Sunday, September 26, 2010

Trading a gap up day

Well, the post title says it all. The concepts are useful for day traders, but then again, trading concepts can be educative for all traders. So here I go.

Once a market opens gap up, there are three possibilities for the day's action: 1. The market continues to move higher. 2. The open is roughly the high of the day and the market then makes a bearish reversal and, 3. The market drifts throughout the day around the open.

Let us start with one number: the Average True Range for Nifty futures. Currently, this is 75. This means, on an average day, futures move 75 points between high and low. Once we have this number, our task becomes easier. With a gap open, we add 75 to Friday's close (6034) to get the likely high point, which is: 75+6034 = 6109. Remember this is the average, but that's what we have to work with.

If the gap open takes the open near 6109 then scenario 2 is likely. If the open is near Friday's high then scenario 1 is possible. If the open is somewhere in the middle of Friday's high and 6109 then scenario 3 is possible. All of this is anticipation. But doing mental scenarios makes life easy.

Ms Rousseff -the world's most powerful woman

Ms Rousseff, the daughter of a Bulgarian immigrant to Brazil and his schoolteacher wife, is likely to be elected president of Brazil on an election to be held on Sunday (today). She has benefited from being, in effect, the prime minister of the immensely popular President Luiz Inacio Lula da Silva, the former union leader. But, with a record of determination and success (which includes appearing to have conquered lymphatic cancer), this wife, mother and grandmother will be her own woman.

Brazil has a population of 200 million, is enjoying prosperity thanks to vast natural resources and wise political leadership. Brazil's growth rate rivals China's. The Govt has ensured  social justice meaning that the poor have been helped to move up.

My Notes: This news has a lot to do with trading. First, it opens our minds to a world beyond trading calls. Then, the news of a woman taking this high position takes the world to a more equal society - equal respect for men and women. To take this further, for men, when our mind is prepared to accept leadership by women, we become ready to accept change. We can adapt from a bearish stance to a bullish stance without much difficulty or vice versa. This means we can accept change without resisting it.

Off Topic: We Indians are filled with self praise. But, All emerging markets are doing well. Many of the countries are actually performing better than us (in terms of growth and social justice indicators) . Yet, our TV is filled with 'India growth stories' without comparing us to others, without checking if this growth is benefitting the 1.2 billion people.

Friday, September 24, 2010

Even bull markets will correct

A DOJI identified two days ago seems to be suggesting that a short term top is in place. For Nifty futures, 5950 remains the first level of support. A breakdown then shows 5880 as the next lower level of support.

Just a few days ago, we had this super strong momentum in the Nifty. The impression was that 'this time it is different'. Now, two days of range bound price action tells us that buyers are not willing to pay higher and higher prices. As traders, we know that range bound days are not profit making days. Moreover, corrections are difficult to trade.

The Market is ready for a correction. It could be deep or shallow, that is difficult to say. But, whatever decline comes will confirm that it is never different. I am of the belief  - "all markets correct". We just need patience.

Mid cap and small cap stocks have already started a process of correction even while the Nifty was going up. It is possible that this group may also bottom out earlier than the Nifty. Not all stocks, but some of them.

This post doesnt actually provide a trading strategy. It shares with you, how and what I am thinking.

Thursday, September 23, 2010

Water water everywhere

These lines come from a poem The Rime of the Ancient Mariner (published in 1798) , which speaks of a ship in the middle of the oceans, where


Water, water, everywhere,

Nor any drop to drink

My Notes: You cannot drink sea water, so all the water is of little use to the sailors.

Today morning (Thursday, sept 23) I will be doing an interview with CNB Awaaz at 8.40, where I will be giving my stock picks. The program also feature picks by other analysts, for a total of nine picks. That's not all. During the interview with different analysts more stocks suggestions are taken. That's not all. Their popular program 20/20 gives more picks - 30 or 40. That's not all. Their even more popular program - Khatron ke Khiladi has many more picks. Surely, that's not all. There are six business channels. What do readers say?

Wednesday, September 22, 2010

Minimalism in Trading

"Diversification is Dead" Portfolio. Find out where you should be investing. PDF download here.

I came accross an interview which I wanted to share with readers. Chicagosean - a trader interviews Everett Bogue, the author of the fantastic website/blog Far Beyond the Stars. Everett is not a trader. Everett has developed his lifestyle to live with less and work from anywhere in the world. Here are gems of wisdom from that interview:

Location independence really has been made possible by the radical expansion of the Internet over the last few years. Working from your laptop is pretty much what everyone in the information or trading business does these days, so why do it from one desk when you can do it from anywhere in the world?


Yeah, well... do you really need to trade all day? As I said previously, I don't know anything about Trading, but take a moment and imagine this: What if you were to find a way to identify the hours of the day when you do your best trading? Maybe it's after your first cup of coffee and before breakfast?


You might find that spending 30 minutes a day trading, with a specific plan of action, or by trusting your instincts can lead to a much more profitable business than spending 8 hours a day trying to make sense out of a lot of numbers that are going up and down.


A lot of people can benefit from pulling the plug on information overload, trusting that their decisions are right, measuring results, and then replicating successes. Spending all day a computer, in my experience, doesn't accomplish that as well.

"A hunter spots opportunities and greets them...this, above all else is the winning strategy for working less." AND "Once you start to spot opportunities outside of everyone else's assumed reality, you'll begin to notice them everywhere."


ChicagoSean, the trader says: In fact, a little while back I wrote a blog post discussing my attempts at slowing down in a trading world that is constantly speeding up. Humans can't possibly compete with computers on speed. So the trick is to learn to play a different game that relies on your intuition and the big picture.


Sometimes Traders get into the rut of trying to be perfect. As you've written before, "Perfect is overcoming the final 1%, and most people can't do that". I've always repeated the mantra: "Perfect" is the mortal enemy of "good enough."

Tuesday, September 21, 2010

A DOJI

In the near month contract for Nifty Futures (September), a DOJI has been made today. The DOJI is a bar in which the open and close are roughly equal. Today's DOJI comes after a sustained advance. The Japanese attach great importance to the DOJI. On a DOJI day,the buyers and sellers are equally matched. That is why after a daylong battle, buyers could not push prices up, while sellers could not push prices down. Therefore, the open and close were equal, hence the DOJI.

Why is it significant? So far, the bulls have been in total control of the market. There has been no confusion about the direction. But, on a day when higher highs were made, bulls couldnot push closing prices could not go above the open. Therefopre, there has been a subtle shift in the balance of power from bullish to neutral. Probably, some of the bulls have retreated. This could be just a short term blip. We will see. A close below the DOJI low will confirm that the scenrio is shifting to neuutral. A close above the DOJI high will tell us that the DOJi was just one day of consolidation. Interesting!

Monday, September 20, 2010

Should we worry about an impending top?

The Nifty has rallied 550 points from 5350 - in barely two weeks. This is a ten percent gain in two weeks - as good as it gets. The market is in an uptrend, therefore the trade should be to buy on dips.

Traders should be looking for a dip rather than an impending top. The use of trailing stops is needed to ensure that existing long positions are not caught up inside a correction, whenever it starts.

Should you trade a correction? The answer for most traders is: a correction is a messy affair, not worth trading. Also, it goes against the main trend, therefore the risks are probably larger than the rewards. But, a day trader could still catch a down day.This is an exception rather than the rule.

Stocks are not the only market we can trade in. There has been a roaring bull market in Silver. For professional traders, there are many opportunities.

The question was: Should we worry about an impending top? My answer would be: If my positions are protected by appropriate exit strategies (trailing stops, targets if any, rules for exits on indicator turns, etc) we do not have to worry about tops or reversals. We focus on what we need to do.

Wednesday, September 15, 2010

A wrong trade

Yesterday I referred to an email in which the trader said he was short in Nifty December calls. I had suggested he should lighten up. Today I received this message "i have cut down my position down to xx now. xx lots of each 5700,5800,5900 are dec. call are left short with me , but it's creating huge loss, sir i dont have any MTM , margin etc problems, but the mental pressure is very high, i dont know what high can we see in nifty, is there any idea of any high point in nifty, so that i can prepare my mind for that???

This was my reply

"Okay, xxxxx, let me explain the problem.


You have xx lots, xxx Nifty short. They are calls but short calls become like futures. Now, if the Nifty goes up by another 1000 points, you will lose xx lakhs. I think this is the worst case scenario.

You should be mentally prepared for this. But, even if you can afford this loss, is it wise?

Therefore, you need to decide on a cutoff - a point at which you accept that the trade has gone wrong. That's ok. This is just one trade in thousands that you will do. All traders go through such phases. Not to worry.

Can you decide on a cut off? if so, let me know so I can give my opinion.

Now, I am travelling for the next 2 days - thursday and friday. I will be in Chennai but I am going for some darshan etc so I may not be able to access my email. If you wish to contact me for some reason, please call xx at xx number and ask him to convey your message to me.

Now, to answer your question: My analysis suggests it is a matter of days before a correction begins. But, what if I am wrong?"
 
My Notes: I have reproduced this exchange because (1) I feel this will help many traders avoid this kind of mistake, (2) I hope readers will offer their suggestions to help the trader.

Note how Silver has rallied to life time highs. What is the outlook for gold?
Find out about the Gold Super Cycle by clicking here.

Also find out about the 52 week High Friday Rule. Click here for this rule.

Themes for the Future

As the Nifty moves up, non-stop, investors and traders should be looking for themes that may outperform.

First, we must understand that the market cannot go up, day after day. It can go up for many days, but not indefinitely. My point is: if you are looking to intiate a trade or an investment, you could wait out this momentum move. There will be a pause, a dip. That's when you enter. But where?

PSU Banks continue to remain a viable trading idea.

A second theme is capital goods. I am looking at companies that are, well, service providers rather than large engineering outfits. There is a long list. There is a difference between this sector and the PSU banks. When I started talking about PSU banks, they were extremely undervalued. They still are, but the gap is narrowing down. Most capital goods providers are not undervalued. Also, they are already in the limelight. Some stocks that I am considering are: Alsthom Projects (APIL), Cummins & Thermax. I have positions in APIL, but for the rest I will wait for a correction. No hurry.

Tuesday, September 14, 2010

Need to Short

I received an email today which says "a trade which i did trying to act oversmart and that trade is costing me a huge loss.
I have shorted .... lots of nifty dec. 5700 call ....... As a result of which ... very huge loss which i cant bear."
 
Then, a comment (not published) on this blog " want to share some of the negative aspects that I have in me and I do not know how I can take out those negatives. I learned a bit of technical analysis not to that great length, but still I do not understand why I always favored shorting Nifty instead of buying it, I initiated shorts at 5605, 5690, and 5735, and did not understand what to do then I hedged by buying october 5768 and at the end of the day when I looked into charts there was no indication of nifty correcting and today instead of buying again I remained short. Can you please suggest and help me though I know the right thing why I keep on doing the wrong thing. Well I am from andhra pradesh and wanted to attend your certificate program....."

My Notes: On TV, I have stressed this point hundreds of times - short selling should be done only by professional investors.
Often, markets move into prices that appear irrational, and, probably are so. But so what? Keynes, said "Markets can remain irrational a lot longer than you and I can remain solvent". Sensible human beings understand that markets have bcome irrational. But, common sense is not always the correct approach in trading. Professional traders understand that they cannot short such markets because they do not know for how long this irrational behavior may continue. So they stay away.

My Suggestion: Novice traders should take only BUY trades. If such trades are not available stay away. In numerous Investor Camps which I did for CNBC, I have explained that buyers make more money than sellers because Stock market has a secular uptrend, thanks to economic growth. This does not mean blind buying, but it does suggest a bias in favor of owning stocks rather than shorting.

What should be done with short positions?
In case there is a short position in futures, I would suggest keeping a tight stop loss and exiting if that stop is hit. Thi is going to be painful, but losses have to be cut. Keeping a stop rather than exiting immediately has the advantage of keeping you in the trade if the market does begin a decline.
In another case, december calls have been sold short. Here, the investor has the advantage of time. Given enough time, this trade could actually be closed without any loss. But, there is the question of MTM +  psychological pressure day after day. Same suggestion. Keep a stop loss. Close part of your position if that stop is hit. Hold part of position till a correction comes in. Then exit immediately.

Reader opinions are welcome.

Monday, September 13, 2010

Patience, our friend

In the stock market, patience usually wins. In the same way, impatience usually loses (although in the momentum phase of the market, it appears that only the impatient win - bu not for long).

Thanks to 24 hour TV, our ability to wait has been reduced. While the patient investor could look forward to handsome gains over a few years, that time frame hs changed so much that gains are expected immediately. We cannot wait for time to do its own thing. We want results. Now!

As an example, reading habits have changed because of the cable TV & internet. People have bcome impatient readers. They have become used to channel surfing or sufring the web, quickly moving from one page/channel to another. people send SMS instead of calling or sending emails.

As a trader, impatience and the need for instant results cause us to make poor quality trades. There is a stock, for example, we can take Hindalco. You have heard experts (who else but  me!) say on TV today that Hindalco is a buy.

You check up your charts and find the share is up almost four percent today. Now what? You tell yourself that the stock will run away so you must enter it quickly. Tomorrow, suppose the share opens one percent lower. You buy quickly since you know this is going up big time.

Much to your horror, the share price keeps on falling, finally ends up 11% lower over a period of three weeks. At that point, you curse the expert, sell off the shares and begin paying attention to the other experts. Now, the share (Hindalco) stops falling, slowly starts rising, then over a period of three months, makes new highs.

Suppose you had the patience to tell yourself: I will buy, but only on a correction. If I do not get a correction, then I will not buy. Would the outcome be different? Your views are welcome.

And now we have 5700

The Nifty crossed 5715 today, a number last seen on January 18, 2008. We are at the current highs after 32 months. This has been quite a journey, from 6355 to 2240, then back to 5715 today, and, of course, who knows about tomorrow?

On CNBC today, I suggested buying 5600 October Puts. This is a game of patience, I said. The intermediate trend for the Nifty is now living on borrowed time.We are in the 14th week, while the maximum has been 15 weeks. A correction, whenever it comes about, will not be a friendly neighbourhood dip.

Traders should do both - ride the upward momentum, and, also buy these puts slowly, bit by bit on rallies.

What about investors? Investors should buy only on corrections. Remember, these dips come two to three times a year, at least.

Finally, find out about the Gold Super Cycle. Click here to read.

Sunday, September 12, 2010

Concentration of Trading in few hands

Dakshit writes - "every retail investor and specially trader quite concern about news article in times now. in which 50% volume is generated by 457 member"

My Notes: It is true that most of the volume on the exchanges is contributed by about 500 traders. Do the traders therefore control the market? It seems unlikely.

For these big traders to control the market, they have to work together like some kind of an organised group. It is diffucult to imagine so many people agreeing, and, then working in the same fashion. That also in secrecy without any leaks at all. Then, why did the big traders (like Lehman, Bears Stern...) collapse when they were so good?

(1) When a few traders control most of the volume, the result is increased volatility. We are already seeing this. Volatility harms the market because it scares away 'good' long term money.
(2) While it is not possible to manipulate the market, it should be much easier to manipulate individual stocks. We cannot say what actually happens, but in the long run, manipulation kills the business, since all the 'good' players eventually run away from it.
(3) Even if a few players make large sums of money, the middle class gets attracted to the trading business, as also the newly educated kids. This draws talent away from essential businesses like manufacturing or services, to financial jugglery, which does not add any value.

So, the scenario does hurt the country in the long run. But, when did the large traders worry about the people or the country?

For traders, like us, it is essential to adapt to the new circumstances. Take a longer view, then trade in that direction. Keep larger stops to account for the volatility. Reduce position size, if neccessary. Most important, have fun!

A tale of two stocks

Why did I choose Hindalco over Tata Steel? Here are the charts which explain this.

Chart 1:

When compared with the Nifty, Hindalco has been a consistent outperformer, while Tata Steel has seen ups and downs. Price charts not shown.I am showing the relative Strength on daily prices but weekly is similar.



Chart 2 & 3

Weekly charts for Hindalco & Tata Steel. Hindalco is pushing against resistance, leading to a break into new highs of this bull market. Tata Steel is having overhead resistance so no breakout here.



More notes:
A free two week trial to Marketclub is available. I hope readers take advantage of it. No payment information is required. Click Here

Saturday, September 11, 2010

There is no substitute for hard work

The only thing better than hard work is reading this Blog!

Well, on a more serious note, the question in our minds is: this rally shows to signs of stopping. How do we do our analysis? One way is to look at our charts to determine the nature of such up moves. I am looking at the up swing and subsequent corrections for the past few months. What is the average duration of the rally?


On this chart, the number of days in each upswing have been labelled. Now, each upswing has its own reason for moving higher or stopping at some point. My point is: we cannot create an average that says: okay the average is xx so market should stop moving up at xx days. Eash swing will be different. But, we can say: the market has been making swings of 4 - 5 days. The current swing has lasted 7 days. This should be compared with the initial upmove from May lows, which went on for 9 days. Therefore (a) we may be in a strong trend, and, (b) we may be in the final phase of a minor uptrend. One or both of these are possible.

This was analysis, not an attempt to generate buy / sell signals. But, all analysis must eventually lead to actionable ideas. Please share your ideas through comments.

More notes:
A free two week trial to Marketclub is available. I hope readers take advantage of it. No payment information is required. Click Here

Friday, September 10, 2010

A successful breakout

We are familiar with breakouts. If correct, a breakout provides large profits because it enters at the start of a trend, up or down. But, breakouts are often wrong. In fact, less than 30% of breakouts will give the desired profits. The pattern makes money because breakouts that are successful make far more money than breakouts that fail.

Let us ask ourselves: why do breakouts succeed? When prices cross resistance or support, to move further requires a huge mood swing. Quickly, traders / investors should agree that the breakout is likely to succeed. Once that happens, they jump on the bandwagon, thus pushing prices further which gets even more traders to feel that the breakout will succeed....

So, a breakout actually requires a mood shift. Now, we come back to the real world. We have a breakout from 5550 in the Nifty. If we have a mood shift meaning that traders feel that the market will go up, then we may well find that the market will go up.

What do you say?

Tuesday, September 7, 2010

Life at 5600

The Nifty touched 5600, rather easily today. As most readers know, this is a 31 month high - highest since Janaury 2008.

Should investors buy now? My view has been that investors should buy only on dips. Such dips occur regularly. If we are not in a dip now, then wait. Patience pays.

Traders should go with momentum, which is clearly up. I am giving below a monthly chart highlighting similar patterns in 2007 and 2010. Reader comments are welcome.

Who is getting Richer?

BusinessInsider.com says:

Companies that cater to average Americans are doing rather poorly right now while companies that market luxury goods and services are generally performing exceptionally well

My Notes:

The comments are for the USA. This does raise social issues about the rich getting richer, the poor getting poorer and the middle class getting crushed. But, as investors or traders it also highlights the areas of interest to us - Luxury goods and Services.

For Day Traders:
The miday is different from the open and the close. These are slow market hours. smbtraining blog gives suggestions on what to do during this dull period. Here is a list:

1. Trade only the best set ups.

2. Trade with less size.
3. Rip through charts. - go through your charts
4. Write in your trading journal.
5. Read blogs.
6. Find great set ups for the close.


7. Talk to others about the open.

Saturday, September 4, 2010

ATA meeting ends well

The Association of Technical Analysts held its monthly meeting in Delhi, today. The topic was different: Speakers were requested to share their current strategies / themes.

Me, Sudarshan, explained the tools I use to analyse the Nifty. I discussed the current theme I am using in my trading.
Sunil Miglani told us how to prepare a shortlist of stocks for day trading.
Rajesh Jain, NSE Member, Private Trader, shared four different short term trading strategies for the Nifty, which he currently trades.

ATA members who were not present will have access to the slides.

This is the first of what we hope will be monthly interactions between members where the participants discuss themes and strategies.

If you are not a member of ATA, then join it now. Visit http://www.taindia.org/ for more details.

Thursday, September 2, 2010

Bounce from Correction

Rajv Malik wrote "you have been saying that the nifty is in downtrend. what do you have to say on its bouncing back again and again in the past few weeks ?"

My Notes:

This is not correct. I was saying that the Nifty is in a correction. But once we touched 5400 the support at 5350 was visible. On Tuesday morning on CNBC giving a tech call I had suggested that at least a short term low is in place. I repeated this at 11:30 on that day when speaking to Lata, the Nifty was at 5370 when I suggested there is no opportunity to go short since we are at support. On Tuesday morning, I wrote in this blog "I feel there are two trades in the Nifty: First, a sell on rally for a test of 5350 or lower. Second, the bounce from whatever lows are made. I usually take only one side of the trade (long or short, ignoring the signal for the other side) but these two trades seem to be worth taking."

I write this in some detail because I wish to explain that I am a short term trader. Therefore, I do not have fixed views and positions. They have to change in accordance with market flow.

The Nifty remains in a trading range with 5350 and 5550 as bounadries.  Since were are all waiting for the Nifty to break below 5350, We should consider the possibility that the Nifty may cross 5550 decisively. What then? I am not saying this will happen. I do a lot of mental scenario building, which I hope enables me to accept any market position without getting into denial.

Wednesday, September 1, 2010

Support Levels actually provide support

For the Nifty, we have seen a strong bounce from 5350 support. Yesterday, while the Nifty was in a free fall, around 5350 - the decline stopped. This is the level which has provided support many times earlier. It worked this time also. Classical technical analysis provides us with a framework to make trading decisions. Some decisions will go wrong since the market has its own mind. But, there exists a strong probbaility to make money using classical TA.

While a lot of focus seems to be on the Nifty which isa ctually a choppy market, the big moves are coming in metals - Gold and Silver both of which are at lifetime highs. All time highs are bullish. There will come a time when these highs will become a bubble, but we cannot say when that scenario will emerge. So for now, both metals are buy on dips.