]
Apart from the trading range breakdown, the Nifty also closed below the neckline of a bearish head and shoulder pattern. Depending on how you draw the neckline, the potential targets are between 3600 to 3800. This is a significant support zone for the Index. A drift down to these levels is likely.

Lessons learned:
1. Traders should wait to see the final impact from big news events.
2. Trading range breakouts / breakdowns offer significant trading opportunities, even after allowing for a false move.
3. Traders should ignore the hype created by electronic media. If you watch business channels, you will get the impresion that they have the details of the budget before it is announced - STT will be abolished, Infra companies will be given tax benefits, short term capital gains tax will be reduced, ----- all completely false and rubbish, as it turned out.

Sunday, July 5, 2009

Waiting for Monday

Hre is an email I received 2 days ago:
"... i am always been reader of your sites, i get lot of information from your analysis and many thanks to you for such a kind of valuable analysis. I have one doubt sir that i often hearing that market player operate nifty to move here and there and also taking contra trading postion during intraday. Is it really possible to move nifty as they like? If it so, there is no meaning of technical analysis, dow theory and so on so. If there weren't real bull and bear operation, there is no use talking about T.A. and fundamentals. I hope, could you give me a fine answer for my question?. "

My Notes: I do not think anyone person or fund can manipulate the Nifty if the sentiment is not in favor of the manipulator. This means, if a fund wishes to move up the Nifty, it may try to buy selected heavy weights, also buy futures in large volumes to give the impression of a new trend. But, if market sentiment is not in favor then the opposite trades will quickly come in and the effort is not likely to be successful. But, suppose the market is slowly getting bullish, then the fund buying will actually encourage more buyers to come in. We should not think of this move as manipulation, it is the effect of big money. That happens in all markets. Technical trading works well in markets with liquidity and participation.
It is far easier to manipulate small and mid caps. Specially in India where we have very lax moral values. I usually avoid this segment altogether.

Vinod Dhandapani has asked for my view on a Nifty Elliot Wave forceast in afraidtotrade.com . Corey suggests that the up move in the Nifty may be correction of the previous bear market. We are at a resistance point, from which we could decline to 2500. But, the analysis stands cancelled if the Nifty were to cross 5000 or so.

My Notes: Well, the Markets can do anything, can't they? Our job is to determine how we are going to respond to market moves. A number of analysts have forecast similar scenarios. But, ask yourself: how are you going to trade it? Trading this wave count requires you to keep a position trade (short) with a stop loss of 5000 aprox. The decision depends on the trader. There is no such thing as a 'painless' trade. I do not understand or use Elliot waves. A detailed answer follows in the next section.

Markets break out above 4400
Friday's breakout from a range is good enough sign for me to expect higher levels. The only reason I am not taking this as a confirmed breakout is the news event on Monday - the budget. If the markets rally after the budget, we should expect much higher levels as the rally comes after a trading range and subsequent breakout. If the markets fall, we are back inside the range.

Friday, July 3, 2009

Pre Budget Moves

Disclaimer: Only the Finance Minister knows what he is putting in the budget. As traders, we should try to manage expectations from big news events.
The ideal way to trade a news event is not to do anything. Sometimes (as in the election results) there is early warning of what the news might be.
In case of this budget (or any budget) that sense is not going to be available.
So we should try to set up a trade based on our own understanding of trading news events. It is all about trader perception. Will STT be abolished or 'tweaked' as some people are demanding on the TV? And, if it is 'tweaked' will it bring long term peace and prosperity to the country? I can answer this: STT is irrelevant to all but a few large local brokers (who should not be doing proprietory trading anyway).
My sense is: the budget may prove to be a non-event, as previous budgets are doing. Then, we are left to follow our charts. The reason why big news trading is difficult is due to volatility which occurs during announcements. The charts are telling us: the Nifty is poised for a big move, direction unknown. Why? The Index is in a narrow trading range between 4250 and 4400, for 12 trading days. An explosion is imminent.
A simple way to trade this is to buy 4300 calls and puts. Then, exit the losing leg next week. Or, buy 4400 calls and 4200 puts. But options should be preferred due to the increase intra day volatility.
I also regret that I could not give you a more tangible strategy for the budget: like saying buy xyz because the budget will give big concessions to the company. Perhaps other better informed people on Tv will tell us what exactly to do.

Have Fun!

Wednesday, July 1, 2009

Understanding different time frames

wildeazoscar refers to a chart showing a bullish head & shoulder in the Nifty, says "A bullish head and shoulder at the market top!! what does it indicate? i think we look for bearish reversals after a rally and bullish reversals after a fall.....please let me know if i am wrong."

The chart was for 60 minute Nifty. The time frame is different. In this smaller tme frame, the Nifty has seen a sharp decline from 4700 to 4200, therefore, the development of a bullish pattern after a decline is not surprising. There was a fall and then we had a bullish reversal pattern. While the larger time frame may see one bullish or bearish cycle, a lower time frame inside that cycle may actually see many bullish and bearish cycles. Day traders & swing traders should be aware fo these smaller cycles which are more relevant for their trading.

H&S confirmation
JSKservices says "Sir I was at the Inv Camp on Saturday. There you did mention that Inv H&S was confirmed. Actually the text books say that the confirmation comes when the prices move abt 1-3% from the neckline. In our "emotional" mkt 3% would be a good assumption for confirmation. Of course your note now is another great learning."

My Notes: Yes, Edwards and Maggie suggests a 3% move away from the neckline is confirmation of the pattern. But, we are looking at a 60 minute chart and the same percentage rules cannot apply on a lower time frame. 3% means almost 125 points, which is half way to he possible target! Then, how do we confirm? I simply take a close above the neckline. See, there is a trade-off between confirmation and early entry. Sometimes confirmation can be too late to enter.

men talks about 9 to 11 hour power cuts in Bangalore, the IT capital of India. In the last month, we had 4 to 6 hours of power cuts in Delhi with temperatures at 44 degreees C. The Ramcharitmanas says: "Whoever is king makes no difference to us. We will have the same days and the same nights."

Nail on the Head

Satya writes:

"This is your second post after 9 AM, Usually u wont post any updates after 9,Evening or late night or early morning u update your thoughts.What i feel is in these two posts You are influenced by ........"


I am not really influenced by TV. But yes, I think posting after 9 AM is not a good idea. A lot of blog posts written in late evening or early morning emerge out of contemplation / some thoughts, but the 9 AM ones are probably quickies (influenced by something or the other, I am unsure what). Thanks, Satya. I took your post in the right spirit.


We have to address three questions on the Market:


1. What is the intermediate trend ?

To me, the Intermediate trend is UP. It will change to down only if and when the Nifty trades below 4200.

2. If the trend is UP, are we going through a correction?

Yes, we are.

3. How do we know that the correction is over?

A pivot low was made on June 23. I assume that the correction is over because prices have moved away from the low.



Now, it is possible to view the markets in different ways, and, make money with each view point provided risk is managed properly. The Nifty is trading in a small range, with two pivots - Low on June 23, and High on June 29. Range trading is difficult in the best of times.



Bullish head and shoulder in the Nifty. Here is the futures chart.