Sunday, March 20, 2011

Trading Range Breakdown in Nifty

A trading range is when a stock trades within a given high and low period for a given period of time. This back and forth price movement between extremes generates a trading range. Trading ranges are formed when neither bulls nor bears are in control. There is no way to know that a stock will enter a trading range until it has already begun.

For the Nifty, a trading range developed after the Low on feb 11 was made around 5175. The range was broadly between 5400 and 5600. This range seems to have broken down on Friday when the Nifty closed below 5400, for the first time since feb 28. A move out of the trading range (up or down) is the point of maximum risk. Traders take a position on the breakout/breakdown. In case of a false move out of the range, there is no escape from a loss. That is the cost of trading.

What are the signs that the breakdown may work out? (a) The Nifty was making a series of lower highs.  (b) On the daily charts, the RSI remained below 50, suggesting that the recent up move did not have enough momentum.(c) The Primary trend is down, therefore, moves in the direction of the primary are more likely to succeed.

For short term traders, the mid point of the range should act as a stop loss. For Position traders, a close above 5600 will be the point of exit from short positions. For day traders, take one ay at a time.

Wednesday, March 9, 2011

Lagging or Leading Indicators

Nirav asks: "As you have said that Moving Avg. is a laggin indicator as it uses past price data. So does it mean that all the indicators are ladding indicator as they use past prices? And if they are lagging indicator than which are leading indicators or what can be used as a leading indicator or to forecast the trend? Are price patterns or candelstick formation are the leading indicators? "

My Notes:
Technical indicators are derivatives of price action. This is good and bad, both. It is good because the indicator will more or less reflect what price does. It will not go its own way. It is bad because, they are likely to lag price action. This means that while indicators tend to be correct, they also tend to be late.

Indicators can be divided in two parts. Trend indicators like moving averages, MACD, identify the direction of the market, the trend. These are almost always lagging, meaning that the trend has already started when the indicator gives a signal. When there is a long trend, this does not matter much, since the indicator will capture a good part of it, inspite of being late. But, when the trend is short, the indicator gets in late and gets out late causing whipsaws.

Momentum indicators like, ROC, stochastics, RSI are leading indicators. Rather than measure price directly, momentum indicators measure the ratio between buying and selling strength. They alert traders on overbought/oversold, divergences and crossing of middle lines, all of which are leading signals. The alert is given before the actual event. As most traders know, many of these signals do not work out, while those that do let you sell at the very top and buy at the very bottom.

Candlesticks are also leading indicators.

It is the task of the trader to understand the nuances of trend, momentum and candlesticks patterns in different trading environments. This is usually many years of study. Patience has its own rewards.

Sunday, March 6, 2011

About ITC

Questions have come up on ITC. Why am I bearish on it? Here is a weekly chart of ITC. I have noted a long trading range and a subsequent breakdown from the range. This breakdown suggests that share prices have entered an intermediate downtrend. The downtrend should normally end at (1) previous support, which comes at 120, OR, (2) Some fibonacci retracement.

Saturday, March 5, 2011

Trading with Moving Averages

Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays.
Moving averages smooth out a data series and make it easier to identify the direction of the trend. Because past price data is used to form moving averages, they are considered lagging, or trend following, indicators. Moving averages will not predict a change in trend, but rather follow behind the current trend. Therefore, they are best suited for trend identification and trend following purposes, not for prediction.
Don't expect to get out at the top and in at the bottom using moving averages. As with most tools of technical analysis, moving averages should not be used on their own, but in conjunction with other tools that complement them. Using moving averages to confirm other indicators and analysis can greatly enhance technical analysis.

Primary Trend
On a daily chart, apply a simple moving average with 200 days as the period. The 200 day MA gives a rough idea of the primary trend. A bull market exists when the closing price is above the 200 day average. A bear market exists when the closing price is below the 200 day average.

Intermediate Trend
On a daily chart, apply a simple moving average with 50 days as the period. The 50 day MA gives a rough idea of the intermediate trend. The intermediate trend is up when the closing price is above the 50 day average. The intermediate trend is down when the closing price is below the 50 day average.

Friday, March 4, 2011

Trading with Breakouts

1. Good consolidation before the breakout Good consolidation can come as a tight trading range with well-defined support and resistance,a good consolidation near its high and a bullish pattern is a situation where buying the initial breakout often makes sense.
2. High relative volume at the breakout When a stock breaks out above the consolidation high the supply and demand picture often becomes clear. If the breakout occurs with an increase in volume it is confirmation that the demand for the stock was not satisfied during the consolidation phase and bulls are willing not only to pay higher prices but also to buy an increasing amount of stock at higher prices.
3. A clean breakout followed by bullish price action A clean breakout followed by bullish price action provides two forms of confirmation that the breakout will stay above the high. First, the quick and pronounced nature of the breakout demonstrates that the high was a significant price point, and second, the stock’s ability to continue trading above the breakout point shows that the bulls have the upper hand.
4. A bullish big picture Here are two simple conditions to consider in order to increase your success in buying breakouts with follow-through.
1. The daily trend should be positive.
2. The stock is trading above the prior day’s high.

Thursday, March 3, 2011

Buy on Dips - How To

Stocks will often pull back or retrace a percentage of the previous move before reversing. These Fibonacci retracements often occur at five levels: 23%, 38.2%, 50%, 61.8% and 78%. After a stock makes a move to the upside , it can then retrace a part of that move down , before moving on again in the desired up direction . These retracements or pullbacks are what you as a swing trader want to watch for when initiating long or short positions.

Once the stock begins to pull back (retrace), then you can plot these retracement levels on a chart to look for signs of a reversal. You do not automatically buy the stock just because it is at a common retracement level! Wait, and look for candlestick patterns to develop at the 38.2% area. If you do not see any signs of a reversal, then it may go down to the 50% area and so on. Look for a reversal there. You do not know if or when the stock will reverse at a Fibonacci level! You just mark these areas on a chart and wait for signal to go long or short.

Wednesday, March 2, 2011

Factors for support and resistance levels

To check out that how your support and resistance levels are significant or strong, below are the some factors you always keep in mind:

1. Time. The more time a stock trades at a price level the more significant that level becomes. This may not occur in the form of multiple clearly defined swings, but rather in a consolidation period where many of the lows of the consolidation area are at the same price level forming support.
2. Number of occurrences. This is another way of looking at how much time a stock has traded at a particular level. If a stock has created multiple swing lows at the same price level over time, then that price level will be significant support in the future.
3. Volume. The higher the relative volume is at a particular price level, the more likely it is that the price level will become significant support or resistance. This should make sense. If support, for example, is a function of the number of buyers willing to purchase the stock at a certain price, then a price level which has attracted high volume in the past is more likely to act as support than the price level that has not attracted volume in the past.
4. How recently it was formed. Support and resistance are created by the fact that there is real demand (creating support) or a big supply of stock (creating resistance) at certain price levels. Support and resistance levels that have been created recently are likely to be more significant than those that were formed weeks or months ago. It is for this reason that the day trader should always know the prior day’s high and low. These points represent the most recent support and resistance on the daily chart.