Wednesday, September 30, 2009

Trend Channel for the Nifty

The recent up move for the Nifty fits a trend channel well. The Nifty chart below shows the channel as well as the A & B points from which the lower trendline has been made.

Futures Trading with Channels
A move below the lower trend line will be a signal tht the current up move is facing a correction or whatever. This is simple technical analysis, but effective.

If we follow this method, then we are unlikely to sell at the very top. Prices will have to come down about 150 points before a down move is signalled. Now, think about this: is this so terrible? In an uptrend, do you really want to goshort every time the Nifty moves down just a little bit?

As I write, U.S. markets are down. It is possible that this weakness can continue till the close, and, may then affect the Indian markets tomorrow. If you are a day / swing trader, you may like to use the 15 minute rule to go short in the Nifty. You should also keep some rules with you on the short term trend. What will signal a change in the trend from up to down? I have given one rule here - the channel. You must have some method of your own. So far the short term trend is up, short positions carry high risk, so keep volumes down, and follow your stops.

inside a trading range

The Nifty has this tendency to go through a big move (range expansion) and then huddle inside a range for many days. This is the cycle of expansion and contraction. The trading range represents contraction.

Currently, we are inside a trading range after the up move from 4800 to 5000. Now, the trend is up. Then, the trader assumes that the move out of this range will be on the upside. Remember this is a probability since prices should continue with the trend after a consolidation. For this reason, I do not suggest going short while we remain inside a range, not in my letter to clients, and, not on TV.

What is the next step for the Nifty?
The range is pretty narrow, 4950 - 5020 approx.
(1) The Nifty closes above 5020, and continues its up thrust. Fine.
(2) The Nifty decides to go fo a correction, closes below 4950. Most traders should simply close long positions and wait it out. Professional traders can try to catch the downside, understanding that this is a correction. But then, you never know!
(3) The problem comes on a fakeout. If the Nifty close above 5020, then declines to finally move down, the trader is left holding a loss. Pity, but that's the way it is.

Technicals and Fundamentals

Shazia asks if we should ignore fundamentals altogether. My answer would be: yes. For trading, do not even think about what the fundamental news flow is saying. But, I use the fundamentals to filter a list of stocks to invest or trade. When we make a list of stocks for position trading, we check their earnings. If the company has not earned during the latest quarter, we discard it. Our position trades last for a couple of weeks, yet, I do require that we start with essentially profitable companies. The information is available at the NSE and BSE web sites - that is enough.

Tuesday, September 29, 2009

Reserve Bank of India is the best

Marc Faber in an interview with Bloomberg says that the Reseve Bank of India is probably the best central bank in the world.

You can watch the intervew here (in the first part)

Mr Faber also predicts the collapse of capitalism. I assume, that India will also be affected, but much less, thanks to superior policy making by the RBI.


The CrossHair Trader blog says:

"No matter how good your analysis, no matter how perfect your set-up or pattern may be, no matter how many others may agree with your analysis, and no matter how many wins in a row you have had, once you enter a trade anything can happen. In fact, you should be surprised every time you make money!”

Ed Seykota Quotes

Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.

To avoid whipsaw losses, stop trading.

Risk no more than you can afford to lose and also risk enough so that a win is meaningful.

Trend following is an exercise in observing and responding to the ever-present moment of now.

Fundamentalists and anticipators may have difficulties with risk control because a trade keeps looking ‘better’ the more it goes against them.

Until you master the basic literature and spend some time with successful traders, you might consider confining your trading to the supermarket.

I don’t predict a nonexisting future.

It can be very expensive to try to convince the markets you are right.

Sunday, September 27, 2009

Wave counts for the Nifty

Nirav had sent a chart for the Nifty which shows his preferred wave count.
[edited: the chart removed, comments abidged to make this easier to understand]

His up waves start from the July lows made at 3915 approx.
His comments are given below:

As shown in the chart the 3rd wave target can be as follows;
There are many possibilities which are as follows;
If 3rd wave is 100% of 1st wave i.e. 100% of 813 = 813. There for target will be 4353+813=5166.
Now, if we take 1st possibly of above mentioned. Then if we consider 4th wave is 38.2% of 1st wave i.e. 310. Then its target will be 5166-310=4856.
And after this 5th wave targets can be as follows;
If 5th wave is 61.8% of 1st wave i.e. 61.8% of 813=502. There for target will be 4856+502=5358.
If it is 100% then target will be 4856+813=5669. And so on….

Nirav wrote in an email to me:

"I regularly follows your blog and getting benefit of it.

I have tried to forecast Nifty with Elliott Wave Theory. This may or may not be possible wave. I am sending you this forecasted sheet with this mail. Kindly find the attached file and please go through it. And please let me know whether it is correct or not? "

My Notes:

I am responding to him on the blog since I felt that the issues will be of interest to many readers.

Nirav has started his wave counts from the low made at 3915 in July. This is sensible since the more recent price movements are likely to give better forecasting results. Something that happened in July 09 is likely to be more relevant in Sept 09 as compared to a price event that took place, say, one year earlier.

Once the start of the wave counts is accepted, then the counts themselves become easy to identify, and, these have been properly selected in his chart.

Now comes the difficult part: How do you trade this?

The minimum target for the 3rd wave is 5166 while the Nifty is currently at 4965 approx.

Do you assume that you are in an ongoing wave 3 UP? If so, what is your stop?

My answer is: Yes, assume that this wave 3 is continuing. The point at which this assumption will be proved wrong is 4700 when the Nifty moves below the wave 1 high. Such wide stops are relevant to position tarders, but swing traders must identify other stops.

The big trade will come when the Nifty corrects to wave 4. Then, we can assume that another wave 5 move may come which should be a fairly large move.

Readers may like to share their ideas on how to trade this wave count, if you broadly agree with it.

Saturday, September 26, 2009

Conversations Sept 26

Shazia says:
"In todays blog you are of the view that a small correction may have started, but on tv you were reluctant to go short at the end of the day. I was short on the markets but i hurriedly covered after your comments. "

My Notes: I do feel that we may be looking at a small correction. But a correction is a move against the main trend, which should be left alone.
First, We have enough evidence to suggest that this is a strong up trend. So, going short is trying to go against the trend.
Second, the Nifty has a consistent pattern of a range expansion, then a series of consolidating bars. The minor weakness may infact be part of the consolidation. Not easy to trade!
Third, we are seeing a holiday on Monday. So, we have two days in which international markets will influence us without our response. Who knows how the markets may open on Tuesday morning. I said on TV "The best approach is to go flat. But, if you want a trade, you should be long, since the trend remains up".

Now, I have explained the reasons for my view. I also have a suggestion. When you take a trade, have a clear view. Write down these ideas on paper also - (a) Identify the reason for the trade, (b) A Stop Loss, (c) A profit target or trailing stop mechanism (d) The point at which you accept that the trade is not working even if the stop did not hit. (e) Number of shares / contracts that you will hold. Keep in mind that your loss on a single trade should not be more than x% of your capital (you decide the x%) (f) maintain a trading journal in which you write every evening, without fail.

Once you follow these ideas with discipline, you will realize that you will never react to any talk on TV. That will be the 'A-ha' moment for you.

Nitin Damle asks:
"I think short term tone of mkt. is down we will see a correction up to atleast 4850. Can we go short with stop @ 5040 spot nifty?'

My Notes: I assume you are following some technical method that has given you a short signal. If this is so, go ahead and follow the signal. For traders who are / wish to go short, above 5040 is the correct stop since above this level, the Nifty begins to make new multi month highs again.

Thursday, September 24, 2009

Using Options in Trend Following Systems

Aurobindo asks:

"How can we reduce the risk using options in a trend following system. As price reaches certain moving average we see a change in direction. But before this change there are few whipsaws. Can we effectively reduce the risk by using a combination of options and futures?

I googled a lot found few but nothing partticularly on trend-following-system + options.

Could you please share some strategies involving options in trend following system to reduce risk?"

My Notes: The use of options in trend following systems has many advantages:
(1) If the system enters a strong trend, then the option will make almost as much money as the underlying, since the option will achieve a delta of 1.
(2) If the trade is getting whipsawed, the options will lose a less money since the price decay in options will be less than the underlying.

I used the idea of using options as a substitute for the underlying, in an hourly trading system for the Nifty. When the system gives a buy signal, we buy calls which are one strike deep in the money. When the system gives a sell signal, we buy puts one strike deep (and sell any calls we were holding). Here are my observations:

(a) The impact of implied volatility on such a trading system was more than we imagined. When we are buying, the trend is moving up, with the call options priced higher. We are buying puts when the trend is moving down, thus puts are price higher. At that point, if we sell the calls, we will get a lower IV, and, much lower prices than when we bought them. Thus, the gains in periods of whipsaws were much less than we thought we will get.

(b) When we found a trend, the options lost I.V. quickly, as the strike prices moved deep in the money. So, we lost a lot of premium value which we had paid for.

In conclusion, the use of options was not a success. Now, this was an hourly trading system. Perhaps, an end of day system may have different results. But, then, the issues will be of shifting from one month to the other, which could face similar problems. It may be wise to paper trade a system with actual bid and ask spreads used to take the paper trades.

More on the Powergrid trade:
I identified the basic pattern for the trade. Entry was done using intra day charts, which sometimes allow us to get an early entry prior to a breakout.

A small correction may have started. Today's late afternoon pullback, could be the result of the F&O expiry. Our cycle indicators suggest that prices should move down.

Wednesday, September 23, 2009

'Liquidity' sell offs can be brisk

In my newsletter to our clients, as well as on CNBC, I have emphasized many times that this stage of the rally is all about momentum. We should not give attach any fundamental reason to the market's current strength. It is just the same old story of fear and greed. Past evidence would suggest in a market driven by notions of "liquidity"; sell offs can be rather brisk.

This is not to suggest that a sell-off is coming. But from this perspective, risk is rising. For this reason, Investment money should wait for a market correction. Investors who wish to participate in this rally should do so as traders. A trader will always keep a stop loss allowing him to take the least risk possible. An Investors puts his money on themes, has either a wide stop or does not have an exit strategy until the theme changes. For this reason, investing should always be done on dips to ensure the least damage if the theme changes.

How much time do you spend in searching for buy and sell calls? How much time do you spend in learning the tools of the trade?

Here is what you should do:

Give me six hours to chop down a tree and I will spend the first four sharpening the axe.~Abraham Lincoln

ORCHID chemicals may have reached at least a short term price target. The chart below explains why I think so.

I am giving a chart for Powergrid which explains how I search for swing trades. The tradng range is my favorite pattern! Questions on the chart are welcome. Since trading styles can and will be different, comments with criticsm will not be welcome.

Tuesday, September 22, 2009

3500 seems far away

Sunil asks: "Cud u pl help me in confirming my view that whatever was a major resistance, will prove to be major support once the resistance is crossed."

My Notes: Yes. Once resistance is crossed, that zone will act as support. In fact, if the resistance was strong, then it will act as strong support, maybe years later!

A poll was taken on : WIll the Nifty touch 3500 again? My vote was: Yes, but I cannot say when. This is in corfirmity with my view that we can forecast time or price but not both. I think 3500 is possible, but when ? I cannot say.

There was a comment about narrow ranges in the Nifty. Devesh compares the current low volatility period to that in Feb-March. Will we see a big move soon?

My Notes: Yes, quite possible. We have narrow daily ranges, low volatility, low implied volatility - all of this is a setup for a big thrusting move (just like April-May). Now comes the question: will this move be up or will it be down? That's a question only the market will answer. I wish to explain that as traders, we must have an open mind. Suppose, the move is on the upside. If this happens, do not fight the market. Do not say "No, No. The market cannot go up now". We do not decide what the market wants to do. We simply try to follow the market. I make this point for the upside, since the poll says that we are all prepared for a big down move, so that will not be a surprise.

Rakesh feels that technical analysis may not be working since "From the past few months i am seeing that in spite of negative divergences and topping out signals from various indicators the index is making new highs and those technical analysts are being caught on the wrong foot."

My Notes: Most technical analysis will face problems (losses) at some time or the other because the market may not move according to their analysis. This dos not mean that TA does not work. It does. Also, most liquid markts, including India are too large to be consistently manipulated. Finally, a note about divergences. A divergence is just an early warning that a top may be coming. It is never taken as an independent signal. Never!

The Mat Hold candle pattern attracts the attention of Viral. The pattern consists of a long white candle, then three black candles which result in a shallow retracement. IDFC was making such a pattern. Viral has some detailed queries on how to confirm this pattern.

My Notes: I do not track or trade this pattern so my answer is generic rather than specific to this pattern. After three down days, if the fourth day (a) is a white candle, (b) closes in the top 75% of the day's range, (c) closes above the previous close, I would take this as confirmation of the pattern. Yes, higher levels should come. Think of this pattern as a flag on a lower time fram chart, i.e. 60 minute.

Sunday, September 20, 2009

Market Sentiment Indicator Sept 20

A poll for Nifty forecasts has now closed. There were 259 votes. The question was :
Will the Nifty see 3500 again?
Poll results:
Yes, in the next one year. 36%
No, but 4200 is possible. 37%
No, never. 6%
Yes, but I cannot say when. 19%

Market Sentiment is used as a contrary indicator. When more people are bearish at the bottom, this may well be a sign of a recovery in prices. When more people are bullish at the top, this could be a sign of a decline.
Here, we have a majority of the participants looking for lower levels, when the market is at 15 month highs.
There is also a question about the nature of participation. 'The public is always wrong at the top or bottom.' - this is the theory of market sentiment. But, the people who read this blog may not represent the retail 'public'. They are likely to be professional traders, skilled investors, new entrants in technical trading, - perhaps not repersenting the 'public'.

Therefore, these numbers will be useful after we do a few months of collecting the sentiment weekly. Then we will begin to find if there is any kind of direct or inverse correlation between these numbers and the future market movement.

Saturday, September 19, 2009

Forecasts for the Nifty

The two forecasts came in the comments section. Thanks for sharing.

Danish says:

"I think this is the first wave of the larger up-move, if we go by the price behavior. Also, we are in the fifth wave of that first wave and chances are again that the fifth wave will fail rather than completing its logical target because time-wise we are already there. Also, major world markets are running out of steam but I don't know whether that will have any impact on Indian markets or not. But once the correction starts, it won't end soon."

Kapil Gupta (Kaps) says

My Elliot wave counts are different. And my calculation says that we are undergoing A-B-C irregular flat correction since june12,09.The ensuing C-wave of the correction should take the nifty to 3500-3600 by around this Diwali.After this should begin the 3rd wave of the uptrend (weekly basis) for nifty for possible target of 5500-6000 by january.Please give yr comments.Regards

Just to complete this forecast, let me refer to Charles Nenner.

I watched Mr Nenner's interview with CNBC America in Feb 2009. He was saying the the S&P is bottoming out and we will see a rally that will take the S&P to 1000 in just a few months. At that time, the index was around 700, pessimism was around us, so this forecast sounded like fantasy. Then Feb came and went, no rally. The bottom was made in first week march, and the subsequent rally did take the S&P above 1000.

Mr Nenner again appeared on CNBC America on Sept 9. He said "The market is following the 1937 bear market when there was a similar rally. The U.S. market will top out in mid October after which the previous lows will be revisited. Gold will continue its up move, top out by Feb 2010.". That's it.

My Notes: Given below is a chart for the Nifty wave count starting from March. I feel that the October 2008 start fits the wave counts better. Have a look. Meanwhile, please remember that we are at 15 month highs. I have two points. (a) The 10% gains of the past 10 days are unsustainable. We will see a consolidation or dip as the Market removes this excess. Such markets are difficult to trade. But staying with the trend (up) should help. A close below the lows of the last 2 days - 4931 will be required to change the short term trend to down. (b) A correction of the entire up move from 2200 to 5000+ will surely come. We do not know when.

Friday, September 18, 2009

Conversations - Weekend Sept 18

The post title is elaborate since I tought I will use the basic heading 'Conversations' for future dialogs also.

Re: Wave Counts given for the Nifty

B.M. Kajaria says:
The elliot wave principles applied by you are not correct. So please first follow the right principles while drawing the wave pattern/trend line in the nifty chart. They are as follows.
1. Wave 2 cannot retrace more than 100 percent of wave 1.
2. Of waves 1, 3 and 5, wave 3 can never be the shortest.
3. Wave 4 can never end in the price territory of wave 1.

My Notes: I think I have followed these basic rules. In fact, these are the only three rules I follow when trying to identify a wave count. Please tell me where I have gone wrong. Please note that my chart is titled wave counts and not "Elliot wave....". This enables me to define a five wave count without getting caught in the web of Elliot wave rules (apologies to all Elliot enthusiasts!)

More from B.M. Kajaria:
In the chart the wave 1 and 2 that you are showing is the consolidating area of the nifty where it is building base from where a new wave starts only on 9th of march 2009 as per my opinion.

My Notes: You suggest an alternate wave count which will be equally valid. Shazia makes the same point "I think the point where the count should start is from March low.". I will put up a chart with the start in March 2009. (later today)

Shazia also asks: "what is your opinion on the poll you have published, kindly let us know your opinion also."

My Notes: The votes are surely a secret. I will of course share the results in this blog. Slowly, we could develop a sentiment indicator here. I hope so.

Viral Rajnikant Dholakia asks "Do u subscribe to the view that the Technical Gap left on the charts Post-Elecetion Rally needs to be Covered-up by markets sooner or later?"

My Notes: I am not a fan of "gaps will always be filled'. So, I do not subscribe to this view. But, I always believe that markets will revert back to their mean, excesses will be purged from the market. In that view, the retracement of the up move from 2200 to 5000+ could easily see the Nifty back to 3500, which, as a coincidence will fill up the gap.

The reason I do not subscribe to this view is my firm belief that the Markets can do anything. If this is so, Markets can then fill a gap, or, not fill a gap, or whatever else. I am wary of any rule that says "this has to happen". Who decided that? It also means , while a reversion to the mean is expected, who knows what will actually happen.

Zia asks: "sir why you choose 3500"

When you look at the Nifty weekly chart, you will see a lot of activity around 3500- (a) when it was going up in 2006 - 2007, (b) when it was coming down in 2008, and, (c) when it rallied again. I rounded off that zone to 3500.

Danish Kapoor says " don't agree with the wave counts. Although, we are near the top but these wave counts are not according to the rules of Elliot Wave or Neo Wave. The wave labelled 2 should be wave 5 of the correction which started in Jan 2008. It was wave 5 failure that ended above the low of wave 3."

My Notes: This is probably the correct / classical Elliot wave count. Does this mean the current up move is an A-B-C, or the first wave of a larger up wave. I hope you share your views on this. I do not go for classical elliot wave counts, since they rely too much on the past and the future, while I like to focus on the present.

Danish concludes wisely "All said and done, it is really how one manages the trade rather than counting the waves."

Well said. If there is one lesson in this post, this is it.


men says if the Nikkei could fall from 40000 to 10000 why should not the Nifty do so?
My Notes: One simple reason is that the Nifty is not at the bubble stage where the Nikkei was. Second, my point is: we almost did so last year. So, we have done our bit.

We have seen a 10 percent rally in the last 10 days. Such momentum is not sustainable. The Nifty should either consolidate or dip.

Thursday, September 17, 2009

Wave Counts for the Nifty

Here is a chart showing a possible wave count for the Nifty from Otober 2008 when the lows were made. We may be in the fifth wave of the up move - the last wave. But, where will it end? The targets are shown on the right, with black lines and the label - wave 5.

Which target will be met? We do not know in advance. When the Nifty starts rolling over, and begins to make lower lows / lower highs (preferably at one of these levels), then the first indication will come that the fifth wave targets may have been met.

Your views are welcome.

Added soon after: I have set up a poll (see the right column). Please participate since it gives everyone an idea of current opinion. I will publish the results after the poll finishes on Saturday, 9 AM.

Trading is Probability

An interesting comment comes from GUNTAS:


My Notes: The question is: "(Your) Analysis is More a Fluke". GUNTAS will be surprised to know that the answer is almost "YES". But, the term used is not 'fluke', but probabiity. All trading is based on probability. The trader who understands this concept has crossed the river of ignorance.
The Technical Approach, regretfully, does not have the Holy Grail. Neither does the fundamental approach, or anything else in life. The concept of probability runs like this: We base our analysis on sensible rules. Then we follow our rules. We are more right then wrong. What saves us is our acceptance that we will be wrong. When the trader realizes he is on the wrong side of the market, he exits quickly with small losses.

Ravi Chandra asked this question a few days ago:

"As for my question... do you think hedging is a good idea, specially in a market like this. We've been holding hedged positions on the nifty to be able to minimize a loss and ride the unsureness present."

My Notes: hedging is a good idea when the investor has large open profits or large investments which he is reluctant to liquidate. You hedge your positions to protect part of your profits and most of your investments. Traders should not be thinking about hedging, since they go with the trend. If they do not know the trend, then why should they be holding a position?

Anirvan says: "I was looking at the nifty charts today and a question popped up - - When its a bullish head and shoulder every one is so optimistic that it has broken out - but in the same vein THE same head and shoulders pattern failed a couple of months back for this rally to start across all indices globally"

My Notes: Anirvan, nothing succeeds like success. This one is working so we are all proudly talking about this pattern as if it were my discovery. Your question is: this one can also fail, just like the last one. Yes, of course. But we have to trade it anyway. Otherwise later on, we will find out that this one worked out while we were waiting. Also, the current H&S is a big picture pattern, spanning many months, multiple years. So, it will take its time to work out or not work out. Traders should therefore focus on patterns in smaller time frames. This large pattern is mainly academic, meant for the text books.

Trading is Probability

Wednesday, September 16, 2009


This post is mainly to reply to a number of comments.
Shazia says: "The markets have raced from 8000 odd levels on the sensex to 16600 today covering what it did in 05 to 07 that is 2 years in just 6 months. Is this the correction of last year's correction, implying in a way that there shouldnt have been any at all. What is the level where one will say for sure that the bull maket has returned?"

Well, Shazia, I do think we are in an uptrend. I do not know if this is a bull market, since bull markets start with long bases. But, this is an up move. Your earlier question, I think, is: was last year's decline a mistake and has this up move corrected this mistake? This is an interesting thought, with philosophy and a sense of history. Good for you to think out of the box. But, I do not have the answer to this one.

Men asks "could you please explain how one should trade on days of gap up/down? What should a person having longs do in case of a gap up?Secondly what to look out for a trend reversal apart from fiboancci levels."

My Notes: On a gap up day, if you are short, then you get out following the 15 minute rule. If you are long, then you wait patiently, for more gains. Move your trailing stop , maybe at the midpoint of the gap. For trend reversals, fib levels may not be useful Fib levels are use to identify support when we are in an uptrend (like now) or resistance, when the trend is down. To identify support in an uptrend (really the end of a correction) look for one or more of these: (a) Oscilaltor divergence, in the oversold area (b) Long lower shadows, followed by white candles (c) a decline stopping at an earlier support (previous high or low), (d) prices developing into a consolidation, and, subsequent breakout.

jagjit has a number of questions, two of which are:
What is your expected targets for the Nifty in the coming two weeks?*
Is it wise to still hold our stocks which are in really huge profits?

My Notes: See, price targets have very little relevance in trading. Who am I to tell the market that it has to go to xyz level? Yet, we like to have the comfort of knowing th future, therefore, most of the traders love targets. So here is my idea: The Nifty should be touching the 5000 - 5500 zone in the next few weeks. This seems to be he current target. Remember that strongly trending markets can surprise us. They did so during the decline, and may continue to do so on the upmove.
When you have large profits in stocks, it is wise to take some money out of the market. You shuld sell a part of your holdings.

Tuesday, September 15, 2009

The Uptrend Continues

The Nifty moved up after remaining for five days in a narrow range. This has been the behavior of the Nifty - a Big Range breakout then consolidate for many days, then take the next move. Back to back gains are not frequent. More common is the pattern of Expansion - contraction for many days, then expansion.

Will the Nifty touch 5150, its pattern target, and, cross it? This question can be answered in terms of probabilities. So far, in this uptrend, all breakouts have exceded their pattern targets. What sectors will lead th charge? My sense is that the current up move has been broad based with banks outperforming. This position is likely to continue.

Will there be a pullback to enable those who were left out, to enter? Well, the markets seldom work according to predictable patterns. If the popular demand is for a pullback, the market may simply keep on going up, till everyone says "there will be no pullback, so let me enter now". This sense has already started coming in. Last Sunday, on a visit to Gurgaon to see some properties (too expensive, not value for money!), I asked the real estate agent: "Will property prices come down if share prices all?". He looked at me and asserted: "Share prices will not fall". Sure.

Saturday, September 12, 2009

Is this breakout going to make it?

I think the title of the post reflects the question which is uppermost in the minds of most readers.

The Nifty moved in a trading range, 4350 to 4750 and then broke out closing above 4750 for five successive days. The target for this breakout is 5150. Will the Nifty make it?

As usual, the first point is simple: The markets will do what they want. So, making learned comments on where this breakout will go does not matter at all. No matter what I write and analyze, the market will not do what I say.

Then, why should I even try to answer this question? Okay. I will not even try.

A more relevant question is: given a breakout from the trading range, how should traders setup their positions in the coming days. I will answer this one. Again this is my analysis, and, could easily go wrong.

1. I do not argue with breakouts. Price tells us that after remaining undecided for many days (trading range), it has come to a decision on the direction. The trend is UP.[additional notes: volume, long term trendlines may affect the actual outcome of this breakout. But we will know this affect much later when the breakout either succeeds (did not affect) or fails (did affect). In either case the information when it is finally received cannot be used for action now. So, I choose to let it be, just focus on the price.]

2. When will the breakout fail? A tight small range was made with a low around 4570. This is my level for a sign that the trend may actually be turning down. This is for the trend, not for stops.

3. For Swing traders, a pivot low was made at 4780 approx. So far the Nifty remains above this number, assume that the short term trend is up, buy on dips. A break below 4780 will only signal a short term downswing, which you may or may not like to trade because it will be a correction. But buying should then be avoided till a pivot low is made.

4. For day traders, there is always the desire to sell at the high of the day. My suggestion is: avoid this impulse, and, see 3 above. Buy on dips and on consolidations. You can use simple rules to determine if the market is likely to move down. Then of course, you do not buy.One way is to stay away if the Nifty is trading below the low of the first 15 minutes. Or, if the Nifty has made a big gap up. These are stay out of trouble ideas. If the Nifty remains below the low of the first 15 minutes, moves down then builds a base in intra day charts, that may well be a buying opportunity even as price is below the lows of 15 minutes. So always have an open mind.

It helps a lot when you are aware of the direction in which you want to trade.

5. For position traders who wish to buy stocks, remember that stocks have a momentum of their own. The trend in the Nifty (up) allows us to buy, but the individual stock chart should not be in an 'overbought' position. Buy on dips / after a consolidation.

I will try to answer questions in a later post. Have a good weekend!

Wednesday, September 9, 2009

Time and Price

I have a lot of comments to which I really need to reply. Give me some time. This post is about two critical elements in technical analysis, Time and price.

The immediate relevance ia a request by men to find out if it is possible to forecast the time in which a head and shoulder bullish breakout will hit its target.

Now, Time is a much more difficult element to forecast. Any number of unknown events can influence Time. Suppose a big hedge fund trader did not come to office today. Therefore a planned trade was not taken, which if taken would have pushed up prices of Orchid (example). He came in the next day, when the trade was taken. Understand how time has been influenced by a factor completely unrelated to charts. You can easily imagine many more scenarios like this.

Price forecasting and target setting is much easier. In fact, setting a price target is part of many technical analysis studies. Often, these targets wil be hit, but when? As I have just explained, the time factor is difficult to predict.

Now, there are some sections of technical analyysis, which do forecast time. Gann, was a pioneer in such forecasting. Since no one after him has been equally successful, I assume that Gann had some extraordinary abilities. The methods which deal in Time forecasting are: cycles, Different types of fibonacci time projections (including Elliot Waves). If you do work on Time, then you should be looking at Time zones rather than a date.

Price and Time together
Think carefully, if a trader can forecast Price and Time, both, then what is left? You are really like God, telling us the exact future. Therefore, this ability is unlikely. Traders who do try to forecast time and price understand that they will get only one of the components right. Either Time or Price. An example for the Nifty is given below.


For the Nifty, two last two time projections for swing lows worked out well, but the price targets were not touched, which suggested strength. The last three targets for swing highs were touched suggesting strength. The current up move was projected as below:
Price target: 4730 - 4870 zone
Time Zone: Sept 4 to Sept 8.
What happens if prices move up today also. Then the Time target has shifted. What happens if prices move beyond 4870. Then, the price targets have also shifted. Thus, you can only surmise that the Nifty may be reaching some kind of short term consolidation.

The downside time zone as of now is: Sept 14 to Sept 18.
The price zone is: 4525 - 4385.

Remember, these are only probabilities. Also, as I explained, usually, Time or Price (amy one) may touch our estimates.

Please do not trade on these numbers, as much more analysis (on your part) will be required to use them. But you can surely try to correlate these ideas with your own analysis.


Tuesday, September 8, 2009

Buying the Nifty on Friday, pre-breakout

Gulshan makes a point: "As the nifty rises and broke out, suddenly momentum also turned up to this blog also (some times there was 1 or 2 comments and most of times it was 0). Everybody is proving to be right, then where were all when the nifty was in a range."
He asks: "Tell me, if any person has taken a position in Nifty on 20-08-2009 based on assumptions which are posted now after the breakout.".

My Notes: I am not sure why anyone should declare a breakout when the Nifty was in a trading range. I did not understand why we should be buying the Nifty on 20-08-09. On Friday, Sept 4, the Nifty rallied from its lows and was pushing against 4650 which was a minor three day resistance. As Nifty futures moved above 4650, I did buy the Nifty. In fact, the move from 4650 to 4680 was fast (5 minutes) so the actual entry was much higher than 4650.
I do not usually discuss my positions, but I explained the trade here since Gulshan was making a point that we are all discussing without action. That is not so. We do act on many ideas discussed here. In any case, this is not a trading journal. It is about using technical analysis in trading. I carry the trade as I write this blog, on tuesday morning.

Stops for the position trader MUST be trailing. Thanks to the parabolic advance, there are no logical stops. On the 60 minute futures chart, the average true range is currently 31.5 points. If I give a multiple of 3 to ensure that I am not stopped out due to noise, the stop is 3 * 31.5 = 94.5 points from the highest high of the up move. Today morning, the high of the move is 4805. So the stop is at 4805 - 95 = 4710. The stop will change (a) If the Nifty makes higher highs, (b) if the ATR changes, (c) If we start seeing divergence on the chart between price and an oscillator. - decrease the multiple. (d) When a minor low is made, at which point the stop can be some points below the low.
Have Fun!

Monday, September 7, 2009

Should we trust this breakout

The underlying theme in many comments by experts and novices is: The Nifty did break out above 4740 today, but can we trust this breakout?

Now, there can be many reasons for saying that the breakout from this four month trading range may well be false. Yet, the only way to find out if the breakout is genuine is to wait for the follow through. If the Nifty holds support then this is genuine, if it breaks down then the breakout was false. There may also be some early warning methods but the only sure way is to wait and find out! But this may not be a good idea since by the time we realize that this is a genuine breakout, the Nifty could be well over 5000.

My point is: The point of any breakout is the point of maximum risk. If the breakout is false then you have bought at the highest point in the move. There are two ways of trading a breakout - (1) Buy at the point of breakout (2) Buy on a pullback after the initial breakout. Both methods are correct. Traders may use one or a mix of both methods.

The width of the trading range was 400 points - 4350 to 4750. Thus, a possible target is 5150 for the Nifty. Will this be achieved? Again, we cannot say. But, until proved otherwise, we will go with the breakout.

Have the bears stopped selling?

Shazia makes some points.
"On cnbc tv you said that if nifty crossed the 4760 mark then it may well be on its way to form another bubble, why ?"

My Notes: The 4740 - 4760 zone has acted as resistance during the current rangeing market. This is also the level where the larger picture cup & handle or inverted h&s pattern is confirmed. Therefore with so much compression in prices just before 4760, a big expansion in prices may come if 4760 is broken. prices may continue going higher beciase (a) everyone else is buying, and, (b) 'Liquidity'. That's how bubbles are made.

Again in comments today:
"The nifty is now more squeezed in a narrow range having almost the same top but ascending bottoms. Technically it looks like the bulls havent given up buying but the bears have given up selling beyond 4750, which is why there is no short squeeze to pull the markets up."

My Notes: These are usually the reasons for the market remaining in a range, which is what it is doing now. Bulls buy at support, and, either bears sell at resistance, or as you suggest, bulls themselves get out at resistance, while bears stay away. With the anbsence of bears, the bulls will have to get enough confidence to push the markets up. This could lead to a significant rally, because first the bulls will push prices, while intiially at least the bears may remain on the sidelines.

My grateful thanks to Student of the Markets for his kind words and sensible advice. Given here:
"today being the teacher's day, I want to express my deepest respect to you who has taught me so much in trading. The most important things I have learned from you are - Market is bigger than any analysis ( including yours! ) ; The trend is intact until it is broken ( i.e. do not anticipate end of a trend); Focus on following a disciplined strategy rather than focusing on making the correct call as that is what works in trading."

Friday, September 4, 2009

Nifty is standing at short term support

Intra day charts for the Nifty suggests support coming in at 4570 approximately. The 60 minute chart also shows a rounding top and a bearish head and shouler with a neckline around 4570. This zone becomes significant in deciding if the Nifty will breakdown and move towards a deeper correction, or bounce back above 4600.

Since 4570 is closeby, traders may like to take long positions on dips with a stop below this support.

Gaurav asks: "The current pattern on Nifty daily charts suggest a triple top or ascending triangle? Both these patterns have a opposite interpreation. On a longer term basis we also see a inverted heads and shoulders with neckline around 4700. Sir what is your opinion on all these patterns?"

My Notes: A triple top - yes (June, July, August) but an ascending triangle is difficult to locate. The triple top is confirmed if prices berkdown from the valley created around 3950, so it requires a lot of decline before it is confirmed. We should use a trading range between 4740 and 4350 to determine direction. On the longer term we have the inverte H&S with neckline around 4760. This column has written about it earlier on several occassions. The trading range breakout will also confirm this pattern, so we just have to wait and watch.

Wednesday, September 2, 2009

Focus on individual stocks

As the Nifty goes nowhere, it may be wise to focus on trading in individual stocks.
Traders may like to select at the most two stocks to trade in. The trading may be intra day, or, swing trading involving the overnight carrying of positions.
The first step in a trading plan is to determine the trend. As of now, the Nifty remains clearly in an uptrend. Therefore, stocks may be traded with an upward bias. This means, identify stocks which (a) may be ready for an upmove after a dip. (b) Stocks already in a rally, which may continue to move up.
Since I like to buy dips, I will focus on this part of stock selection. Look for a short term oscillator to become oversold. Share prices must dip with the decline in the oscillator. If you wish, you can use a 5 period RSI on end of day charts. If the RSI moves below 40, then goes up, this could well qualify as a dip that could be ending.
Some stocks that come up for Thursday, include, Grasim, HCC, HDFC and ITC. This is not a recommendation to buy any of these stocks. I am explaining how a short list can be created. Look at the charts and pick up two stocks. Now, identify a stop loss, a possible traget and buy on signs of strength during the day.
Also consider identifying stocks on themes. Today, the themes were: Reliance cap will gain because the Govt is taking a neutral stance in the brothers cases, and, IT stocks could be in flavor since the Rupee was falling. The actual buying / selling should be done on the basis of intra day price action.

Is this a breakdown?

A small trading range between 4650 and 4710 may have finally broken down yesterday after one big false move. While the Nifty closed at 4625, well below the 4650 support, today's premarket suggests that the decline is likely to continue.
While targets for the downside are difficult to estimate, suppport based on earlier price bars, comes initially at 4570. We should not get attached to one single number, rather think of this support as a zone. The next area of support is 4500 to 4480.

But, how do you trade? The day trader should take both sides of the trend, up and down. The short term trend is down, therefore, it is possible to go short.
The Position trader should not buy the dips until and unless markets finally find a low and stabilise.
If you have existing long positions, then, follow the stop losses strictly.