Wednesday, June 30, 2010

Our good friend, the trading range

The Nifty is back into a range - with a breakout at 5370 and a breakdown below 5250. We should expect a move out of this narrow band, sooner rather than later.

Meanwhile, the S&P500, the U.S. Index broke down trading below a significant support at 1040. This is the fourth time that the S&P has come down to test the 1040 support. Just as a breakout above 5400 will be a bullish signal, so also a breakdown below 1040 for the S&P will be a Sell signal.

Meanwhile, the story has started that 'This time it is different' for India, since we are going up while the world is going down. My own sense is that it is never different. We will follow the world markets, sooner or later. I am not saying we will go down. But, our markets will align with the other markets. If world markets begin to go up, maybe we will be rangebound till they catch up with us. or, maybe we will see a sharp sudden decline to catch up with them. I cannot say. But, we are not decoupled.

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4. Application of the Fibonacci Sequence and Tools
5. How to Apply Fibonacci to Real-World Trading
6. How to Draw and Use Trendlines (simple but effective)
7. Time Divergences
8. Head and Shoulders – An Old-School Approach
9. Four Kinds of Protective Stops

What should you do now

Most traders may not have short positions in the market. After all the Nifty has been consistently strong. Yesterday, it fell below a pivot - 5273. Just barely, since the close was very near this level.

Therefore, the question remains: is this a correction or a new down move?

If you are a short term trader, then understand that the up move has come to an end. Your view should be either to the downside or sideways, which means you are open to long as well as short positions.

If you are a position trader, then also the uptrend is likely to come to an end. I say likely, because today will give that confirmation. An uptrending line will be broken if the Nifty were to close below 5250, an event that seems likely before market opens - but who knows? Assuming this event takes place, you want to close your trading positions, then wait or take short positions on rallies - your choice.

If you are an active investor, this is just a correction. The first signs of a decline will come only if the Nifty were to close below 5140 - 5160 which is a support zone. A final confirmation comes if the Nifty closes below 4786 which is the intermediate low.

Have Fun!

P.S. This is my third post since yesterday evening. The first two can be read from Blog Archives (right hand side).

Tuesday, June 29, 2010

Are there cycles in the market?

Does the stock market move in cycles? Do prices rise and fall with some kind of regularity?
If there are cycles in the market then a trader who can identify these cyclical turns can make a lot of money. So we will take it for granted that smooth, easy to use cycles do not exist. But what about rough, difficult to use cycles?

After all, most patterns are visible only in the eyes of a beholder. Look at a head and shoulder on a chart. if you are a techncal trader you can spot the pattern in seconds. But, show the chart to your friend who is in the market but not into technicals. She may be a market participant, but she is unlikely to spot the pattern.

Therefore, it is possible that cycles do exist which are detected only by some traders mainly because they have practised for years to identify such cycles. Then, why do these traders not make much money? I think it is the same reason that prevents you from making money on the head and shoulder pattern that you easily identifed on a chart!

Trading is not just about setups. It requires (a) discipline to trade the setup (b) Capital to withstand the inevitable drawdowns (c) Mental ability to accept that some patterns will not work even when identified correctly, (d) Fortitude to continue with the patterns after a period when the pattern keeps on failing, and, so many other reasons.

Does this one chart line spell doom for the markets?

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Doom for the Markets?

Does this one chart line spell doom for the markets?


Click here to watch Free Video 

The Nifty has began a correction. While trend indicators have turned down, the chances are that 5240 support will not hold. We are now looking at a correction of the 4800 - 5365 up move. There is strong support around the 5150 area.

U.S. markets are on the verge of breaking down from the lows made in Feb - 1040. This is equivalent to 4675 low in the Nifty which was made in feb. Then, by comparison, the Indian markets can fall a lot more to 'catch up'.

Monday, June 28, 2010

An Interesting Presentation

Saturday was ATA meeting day. S.K. Sukhija, Trader and Elliot Wave Expert came to Delhi for a presentation on terminal waves. Attendees were treated to a delightful afternoon of knowledge. The grand finale came when Mr Sukhija showed a roadmap for the Nifty. Outstation members will get the slides, so they will be sharing in the presentation. Readers who live around Delhi should become members of the ATA and attend each monthly meeting. Readers away from Delhi should become members to take advantage of the wealth of knowledge that the ATA is developing.  Please contact Vivek at www.ataindia.org

Monday was a cheerful day for the Indian stock market. But it does seem that each trading day comes on its own, without any link with the previous day. My point is: the market action appears to be increasingly random. Trying to make money in this environment is a lot of fun. Just take it easy. Trade only when you have a setup that you understand. Do not overstay your welcome.

Every day is not Sunday

I have written about the 15 minute breakout rule, a number of times. This is a favorite day trading strategy for me. But, it is NOT a blind, mechanical method. Trading discretion is neccessary. Today was one day which was a big whipsaw for this rule.

Nifty Futures opened higher, then built a 15 minute range between 5295 and 5314. Price traded above the high of 5314, went on to 5322 then saw a sudden decline to 5291. Finally a rally saw the day end at 5339. While the day's trend as up, the 15 minute rule created two losses. The trader who bought above 5314 was stopped out below 5295. A short taken below 5295 would be stopped out at 5314 or 5322, depending on where you put your stop. I doubt if the trader would have the energy to take the third trade - to buy.

This is why, I advocate the concept of a 'view'. Traders should enter the market with a view - an awareness of the trend. Today morning, on CNBC, Udayan asked me before the open, what was my view on the short term trend. I said, I am bullish, since we have seen a four day correction of some sort. This was my view. This helped me take two trades today. First, a buy at the open (5298), which was closed at 5312 in about 15 minutes. Second, a buy at 5316 when the 15 minute high was taken out. Since my view was to look for an upswing, I did not use the 15 minute low as a stop. My stop was: 5273 which was the pivot made on Friday. This was lucky. This enabled me to close the trade at the end of the day.

Why did I not use the low? Because a sharp sudden move can go below the low only to recover quickly. If my view on the trend is wrong, then I will lose money, but I should not lose even when I am right! Think about it.

Friday, June 25, 2010

Guide to Technical Trading

Abridged article from http://leighdrogen.com/on-technical-analysis/

The technical trader uses technical analysis backed up by fundamentals and a broader macro economic view.



No Shortcuts

There are no shortcuts when it comes to making money in the market, and technical trading is no different.

Technical Analysis is the study of market psychology
Because people are the ones buying and selling assets in the market, or writing the algorithms which buy and sell assets for them, asset prices will always be subject to the fallibility of human emotions. Because human emotions don’t change, the name of stocks change, the fundamentals of companies change, but human emotions never will, and the chart is the representation of that emotion. So when I look at a chart, and call it technical analysis, what I’m really looking at is the collective psychology of all market participants for that asset.


Patterns in Technical Analysis
The patterns are nothing more than the psychology of the market at work. If you play tennis against a friend over and over, you’ll eventually come to understand patterns in his shot selection. You might decide to position yourself early to take advantage of his shot. Well, we do the same thing in the market. When we see a pattern that we recognize with a high probability of moving in a certain direction, we position ourselves to take advantage of it.


Not Prediction but Probability
I didn’t say I knew where the price was going, I’m saying that I’ve got a rough estimate of the probability of which direction and at what rate the price will move over a certain period of time. I think about the market in terms of risk vs reward, and the patterns that I recognize allow me to only buy or short stocks which give me the best chances of success.

Useful for All kinds of participants - Investors , Traders
Technical analysis is useful on all time frames. If you’re an investor who likes to buy stock in companies where you believe there is good value. There’s this idea in technical analysis called support and resistance. So how can this help you? well, if you’re looking to buy a stock that is at a fair value, it’s best to find a level of support at which the stock has been bought in the past, and set your buy order there.

Technical analysis is about risk management first and foremost. When you’ve got a position that shows you a profit, you can use technical analysis to get you out of the position by using resistance levels and moving averages as well.

A systematic approach for an intermediate term trader
After scanning a universe of stocks for certain fundamental characteristics, I look for relative strength in price and patterns that I recognize on the daily time frame. I like to buy stocks that are trending nicely above their rising 20 and 50 day moving averages.I also use my macro view to weight my portfolio in certain sectors, industries or asset classes. If the market as a whole is not healthy, or showing technical strength, it doesn’t make much sense to be buying any stocks.

It is a business
Over time, just as you would develop a deep understanding for a company’s fundamentals and when you felt it was cheap, you can develop a deep understanding for how the price and volume of a stock or the market as a whole moves. It takes years and years to become comfortable trusting your intuition when you recognize a pattern that has worked for you in the past.

Whipsaws with Trend

Thursday, June 24, 2010

Different Viewpoints

An upbeat forecast:

David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com says:

Will markets start to “climb a wall of worry” or will they falter? If they climb, the correction will be deemed to be over and the next upward leg will be confirmed. If they selloff from here, the rally will be declared a false start and we will test lower levels. Our view favors positioning in the markets due to the massive and continuing liquidity and near zero interest rate outlook.

This one is quite pessimistic:

(Zerohedge.com which quotes Rosenberg)

Based on a chart that shows over 100 years of the Dow in real terms. There are a few conclusions from this:


•Secular bull and bear markets typically last 16 years


•During the secular bear market, most if not all of the prior gains made (again, in inflation-adjusted terms) in the prior secular bull condition, are wiped out.


There is a very subtle upward drift – the secular low points rise over time, albeit fractionally.


This is the information contained in the chart; do what you like with it. Assuming inflation averages 2% annually and that 2016 marks the end of this secular bear episode (seeing as it began in 2000) then the historical pattern would suggest a test of 5,000 on the Dow as the ultimate trough (at that point, gold will likely be 5,000 too). This does not preclude cyclical rallies along the way, but these will be “bear market rallies” such as we saw from March 2009 to April 2010 and investors should not be tempted into any other strategy than to rent these rallies and not own them

My Notes:
 
Why should we want to forecast what will happen 5 years later or 3 months later or whenever? Instead, I need a plan of what I should do. There are a few basic principles:
 
1. Equity markets have a secular uptrend
 
2. Markets undergo severe corrections. Fundamental analysts go into denial when confronted with falling prices. The damage is done by almost forcing investors to buy at what later appears to have been a market top. This leads to underperformance at best and a wipeout of capital in many cases.
 
3. The constant chanting of "buy, buy, give us your money, and, buy" diverts our attention from other options available as investments. Fixed Deposits, Precious Metals, Property - residential and commercial, commodities, forex, selected small-cap/mid-cap shares(as part owners, not traders or investors)  are alternative investment opportunities. We should shift focus from stocks when they are fairly valued. We will think about alternative options when we feel that stocks may not be a great idea for some time. 
 
4. Buying on significant dips makes money. Such dips come twice a year (generally).
 
5. Traders should not care about the big picture. They should be concerned with disciplined trading. Investors should read 1,2,3 & 4 above.
 
 
 
 
 

Challenges for the swing trader

The short term trend has been up since a while. I will show you the Nifty futures chart which I use. This is a 15 minute chart. Note the dash-dot line which is a control moving average that tells me the short term trend. This average turned up on June 11, around 1400 hours. Futures were 5030 approx. The uptrend was strong, with the average continuing to move up, till, yesterday, june 23, when the control average turned down.



Now, here is the challenge: The Nifty maintains its strength while the primary signal that I use has given a down trend signal. It is possible that this may be a whipsaw, which means the average could turn up again, giving a loss on a short position. It is also possible that markets may move sideways and the average can become flat, like a straight line. But, the current reality is that it is falling. The challenge is to follow your signals as they are visible now.

The software used is Trend Analyzer which I feel is ideal for the short term trader. More information is available  at the software website here

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DO take advantage of these lessons.

Wednesday, June 23, 2010

Readings from Blogs

ECRI Weekly Leading Indicators : One of the Best



My Notes: The ECRI Weekly Indicators have been in a lot of news lately, since the indicator has been falling, suggesting that all is not well in the U.S. economy.


The following discussion is by Lakshman Achuthan and Anirvan Banerji, co-founders of ECRI:


A 63-country IMF study on economists’ recession-forecasting prowess concluded that “The record of failure to predict recessions is virtually unblemished.” In contrast, the IMF subsequently noted that ECRI “has actually had a very stellar record” of recession forecasting.


In August 2009, we said the recovery would be “at a stronger pace than any the United States has seen since the early 1980s.”

Its message today is quite simple: A slowdown in U.S. economic growth is imminent, but a new recession is not.

My Notes: This indicator is developed by two Indians. This fact is gratifying to all of us in India. The curent reading suggests that a slowdown in the USA. There will be some impact on India.


(from: ritholtz.com)


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Baltic Dry Index Decline


Analysts are taking note of the recent 40% drop over the last month in the Baltic Dry (Shipping) Index, which is often seen as a leading indicator of global economic activity. (chart from afraidtotrad.com)






Notice that the BDI ‘bottomed’ in November/December 2008, prior to the March 2009 stock market bottom. The sharp recovery in the BDI preceded the 2009 stock market ’straight up’ recovery, though the BDI became rangegound between the 3,000 and 4,000 level… which is where we have remained for over a year now.


The weekly chart just broke a rising trendline at the 3,000 index value level last week, so we need to keep a close eye on that for any further signs of deterioration – which would be likely bearish for the global economy and equity markets.


(from: afraidtotrade.com)


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Number Of Millionaires Hit 10 Million In 2009, No Word On Poor


According to the Merrill Lynch / CapGemini “State of the World’s Wealth” report, the number of high net worth individuals rose 17.1% last year to 10 million. Their total assets combined increased 18.9% to $39 trillion. The US, Japan, and Germany accounted for 53.5% of the world’s wealthy.


In regional and country trends:


After losing the least in 2008, Latin American wealth surpassed the 2007 levels.


Countries from Asia-Pacific region have higher growth rates than other regions.


HNWI population in Hong Kong and India increased significantly in 2009


Not included in the study is new information that 115 million of the world’s 245 million widows live in poverty. Also missing is the statistic that more than three billion people in the world live on less than $3.50 per day or the World Bank’s estimate that 1.4 billion people live below the poverty line.


The Merrill study is the kind of headline grabbing news that banks, brokerage firms, and business magazines like to give out. The data say that wealth is re-emerging again now that the global recession is over. Stock market prices and real estate prices have recovered. There are 10 million millionaires, a testimony to the ability of those with pluck or inheritance to live long and prosper.


But, in the meantime, there was not any word about the poor.

(from: 247wallst.com)

Tuesday, June 22, 2010

The Challenge of 5400

Since the bull market started in 2009, a roof has been placed on the upside movement, at 5400 in the Nifty. This resistance is now undergoing a challenge with the markets seeing a sharp rally, reminiscent of previous bull market moves.


Let us consider some possibilites:


1. The Nifty may move up, breaking out above 5400, then slowly moving up with a pattern target of 6000 at the minimum (assuming trading range is 4800 to 5400).


2. The Nifty may move above 5400, but does not get the momentum to move much higher, ensd with a retracement that is higher than 4800. The market ends up in another trading range with support higher than 4800 and resistance also higher than 5400.


3. The Nifty crosses 5400, then falls to create a false breakout. Markets remain locked in the 4800 - 5400 range.


4. The Nifty fails to cross 5400, begins its much awaited decline.


There are more possibilities but these four will suffice. The key question here is: How do you trade? The answer lies with the trader since there are as many ways of trading as there are traders.


One possible strategy could be:


A breakout above 5400 is taken as a breakout! Buying is done with a stop loss identified on charts.
AND,
If, the Nifty closes below 5300, a short term pullback is assumed. Short selling will be done with a stop that is approx 2 ATR above entry price, th ATR calculated on 120 minute charts.


A strategy, any strategy will make trading easier and profitable.


A key question that comes up for traders is the use of Fibonacci retracements in our trading. While these retracements make a lot of sense since they represent 'Buy on dips' or 'Sell on rallies', how do you actually use them.


Now, this Free, educational video discusses Fibonacci Retracements.


A key question that comes up for traders is the use of Fibonacci retracements in our trading. While these retracements make a lot of sense since they represent 'Buy on dips' or 'Sell on rallies', how do you actually use them.


Now, this Free, educational video discusses Fibonacci Retracements.


Click Here to Begin the Video

Fibonacci Retracements: Use Them In Your Trading

A key question that comes up for traders is the use of Fibonacci retracements in our trading. While these retracements make a lot of sense since they represent 'Buy on dips' or 'Sell on rallies', how do you actually use them.


Now, this Free, educational video discusses Fibonacci Retracements.


Click Here to Begin the Learning Process

NIFTY WATCH

The U.S. markets gave up all intra day gains and actually filled the opening gap. There is a low risk, high reward trade setting up in the Indian markets. With 5400 as resistance, we have a fair probability that the Nifty will begin a move on the downside. Traders may take a short position, with a stop above 5400 or slightly higher.

Monday, June 21, 2010

The Yuan Rally

An intention to float the Yuan (partially, within controlled limits) set off a large rally in equities on Monday, today. The rally was most pronounced in Asia, which is geographically close to China. Somehow, Europe and the USA do not seem to be impressed with this announcement.

They should not be. China's action was anticipated, to the extent that the whole world was demanding some action on its undervalued currency. Markets went up, mainly on excitement, and, the chances are they will cool down quickly.

What next?

The Nifty is within striking distance of crossing its current bull market high of 5400. We should remember a saying "There is many a slip between the cup and the lip". Two weeks ago, the Nifty was at 4970, within 20 points of breaking below a significant support level at 4950. I assumed the breakdown was sure. But, nothing is certain in the markets. Regular readers will remember my dismay on becoming 'sure'. Such is the way of the market. Now, we have the Nifty, almost ready to cross 5400. If the Nifty closes above 5400, this will be a sign of continued strength. Let it do so.

The trend is up. Most momentum and breadth indicators suggest the markets are in extreme zones, likely to see some correction / consolidation. When your chart setups give signals, the trade is to buy on dips.

Trading a Gap open

A big up gap in the morning was a problem to traders who wished to take on a long position. How do you enter? The answer lies in the 15 minute rule, referred to many times here. There is a lot of information on this rule inside this blog. Just do a google search using the search box in the right column.

Sunday, June 20, 2010

52 Week High Friday Rule

In continuing our learning process, here is a video on the 52 week high Friday rule. I hope readers take full advantage of these free learning sessions.


Click Here - Opens in new window



The Indian Outperformance

Here is the international outperformance achieved in a sample of international markets from April 2000 to June 2010:



Brazil +266.22% (EWZ tracking Bovespa Index)


India +266.16% (Bombay Stock Exchange – BSE)


Australia +68.16% (ASX 200 Index)


China +68.06% (Shanghai Index)


Hong Kong +39.74% (Hang Seng Index)


United States -26% (S&P 500)
An added kicker for investment consideration is valuation. According to The Financial Times market data section, all these international markets, with the exception of India, trade at a discount to the S&P 500 on a Price/Earnings ratio basis (P/E).
 
(from http://investingcaffeine.com)
 
My Notes:
 
What we undestand is that India has been a big growth story, is now overvalued as compared to other international markets. As Investors, we should look for opportunities to invest in assets beyond the Indian stock markets. We will offer suggestions soon.

Wednesday, June 16, 2010

The Five Day Rally

A blistering rally in the Nifty has seen gains of over 250 points in five days. To see this in perspective, the Index gained about 5% in five days, as compared to a bank deposit which fetches 7% in a year. The gains are a lot.

It is fair to assume that momentum will fall. But the gains may well continue with the Index inching its way up, adding a few points every day. Thus, Index action could be a trap for short sellers. There is always a caveat to our analysis. Volatile markets can do anything, therefore our scenario may face difficulties in case of sudden news flow.

All of us have our eyes fixed on a resistance zone between 5300 to 5400. Many fundamental analysts believe that the Index does not have the strength to overcome this resistance. But, who knows. The trend is up, so we assume that markets will reward bulls. That's the way, short term traders should plan.

Think Crude

The Talk Of The Day Is Crude Oil. We may have started a process of higher prices in crude. To get a feel of what crude may do, watch this video :


Crude: Talk of the Day


Apart from stocks, traders should focus on commodities and forex. Here is a review of the Gold market with special focus on candlesticks


Japanese candlesticks and the Gold Market

This is Wednesday morning. The U.S. markets were up 2%. Indian markets are already outperforming, therefore we should expect more gains today. If you wish to trade today, you my like to follow the 15 minute rule. You can read about the rule here : http://practical-ta.blogspot.com/2008/11/fifteen-minute-rule.html

Tuesday, June 15, 2010

Bullish or Bearish - Try to avoid a bias

A sharp rally in the S&P500 is beginning to slow. What is the outlook for the U.S. markets?
Have a look and understand the big trends. (Video opens in new window)

A quick update on the S&P
 
What follows is the main post. This is a bit complicated.


First, I suggest that the trader should always have an open mind - there should be no perconceived ideas about being bullish or bearish.


Second, I strongly urge traders to trade with a view, a sense of dirction.


Are these suggestions contradictory?

No. The trader should have an open mind on the direction of the market. Determine the trend using your trend detection methods. Then, trade in the direction of the trend as you perceive it.

An open mind means : I can imagine the Nifty falling back to 3500 again. Why not? It also means that the Index could rally to 7000! After all, there is no law saying that the Nifty cannot go into a bubble. So, anything can happen. When we have an open mind, the real message of the charts comes to us.

But we cannot trade with these flights of imagination. With an open mind, we are mentally preparing ourselves to listen to whatever the charts say. Trading is done on trend & setups available on our charts.An open mind ensure that we do not go into denial.

Monday, June 14, 2010

Stocks with classical patterns

Classical technical analysis patterns are alive and kicking. On June 8, we gave a buy call for Reliance Capital in our newsletter. (The newsletter is available to newsletter subscribers as well as Trend Analyzer software users).
The pattern was an Ascending Triangle, a classical Edwards and Magee pattern. Here is the chart that was given:


Slowly but steadily, Relcap did go up, closing at 720 today. (Four trading days have elapsed).

Learning is a continuous process. In keeping with this idea, here is a video that shows "How to Tell When a Market is Oversold"

Click Here to find out How to identify oversold markets

Nifty closes above 5150 resistance

Today is the third day of rally, with the Nifty breaking out of the 4970 - 5150 trading range, closing at 5198, decisively above resistance.

The Index has made a pattern of higher highs, higher lows, which is the sign of an uptrend. The Nifty had earlier broken down from what appeared to be a rising wedge. A rally has now brought prices near the apex of the wedge (5200), which is the make or break level for the wedge.

How do we trade: Assume that the trend is up. Wait for dips to go long. If this is a bull trap, which means that there is a false breakout, then traders will be confronted with losses, hence our suggestion to wait for dips before going long.

Get 10 Trading Lessons FREE   Click Here 

Sunday, June 13, 2010

What the blogs are saying June 13 2010

Japan's new PM warns country at the risk of collapse

"Naoto Kan, in his first major speech since taking over, said Japan needed a financial restructuring to avert a Greece-style crisis."Our country's outstanding public debt is huge... our public finances have become the worst of any developed country," he said."

My Notes: This is probably bullish. When politicians accept the problems, they begin to seek solutions. Usually, they are in denial.

Get 10 Trading Lessons FREE   Click Here 


George Soros: Financial Crisis Has "Only Entered Act II"


There is no doubt George Soros is one of the brightest investment minds of the past few generations.
“The collapse of the financial system as we know it is real, and the crisis is far from over,” Mr. Soros said at a conference in Vienna. “Indeed, we have just entered Act II of the drama.”

My Notes: Well, Mr Soros is far smarter than I will ever be. So we should be worried. The actionable part is: Avoid risk. Think long term.


The Chances of a "Double-Dip" are Essentially Nil
http://macroadvisers.blogspot.com/2010/06/chances-of-double-dip-are-essentially.html

Early in the recovery many forecasters, concerned that the nascent expansion was fueled only by temporary inventory dynamics and short-lived fiscal stimulus, fretted over the possibility of a double-dip recession. Now, with the emergence of the sovereign debt crisis in Europe, that concern has re-surfaced. Certainly we recognize that the debt crisis imparts some downside risk to our baseline forecast for GDP growth. However, based on current, high-frequency data — most of which is financial in nature and so is not subject to revision — we believe the chance of a double-dip recession is small.

My Notes: Quite possible. But we have completely contradictory opinions from experts, so we have to wait and find out what actually will work out. Nothing actionable here, since people are bullish, looking to buy, anyway.


Wall street is too bullish, which may be bearish

Ritholtz,com reports a Barrons survey of 13 market analysts from top names like Deutsche Bank, UBS, JPMorgan, Oppenheimer, HSBC, Bank of America, Credit Suisse, Goldman Sachs, RBS, Barclays, Bank of Montreal, Morgan Stanley and Citigroup.

All 13 are bullish on the U.S. stock market forecasting gains between 8% to 26% for the year (over 2009).


Barrons says "What really caught our eye, though, is that not a single one of these worthies was bearish. Which strikes us, of course, as enormously depressing.”

My Notes: May not mean much. This is mainly a proof that most blog authors remain bearish. We should look at the charts, understand the risk, then trade or invest accordingly.


$34 Billion Asset Manager Says Market Prices Are Manipulated


•The US equity markets are meant to facilitate investors' allocation of capital to businesses, thus expanding production and improving the quality of life in America.

•The markets have strayed from this social purpose, and presently resemble casinos more than orderly markets. As a result, the economy is hindered, fewer jobs are created, and reasonable returns for true investors (not traders) are compromised.


•The property rights of creators of intellectual capital are being systematically and openly ignored by the exchanges and certain market participants. The order originator's hard work, ingenuity, and prospective returns are being taken and sold by those who did not create it.


•Whereas trading was once a means with which to match long-term buyers and sellers of businesses, trading has now become an end in and of itself.

My Notes: There is a lot of philosophy in this, but I agree with most of the contents. The stock markets, world over are beginning to resemble a casino. The purpose of the market was to help in capital formation and economic growth. Now, it is becoming a gambler's den. Pity.


(http://www.zerohedge.com/article/34-billion-asset-manager-says-market-prices-are-manipulated-accuses-nyse-intellectual-proper)


Felix Zulauf is Mega-Bearish in Barron’s June Roundtable


Zulauf is mega-bearish, more so than I remember him being in either January's magazine or in any prior issue.

Why this is troubling is that Zulauf's been pretty damn good, better than most of the other Roundtable prognosticators, from what I remember of recent editions.


Basically, he's saying (paraphrased):

The pain in European states has been peripheral, now the contagion will penetrate into the bigger, more important countries.
The only real shot of a stock rally is when another stimulus is attempted or when more money is printed, but these efforts will produce only a temporary bump.
The potential upside for equities here is only 5%, the downside looks more like 20%-ish.
Even gold will correct because the party got too crowded lately, but it should be bought close to $1000 an ounce when that happens.
US Treasuries are a good bet for the intermediate term (2 to 3 quarters).
Blue chip stocks should only be bought if one's time horizon is 10 years or greater, anyone with a 1 to 3 year time horizon should watch from the stands.
The stock market will make a lower low than the March 2009 bottom after more attempts to stimulate fail. He notes that we are trading at 2 times book value now (1096 vs $500) and that stocks didn't bottom until they were trading at half of their book value during the Great Depression.

My Notes: What can I say? I am bearish on the markets expcting a corretion of the 2250 to 5400 upswing. We can see a higher high and then correct or maybe we are in a correction. Only time will tell. Following our charts makes it a bit easier.

http://www.thereformedbroker.com/2010/06/12/felix-zulauf-is-mega-bearish-in-barrons-june-roundtable/

Saturday, June 12, 2010

Markets next week

Here are two different projections for the next few eeks, by two fairly accomplished U.S. traders. Both have good track records of identifying turning points. The levels discussed are for the S&P500, the U.S. Index which closed at 1091 on Friday.

Trader A
Right now I think Monday/Tuesday high

1100-1105
Then 1033
970
840

Trader B
Summer Rally?
On 6/7 I projected the DOW low to be 9864 and the S&P low to be 1045 before a rally begins. The actual lows were 9757 and 1042 on 6/8. Now after two days of rally the question becomes is this a longer term rally or just a minor correction in the bear. The prices to note are 10360 and 1108. If we close above those on a weekly basis, the longer term rally should be in place.
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My Notes:


The Indian markets are likely to follow the U.S. markets. We are competely coupled with the rest of the world. We have a trading range between 4970 - 5150. Current action in the Nifty suggests that 5150 could be taken out. If there is a breakout it should be accompanied by similar breakouts in world indices. The levels for the S&P are useful for us, since this will tell us if the world markets are breaking out or not.


For the short term, we can expect a sideways market for the next 2-3 days or even a mild dip. A brief rally to 5150 is possible, but that is about all. This is for the next 2-3 days only.

A video that shows what the markets may be setting up is available. I strongly recommend readers should see it. The link is given below. Registration is free, so do take advantage.

Battle between Bulls and Bears

The link opens in a new window.

Friday, June 11, 2010

Battle between Bulls and Bears

The battle between the Bulls and Bears continues with very choppy trading action. The rally from a potential double bottom is cause for concern for the Bears, however the Bulls are in a similar situation as they have to prove their case with sustained market action.


Learning is 90% of trading. Have a look at the video to pick up new ideas. (opens in new window)

Battle between Bulls and Bears

Practice is learning. Doing the same setups many times makes us better.

Rally to top of range

Thursday saw a rally to the top of the trading range, which is between 4970 and 5150 for the Nifty. We have strong chances that the Nifty should reach 5150 today, given strong cues from international markets.

The trading range remains intact with support now at 4970 and resistance at 5150 (so far!). A close above 5150 will give the first hint that the range is breaking to the upside. If the market remains higher above 5150 for at least two to three trading sessions, we will assume that the range has been broken on the upside.

We are traders, not forecasters. It is our job to follow the market. While I have been consistently holding that we are going lower, it is the market which decides what it wants to do. A move above 5150 (as explained above) will then become a buy on dips trade.

More than the Nifty, we should be watching the S&P500 in the USA. This index closed at 1084 approx which is lower than 1104 that it saw last week. If the S&P500 were to move above 1104 decisively, chances are that most of the other world markets will follow. My point is: a breakout in the Nifty is only half the picture, the other half is the S&P500.

Humble Pie
The markets teach us to be humble, all the time. On Monday, I suggested on CNBC that the Nifty (then at 4990) was unlikely to go back to 5150 this month. Just four days later the market proves me wrong. That is not an issue, since the market will have its own mind, and we do adapt to the market. The problem is: why should I even think about what the market will do or not do? Why not just follow the setups / signals? When I start getting these periods of overconfidence, the market shows me my place and keeps me humble for the next few months.

I have a banner for educational videos. I hope you watch it for the learning and education that this content will provide. Take some time and have a look.

Thursday, June 10, 2010

Managing A Trade

Ashok Leyland was given as a buying opportunity to our subscribers for today. The trade was to buy above 62.30. This level was crossed in the first 30 minutes so we have a long trade. An initial stop was given at 61.00. The trade closed today in our favor. How do we manage the trade from here, given the volatility in markets?


Today, as a follow up, our suggestion for this trade is to keep a trailing stop below the low of the previous trading day. We want to catch an up move but we would like to exit at he first sign of weakness. On this basis, the stop loss for tomorrow is 61.50, and for subsequent days, it will be the low of the previous day.


Exit strategies should be different for different market environments.
Comments are welcome.
I also have a  Link to a trading education page, which users may want to use. Please have a look.

Why buying stocks with low PE makes sense?

Robert Shiller is one of America's finest acadamicians in the field of economic reserach. Here is a chart picked up from data collected by Shiller on PE ratios and their impact on market performance.



The chart tells us: Over a 10 year period, stocks with low PE have outperformed stocks with high PE> This is common sense, but investors will often forget this. Stocks with a PE between 5 and 10 have given the best returns, while those above 20 PE have given the worst.

((http://www.mebanefaber.com/2010/06/09/shiller-pe-ratios-and-10yr-annualized-real-returns/)

A good trading education = a good trader = good profits

If you have not had the chance I strongly recommend that you check out this educational resource for traders, as it’s something I personally use and enjoy.

You see, it’s no longer necessary to spend thousands of dollars, travel great distances and be away from home and family to understand the secrets of the market experts.


It doesn't matter where you live, it doesn't matter if you are just starting to trade or a seasoned pro ... this "brain trust" of trading experts has the potential to change your life.
Link for Trading education  (opens in new window)


My Notes: I hope readers can get some value from these educational links. You may like to try it out. 

Tuesday, June 8, 2010

I am not bearish, I am actually quite bullish

Goldman sachs wants our money (yours and mine) but we do not have to give it to them. Note how a series of market experts come on TV and tell us to buy because 'fundamentals are good'.
Now, it is my money, which I wish to invest when there is good value in the market. A Nifty PE of 20 is NOT value for me. HDFC Bank at a PE of 25 is NOT value for me.Therefore, I am waiting for value to emerge in the markets. My technical analysis suggests that markets are ripe for a decline. If this is my analysis, then, as an investor I should wait for the decline to put in my money at fair value.



Suppose the market does not fall, continues to move up. So what? My money is still with me. I am getting 7.25% on it. I will not be a part of the rally so any gains beyond 7.25% will be foregone. Fine with me. I also know that markets correct regularly, therefore if I am patient I will get a correction to buy.

I am therefore bullish since I am a buyer. The difference is the price which I am willing to pay. If I think a product is overpriced and not worth for me, why should I buy it at that higher price?





Nifty Rising Wedge

Monday, June 7, 2010

Market Notes

The Nifty fell to 5034, down 100 points from Friday. The decline was cased by weak American markets on Friday which fell by 3%. Compared to that 3% decline, our market fell by about 2%, so we are that much better off.



With all the volatility, the up and then the down gaps we are seeing, the Nifty remains in a trading range between 4900 to 5100. A big move in the Nify may be expected once the Index moves out of this range.

A rising wedge in the Nifty was broken on the downside today. The wedge gives a target of about 4500 for the Index. Remember, markets will not go in one direction ll the time. Even if the Nifty is going down, we are likely to see a number of choppy days, up days and of course, down days. SO, if your view is for Nifty 4500, then you have to accept the reverses and volatility that comes with it.
 
Take Care, the Indian markets may be overvalued...



In March 2009, the S&P500, the benchmark, U.S. index was at 666, its low in the bear market. On Friday, June 5,2010, the Index closed at 1064.88. The Index has gained about 60% from its lows. If we take the same 60% gain for the Indian Markets, the March 2009 low was 2539 for the Nifty. Add 60% gains, and, we should be standing at 4062. Therefore, compared to the U.S. markets we may be overvalued by a 1000 points!


No, this time it is NOT different

Similar divergences were appearing between the Indian Markets which continued their rally and the international markets, which had already started falling in Nov-Dec 2007. Then, a number of so-called experts (mainly fund managers or people who use funds from OPM - other people's money) used to come on TV and tell us - this time it is different, India will go its own way. But that did not happen, and, when we fell, we fell with a big thud!

It is NOT the Economy

There is a clear relationship between the long term trend of the stock market, and, the economy. If the economy is growing, we should see a long term uptrend in stock prices. But, suppose stock prices have reached high valuations? Then, even with economic growth, there will be long periods of adjustment when share prices may fall or remain sideways. But the economy will still be growing, isn't it? Now, why should high valuations be a problem if he economy is growing? First, the world may be moving towards risk aversion - meaning investors are not prepared to pay high premiums for equity, and, second, short term bubbles may put share prices out of line with 'normal'.

Tuesday, June 1, 2010

Blog Readings

More on 1930s

from http://quicktakespro.blogspot.com/2010/06/more-on-1930s.html



Larry McMillan had a nice piece in MarketWatch about how the current market compares to the 1930s as well as a few other bear markets. We posted a comparison to the 1930s here last week so scroll down to see it.


Quote:


So, we have three previous time periods in which a severe bear market shook the financial system. These then gave way to strong rallies, fueled by the liquidity thrown into the system to stem the bear market. However, once those rallies ran their course, reality set in and prices drifted, grinding their way lower for three or four years.

(end quote)

Two things here - first, the concept of a liquidity rally.

The second is the term "grinding their way lower." That is how real bear markets end when the market demoralizes everyone and nobody wants to own stocks.

Why you shouldn't sweat Europe



http://wallstreet.blogs.fortune.cnn.com/2010/05/25/why-you-shouldnt-sweat-europe/


Do rising credit spreads and tumbling stock prices signal that the U.S. is in for another shock like the one that sent the economy into free fall in 2008?

Glass half full


Don't bet on it. While there are problems all over the globe and stocks could easily head still lower after a recent correction, there are signs the domestic economy is strong enough to weather the storm.

"People are completely ignoring any good news domestically," said Matthew Keator, a partner at the Keator Group wealth management firm in Lenox, Mass. "We've been here before, in 1994 and 1997-1998. We can handle an international crisis."

What's more, Keator said, corporate balance sheets are in good shape after big companies slashed spending and boosted productivity. That should help the biggest corporations to keep growing, even as small businesses struggle to get financing and compete for penny-pinching customers.

Keator concedes that there are plenty of problems around the world for investors to consider, from a double-dip in real estate, to the problems in European banks, to the fiscal health of the United States and other rich countries.

But he says that stocks rallied so sharply from their March 2009 lows that "everyone has been looking for some bad news" that would justify a decision to cut equity exposure. As troubling as the European banking problems are, he believes policymakers will sooner or later devise a response that will stamp out the current political rancor among euro zone members and stabilize the situation.