Sunday, November 29, 2009

Markets are still confused !

MARKETS

Big declines on Friday saw the Nifty touch 4800, and then suddenly rally back to 4940. So what is the market telling us? Does it say that the decline was overdone & not relevant at all OR does it tell us that the rally after the decline was just a correction? Confusing, to say the least.

I am keeping this simple enough. Momentum continues to fall on the daily chart. A reversal of falling momentum will be the first sign that the correction is probably over.

DUBAI

Defaults by the Dubai conglomerate may lead to (a) Similar defaults by other Soveriegn countries OR (b) remain a one - off case, where the company + country created a real estate bubble that could not be sustained. Experts differ on what it could mean. It seems that it was a real estate bubble rather than a soverign default. The gulf countries have $1 trillion in assets so they can probably solve an $80 billion loan issue.

GOLD

David Rosenberg of Gluskin Sheff says that Gold is becoming a crowded trade but it can still rise to $3000 before the secular bull market ends in Gold. Well, my own targets were about $2000, but it seems I was conservative.

CeTA - Chartered Technical Analyst

An email asks:  "i am a graduate in science. i havebeen teaching mathematics from last 10 years for +2 level. oflate i developed interest in technical analysis.


if i pursue CeFT course, what are the job prospects. will i be absorbed as a technical analyst in any brokerage firm. please tell me  in detail."

My Notes: If you wish to be a Technical Analyst then the CeFT certification will provide you with better chances of a job. But, CeFT should be done with a desire to upgrade your TA skills rather than to take a job.

Thursday, November 26, 2009

Confused Markets

The Nifty remains in a  trading range between 5120 and 4920. The Index cannot remain inside such a narrow range for much longer. We have already seen two months of range bound movement.

Which way will the price go? The asnwer is easy: We do not know. So we should let the market tell us if it wants to go for another correction , or it will eventually move above 5120 to scale new highs (in this up move).

Does mechanical trading make money? Think of mechanical trading as disciplined / systematic trading. It makes money, there is no doubt about it. Our day trading system is an example. The system was making money in the beginning of the month, then fell toa litttle above breakeven, and today, recovered to end up the month with a decent gain, also the month high.But such trading requires so much discipline that it is difficult to trade for most people. n the other hand, October was a spectacular month for our swing systems but they ended November at breakeven. What this means is that just one day - today contributed all the profits of the two systems for the month. Yes, that's the way it is, sometimes.

I will be in Jodhpur on Saturday, Nov 28, for he CNBC Investor Camp. Any reader living in that area is welcome to meet me in Jodhpur.

Have Fun!

Wednesday, November 25, 2009

Video: Inside a trading range

Momentum Cycles

When markets are in a trading range, momentum takes over, and it is possible to trade using cycles in momentum indicators. The current scenario represents some kind of a range.


Apply your favorite momentum indicator and identify the crest (top) and troughs(bottom) in the indicator. You will see the indicator moving in well defined cycles. When it turns from below, go long. The stop should be the indicator itself.


When the indicator turns down, that is your signal to exit with a loss or profit. The reverse is true when th indicator touches the upper limits. GO short, using the indicator as the exit.


I am giving the 60 minute chart for IDFC. The indicator is doing what I pointed out earlier.







Thank you, friends.
 This comment makes my day, and is worth more than all the riches of Persia.


Quote:
Sir, I'm R P Kulkarni from Mumbai working in Air India as Aircraft Engineer age 41. I am trading in stock market (F&O - nifty) last 2 years. I'm not a professional trader.


Sir to me you are among the very few TAs in India who are honest as well as quite intelligent in their job. This is a rare combination. Thank you very much for serving the people & keep up the good work. I never heard a single wrong or suspicious call from you. I wonder how you do it?
Sir I'm your fan & will always follow you.
UnQuote

Saturday, November 21, 2009

Volatile moves in a narrow range

Friday's price action tells us that there is a lot of intra day volatility inside a narrow range. The Nifty is locked in a range between 4940 and 5080 for past eight days. Inside this range, we see big moves on some days giving the impression of volatility. In reality, it is not volatile, but probably random moves inside an indecisive market.

What about my absence? I was in Ahmedabad for two days, on a private visit. I did my CNBC interview on Thursday morning from the city. I received a report from my office giving the basic features of market on Wednesday. Then, at 10:00 AM, the Nifty opened slightly lower. Udayan asked me for my Nifty strategy for the day. That one was easy. Obnly for the day trader - go short with a stop above 5080 and look for a 40 - 50 point downside reaching somewhere around 5000. The Market did almost exactly this.

Why was this easy? On the prior day, Nifty futures moved in a narrow range of 47 points. This was the narrowest in a month. Any break from this range should give some kind of a trading move. When the Nifty opened lower on Thursday, a down move to 5000 support was reasonable to expect.

Traders are well advised to study the process of contraction and expansion in the markets.

Now for responses to comments:

Gaurav asks: "So if we are of the view that India is going to underperfom in coming years...should we tarde other markets like DOW,HANSANG,FTSE etc...what are the advantages and challenges for tarding other markets specialy the FOREX."

My response: Diversifying into other markets will become essential for traders. Forex is an easy option, because you can trade the USD-INR in India, and, trade the many forex pairs on websites abroad. (www.interactivebrokers.in offers such facilities in Indian Rupees).

Sanjeev asks: "What are the basic principle/assumptions which determines sidewise market ?"

My response: This is a sensible question, but requires a more detailed answer. Basically, market often has periods when it does not exhibit any trend. Visually, on the chart, it becomes possible to define boundaries of support and resistance inside which prices appear to be locked. The Average True Range Indicator will fall to its lows, Bollinger bands will contract (come closer).

Nirav asks: "Can you tell me that what is the difference between Elliott Wave and Normal Wave Count which you normally prefered?"

My Notes: Some differences are:

1. Elliot Waves will always try to find some wave count or the other. Often, the market is not moving in a wave sequence. Momentum waves will identify wave counts only when they are visible.

2. There are possible many rules in Elliot Waves. In momentum waves, we have simple rules, easily understood.

3. Every technical trader can use momentum waves (because they are easy to use), but only specialized wave practioners can trade with Elliot Waves.

Tuesday, November 17, 2009

The Great PSU share sale

As per TV coverage, NTPC and SAIL share sale is likely to exceed Rs 30,000 crores this year. That is about US $6.5 billion. This is a lot of liquidity moving out from the market into the hands of the Govt.

Less money could mean higher interest rates, which could mean lower share prices. It is possible that India may see (a) Decent GDP growth at 6%+ (b) Growth in corporate earnings, and, (c) A trading range for stocks. China has gone through this process a few years ago when the Chinese market was falling while the economy was booming.

Indian markets, as we are reminded, are - fairly valued. As per the NSE web site, the PE ratio on Nov 16, 2009 was 22.48. This is not low.

While the markets can do anything, it is possible that Indian stocks may go through a period of relative underperformance as compared to world markets.

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CeTA - Certified Technical Analyst

This certification offered by The Association of Technical Analysts, India should be essential qualification for every aspiring analyst. If you are an exisitng professional then the certification will provide an added assurance that you know the subject. If you are aspiring to become a Technician then the certification is essential to your prospects.

Please visit www.taindia.org for more details. The Exam for Level - 1 will be held in the last week of December 2009.

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Bollinger Bands

The traditional approach to Bands on prices is to identify the bands as support and resistance lines. Traders will often use the lower line as support and upper line as resistance. But, system testing suggests that the opposite is superior in terms of profitability. When prices break the resistance line, they signify strength, thus giving a buy signal. When prices break the support line, they signify weakness, thus giving a sell signal. The bands then become a trend indicator. Like all trend following mechanisms, this approach will lose money when markets go sideways.

Sunday, November 15, 2009

Understanding the Dollar Index

CNBC-TV18 anchors, mainly Udayan and Mitali, track the Dolalr Index every day. In the last few days, the Index hit 75, which was the lowest since August 2008. The lowest level of the Index is 70.70 in Mrach 2008.

Now, the Dollar Index is actually a basket of currencie against which the value of the Dollar is measured. There are six currencies but the Euro is the most important. Here are the weights:

Euro = 57.6%

Japanese yen = 13.6%
British pound = 11.9%
Canadian dollar = 9.1%
Sweden krona = 4.2%
Swiss franc = 3.6%

So, the Dollar Index is heavily influenced by the Euro, and, remember that the Swiss Franc is closely related to the Euro so the influence is actually more than visible.

When the Dollar rises in value to the currencies listed above, the Dollar Index moves up. The Index measures the strength of the dollar.When the Dollar Index falls, it means that the Dollar is getting weaker. (As the Index falls, I.T. stocks in India face heavy weather because the Rupee may be getting stronger.)

Anticipation of a weak dollar pushes money into emerging markets. The arithmetic goes something like this: One dollar fetches Rs 48. So an investor sells his dollar, buys the Rupee and invests Rs 48 in Indian stocks. Let us say that the market remains where it is. The dollar becomes weaker and now fetches only Rs 44. The Investor can sell his shares for Rs 48 and buy 1.1 dollar (approx) and send this money back. Therefore, a weak dollar encourages movement of capital to emerging economies.

The reverse will be true if the Dollar begins to appreciate.

Below is the chart for the Dollar Index. At Technical Trends, we provide data for this and many other international instruments.




Here is the weekly chart, giving a long term perspective.



Thursday, November 12, 2009

Trading is a Slow process of learning

This comment is interesting "Please guide me I love trading so much that now I am unable to work and I hate to do my job.I will be very happy if I am earning so much that it is enough to leave a middle class life provided I am trading.Please suggsest me what should I do.Should I look for a trading job???"

My Notes: It is a pleasure to view such passion for trading. I think the first requirement for a trader is a passion for the proces of trading (not for the money!). But, trading is a slow teacher. Therefore, it is wise to enjoy your exisiting work, do your best there, and work on charts in the part time. Follow only end of day charts, so that you are not distracted during work hours. Identify one or two patterns and focus on trading only those patterns. Once you acquire the discipline essential for trading, you can make a call on your future course of action.


Harsh asks me : could u describe a sucker rally


My Notes: Not really. I assume that Harsh is thinking of the current upmove as a 'suckers rally'.


Nirav says: have read the book named Swing Trading:A guide to profitable short-term investing by Marc Rivalland.  
"1. Is there any other book which will give more knowlege about Swing Trading?

2. Is there any book available in market which was written by W.D. Gann or related to W.D. Gann swing theory?"

My Notes: A lot of Indian reprints are offered by Vision Books. Go to their website and you may find more books of your interest. Instead of buying from Amazon, you should kep on searching the internet for Swing Trading and Gann. You are likely to get a lot of information for free. The Swing Traders bible is Streetsmarts by Raschke and Connors.

kk says "IN YOUR RECENT UPDATES YOU USED A WORD "LUCK".SIR I HAVE NEVER HEARD THIS WORD FROM ANY TECHNICAL ANALYST.PLEASE ELABORATE"

My Notes: You take a trade based on your analysis. Your analysis is conceptually correct, giving you a positive expectation. (meaning over a period of time, your profits will exceed your losses). Your trade by trade profit or loss depends on market conditions, but you will emerge as a winner over time.

Now, you take a trade that is conceptually incorrect. But, Luck favors you and the trade works well. Your rewards have come due to a sudden chance, not because of your analysis. If you persist in such trades, the risk of ruin is high. Most technical analysts will offer such incorrect trades. As a matter of luck some of them will work out, and they think they can get away with it, till the big one goes against them. Then of course, they are out of the market of many years. Sounds familiar?

In the same way, when you take properly analyzed trades, sometimes you get a  big winner. This is not due to some extraordinary skill in picking winners. It is a matter of luck that you had the winner first, and, probably the losers will follow. The wise trader knows this, and does not get carried away.

Tuesday, November 10, 2009

Riding a Trend

As the Nifty continues to make gains, the up move has been restored after a decent correction. The trading theme is simple: look for strong stocks, thn buy on dips.

One risk in the buy on dips scenario is the stock that does not dip. Many stocks will take some rest, then move up. Most of such stocks are within reach of the trader, because the period of rest actually repersents a dip. A consolidation can be taken as a dip and a move out of the consolidation represents a buying opportunity.

Some stocks will nethier dip or go into a consolidation. A sudden up thrust will see them rallying towards higher prices. We can think of such moves as V shaped reversals. How do you catch such reversals? The answer is : you do not. There is very little sign that the stock price is likely to move. In such stocks, it is more a question of luck, or being in the right place at the right time.

Losing by Buying

For market participants, it is possible to lose in an up move, even if you buy. There can be many reasons for this:

1. Wrong stock. The weakest stock was selected for buying since 'this one should move now'.

2. Greed. As the market moves up, the trader refuses to sell, expecting higher and higher gains,  Usually, such stocks are carried forward to the next bull market, not always finding their original levels.

3. Fear. The impatient trader who is not in the market sees prices going up, while the expected dip does not come. At some point she says "this time it is different. there will be no correction". She enters the market to buy, usually at the highest prices of the move. Such traders will often liquidate at the lows of the inevitable correction.

4. Not doing your home work. This could be repharsed as "Listening to analysts without applying your mind on the above three points". ( Easy on this one. It is written in a light vein!).  But, you have to do your own analysis. TV can provide you with ideas. If you use these ideas as trading signals, then you are going to be in trouble, the only question is: when.

There is an underlying theme here. All of these errors can be managed provided the volume involved are small (small in relation to the trader's capacity).

Have Fun!

Sunday, November 8, 2009

Conversations Nov 8

On CeTA exams:

Bhavin asks:

what are the job opportunities after clearing the 1st level or after clearing both the levels of ATA exams?


My Notes: Well, ATA will try to act as a clearinghouse, trying to encourage companies to hire analysts as well as bringing together aspirants and employers. But, all said and done, you must approach certifiction as a means to enhance your skills. It should not be taken as an employment generating method.
Prashant said...

i just wanted to ask, i have cleared CFTe level I exam. can I get exemption from CeTA level I?

My Notes: Yes, you will. We hope that the second level of CeTA will be more advancd than the IFTA exam, providing indepth learning.

Nirav has this question:
As per my knowledge in technical analysis there are so many techniques like Swing Trading,Japanese Candlestick charts,Elliott wave theory and may be others and also supporting stuff like technical indicators.


So I want to know that out of this technique which is the most effective in stock market and which is the easiest to learn and follow?

My Notes:
The search for the 'perfect' method continues. Since the search continues, we can assume that no one has found it yet.  Now, Swing trading is a style of trading, like day trading. Candlesticks do not represent an independent trading system, they have to be used as part of a system. Elliot wave is a complete system by itself, so are many other methods, including classical chart analysis.

You should experiment with these ideas. Eventually, you will come to realize that some methods make you comfortable during analysis while some others go above your head. The methods that help you are the most effective for you.

A side question is: which is the easiest? Again, it can differ for different people. But I would recommend that you should start with classical chart analysis, using charts and trend indicators.

Rohit has a point about MACD divergencs on weekly charts.
If you'll look at the weekly chart of sensex, You'll notice that the MACD divergence is in the negative for the past two weeks.

Historically since 2006 there are only 5 negative phases for Weekly MACD and four out of the five times Markets corrected severly.
Since Weekly charts are in control of the market now, I think Markets will test much lower levels very soon till we come out of the negative MACD phase.

My Notes: A divergence says that prices are probably running too fast and need a rest. From 2006 to 2008 January, there were multiple divergences, but the Nifty rallied from 3500 to 6300. Each divergence was followed by some weeks of dips / range bound action.

So, what I am thinking is this: let the market tel us where it wants to go. Curently, the Nifty is making higher highs - higher lows in the 60 minute chart. Either the pattern will come in the daily chart, reinforcing the upmove, or the hourly itself will turn down suggesting uncertainty.

Cheers. More later.

Thursday, November 5, 2009

A small base is made

men asks "Why no updates, hope everything is ok"

My Notes: Thanks for the concern. I appreciate it. Everything is ok.


The markets are a wonderful being. Often, they behave almost in a textbook pattern. A sudden, sharp dip to 4550 brought the Index to the 4500 - 4550 zone we discussed earlier. What should be the enxt step? The market should provide a test of the lows. This happened today, when the Nifty suddenly fell to 4600. IIn the process, a small but visible bullish head and shoulder pattern was made in the hourly charts. The neckline was broken at 4700 approx - the point at which we should go long.  (We did!). The pattern target is 4850 approx.

Is this the real thing?

The question can be reframed thus: Will we see new highs again? The answer is: why worry about a future event. Focus on the present. The short term trend is up. Go with the flow.

If someone does not track the hourly chart, what is the signal that the markets are showing strength ?

Krishna says "You had wrote in the last article


"The first sign that the market has bottomed out will come when w have a higher low, bullish candles, for more than one day. You have to wait."

We have got two green candles..is it a sign of market bottoming out?"

My Notes: The asnwer is yes. Sinc the primary trend is up, the last two days tell us that the Nifty is showing signs of strength.

dineshrishi asked about articles on arbitrage.  I am not into the study or trading of arbitrage opportunities. have you trie to do a google search. It is my impression that the Markets and Google can do anything!


Jazz asks: "plz let me know the merits of becoming a member of Association of Technical Analysts. why should i choose this and not something like MTA or CFT ????"

My Notes: CFT is not a technical analysis association, so we can let it be. Now between the MTA and ATA, MTA is a society located in New York. ATA is located in New Delhi. Both offer certification exams. To retain your certification, you have to remain a member of the association. Annual membership of the MTA is $300 (Rs 15,000/-) while it is Rs 2,000/- for the ATA.  The MTA is not associated with any international organization, while the ATA is part of IFTA (International federation of Technical Analysts).

The first exams of the ATA will be held in end december 2009. I strongly urge readers to take the level 1 exam.

Monday, November 2, 2009

Conversations Nov2

All of us have enjoyed a well deserved rest for almost three days. Tomorrow will be markets, once again. I wish you the best for the coming weeks.

StopLosses

afzala.com has this problem : two days ago you described about stoplosses as per that i bought cropmton at 337 putting stop loss below 330 that was 2 weeks low . my stoploss triggered and at the same time it shoot up now at 375

My Notes: Sometimes, no matter where you place the stop, the market will stop you out and resume the original trend. That's the way markets work. My suggestion is not to worry about one trade. Follow your rules consistently and you will get the rewards.

MACD

Vikas writes from Ludhiana: the default settings for MACD is 12,26,9..Suppose i use EMA crossovers of 5 & 40..then



1. Shud i change the settings of MACD for my purpose?


2. Wat shall be the substitute number for 9.( for 5/40).& how do you arrive at ? Pl explain so that settings can be altered for different set of EMA combinations.


My Notes: If you are using EMA crossover of 5 and 40 then change the MACD settings to 5 and 40. The result will be the same as the EMA crossover. Usually 9 is the accepted value for trigger. There is no need to change it, since one value used for all stocks is more robust as compared to adjusting the value for each stock seperately. You can use a software to optimize the values for the MACD. But I do not recommend doing this.

Shazia says "When we were going up 4700 acted as strong resistance thrice, would it not act as support now?"

My Notes: Yes, it should. There was minor support and then resistance at 4700. Therefore, if the Nifty does move towards the larger support area of 4550- 4500, even then it should pause around 4700.

Going long
Nitin Damle says "I think it will bounce from this level and a retracement level of 50% will be achived it comes around 4934



Going short at this level is not at all a good trade but can we go long?"

My Notes: I will modify your comments to formulate a trading system for you. Here it is: I will go with the primary trend. I will buy a dip. My initial target will be a retracement level. I will exit part of my position at the target, and continue with the balance so far as the trend is in my favor. My initial stop will be 50 points below the low of the dip. A higher low will be my signal to go long.

Now, once you have a method in writing, you can follow it. If you consistently follow such a plan (any plan with an edge), you make money in the long run.

My trading system on Friday
men asks: 'would it be possible to put up how your trading system was set up for Friday, I am requesting this as the market was very volatile'

My Notes: My intraday systems were ready to go long in the morning since the gap open changed the short term trend to up. Our systems require a thrust in the trend direction to enter the trade. If we want to go long, then our entry price will  high for the day + an additional number. This level was not touched and we did not go long. Then we went short at 4803 which ws covered at close around 4730. In fact, after the first 10 minutes, the trend was down throughout the day.

men also asks: "Also in such volatile conditions how should a positional person trade, this is beginning to hurt now. "

My Notes: we are in a correction. You have to wait for the decline to be over. Why should you want to catch the absolute low anyway. The first sign that the market has bottomed out will come when w have a higher low, bullish candles, for more than one day. You have to wait.

Pi has a number of questions / points which I hope to reply with some leisure.

manoj bansal from pitampura. "on friday morning news has just come that bajaj hindustan can take over balrampur chini.but share prices fall."

My Notes: Friday's downbeat market may also have influenced this decline. Remember the saying "buy on rumor, sell on the news". The rally in Balrampur prior to this news, probably discounted the beenficial impact.

Certified Technical Analyst

kk says that he is keen to do CeTA. Well, a willing student is the best reward for the Association of Technical Analysts. Please contact taindia.com. I think the exam commitee should look into this issue, hopefuly in your favor.

Buying with the primary trend

Krishna asks if it is wise to buy since the primary trend is up.

My Notes: For a positional trader, buying is the correct appraoch since we are in an uptrend. Instead of thinking about a stop, the trader should determine the situation in which the primary trend will no longer be up. That will be the signal to exit this trade. I have discussed how 4500 - 4550 is a zone acting like a magnet. Then, the trend changes from up to down if the Nifty closes below this zone. A second signal comes if the Nifty clsoes below 4300, which will confirm a pattern of lower lows. Depending on your risk, you can choose on of these points to determine if the trend has changed. Wider stops lead to more profits, but increase risk.