Thursday, April 29, 2010

Ignorance is not bliss

Two days ago on CNBC, my fellow guest was saying: the world is very upbeat on India, investors are willing to pay higher valuations for stocks, therefore a higher valuation will soon become "the new Normal".

We hear a lot of buy side advice from investment bankers in all kinds of forums. I rarely hear an expert talk about a more reasonable valuation. The Nifty is trading at 23 PE. Now, who decided that this is reasonable? Historical values are much lower. Given the revulsion towards investment bankers, it is possible that their high flying values may also become unacceptable.

Our friends, cleverly link the growth in the Indian economy with higher valuations. They give the impression that people must accept higher and higher valuations since the economy is on fine footing. Sure. The economy is on fine footing thanks to the hard work of 120 crore people. I often think that the economy is in good shape inspite of the financial terror that the financial professionals unleash!

So, we are all hearing the buy-side advice. But we should understand the other side of the argument. Ignorance is not bliss.

Tuesday, April 27, 2010

High Frequency Trading

An article found Here discusses high frequency trading. I am giving below a graphics from the site which explains what high frequency trading is:

A comment from the site:

This chart is a great example of what's wrong with using the term "High Frequency Trading" to mean so many different things. To me, true HFT strategies are those strategies which wouldn't be viable without the ability to enter and exit a position in under a second.

Three of the strategies mentioned here -- Filter Trading, Momentum Trading, and Technical Trading -- usually don't even involve sub-second holding periods.

Monday, April 26, 2010

Shallow Corrections

The Nifty seems to be unwilling to go through a significant correction. The upmove from 4675 to 5400 has not seen a 'normal' 50% or 61.8% correction. At least, not yet. What we saw was a dip to the area between 23% and 38% retracement. This is a shallow correction.

The message is: The Market is not ready to go down. At least, not yet!

Will the Index cross 5400? Given the strong momentum, it does seem likely. I have been writing about a bubble like move from 5400 to 6350, an area which has little resistance. While this move is possible, we should not expect the market to continue going up until it goes through a more normal correction.

So, how do we trade? Assuming that the Nifty is in a trading range, buy dips and exit on rallies. We avoided byung breakouts and this saved us a lot of unneccessary trading last week. (Saved us from whipsaws!).

On Saturday, the Association of Technical Analysts organized its monthly meeting with a presentation by Dr S.K. Sinha from Patna. His topic was to explain entries when the C wave is completing. These are the lowest risk entries for the trader. The presentation was not heavy on Elliot Waves. It was easy and simple to understand. Outstation members ill get access to the presentation soon enough. We have recorded the event, and we will try to provide the DVD at a nominal cost to members.

Wednesday, April 21, 2010

It is your hard earned money

Paul Krugman, Noble prize winner in economics, writes in his blog post titled, 'Looters in Loafers':


For the fact is that much of the financial industry has become a racket — a game in which a handful of people are lavishly paid to mislead and exploit consumers and investors.


In this blog, over the last two years, I have been making the same point, although Mr Krugman has been much better in puting this idea accross.

Now, readers do not have to be exploited. Remember, it is your hard earned money. And, greed kills.

Tuesday, April 20, 2010

Risk reward does not favor the bulls any more

It is an intermediate downtrend! The Nifty closed below 5235, which was my closing level for the change of trend.

The story of Goldman Sachs will not end here.It is the beginning. There was balatant financial manipulation of the markets for the past few years when investment bankers were given free rein in the garb of  'capitalism'. Everything was going well for them but their plunder was disturbed by the crash of 2007. Now, the governments and the world focused on them. Since the priority was to save the world, retribution and reform had to wait. But that time has come. There will be significant retribution as well as reform. Everywhere, including India.

Let us take the example of IPL - the Indian Premier League. IPL came in the limilight due to the Tharoor episode. Now the issue will take a momentum of its own. And, the investigations will be taken to its logical conclusion.

This is what democracy is about. We are slow, but once some wrong doing is detected, the wheels of justice start.

How does this affect the markets?

Almost all world markets are driven by 'hot' money. Tht money will probably come under intense scanning and probably dry up. This will lead to volatility, upheavels and churing in the financial markets. Eventually, the traightforward traders & investors will survive which will be good for the long term health of the market. But, in the short term, I expect a lot of confusion.

In the Nifty, I am taking the 5400 level as a barrier. The expected breakout did not happen. The market will go in a bubble phase if the Nifty were to break above 5400. Therefore, any long positions should be taken if and when this happens.

Currently, the strategy is to sell on rallies, focus on individual stocks which will be acquired only on dips and watch the market. To most traders, my suggestion will be: for some time stay away from derivatives.

Monday, April 19, 2010

ATA meeting

The next monthly meeting of The Association of technical Analysts will be held on Saturday, April 24 in New Delhi. The peaker is:

"Pinpointing Optimal Entry with the 'C Wave' Patterns" by Dr. Sanjay Kumar Sinha

We, at ATA are trying to bring accomplished traders in this field to share their experiences with you. Seating is limited, so please register early.

As usual, outstation members who cannot attend will get the presentation materials on the members only website.

Friday, April 16, 2010

Fraud and Investment Bankers

Barely 18 months ago, in October 2008, Investment bankers had brought the world to the brink of destruction.Their unbounded greed had no parallel in the history of mankind.

As time passed by, it seemed that greed had won the day, with no penalties imposed on these people.

Today, justice seems to have started its work. Bloomberg says:

"Goldman Sachs was sued by U.S. regulators for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. The firm’s shares tumbled as much as 16 percent and financial stocks slumped. "

I do not think this is the end. There will be many more such investigations, cases, attempts to bring the perpetrators to justice. And, it will happen in India, also. [we did not have subprime problems, but we have the same kind of greed].


The Markets are not perfect, but they are the best we have

Note how the Nifty remained in a narrow trading range, then broke down from the range on Thursday. A breakout / breakdown from a trading range is a significant technical event. My recent posts have dsicussed this.

Wednesday, April 14, 2010

Earnings, rallies & ranges

Siva Sunku writes on the impact of quarterly results on share prices. Is there a connection?

My Notes: The market will usually discount results prior to their announcement, thus justifiying the saying "Buy the rumor, Sell the news". But, one exception is earnings surprises. if the surprise is on the downside, markets will quickly respond by falling. If the surprise is on the upside, then this is often the start of a new up move as the big players slowly adjust their forecasts on the upside.

While the trading range in the Nifty remains intact, Tuesday's price action was unusual, to say the least. Here is what we wrote to our subscribers on Tuesday evening:


Today (Tuesday, April13), Nifty futures moved in a narrow range of just 30 points between 5308 and 5338.

Research on Narrow ranges in nifty futures:

From March 20, 2008 to April 13, 2010 (today) there is only one instance when daily range in Nifty futures was equal to or less than 30. This was on January 15, 2010. After a significant rally, markets were (probably) consolidating. Now, January 15 was a friday, with two days of holidays before markets opened on Jan 18. The Nifty rallied by over 30 points on Monday, January 18. But this rally was a false signal, as it later turned out. Starting Jan 19, came the sharp decline we saw in January - February with futures falling all the way down to 4667 on Feb 8.

What we should understand:

1. A range of just 30 points is a rare occurence.

2. A significant move should emerge in the next few days.

3. It is possible that we may see a false move before the real trend emerges.

My Notes:

What is the direction in which a big move can emerge? After nine weeks of gains, unfortunately, the easiest way could well be on the downside, towards a severe correction. But this is only an opinion. If the Nifty decides to take off on the upside, we will follow. So, let the market tell us where it wants to go.

End Quote

Sunday, April 11, 2010

Another Breakout - A big One ??

The Nifty is pushing against 5350 once more after two earlier attempts to breakout did not quite succeed. The range around 5350 is significant since there is very little resistance between 5350 and 6360, the 2008 bull market top. This means, once prices move above 5400 then there may be very little resistance to their upward journey.

Breakouts: Points of Maximum Risk

The breakout from 5350 is an opportunity to enter a new up move. It is also the point of maximum risk since the failure of this breakout could mean entering at the top. Breakouts are always like this. If they work, you make lots of money and if they do not, you end up having entered the market at the worst possible location.

I usually trade these breakouts. I understand the risk. I also understand the potential rewards. But each trader has to decide on her own risk level. Do a search of this blog and you should find a number of posts on breakouts. The search option is on the right side, just scroll a bit.

ATA monthly meeting

The next monthly meeting is scheduled for April 24, Saturday in Delhi.

Is the retail investor finally coming in ?

I received a poetry on the Nifty, written in Hindi. The document was a PDF but I did not understand how to upload it in the blog, so here is the poetry, as an image. It is heartening to see an effort made to enrich our own langauges.

Wednesday, April 7, 2010

The Last Leg of the currrent upmove?

The current rally started from 4675 on Feb 8, reaching 5400 today (April 7). So, today is some kind of an anniversary for the rally - two months. In 2 months, the Nifty has rallied 725 points, which is 15.5%. If the Index continues to gain 15.5% every two months, then the Nifty will double itself to 9350 by next february.

It is fair to say that this is unlikely. Not impossible, but very unlikely. This means that the current rate of gains is unsustainable. We can assume safely that there will be serious declines as well as consolidations in the Nifty. But when? We do not have an answer to this question. Therefore, we follow our charts on the trend, even when we understand that the trend is likely to reverse sooner or later.

The trend is up. A short term reversal can take place if the Nifty closes below 5350 (These are my numbers, you may have different levels and both of us can trade successfuly on our levels). The intermediate trend changes to down if and when the Nifty closes below 5250. Our strategy is to buy on dips. We are protecting our investment portfolio by buying 5300 PUTs which cost a little but ensure a reasonable amount of safety.

Have Fun!

Tuesday, April 6, 2010

Analyzing a Mechanical System

ANAS writes:
...The following is my mechanical trading system (or what I assume to be a system, ]. I use daily charts , and trade only in NIFTY. I use MACD(12,26,9]. I short after, when the FAST line crosses the SLOW line, from above. (both are above 0] and the FASTline stays below the SLOW line , for the next three days. I short near the end of the third day. also, i use SLOW STOCHASTICS(14,3] and CCI(20 & 30 too], to ascertain OVERBOUGHT&OVERSOLD levels. Sometimes I just check the ADX(14] , to find the strength of the TREND(I Consider trend as my friend as adviced by you ]. The stop-loss is kept above the most recent turning point. The above principals apply also, when I go LONG (of course the opposite set]

MY QUERY IS: is the system overall correct?, can you please suggest some alternate strategy of ascertaining stop-loss?, are the time frame of using above indicators correct? or will you suggest some other sets ?, many times I miss a considerable portion before I enter the trade, can you suggest some better method where I can take positions early and without facing any whipsaws? I understand and respect the considerable effort & time, which will taken on your part to advice on my query. I request a generous reply from you. THANK YOU ONCE AGAIN , for KEEPING IN TOUCH WITH US.. Other readers are also welcome to give suggestions.

My Notes:
Let us try to analyze the system decstibed here.

INSTRUMENT : Nifty Futures
Time Frame fo analysis: End of Day
Analysis done on: Not known. Are you using Cash or futures chart ?
Trading Rules:

Go Long When
MACD(12,26,9) Crosses above its trigger 3 days ago AND Both are below Zero (at crossover?)
StopLoss below latest turning point (turning point definition not available)

Go Short When
MACD(12,26,9) Crosses below its trigger 3 days ago AND Both are above Zero (at crossover?)
StopLoss above latest turning point (turning point definition not available)

So far this is a mechanical system. The turning point definition needs to be clear, but once that is done this is a trading system.

ANAS says "also, i use SLOW STOCHASTICS(14,3] and CCI(20 & 30 too], to ascertain OVERBOUGHT&OVERSOLD levels"

There is no rule mentioned on the use of stochastics and CCI. How is it used?

ANAS says again "Sometimes I just check the ADX(14]"

When is it checked and what is checked ? Rules not available.

Therefore, in analysis, I am ignoring the stoch, CCI and ADX.

The basic MACD rule is a trend following system. By requiring the lines to be above zero when selling, and, below zero when buying, the trader is buying on dips and selling on rallies. This is sensible.
By waiting for three days before entering, the system will often avoid buying in euphoria and selling in panic. Again, this is sensible.

Overall, this appears to be a profitable system, if used with discipline and some discretion. There should be a profit taking method. How do you exit a trade? Often, the MACD may remain above zero but a rally starts. You do not wish to continue your short position when this happens. Same for buy positions.

ANAS asks: many times I miss a considerable portion before I enter the trade, can you suggest some better method where I can take positions early and without facing any whipsaws?

MACD will often miss the early parts of a move. Sometimes it will push you in a trade at the best possible trade location. So, you win some and you lose some. If you develop a sense of the market, then you can trade in the direction of the priamry trend most of the time. When you feel that a reversal is imminent, take both sides of the trade. If the reversal happens , fine, and, if it does not then you have taken a loss or two and are back in the correct direction. In the same way, when you feel that the market may be going sideways, stop trading.

Now, this is not a mchanical system in the sense that it is not 100% automated. But it instills discipline and you can use your judgement to improve your trading.


Monday, April 5, 2010

Market takes a ride

The Nifty moved up, above the resistance of 5340, with a lot of style. Today's trading has lessons for short term traders.

1. Anticipation. Friday was a holiday in most international markets including India. On Thursday, the Nifty rallied throughout the day to close at its highs. The Market was closing in strength. On Friday, while the U.S. markets were closed, a job report was released which was considered bullish.Sunday saw the Dubai stock exchange notch up gains. (This was a bloomberg news item so it caught my attention). Monday morning saw Asian markets up. The anticipation was then for an up day.

2. Waiting after a gap. Nifty Futures opened with a gap up to 5332 (previous day close: 5305) . After the initial euphoria, prices moved lower below the first 15 minute low, and, then below the low of the first 30 minutes. Therefore, the trader should wait after a gap for some cooling off. The dip was NOT a sell signal. It ws a normal correction after a gap.

3. Strong Close. A trend day ends with a strong close. Today was likely to be a trend day - this indication came from (1) above, confirmed by higher prices throughout the day. Further confirmation came when the gap was not abnormally large. A trend day usually ends up closing at the top of the range (if it is an up day). The trader should have the patience to sit through the day, wherever he went long. At 2:25 PM, the Nifty was at 5341, then a sudden burst saw futures rally to close at 5365.

4. Buy the dull periods. When signs point to a strong trend, dull periods should be bought as they are usually part of the contraction cycle which will eventually lead to expansion.

5. Buy Strength. In the morning, after the first five minutes, I fired up LiveGrid [a software tool available in Trend Analyzer from ] to identify stocks that were the strongest after the first five minutes of trading. Sun Pharma was in the top five list. I went long in April futures at 1822, waited whole day while it did nothing, then, in the last hour saw it rally to 1850. I was comfortable since the instrument was strong in early morning tradng, supported by strength on daily charts.

Have Fun!