Sunday, May 30, 2010

Sunday Afternoon Musings

nagu asks "can any body explain why thare is huge discount on nifty futeres ?"
My Notes: This is mainly due to dividends. Some Index heavyweights will go ex-dividend this month. The lower price of futures reflects the ex-dividend price of the cash index.

men says "Some stocks like itc n maybe lupin continue to make new all time highs while the nifty flirts with the 200 dma so what is to be done to those stocks any guidance?"
My Notes: Well, you may not like what I say, but what goes up comes down. ITC and Lupin are both making life time highs - this is a sign of strength. Yet, ITC will remain strong even if there is a dip to 220 area where support will come in. If you own it, then you probably want to hold it, but if you want to buy, wait for a deep correction.

Anuj says "these-days I have been quite frustrated by unexpected news and inability of technical analysis to give advance warning about price direction...... Now with a heavy heart I have decided to reduce my dependence on technicals and concentrate on money management or what you have mentioned here as trade management"
My Notes: Why with a heavy heart? Traders should always focus more on trade management. Technical analysis does not forecast the future. It explains the probability of future price action. Unforseen events will always come in, that is why TA gives probabilities, and, not certainties."

Only two groups of people give certainty in forecasting. The first is God, and, the second is the fund managers - investment bankers - fundamental analysts who always seem to know the future. 

Mind without Fear says "am finding that it is very difficult to trade with one lot only. The specific difficulty is not knowing whether to book profits at 15-20 points gain or whether to let the profit run. Two lots solve this problem -- one can book one lot at 15 points or so and then let the second one run longer .... please comment ...."
My Notes: Absolutely correct. two units make it easier to trade a longer trend. Although, if the trade gets stopped out, the pain is also twice as great. But then, losses are the cost of doing business!

Pranav says "Many experts feel that you should keep a journal of your trading history, you should update it daily. Sir, do you have one such journal, and if yes, could I request you to share what are the points you included in your journal."
My Notes: A Journal is required for all traders. But do not think of the Journal as a form of literature. It is a recap of whatever trading you do. I trade mechancial systems and track the system performance versus the actual performance, every day, every trade. This becomes important since we sometimes override our system orders. I want my journal to answer this question: Are we correctly judging the changing nature of the market? So, the Journal will take the shape of the trader's priorities. But, it should be there.

gourav says "Thanks a lot for answering my query regarding money management for mini nifty.however the SL you advised is on your assumption of day trader.Could you please take few minutes of yours to say how much the SL could be for EOD trade."
My Notes: I did not actually give you a stop loss. I just used a number to explain how you should work out your plans. Please understand, stop losses are method + trader dependent. It is like asking me to drive for you while you sit on the drivers seat. Not a good idea!

My Notes:

Saturday, May 29, 2010

Volatility - A chart Check

Thursday, May 27, 2010

Nifty Futures Trade Management

Gourv asks:
"could u please explain money management to trade 1 mini how much money 1 need to have in his/her account to trade 1 lot mini much maximum in %wise of the total capital can be given as Stop loss."

Sensible question. The mini nifty details are:

Lot size of 20.
Current Nifty value: 5000
Mini Nifty contract Value = 20 * 5000 = Rs 1,00,000
Approx margin required = Rs 20,000
Cover for drawdowns = 2 times margin = Rs 40,000
Total capital required = Rs 60,000
Desired annual gains = 60% on capital = Rs 36,000
Annual gain in points = 1800. Per month = 150

Stop Loss
This will depend on your trading style as well as your time frame. If you are a day trader, your setups will be on five minute charts. I assume that the maximum loss on a five minute chart pattern will not be more than 20 or 25 points. This is the maximum, the average should be less. But, there will be a run of losses, which means there can be many consecutive losses. To protect against such runs, the trader must make some rules to avoid trading when conditions / setups are not in favor. For example: stop trading for the month if losses exceed 10% of capital. The exact number is not as important as the discipline.

However, random trading will not give any benefits. Traders should work on disciplined methods.

Wednesday, May 26, 2010

The 200 day moving average

This moving average has been in the limelight for the past few days. There have been comments and queries on it, so I will discuss this topic today.

How do you determine the trend? The answer to this question depends on the trader: Higher Highs/Higher Lows, falling/rising trendline, reversal patterns, MACD and so on. One way of determining the trend is to use the 200 day moving average to determine up and down markets. If the closing price is above the 200 DMA then the trend is up, if the closing price is below the 200 DMA then the trend is down. A 200 day average uses the past data of 200 days in its calculations, therefore it is not subject to short term movements.

Why 200? Well this represents about 10 months of price movement, therefore it should identify the primary trend of the market. There is nothing sacrosant about the number 200. Analysts found the 200 day easier to speak of, instead of referring to, say, 177 day average. Because it was a round number, as well as representing inermediate term price action, the 200 day become commonplace.

The 200 day average is of particular importance to position traders and investors. This group of people wish to stay as much as possible with the primary trend of the market. They are not keen to churn their portfolios. Now, the 200 DMA can remain below prices for months or even years, indicating a bullish environment, or vice versa.

When prices move below the 200 day MA, as they have done recently, they indicate that the uptrend is over. A break of the 200 DMA is not an event that takes place on and off. Now, the markets have a mind of their own. It is possible that the breach of the MA may just be a short term act, lasting only a few days. No one can predict the future. But, since we have to work with the present, investors will stay away from buying till prices remain below the MA.

What about the exponential 200 MA? Well, the only average that is popularly watched is the 200 days simple MA. So, this is the one that we should be interested in. You must have understood that 200 DMA is not some magic potion, it is relevant because a lot of investors watch it for trend direction. And, it does a reasonable task of catching primary trend movements.

Tuesday, May 25, 2010

Watch the Levels

Intra day and end of day volatility gives the impression of big moves going on in the Nifty. But, after the decline to 4900, the Nifty has really been moving sideways. For short term traders, there is some trading possible if you have a view on the trend. My view is: the trend is down, while we may be making a trading range at current levels. The view is based on charts, not just random!

For position traders, there really is no trsde in the Nify. The markets are probably developing a range. Then, once the boundaries of this range are visible, a break above will represent buying, while, a break below will repersent a continuation of the down move. It is true that this is a slow process, but then, what is the hurry?

Saturday, May 22, 2010

Correction or Bear Market?

See, it is too early to say so, but please remember that we have been looking for weakness since mid april, when the nifty broke down below 5270. Instead of worrying about a correction or a bear market, we need to understand that we should not buy.This is what will protect us from any kind of decline. We have also suggested many times that investors should switch from mid cap / speculative stocks to blue chips.

The Nifty continues to follow a pattern of lower highs, lower lows. This pattern will get broken if he Nifty were to close above 5206. These levels will change over time. There are three qualifiers for defining a bear market:

1. Pattern of lower highs, lower lows
2. Trading below the 200 day moving average
3. Breaking below the previous intermediate low

The previous intermediate low was at 4675 made in Feb 2010. This has not been broken yet, although the first two points have been met.

So, this is still a correction. What do readers say?

Should you buy now?

Thursday, May 20, 2010

Shock and Awe - this time in reverse

Just 10 days ago, on Sunday night, the full might of Governments in the Euro zone was on display when the one trillion dollar bailout was announced. The principle was: use a bazooka to disarm the pessimists. It worked for one day when markets opened 3 to 4 percent higher. Quickly, the shock and awe was replaced by uncertainty.

Now comes shock and awe in reverse. Mr Market, or Ms Market to be politically correct, is not a collection of governments. The Market does not have powerful weapons. It is only the collective judgement of market participants - a David in front of Govt Goliaths. But the Market feels that this bailout recovery is no good, there are problems in Europe and China which will affect the world. Therefore, in its wisdom, the Market has decided to stay away from risk assets - equities and commdities.

Now, dear readers - open the chart of any midcap which has seen a rally in the past 12 months. Just to pick a random example, I open up Themis Midcare - a stock that rallied from 48 in feb 2009 to 300 in April 2010. Suppose a normal 61.8% retracement were to take place - then the pullback will be155 points, bringing the price down to 145. This is the story with all midcaps, smallcaps, and, many large caps.

Proof: Technical Analysis works:

I have ben consistently bearish on Educomp. I have nothing against the company, my sense was that valuations were high, and, around 800 its price chart also started saying the same message. Since then, this has been my favorite sell. Today, the stock was quoting at 500. Now where can it go? I leave this as an exercise to readers. Open a weekly chart of the stock and check out the starting price levels and the peak which it touched in 2009, fourth quarter. What is the possible retracement?

I say that credit for this analysis goes to technicals because while I was bearish, I heard many fundamental analysts go overboard in their praise for this stock. In fact, the same story applies to Hind oil Exploration. When the share price was going up, TV anchors (not Udayan & Mitali, who are probably one of the best business anchors in the world) were high flying singing praises of the share. At 350, I suggested that buyers should wait for at least 250 before thinking of buying. I was treated as untouchable - a person who was deflating the big feel wonderful balloon. Now, at 185, we do not hear any talk of Hind Oil Expl on TV. I wonder why?

Take Care.

Tuesday, May 18, 2010

Nifty Review May18

After a big early morning decline on Monday, the Nifty rallied from 4966 (Monday's intraday low) and by the end of Tuesday (today), the Index had gained over 100 points from Monday's low, to close at 5066.20.

The Big Picture continues to suggest lower levels ahead. We have lower highs & lower lows in the Nifty - a classic picture of a downtrend. The tops that were made were rounding tops,which appear during a distribution process.

Also note the big range bars during the decline. We should contrast these bars with the narrow range bars during the up move from January to April. Bear markets are marked with big moves, while bull markets are soft, slow and steady performers - they move up quitely.

How will the down move end?
For now, a close above 5206 the recent minor high will give the first indication of a trend reversal.

Snap Back Rally
In the initial stages of a downtrend, participants do not believe that the trend has changed. A decline is considered as a dip which should be bought. Therefore, most traders start buying at the first signs of stability, leading to monster rallies. These rallies fizzle out, as we saw last week. But, dramatic snap back rallies are signs of market reversals (not of strength).

Monday, May 17, 2010

Tracking the Analysts

An American blog suggested that TV Channels should keep a record of Analyst suggestions. This will give some legitimacy to guests who come on TV, as well as provide a method for the viewers to review the advice given to them.

I liked this idea. We must be as transparent as possible. So, in my own modest way, I have started today, tracking what I am saying on TV. In this blog, in the left hand column, There is a link to Track Record, within the My Blog List section.

The problem is: It will take some extra time to sumamrise the talk, and, then to write it.

If viewers have any suggestions, please do write. I have one request. Whenever you feel like, please do write a brief summary of my interview, which I can then publish.

Saturday, May 15, 2010

Insert foot in mouth and Chew

[adapted from blog: naked capitalism]

What did they say moments in Financial Crisis:

Irving Fisher, renowned economist, one week beofre the crash of 1929:

“Stock prices have reached what looks like a permanently high plateau.”

[My Notes: This tells us that economists and stock market investing are completely different vocations]

Ben Bernanke in his March 2007 Congress testimony:

"The subprime crisis is contained. Losses at most will be $50 to $100 billion."

[My Notes: We know what happened to subprime, rather, what subprime did to the world. The losses have come in trillions, and, still counting.]

Hank Paulson, U.S. Treasury Secretary, on why he wanted immense powers to manage the Freddie mae / Fannie Mae problems:

"If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out.”

[My Notes: the markets have a nasty way of calling bluffs. Paulson put Fannie and Freddie into conservatorship less than two months after his comment.]

Now, we have a Euro Crisis Moment:

U.S. Treasury Secretary, Geithner’s moment may have arrived. In an interview with Bloomberg TV, he said:

“Europe has the capacity to manage through this, And I think they will.”

Friday, May 14, 2010

Blog Scanning

I read a number of blogs. Here is a sample of current writings:

Politicians Can’t Change - The Market Is Preparing For A Credit Crisis! []

I believe that the highs of the year are in. We are in the early stages of the decline and fear is elevated. Traders no longer trust the promises that are made.
By late summer, the credit crisis will worsen and economic conditions will deteriorate. That is when we will see sustained selling.
Here’s how to profit from this sorry state of affairs. Short every failed rally. In the early going, take profits and expect snap back rallies. When those rallies become less frequent, you’ll know that investors are ready to throw in the towel. Major support levels will fall easily and that is when you need to hang on to positions. You can already start to buy long term options (4-6 months out) that are far out of the money (20% or more). Scale into these trades. Focus on companies that rely on credit (heavy equipment, banks, and consumer stocks). Any company that carries a lot of debt and needs cash flow (airlines) will be in trouble. Keep your long term put positions and add to them in coming months. Have shorter term capital available to get in and out of front month put options in the early stages of the decline.

Sarkozy, Ackermann, Volcker Weigh On Euro  []

In seeking further reasons to sell the euro, look no further than to the unlikely trio of French President Nicolas Sarkozy, White House adviser and former Fed Chairman Paul Volcker and Deutsche Bank chief executive Josef Ackermann.
First, Sarkozy apprently in a hot-headed outburst during last weekend’s heated euro zone negotiations threatened to pull France out of the euro zone. Not exactly a vote of confidence. Then Deutsche Bank chief executive Josef Ackermann said there are some doubts about Greece’s ability to repay debt.
Volcker provided the icing on the cake with remarks that raised big questions about the entire future of the euro. “Clearly, I think we have to say that the euro failed and fell into a trap that was evident at the beginning. I think Europe’s going to have to decide in the end whether to get more integrated or to get less integrated, in which case the euro is the question.”

The Rebirth of Regulation []

What do oil giant BP, the mining company Massey Energy, and Goldman Sachs have in common? They’re all big firms involved in massive plunder. BP’s oil spill is already one of the biggest and most damaging in American history. Massey’s mine disaster, claiming the lives of 29 miners, is one of the worst in recent history. Goldman’s alleged fraud is but a part of the largest financial meltdown in 75 years.
When shareholders demand the highest returns possible and executive pay is linked to stock performance, many companies will do whatever necessary to squeeze out added profits. And that will spell disaster – giant oil spills, terrible coal-mine disasters, and Wall Street meltdowns – unless the nation has tough regulations backed up by significant penalties, including jail terms for executives found guilty of recklessness, and vigilant enforcement.
After thirty years of deregulation, it’s time for the rebirth of regulation: Not heavy-handed and unncessarily costly regulation, but regulation that’s up to the task of protecting the public from companies and executives that will do almost anything to make a buck.

Wednesday, May 12, 2010

Markets again in trading range

I have to apologize for not writing in recent days. A lot has moved in the markets since the last post. The Nifty fell to touch the 5000 target identified earlier. Another bailout package - this time by the Europeans saw big gains on Monday but a decline in enthusiasm on tuesday when Asian markets fell a lot, Europe somewhat while the US remained flat with small losses.

Euphoria is not a sustainable basis for a rally. Remember last year's election rally in India? A subsequent correction saw half the gap being filled. One year later, we are 15% higher from the first post gap numbers - as compared to a 25% gain in the S&P 500 for the same period. My point is : Euphoria hardly ever leads to more gains. At best, the market enters a prolonged period of consolidation.

The problems of the Eurozone countries, as well as the bubble in China will not go away by throwing money at it. The market understood this one day after the big rally - note how the Euro has given up all its gains. A weak Euro makes Chinese exports expensive, causing worries in China. The real estate bubble has already made China ready for a crash - it seems the question now is : when rather than If. The Shanghai stock exchange is down 20% from its highs, qualifying the decline as a bear market.

What is my analysis of the Nifty?

The Nifty has seen a pattern of lower high, lower lows. This is a downtrend. Subsequent price action can be:

1. The downtrend continues. The Nifty should remain below 5295 - a minor pivot and subsequently close below 5100 which was roughly the mid point of Monday's price bar.

2. The Nifty builds a trading range somewhere between 5100 and 5200, then breaks out from it.

3. The Nifty stages a sudden V shaped recovery, crossing its minor pivot of 5295 and reversing the down trend to a new upmove.

This is what the possibilities are and we should follow what the market does.

Tuesday, May 4, 2010

Nifty falls below 5200, looks towards 5000 support

This is what we wrote to our clients today, in the daily letter:


Indian markets fell sharply, closing below 5200, in fact well below this support level, at 5148. The bearish head and shoulder which we have been tracking has been confirmed by today's price action. The pattern target for this move is 5000, although I suspect that the Market may actually fall lower.

We may well be entering a deep correction.

For Investors:

Buying opportunities are likely to emerge whenever the correction gets over. Please remember that a one or two day rally will not be a sign of an end to such a correction. patiemce is the best friend of the Investor. This column had advised liquidation of all shares held on your trading account when the Nifty fell below 5270 two weeks ago. For your investments, we suggest that you switch from low cost small caps to blue chips. There is no hurry. We will provide you with a list of stocks where such switching can take place.

For Traders:

Look for opportunities mainly on the short side. Again, buying on dips is possible in selected stocks which show relative strength. We will provide readers with our own list, soon enough.