Monday, August 31, 2009

In the Trading Range

Prices inside a trading range result in a frustrating exercise in getting our trades on the right side. Actually, inside the range, there is no right side, so we search for a trade that does not quite exist.
The Nifty remains inside a very narrow range between 4650 and 4740. Please see my earlier post where I had given an hourly chart for this pattern in the Nifty. Inspite of a fair amount of volatility, the Nifty did not close below 4650. So, how do we trade this pattern?

In comments, there are a number of suggestions, all of them valid. But, here I will explain what I plan to do.
An existing long position was stopped out when the hourly bar closed below 4680. Now, the next trade is a move out of the range. A move out of the range will be confirmed by a close beyond 4740 or below 4650. An early warning trade can be taken if the Nifty closes above 4710 - the previous resistance level which was taken out on Friday.

Sun Pharma triangle.
Viral writes - "With reference to the follow-up of Sun Pharma Triangular pattern breakout... from what I have read online, they say that the breakout should ideally occur between 2/3rd (66%) to 3/4th (75%) of the width of the triangluar pattern. If the breakout occurs near the apex, the breakout could be said to be "No so Effective" or may as well prove out to be a "False Breakout"In the case of Sun Pharma, the price movement seems to be stretching more towards the apex (85-95%). Do you feel such minor aspects are significant?"

My Notes: A breakout before the 2/3rd width is considered reliable since momentum is strong enough to push prices out of the pattern. If prices drift all the way to the apex (as in Sun Pharma) , then markets do not have conviction on any direction. A move out of the triangle may well be a failure, or become irrelevant. Viral has correctly pointed out this behavior of the triangle pattern. Thanks!
Now, I add some more ideas. If the breakout, even from the apex, comes with a large trend bar, heavy volume, then the breakout may well carry conviction.

Chart Patterns and Trading Ranges

Vinod asks:

"Is the pattern in Sun Pharma a Symmetrical Triangle? If yes how will you trade it now. It looks like a breakout is on the cards. what is the target."


Yes, the pattern does suggest a contracting triangle, ready to break out. I am giving the chart below. Trading tactics can vary: 1. buy now in anticipation. Keep a stop below the lower line. 2. Wait for breakout. Buy at breakout point - around 1240. 3. Buy after breakout, on a pullback. How you trade depends on your aptitude.



Trading Range in Nifty


On Thursday, in my post, I had identified a range in the Nifty, suggesting that a move out of the range will be tradeable. Shazia asks: "How to determine the boundaries within the contraction? The first breakout apparently looks on the upside.. 4730 was the upper boundary which was broken on friday."


I was tracking the range on 60 minute charts, which give finer support/reistance levels. The chart is given below. Notes on the chart are hopefully self explanatory.




Pi says, "Can you write a post on the post 4700 breakout. Technically we did see a 2009 high, but it didnt really seem like a strong breakout to me. Maybe we might have it on monday - or maybe not. Can you suggest, when we can say with confidence that we have a breakout (though with so many ppl anticipating i doubt it will happen). Or it might turn out to be a false breakout. How/when does one decide that the breakout was a false one and to distinguish any pullback from a deeper correction of the Mar-Aug bull run ?"


My Notes: A breakout is a breakout. The only way to challenge it is to wait for it to fail. Minor support comes at 4600, so a close below this level is required to suggest that the breakout may not be working. For short term traders, the levels may be different. Please see chart above.




Sunday, August 30, 2009

Better Safe than Sorry

As the stock markets continue to move up, here are some sobering thoughts from the blogosphere.

US Markets may be in risk as insiders sell in large numbers
Insider selling in the USA is reaching record levels, even as more speculators borrow to go long stocks.
Insider Selling in August Soars to 30.6 Times Insider Buying, Highest Level Since TrimTabs Began Tracking in 2004. NYSE Short Interest Plunges 10.3%, While Margin Debt Spikes 5.9%.
"The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon," said Charles Biderman, CEO of TrimTabs.

World stocks controlled by a select few

A recent analysis of the 2007 financial markets of 48 countries has revealed that the world’s finances are in the hands of just a few mutual funds, banks, and corporations. This is the first clear picture of the global concentration of financial power.

If you would look at this locally, it’s always distributed,” Glattfelder said. “If you then look at who is at the end of these links, you find that it’s the same guys, [which] is not something you’d expect from the local view.” (http://www.nakedcapitalism.com/)

Those who invest in China or ignore the consequence of very likely Chinese economic malaise do so at great peril.

Today, Chinese economic growth is the force pushing the global economy. The quality of this growth, however, is low as it is predicated on massive (forced) lending and thus unsustainable. As Chinese growth slows, China will turn from a wind into sails of global economy to its anchor. The impact will be felt in many, often unsuspected places.

It will tank the commodity markets, commodity producers and commodity exporting nations. Let’s take oil, for instance. As incremental demand from China collapses, oil prices will follow, taking the Russian economy with it, as Russia is for the most part a one-trick-petrochemical-pony. According to GavKal Research China accounts for 15% of Brazil’s exports (up from 1.5% a decade ago), significantly impacting the economy of that South American nation..

Demand for industrial goods will fall off the cliff. China consumed a lot of those goods - $550 billion worth annually (also according to GaveKal Research). So if Caterpillar expects to sell more of its yellow earthmovers to China, it will have put that thought on hold for awhile…..
Finally, Chinese appetite for our fine currency will diminish, driving the dollar lower against the renminbi and boosting our interest rates higher. No more 5% mortgages and 6% car loans.

Identifying bubbles is a lot easier than timing them. An astute observer could have seen the Japanese bubble developing in 1986, 1987 and 1988, but he would have been “wrong” until 1989….

Thursday, August 27, 2009

Signs of contraction

The Nifty moved up about 350 points before starting to pause near the 4700 resistance zone. For past two days, the Index has been in some kind of narrow range. I think of this narrow range as contraction.
Markets go through cycles of expansion and contraction. We saw the expansion when the Nifty made bullish bars, moving up from 4350. Now, we are probably in the contraction part of the momentum cycle. Yesterday, was an NR7 - the narrowest range in 7 days. Today's price action was also confined to a narrow range. Now, the contraction may last for a few more days or may quickly moe on to a big directional moe which will be the 'expansion' segment. Traders who are able to catch this big move, as and when it comes, will be able to enjoy a low risk, high probability trade.

It is not neccessary to determine the direction of the coming breakout. It is important to determine the boundaries within which prices remain in contraction. Any move out of these boundaries will be the first sign of expansion - the big move.

Bullish head and shoulder

A free ebook available at this link may be worth reading. http://www.foreximpact.com/disciplinedtrader


I am giving below the chart for Orchid Chemicals, with the inverted H&S marked out, as well as the target.


Wednesday, August 26, 2009

Day Trading with Bulls Eye

Bulls Eye Fun

Today, wednesday will be my third day in the Game Show, Bulls Eye, shown on CNBC.

I will try to explain the reasons for stocks selected on Monday and Tuesday.

Monday

Infosys - The markets are expected to open strong on Monday on the back of higher prices in the US markets. Infosys, has seen a small correcion, therefore qualifies as a buy on dips stock + outperform due to American gains.

SREI Infra
A deep correction in the stock may be over. Infrastructure remains flavor of the season.

Orchid Chem - This stock was also dsicussed in the 'Top 5 Picks' section in CNBC, in the previous week. A bullish head and shoulder pattern is on the verge of breakout.

Grasim - After strong rally, we saw a deep corrction. This seems to be complete with two days of sideways movements. The previous rally may resume.

Tuesday
Essar Oil - Remains inside a range after deep correcion, while CAIRN, ONGC have moved up. With crude seeing gains, a breakout from the range is possible.

Dolphin Offshore - Narrow sideways range near the highs in the chart suggests consolidaiton before strong breakout to new highs. And, of course, 'Offshore' is the magic word.

GE Shipping - Inside a trading range, may breakout keeping in mind the upbeat markets.

Welspun Gujrat - A trading range at the top of the chart has a bullish head and shoulder pattern. May outperform the broad market.

Targets:My targets were set for small modest gains, as a day trader was likely to do. In real trading, profits are taken in segments, or trailed, with some quantity left to ride the bigger trend. But, in the game show this is not possible.

Avoid:I decided to avoid the 5% circuit stocks. You name them and they hit a circuit early morning. While these qualify as gains for the show, viewers cannot actually buy them. So, I decided to avoid such stocks, and keep to the spirit of the game.

Basic Theme: The underlying theme is - stocks that are in an uptrend but seeing a dip, OR, stocks that are in a trading range with signs of bullish breakouts.

If you have questions, please post them in comments.
Cheers!

Tuesday, August 25, 2009

Trading Range Resistance

In earlier posts, I have explained the nature of the trading range. When prices hit support and begin movin up, there is a sense of euphoria ("this is it!'). Soon enough, prices touch resistance, stall and begin a decline. The sentiment quickly turns to pessimism. These alternating bouts of euphoria and pessimism continue till the trading range holds prices.

My point is: the up move or the down move inside the range are just that - small price movements. The only way to determine the direction of the breakout is to actually wait for the breakout / breakdown to take place.

The Nifty moved out of a narrow trading range between 4380 and 4500. The targets for this range were 4620 on the upside which were exceeded yesterday. Now, the larger range remains with resistance at 4730 and support at 4350. A move above 4730 will tell us that the Nifty may be ready for another 400 point of gains. In the same way, a break below 4350 gives us a downside target of 3980 or so.

Markets move through a cycle of contraction and expansion. We just saw a small expansion in the Nifty over the last 2 days. We may well see a day or two of contraction, which means random . narrow range movements.

BullsEye - the Game
I am participating in this stock market show on CNBC. The idea is to maintain a portfolio of four stocks (long or short) with at least two stocks o be shuffled every day. The show started on Monday and runs for five days, ending on Friday.
In comments, Men wote: "Mr. Sudarshan, it is good to see you play the game on cnbc, all the best, I will personally be tracking YOU."
That's fine. But readers should understand that this is a game, and enjoy it as such.

Monday, August 24, 2009

India and China

Bloomberg has an article on the Chinese stock market bubble, here . China, it says is trading at 31.7 times reported earnings, while the USA trades at 18.9 for the S&P 500. As per the NSE website, the Nifty is trading at 20.31 times reported earnings.

When we view the charts alone, we find that India has recouped more of the bear market losses as compared to the Chinese market. Yet, India remains less expensive. This tells us that the 2007 top in China was in fact a bubble. The other side is: Indian stocks have the potential to rally more before they enter a 'bubble' stage.

The trend is up. The current price pattern is that of a consolidation. In my earlier post written on Sunday, I mentioned a pattern target of 5110. Here is the complete post:

The Nifty finally moved out of three day trading zone, by moving above 4500 to close at 4528. Moves out of the trading range should be respected. The minimum target for the up move is 4590, but a more likely scenario can see the Nifty go to 4620 where it faced resistance earlier on.
Earlier, we were discussing a large trading range for the Nifty, between 3930 and 4730. Now, with new price bars coming in, it is apparent that 4350 has developed as strong support. The range, can now be defined as 4350 to 4730. A breakout from this range gives an upside target of 5110, a number that seems possible, given euphoric market conditions. The summary is to trade on the long side, until 4350 is broken, or new support levels develop.

Sunday, August 23, 2009

Do not write a Book!

Men and women of letters, be warned. Do not write a book. Shed all pretensions of being an author!
The BJP has expelled Mr Jaswant Singh for writing a book on MA Jinnah. The book was against the core values of the BJP, says its spokeperson.
What are the core values? Here is a list:
1. Elections are horrible. All elected persons are nominated. Those who were actually elected (lIke Vasundhara Raje) must be removed because they enjoy majority support in the party.
2. There is responsibility without accountability. If the President and the LOP lose elections, that is fine. No reason to take blame.
3. Nature's law of old order giving way to the new, does not apply to the leadership. RNS is quoted in the Times of India as saying "Why 5 years, why not 50 or 100 years"? This was in response to a question if LKA will remain LOP for 5 years. So the succession in the BJP is settled, LKA as LOP for next 100 years.

I feel betrayed. Having given unstinted support to the BJP since my voting age, I find that these people have feet of clay, probably worse than the Congress leaders. Is it so difficult to be just and honest?

To paraphrase a saying "Hell hath no fury than the faithful scorned".

Breakout from 4500 resistance

The Nifty finally moved out of three day trading zone, by moving above 4500 to close at 4528. Moves out of the trading range should be respected. The minimum target for the up move is 4590, but a more likely scenario can see the Nifty go to 4620 where it faced resistance earlier on.

Earlier, we were discussing a large trading range for the Nifty, between 3930 and 4730. Now, with new price bars coming in, it is apparent that 4350 has developed as strong support. The range, can now be defined as 4350 to 4730. A breakout from this range gives an upside target of 5110, a number that seems possible, given euphoric market conditions. The summary is to trade on the long side, until 4350 is broken, or new support levels develop.

Thursday, August 20, 2009

Narrow Range ready for big move

For the past three days, the Nifty has compressed its action between a range - 4500 to 4380. This is good news, because such a narrow range is not likely to be sustained. Therefore, a breakout / breakdown is imminent. What will be the direction? Why not let the market tell us this.
wildeazoscar writes in comments - "And what is the big move target if 4730 is broken on upside? At least an amount equivalent of the trading range? That should guarantee 5660 at least!!"
Here is a valid point, and the I have thought about it, without reaching a conclusion. The Nifty is in a large trading zone between 3930 - 4730 approximately. A breakout should see an 800 point move (width of the trading range) which gives 5530. On the downside we have a target of 3130. For most of us, 3130 is easier to accept since we did see these levels just six months ago, but 5530?
Well, among numerous posibilities - (1) The upside target is reached in many months, with lot of volatility, (2) The target is not touched at all, (3) The Nifty creates the mother of all bubbles, taking itself to 7200 (target for the inverted head and shoulderwhich gets confirmed around 4760).
For 3930 to breakdown, we will enter a bear market. Why not? If the two reliance siblings keep on fighting, the Govt could one day announce gas a a national resource (put the gas under govt control) and that will bring the market down to 3100.

So, take one step at a time. Currently, we are looking at a narrow range. That breakout / breakdown will give a trending move.

Wednesday, August 19, 2009

slowly, the tone changes

While 'Experts' in India keep on harping at the 'golden age' of capital markets soon to come in, the tone of commentaries coming from the USA is changing.
Ft.com. reports Gluskin Sheff economist, David Rosenberg as saying "…all we see is more evidence of a revenue-less recovery". And, "despite the government stimulus, the economy is going to be limping along for a prolonged period of time as savings rates rise and debt ratios decline. "

My suggestion is: the trading range seen in the Nifty tells us that smart money is not sure of the market direction. Once they get a sense of what may happen, the range will break, on the upside or the downside. That is where the big trend will come in.

Monday, August 17, 2009

Trading Range Blues

Ft.com has this to say on the China recovery miracle:
The laws of economics appear to be suspended for the Chinese — but they are not. They just have “better” accountants — ones that would make Enron’s bean counters seem like dilettantes.
And...
But recently they(commodities) had a serious rebound on the hopes that Chinese economic growth would result in revival of demand for their goods. However, the fictional growth coming out of China is putting that hope to rest. If you own these stocks, you’ve been warned.

Well, that is frank opinion. At least for the past few days, the Chinese markets have also agreed to this viewpoint, falling 17.5%.

Compared to China, India may be a bubble
The Shanghai Index peaked out at 6124. It now trades at 2870. The Index is standing at 46.8% of the all time high. The Nifty had its all time high at 6357, now closed at 4387, is standing at 69.01% of the all time highs - much better Shanghai. Of course, such analysis may be too simplistic, but it does appear that the Nifty may be in for a sharp decline if world markets continue to fall.

But the main point is that the Nifty continues to be in a trading range. Such ranges will see alternate bouts of optimism and pessimism. When price are moving from support to resistance, things seems fine. When they begin moving back to support, a lot of pessimism comes in. While the Nifty remains inside this range, the market movement will alo appear volatile as the Index gets pushed between support and resistance. The big move will come when there is a range breakout.

Wednesday, August 12, 2009

The Market Direction

As the Nifty goes through a correction of the uptrend, a serious question comes to mind: Are we in a bull market or was the upmove (from 2200 to 4700) a correction in an ongoing bear market?

The bear market, for me, ended at 2200 where the Nifty made a final low. Of course, we did not know then that the down move is over. But, as the Nifty started edging up, breaking out of one resistance or the other, we were buying the breakouts.

A bull market starts with a lot of base building. This has not happened with the current rally which took off in a V shaped upswing. I do not classify the uptrend as a long term bull market. I am just calling it an uptrend. The naming of the market waves helps because it allows focus on the direction of trading.

As I write today, the Nifty is in a trading range. We can define the range in different ways. The largest, safest is the band between 3900 to 4730. A trending move may come in only above 4730 and below 3900. Inside the range, we will have to watch the shorter term trend to get trading setups. Being inside a range is frustrating. But, the market does what it wants. It does not give us profits on demand. We have to adjust our strategies to the Market's current behavior.

Cheers!

Monday, August 10, 2009

The Market does what it wants

Ignoring the US markets, our own Nifty refused to go up. Nifty futures finally closed the day below 4400. The market has seen three days of lower lows. If this is a dip, then three lower lows is the most a market should see. Then, tomorrow, tuesday should break the pattern of lower lows by either making a higher low, or, higher high or inside day, or bullish reversal day. Now, this is of course, not a rule, but an expectation. If we have a fourth day of losses, then the dip may lead to a deeper correction.

Whatever happens, one aspect of the market is visible: the Nifty is in a trading range between 4700 and 4100, roughly.

Monday Morning

By the time you read this, Friday's decline will be history. The American markets moved up sharply, while the SGX Nifty is trading 100 points higher. All is well with the world. Paul Krugman, Economics noble prize winner, (often quoted in this blog) says that Obama's stimulus is working and the USA may be on the path to recovery.

What next for the markets? In India, we are faced with the prospects of an uncertain monsoon. Therefore, it is possible that the euphoria seen in the American markets (S&P is up 16% in one month) may remain absent in India. The 4700 - 4760 levels remains strong resistance.

The most reasonable scenario is for the Nifty to remain in some kind of a range It is too early to determine what the boundaries of the range will be.

Economic Times news on algorithmic trading

Well, computers are used to execute trades with lightning speed, mainly aribtrage. In the USA, the SEC is planning to restrain large brokerages from using high speed computers since this gives them an unfair advantage (the brokerages are also allowed few seconds of lead time when they can examine pending orders before the public). ALl this is done in the interests of providing liquidity to the markets. It certainly benefts the large proprietory trading brokerages.

There are two issues here.
First, the computers are best at arbitrage. The trader will not be able to compete with the machines in this area. But, the possibilities of arbitrage will come down as computers from different brokerages fight for the same trades. So the independent trader should not be concerned about this kind of computer trading. There will very little left to share, anyway.

Second, the best computers are still not a substitute for the human brain. So, practise your art. Traders will continue to survive and make money.

Thursday, August 6, 2009

The yellow metal

Junaid asks:
"Is GOLD again headed to break $1000.?"
My Notes:

Gold is in a large symmetrical triangle. This means: the trend is uncertain, as the metal decides on its next direction. The good news is that a trending move should be available if and when prices move out of the triangle.
I am giving a Gold continuous futures chart here. There is a pattern of higher lows in the near term. A position trader, who wishes to take an early position can buy at current levels and keep a stop below Low2 which is around $927. This is much simpler than trying to forecast where the eventual breakout will be.


Tuesday, August 4, 2009

The bull roars like a lion

This is my second post for the day. The earlier post can be read at trading-for-living .
Our markets are roaring like a lion. A significant resistance level around 4760 is now coming up for inspection. It is reasonable to assume that a breakout from this resistance will signal confirmation of the large bullish head and shoulder pattern visible on the weekly nifty chart (or, cup and handle, if you view it that way).

With such strong upside momentum, short selling is not a good idea. Traders should also understand that markets are extended. Sudden sharp declines can take place anytime. I do not know if selling such declines will work. but protecting your long positions is neccessary.

Tuesday, today, may well see the Nifty make a short term top.

Cheers!

Trading for a living

There is a lot of interesting feedback on my ideas on 'the perfect trader'.
@nubhut! says:
"if i were to set aside three lac and trade four lots of nifty(about 60% capital deployed and rest to cater for drawdowns/M to M adjustment) as per a mechanical trading system(e.g trade vinayak), am i not likely to get about 1200 nifty pts in a year (which ur system is likely to get as per the results so far). after paying subscription of 90 thousand for the year, i still get about 1.5 lac . now that is 50% return "

My Notes: your arithmetic is correct and practical. This will work only if you allocate a part of your funds to this method. Which means Rs 3 lakhs is spare money. Overleverage will cause psychological setbacks during periods of drawdowns. Since the returns come with risk, you must remain conservative in capital allocation. In my post, I was being conservative with returns.

Ankush said: "There is nothing like spare money in this world. You cannot spare the money and feel that did not exist. "

My Notes: Fair enough. I meant money which can be used for risk taking activities. This means you do not need this money for your day to day expenses. If you are running a business, then the working capital is NOT spare money. If you have an Fixed Deposit and the interest is reinvested (you do not need it) that may well be spare money.

student of the market said "while I agree with the note of caution in the initial years, how can one trade with spare money if one is trading for a living? Or do you not recommend trading as a living? "

My Notes: Of course, I recommend trading for a living. When you become a full time trader, you have asset allocation. Part of your funds are in trading. Assuming that the bulk of your funds are in trading, then you have become wise and experienced and undertand the risks of overtrading / leverage. [I am worried when I write this, because all readers will think they are wise and experienced!].

Saturday, August 1, 2009

The Perfect Investor

I should point out that the perfect investor does not exist. Investors and traders must face volatility, drawdowns, flat periods in their trading/investing. The perfect investor will adjust to each of the adversities with agility, adapating quickly to new surroundings. But, the relity is likely to be different.

A lot of investing/trading performance has to do with management of expectations. We base our expectations of returns on previous history.

Returns on the Nifty
Let us assume that the perfect investor bought the Nifty right at the bear market low of 850 in September 2001. Almost 8 years later, the investor is looking at Nifty 4650, a gain of 3800 points, giving a return of 26.7% compounded annually. This is when the purchase was made at the absolute low.
Now, 26.7% is better, much better than interest on bank FD's.

If the Nifty were to continue growing at this rate (26.7%), after another 8 years, the Index will stand at 30879 (This is the Nifty, not the Sensex!). This is also the magic of compounding. This also assumes that you are not taking any money out of the profits, everything is getting compounded.

Here are some thoughts for us:
1. What are our expectations from investing? 26.7% per annum or more?
2. Are we compounding our gains?
3. Will the next 8 years see the same kind of gains as the past 8 years. In 2001 we started off with a low base. In 2009, we start off with the 'India Story'.

Personal experiences
I receive many visitors who wish to trade. I talk with them, trying to find out their reasons for trading. In most cases, it is the urge to make 'easy and quick money'. Often, they really need the money. My advice is: if you have a passion for trading, then trade small to get the required experience. For your monetary needs, please do not expect trading to meet them.

And expectations? Someone invests Rs three lakhs and wishes to meet the monthly expenses of Rs 25,000. This is really 100 % return per annum!

I always explain that trading is not meant for them. Many people listen, but many others go away to get the services of someone else. For those who insist on trading, the end result is always a substantial loss of capital.

Trading must be done always with spare money which is not needed by the trader to meet his regular expenses.In the initial years, there is a learning process so there should be no expectations.