Thursday, July 29, 2010

What makes a frustrating market?

If you are finding the Markets hard to follow, you are not alone. Watch as Adam shares some steps with you on how to improve your trading. Click on the link below:
 
What makes a frustrating market?

Taking advantage of Time Decay in Options

Krishna has this point to make:
"Why one should not write stardles or strangles to take advantage of time decay.


I have seen that it normally decays and can fetch a decent money if written in the beginning of series.


Is really risk is so high that retail traders should never go for it ??


Normally retail traders keep burning their hands through buying options as it gives a fake feeling of limited loss.Truth is very few retail traders make money in buying options while on the other hands options writers take good advantage of time decay through writing.


Please note that I am not talking about naked CALL or PUT writing but starddle or strangle seem reasonably good tool to make money.


I have studied on above matter through paper trading for almost one year and in my knowledge area results are normally okay"
 
My Notes:
A straddle is a combined unit of call and put of the same strike price. buying a straddle refers to the purchase of same strike call and put. Selling a straddle refers to the sale of same strike call and put.
 
The Straddle buyer and seller take opposite sides of the same transaction. Therefore, only one of them makes money. Which one? Let us take August series:
5400 Call: Rs 105
5400 Put: Rs 91
 
If we wish to sell a straddle, we receive Rs 196. Our breakeven is 5596 and 5204. Suppose a correction takes the Nifty down to 5200 in the next 10 days, say around August 7. What should the seller do? There is a chance that the Nifty may rally back to 5400 by the end of the series, i.e. by August 26. Should he wait?  Suppose the correction deepens and the Nifty closes at 5000 by the end of August. Then, the writer loses almost 200 points.
 
The problem with writing straddles is the confusion on the follow up action required, if market suddenly moves in one direction much before options expiry.
 
If you were a straddle buyer, and the Nifty fell to 5200, you could close out your straddle for maybe 240, thus making 40 points on an investment of 196. Or, you could sell an at the money put of 5200 strike for maybe 50 and also sell the 5400 call for 20, thus having a put spread 5400 to 5200 for a cost of 126 and potential gain of 74 points. Or you could simply sell the 5400 call for 20 if you were now looking for a deep correction. With a long straddle, there are many opportunities for adjustments.
 
The difference is risk. Short straddles have unlimited risk. Now, the risk can be managed, but once in a while it becomes unmanageable - browse the web on Long term capital management, Victor Niederhoffer, for just two of the big blowups selling options.
 
Buying a straddle limits your risk. If option premiums are high, you have a choice, do not buy options at all.
 
 

Wednesday, July 28, 2010

Market Moves

Nitin Damle asks:
"
Today morning I heard u on CNBC Awaz telling to buy Nifty near 5400



Sir, my reading was different I was thinking that short term trading indicators are pointing towards correction Nifty is not moving above 5450 and there is huge negative divergence on MACD & actully given a sell signal so as per my reading it was a sell with S/L 5450 I got confused hearing u please tell me what was your reading.
"


My Notes:
Nitin, lesson No 1. Do your own thing. TV cannot become a substitute for your own thinking & analysis.
On Awaaz, I said: Buy above 5450 OR on a dip near 5400. This was in response to a question on 'What should a trader do with the Nifty today?".
My own reading of the charts was also explained. I suggeted that there is limited upside as the markets are likely to see choppy conditions for the next few weeks.
Last Friday when the Nifty was at 5470, I said in the morning show with Udayan that I was no longer bullish since at 5470 the risk reward ratio for bulls was not favorable.
Now, for today's day trading call, buying on a dip seemed to be the least risky method. But, overall, I became 'not bullish' since Friday, but that does not mean that a down trend is coming! For me, a dip starts if the 5350 support is broken on a closing basis. For day trading, today did offer a short selling trade, but that was around 1:20 Pm when the Nifty started breaking down below the day's lows.
 

Mental Fitness

Thinking out side the box

Original creative ideas are innovative because no one has ever thought about them before. Those who develop such ideas are usually thinking in a different way than others. Academic studies have shown that fundamental datapoints (earnings,corporate actions, etc.) explain roughly 30 percent of daily/weekly stock price variation. Given that fundamentals are only one of many factors that determine stock price, it is crucial to understand what other factors play a role in determining stock prices.

In order to make money in the markets, a trader needs to know something that other people don't know yet. She needs to be thinking ahead of the curve, to anticipate what is going to happen before there is evidence in the markets that it is going to happen and everyone starts to get on board with the same trading hypothesis. To do that, the trader needs to know nmore about her subject, than others. Whatever her edge is: Technical patterns, fundamental analysis, news flow - the more she knows, the more she can make a calculation about the likely target or trajectory the stock is going to follow. The more work she does, the more she is ahead of others and the earlier she gets into her position. this leads to more confidence in the position and a greater chance of success.


(Adapted from : The Mental Strategies of Top Traders, by Author : Ari Kiev )

Tuesday, July 27, 2010

Trading Turnover

men asks:
"Help needed.



Dear Mr. Sudarshan,


How does one determine turnover for fno for audit purposes?


ASSUME


1 MINI PURCHASED 1,00,000/-


SOLD NEXT DAY 1,00,500/-


hence turnover is 500/-


assume


1 mini purchased 1,00,000/-


sold next day 99,500/-


hence turnover is ALSO 500/-


Therefore total turnover for AUDIT PURPOSE IS 500*2=1000, if no then what is the turnover for audit purposes ONLY.


but PROFIT =0.


Assume the above rates are inclusive of stt, sd etc in both buy and sale.


Please give your views as we are nearing the last date for filing the returns, sorry for any incovenience and THANK YOU.
"
My Notes: This question needs a quick answer. I take the difference of all derivatives transactions as the turnover. The net result of a derivative transaction can be negative or positive. We have to remove the minus sign and take the total of absolute values. Example:
Difference in trade 1 = + 500. Absolute value 500
Difference in trade 2 = -500   Absolute value 500
Total turnover = 1,000

I am not a tax consultant and my advice is based on my understanding of derivatives transactions. Please consult a tax adviser for correct information.

Monday, July 26, 2010

news that we can use

Goldman Sachs earnings fall, trading faces difficulties

It is a piece of very bad news for Goldman in the last few days.Goldman posted disappointing earnings to a large extent because its highly profitable investment banking and trading divisions saw activities slow in the last quarter. The firm had to account for its settlement with the SEC, but that is a one time charge. The faltering in the growth of its core businesses could continue and will likely be compounded by restrictions that the new financial reform legislation puts on proprietary trading.

My Notes: Most U.S. investment banks have faced lower profits, this quarter. The same is the story with many Indian brokerages which have reported lower Q1 earnings. We may be going through a change in the methods of trading. We will look deeper into this issue.


New safe-haven currencies shine amid debt fears 
The Canadian dollar, Australian dollar and Swedish crown are gaining in popularity as investors increasingly look for alternatives.
 
My Notes: Alternate investment vehicles will become increasingly significant in the portfolio of traders. For us, Agro commodities & Metals offer some alternatives to Nifty.
 
Six Reasons Why China Stocks Will Rise 

Investment indicators for China itself were even more dramatic. The Shanghai Composite Index jumped 2.9%, its biggest gain in a month. Chinese firms that consume resources from abroad also leapt on hopes that commodities would drop in price as the yuan rose. In New York, the China ADR Index jumped more than 2.5%
1 China Holds the Keys to Confidence
2 China Will Become a Big Spender
3 It Won’t be the U.S. Consumers to the Rescue This Time
4 Finding A Balance
5 Squelching Inflation
6 The Political Bonus


My Notes: Well, this is the optimistic forecast. But, it could well turn out to be accurate.

Summary

Brokerages are facing difficluties, this seems to be developing as a theme. For the markets, the Nifty is at 5418, certainly not a bearish number. We are at 24 month highs. There will be dips and corrections but we should not challenge the trend.S o far, the trend is up.

Wednesday, July 21, 2010

Wise Words from Barry Ritholtz

What are my strengths?

Gourav wrote: "Is there any specific reason you adress the traders as she instead of he.While reading i fell bit unusual"

My Notes: I should do it more often. Woman constitute 50% of the population, so, in all fairness, they should be referred to half the time in my writings.

This question sparked off a thought: I feel one of my strong qualities is: I have an open mnd. This helps me in my trading. Traders should ask themselves: what are my strengths? Trading plans should be developed around individual strength, avoiding rules that can be influenced by weaknesses. If a trader can ruthlessly cut losses, then he should plan a strategy that trades frequently with many small losses and few large profits. To bring this down to a more macro level, for each trading day, reaffirm your strength before trading starts, decide on a goal for the day which uses your strength, then work for it. For example, A trader has the ability to identify momentum stocks from a list. Then, listen to the top 5 stocks given on CNBC, choose the two most likely to move that day, and, trade them with your levels.

In the same way, identify your weakness. Ensure that your trading plans do not include any action that includes your weak spots. In this way, you can make your weakness, a strength (by knowing about it, therefore, avoiding it). A trader is quickly influenced by TV advice. She avoids getting caught in this trap by putting the TV on mute, so that only news flashes are visible.

Readers are invited to offer comments on perceived strengths and weaknesses and how they can be used to enhance a trading plan.

Tuesday, July 20, 2010

Cycles of expansion and contraction

Narrow ranges are patterns for profit. Liquid markets will usually not stay inside a narrow range for long. Therefore, when the Technician detects a narrow range pattern, she waits patiently for a breakout from this range. The direction of breakout is usually unknown. There is a general rule that consolidation will lead to a resumption of the trend, but this rule does not work at times of trend reversal. Hence, the direction of breakout is unknown.

For past seven days, the Nifty has been inside a trading zone. Quite narrow. We shoulde xpect a move out of this zone, soon enough. Have a look at the chart.

Monday, July 19, 2010

Maybe I am not understanding the numbers

Canara Bank Q1 EPS  Rs 24.72    Share Price 496.5

(Source: http://www.business-standard.com/results/storypage.php?autono=401713)

HDFC Bank Q1 EPS Rs 17.53    Share Price   2047.85

(Source: www.nseindia.com )

(I own long positions in Canara Bank. This has been my favorite PSU Bank for many months.)

More on Chicago

Murali asks:
Can you please elaborate on the rule of RBI that "since we cannot, open derivative trading accounts aborad".

Does it mean that we cannot open an account with a foriegn broker and trade NIFTY or
We cannot trade any other derivatives - NASDAQ / FTSE.
Can you also clarify about CFDs.

My Notes:

The RBI allows Indian citizens to use foreign exchange for investment  in equity shares, in any foreign country. But, derivatives are not equity, and, this has been clarified by the RBI.

We can open an account with any broker, anywhere in the world for investing in equity. We can remit money from india to the broker. We cannot trade in derivatives, and, no money from india can be sent for this purpose. For that matter, if a foreign broker says that they will accept rupee payment for such trading, then they are probably violating RBI rules. (because they will be converting the rupees into forex and remit it, which is not allowed for derivatives).

There are exceptions, for instance, Oil companies can trade in derivatives abroad for hedging etc.. but these are actual users. A trader is not an actual user of any commodity.

CFD's are contracts for difference, trading mainly in the U.K and Australia. Indians cannot send money for such trading. They are also derivatives.

What if an Indian opens an account with a foreign broker for investing in equity, sends money, then starts trading in derivatives, secretly? Well, you are breaking the law, more so, the foreign exchange law. I would not advise such action.

The Nifty trades in Chicago

The Nifty is trading on the Globex. This means it trades for almost 22 hours on the Chicao exchange. In the day, (when it was Monday morning in India and Sunday night in Chicago) the Nifty was trading with 2 contracts in volume and a price of 5384 which was almost equal to what we were having in India.

Now, as I write this, it is 7:23 PM in Delhi. The Nifty is trading in Globex with a volume of 41 contracts.

Here is the URL, if you wish to see the Nifty in Chicago.

http://www.cmegroup.com/trading/equity-index/international-index/emini-sandp-cnx-nifty-50-futures.html

added: link for the micro-nifty contract which has more volumes:

http://www.cmegroup.com/trading/equity-index/international-index/emicro-sandp-cnx-nifty-50-futures.html

Sunday, July 18, 2010

American Shadows

All of a sudden, we seem to get strongly attached to U.S. influences.

First, the S&P500 fell almost 2.5% on Friday, about 26 points (Dow fell 260+ points). This will have some influence on india, on Monday.

Second, There is a news item in the Times of india, confirmed by the CME website - http://www.cmegroup.com/ (check out the Equity Index menu option), that Nifty futures will begin trading on the Chicago Mercantile Exchange (CME) from Monday, July 19, 2010 (that's tomorrow). This will give an unfair advatnage to traders who can trade on all three exchanges (NSE, SGX - Singapore, Chicago), since they can take or reduce positions almost 22 hours every day. Indian traders will be at a disadvantage since we cannot, open derivative trading accounts aborad (As per RBI rules). So, we have to trade only in India, while a foreign trader can keep on adjusting positions, if needed, in india, then in Chicago, then Singapore.

Chances are, the NSE will begin trading in Nifty futures till 11:55 PM. If this does not happen, then Indian traders will have to almost give up trading in derivatives.

Interesting times ahead!

Thursday, July 15, 2010

What if they are wrong?

In earlier posts today, I offered analysis by Dow Thoery Expert, Richard Russel who feels that we may be entering a bear market never seen before. He seems to be agreeing with Robert Prechter who is talking about Dow 400. (As I write, the  Dow is at 10280).

Now, experts have been known to be wrong. (including this writer who is not an expert, but still gets it wrong, many times).

Suppose the Market does not quite fall but remains within a trading range. Or, the Dow inches up every year, touching 20,000 in the next 10 years (That is about 7% annual compounded growth - quite good). Or, productivity with innovation brings about big growth in the USA and the Dow actually touches 30,000 by 2020, with the U.S. markets outperforming the BRICS.

Or, maybe th U.S. Markets actually fall to 7500 Dow where they develop a base and then start a new bull market. It is also possible that Mr Prechter ay be correct, but there is always the possibility that any analysis can go wrong.

My Point: No one knows the future. What we have in front of us is the trend. Depending on yout time profile (day, swing, position, investor), follow the trend.

Richard Russel says worst bear market in history coming

“We’re now in the process of building one of the largest tops in stock market history. The result, I think, will be the most disastrous bear market since the ‘30s, and maybe worse.


Collapse of Fiat Currencies


I think the key element behind this great bear market will be the complete destruction of all fiat currencies. This has been a long time coming. Fiat currencies are “wealth” created by man. They are created without sacrifice, without labor, without risk, and without sweat. Basically they are an immoral device, created by secretive bankers.

Dow 400


If you look at the advance-decline ratio for the Dow you’ll note a subtle deterioration braking the trendline in May. My old friend, Bob Prechter, is talking about Dow 400. I used to think this was an absurd joke. I no longer think it’s a joke. The ultimate result will be a primary bear market shocking in duration and extent.

Gold


As for gold, its stellar performance goes on. This in the face of ominous warnings of various worried experts. The world (minus the U.S.) is loading up with the yellow metal with banks running out of vault space. The great 10-year primary bull market is moving into its 11th year. The bull market in gold attests to the systematic decline in the value of the dollar compared with real money – gold.

One of the greatest modern traders, John Paulson, who made billions on the housing collapse, has, I understand, all his personal money in gold-related items. Many individuals have already built gold profits beyond anything they have ever achieved before but the big profits, the astounding profits, will accrue when gold finally bursts loose of its prejudices and freely expresses itself.

Notes:
The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.


from: munKnee.com

Explaination of a Sucker Rally

Barry Ritholtz (ritholtz.com) gives the opinion of Tomi Kilgore who says that the current bounce in the SP500 may be a suckers rally.

Quote


Tomi Kilgore warns that the recent bounce may be a sucker’s rally:




“The current rally marks the fourth time since early May that the Dow Jones Industrial Average has bounced more than 5%. Previous bounces have taken the Dow above key resistance levels, and yet subsequent declines have resulted in even lower lows. Essentially, the recent pattern surrounding key technical breakdowns and breakouts suggests the Dow is nearing yet another turning point.

It is easy for bulls to fall into another technical trap, since the Dow has climbed above the 50-day simple moving average, which has acted as resistance since the Dow first fell below it in early May, and is now peeking above a downward sloping line that started at the April 26 high and connects the June 21 high. But rather than embolden bulls, the apparent breakout should actually make them skeptical, especially following a six-session rally. “

Other traps of note:

-When the Dow fell below the 200-day moving average;

-After the Dow closed above the 50-day moving average

-When the Dow hit a new low for the year.

-The break below the June 8 low of 9757 (confirming a head-and-shoulders pattern)

Kilgore wanrs that “those reacting to technical breakdowns and breakouts have been fooled many times. And keep in mind that the Dow’s last six-session winning streak ended on April 26, the day before the market correction began.”

The broad trading range, lack of volume, and short term trends that reverse have some people sitting on their hands. Its not a bad way to prevent them from doing something silly

UnQuote

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The look of a lost decade

We have discussed earlier that the U.S.markets have done nothing over the last 10 years. Here is what two of their leading stocks, IBM & INTEL look like over the past 20 years. Finally a chart for the S&P. We learn from history, so these charts are useful.

(charts from stockcharts.blogspot.com)







Wednesday, July 14, 2010

America goes up on Intel, India goes up inspite of Infosys

Strong Intel earnings sent the global markets to otbit. The bears were slaughtered. But, what about earnings in India? Infosys did not give much promise, yet Indian markets have followed the world by moving up.

The American and European markets have been reacting to good news by going up and bad news by going down. In India, "All the news is good news". This is what happens in bull markets. We are in such a market.

What is likely to happen? Well, in uptrending markets, prices go up, as has been happening in India. The markets will see a correction - this is inevitable, but we do not know, when and how.

Meanwhile,

BP decides to wait for a few more days before taking new steps to close the well.

Moody's downgraded Portugal debt, but Euro was almost unchanged, above 1.27

Gold has performed as well as the S&P, adjusted for inflation. Here is a chart that says so.

Breakouts must be respected

The Nifty has broken out of a 15 day trading range. Any breakout, up or down must be accepted as the wisdom of the market.

Monday, July 12, 2010

Time to buy the Dollar

Currency futures are available on the NSE as well as on the MCX. Is it time to buy the dollar. If the dollar index moves up, we might see a rally in the dollar.

Find out what analysts see in the dollar index and the reason why they think a potential rally may be in the foreseeable future. Click on the link below:


Is it time for the dollar index to rally?

What can go wrong

What can go wrong?

First, we are just entering the earnings season. A pessimsitic guidance by Infosys (reporting on July 13) can cause a lot of havoc and confusion.

Second, The American Markets have seen a rally after a big decline. If this rally is a relief rally, we may see lower levels which will certainly affect our own markets.

Third, unknown political events can affect us, for example, Afghanistan, Kashmir, Maoists, or even, Iran.

So, what should traders & investors do?
A breakout (close above 5360) is a reason to buy. keep stop losses.



chart from Trend Analyser from www.technicaltrends.com

Sunday, July 11, 2010

Nifty trading setup

Saturday, July 10, 2010

Moving Average studies on the Nifty

If you want to know about the death cross then:

Learn what the death cross is and how you can construct it and use it in your own trading.

"The "death cross": What it is and how to trade it"

Arvind Sahu, our susbcriber and chart reader, wrote to me:
thanks for your update in daily newsletter for article "death cross". what i understood, i showed in chart. DJIA index has crossed death cross. which may hold true as according to fibonacci ret. its resistance lavel is at 10100 to 10230. and is in resistance zone presently. now 50 MA has death crossed 200 MA which means DJIA index may fall once again. third study of elliot wave also suggest that DJIA index is at wave 2, on first sign of weakness entering into this level could be advisble to play for wave 3 to wave 5.

now as indian market also follow the Americans. But the picture is not clear in nifty yet. as all the MA ie. (50 MA, 127MA and 200 MA) are nearing (approching) each other. if DJIA index falls, very little work for 50MA in nifty require to cross 200 MA.

please comment
unquote
 
The two charts are given below. Readers should please comment.
 


Friday, July 9, 2010

Nifty - line chart

Thursday, July 8, 2010

The Death Cross

Learn what the death cross is and how you can construct it and use it in your own trading.

"The "death cross": What it is and how to trade it"

Wednesday, July 7, 2010

Student's Dilemma

I received this email from one of our subscribers. This is of interest to most readers. Here is the email and my reply which is being given through this blog.

Email:
Quote

sir,


Iam ur subscriber, also keen reader of your blog. Thank you for the valuable information you provide on technical analysis. its fascinating and wonderful.

i have aquestion does a technical trader who trades with technical analysis should also take in in to account the fundamental picture. personally i want to trade focussing only on the charts, but sometimes the noise abt fundamentals thru media creates confusion while taking acall on charts. also sir while reading charts alwys at the back of my mind theres always a thought whether you personally are bullish or bearish, for example when you post articles about analyst or experts bearish like in june, it creates confusion while analyzing a chart as i tend to look at achart based on preconceived notions as what ever i know or assume i know about technical analysis is thru your news letter and by using trend analyzer .As technical trader is it not better to try and only focus on the charts.if yes how can it be done. Please advice.

your student

Unquote

My Notes:
 
I see three issues:
1. "sometimes the noise abt fundamentals thru media creates confusion"
2. "alwys at the back of my mind theres always a thought whether you personally are bullish or bearish"
3. "tend to look at achart based on preconceived notions"
 
Well, here is the good news. Most traders have gone through these steps at the initial stages of their careers. There is nothing to worry about.
Information on fundamentals are important because they enable traders to make shortlist of stocks to focus on. But we do not have to listen to the buy and sell calls. Ignore their trading advice altogether, but listen to the names being discussed.
 
Am I bullish or bearish? I discuss a lot of information moving around in blogs all over the world, so readers can obtain in one place a collection of learning. I have a long term view of the market - likely to outperform fixed income investments, intermediate view: deep correction possible, short term view: changes from day to day.Traders should develop their own view on the market. We are never going to be perfect. We just want to be correct more often or rather for a longer duration than going wrong. This means, suppose I was correct on the bull run from 2800 to 5400. Since April I am looking for a deep correction. Now, I may be wrong, not once but two three times for the next one year. Yet, I emerge a winner since my corrrect analysis compensates for many wrong calls. My point is: do not worry about being right or wrong. No one knows the future. Spend your time on developing a trend identification method that makes you comfortable. Then use it / follow it.
 
When you look at a chart searching for a fixed number of patterns, you will find that the preconceived problem will largely go away. I will give you an example. In the beginning of June, I classified a rally in the Nifty as a rising wedge. This is a bearish pattern. Now, the Nifty did not go down, instead it broke out above 5150. At that point I suggested buying because of a breakout. Am I depressed because of the wrong identification? No! That's what I saw then. It did not work out, so what?
 
In summary: go easy on yourself. Trading is not a stress buster, you know that it can become a major stress creator. That's why, you need to keep the process as simple and easy as possible. And always understand, it is not your fault. We get whipsaws because it is the nature of the markets.
 
Have fun!

Tuesday, July 6, 2010

Markets Ready for big Move

This is an excerpt from the commentary and charts given yesterday evening, in our newsletter for clients:

Markets at tipping point, ready for big move

“If we begin with certainties, we shall end in doubts; but if we begin with doubts, and are patient in them, we shall end in certainties.”

- Francis Bacon.

For the past 10 days, market movements have been tentative and uncertain. Now, we are coming to a point of decision. Today's price move suggests that a trend is likely to emerge soon. Why?

The Nifty has been moving in a narrow range, but today's range was narrower than the 'normal' narrow ranges. Nifty futures moved in a range of just 30.2 points. In the current year, there were three other occassions when the daily range of nifty futures was around 30 points. Each day was followed by significant trends. Here is the chart:
 

One to two trading days after these narrow ranges we have seen big trending moves. In 2010, there were three previous instances of 30 point ranges. All three eventually moved down but this is not a pattern. markets can go up or down after such ranges. The main point is: they move.

Monday, July 5, 2010

Why bulls make the most money

Going short may get trading profits, not big money: Here is why!


If you are short in a stock and that stock falls, what is the maximum potential profit? It is 100% assuming that the price touches zero.


Now, suppose a stock is overpriced at 100. You wait patiently for the market to correct itself. The price falls to 30. You buy the stock and this time slowly it crosses its early high of 100 as it touches 120 in another bubble like move. You make 400%.


This also applies to holding stocks during downturns. If your share is worth 100 and you hold it during a bear market, then finally it reaches 30. Now, you need a 330% return just to break even! This means, wise investors hold cash duting market declines.


For investors, the key to make money is to buy smart. That requires patience, lots of it.


During bear markets, people who have cash are able to buy blue chips at bargain prices. That makes money.
As a long term investor, your task is to make money over the long run. We know this is possible when you do not confuse trading with investing.

Good To Great

Good To Great


Author: Jim Collins , Publisher: Harper

Gist of Collins book for first few chapters.

Good is the enemy of great.

There are many people around the globe who lead or have led good lives but only few people attain great lives. We don’t have great government because we have good government. Similarly, if one looks around the world, she would see that there are thousands of good companies but few great companies. Why? Perhaps, because it is easy to settle for a good company or a good life. Therefore, for vast majority of companies, the problem is that they are good and they are comfortable with it.


The underlying point here is, we should strive to become great. One such company was GE. It outperformed the markets for a long time as long as fifteen years. 15 years is a good time frame to judge as no company can just be lucky for fifteen years. Also, this time frame would exceed the tenure of one chief executive officer re-asserting the fact that the success of the company was not because of one good leader but because of their work culture as a whole.

My Notes: We must demand excellence from ourselves, and from the leading lights of our society. We improve as traders, every day by practice, practice and more practice.

Sunday, July 4, 2010

Market Breadth

Ashvin asks:
"do u use volume&market sentiment indicators like trin,a/d line etc.. in u r trading stratergy.

if no then why?
if yes which indicator and why?"

My Notes: Interesting question. I will bypass the question about my trading strategy. Instead, I am discussing the use of breadth indicators in my market analysis. I use two indicators - the Mclellan Oscillator and a proprietory indicator. The Mclellan Osc is well respected in the TA universe. You can google and get lot of information on it.
Here is a bit of advertising. Trend Analyzer, the newest technical anlaysis software from www.technicaltrends.com has an amazing list of options for traders which are actually (a) easy to use, and, (b) usable in trading. The following chart for Mclellan osc was created with data & tools available in Trend Analyzer.



Intermediate Trend change signals come on two counts: (a) Divergences and (b) crossings of thr zero line. At A, the Osc crossed frm below to above, giving a bullish signal. At B & C, it found support at zero suggesting sn ongoing uptrend. At D, currently, we do not know what the osc will do, find support or cross to the downside. We will find out soon enough. Earlier, we have seen a divergemce between prices and the osc which suggested that the upmove was over at least in the short term.

Saturday, July 3, 2010

Necklines

Chris Kimble at dshort.com has a remarkable chart for the Dow showing different head and shoulder patterns over the years. He writes:
Necklines? It's the topic of the week, along with the adjoining Head and Shoulders. So is it really that big of a deal? Does the pattern happen very often and have much of an impact?
I looked back over the past few years of the SP500 and highlighted a few of these patterns and what happens at the neckline.
Have a look at the chart above and then you be the judge as to whether Head and Shoulders are important and whether the neckline really is that big of a deal!
From my perspective, the neckline is very important, and the markets will play with this neckline for a little while longer.



The chart comes from the same chris kimble. It is a learning experience. Click on the chart and study it in full size.
My Notes: The neckline is at 1040 while the SP500 closed on Friday at 1023. We assume that the index ill oscillate around this zone 1040 - 1010 for a few ays. A close below 1010 will tell us that the neckline may not be holding.

Friday, July 2, 2010

Asset Classes

This is a theoritical topic to start with, but should be easy as we understand the concepts. www.thereformedbroker.com explains the investment pyramid as this:
Quote

It's the Asset Class, then the Market, then the Sector, then the Stock.

If the stock asset class is not in favor, then the stock market isn't either. If the stock market is out of favor, then the sector will not matter that much. If the sector isn't working, then the stocks within the sector won't work either. Conversely, when stocks are in favor, and the market is trending up, and the sector is under accumulation, stock-picking is redundant, almost anything in the right sector will work.

In case you didn't hear me up in the balcony - Asset Class, then Market, then Sector, then Stock. You live in an asset allocation, ETF'd world right now. Why fight yourself?

In a down-trending tape, feed your buy recs and price targets into a shredder. In an up market, dart-throwing monkeys can go head-to-head with the best and the brightest out of Wharton.


Over-generalizing? Of course. Could this change? Of course. But still.

That's how it is.

UnQuote

My Notes: In the USA, the stocks as an asset class are not really in favor. What about India? Reader comments are welcome. More important, can we have an objective method of determining favored or not favored?

A Look at Gold

Gold closes out Q2 on the plus side


The gold market has had a lot of publicity and been under intense scrutiny lately as investors, both conservative (Glenn Beck) and liberal (George Soros), are weighing in and recommending a position in gold.


Certainly the trend in gold remains positive, however there are some possible early chinks in the gold armor that you should be aware of.

Gold - From Here to Where?

How do you take advantage of this bull market in gold? s an investor, consider setting up some kind of monthly SIP - systematic investment plan, wherein you invest a fixed amount in a Gold ETF, every month.

As a trader, watch the Gold ETF or Commodity charts and buy on pullbacks.

Thursday, July 1, 2010

My Notes

The bad news: Chinese (and European) manufacturing indexes came in light.
from Fund My Mutual Fund


US manufacturing (ISM) will be released thursday morning as the last major data point before tomorrow's employment data. (expectation = 59) Keep in mind this has been the main bright spot in the U.S. economy - unfortunately it now accounts for roughly 13% of GDP and 9% of American employment as we've rushed to get rid of as much mfg capability as possible.

HFT - High Frequency Trading
(Wall Street Journal)


Jeff Engelberg, a trader at Southeastern Asset Management Inc., a Memphis, Tenn., value-investing firm with about $35 billion under management, said high-speed traders are jumping ahead of his firm's trades. "Short-term traders are able to get an instantaneous glimpse into the future" through direct feeds to exchange data, he said, turning the market into "something nearer to a casino."


Sometimes, I am writing more than one post. You may like to check the archives in the right column to ensure you do not miss out on any post.

Here are some charts for you:





 My Notes: No matter what the talking heads tell us, the futures is never certain. Wise investments give profitable returns, but do not give your money to people who have only one message: give me your money.

Quick Update

A point of View: Breakdown in the S&P500

This from : http://www.greenfaucet.com/node/17239

Goldman Warns If 1,040 Is Taken Out In S&P, 865 Is Next Stop

Goldman's trading desk technician John Noyce warns, the next stop in the head and shoulders formation, should 1040 be taken out, would be 865, not to mention a complete rout for global teleprompter stocks post the mid-term elections.

From Goldman:

•The SP fails to sustain above the 200-dma with a clear risk of an H and S top forming...

•Early last week the market moved above the 200-dma which argued for some ST stabilisation and the chances of a deeper retrace of the drop from the April highs.

•The break however failed to yield any meaningful rally and the market has now moved back below the 200-dma on a close basis.

•As discussed over recent weeks the underlying structure of the market has a negative setup and you can now also argue an H and S top is in the process of forming.

•The interim low from 8th June and the neckline of that pattern are now converged; 1,042-1,040. This region
also represents the first notable support below current levels.

•If a break below the neckline of the pattern can be achieved as looks the risk on a multi-week basis the target would be 865.

•Overall, the market structurally looks a sell on rallies with the MT-LT (multi-week/-month) risks on the downside.
 

My Notes: The content as well as chart is from the source mentioned above. The note and chart were made beofre June 30. Yesterday, the neckline broke decisively, with the SP500 closing below it at 1030. Traders can learn from ongoing patterns, which is the purpose of putting up this post. More thoughts: When does the pattern fail? How does the trader use this information?