Trading Steps

From Ft.com :

The S&P at 400 is almost inevitable

Albert Edwards, perma bear says:

"Jeremy Grantham of GMO says this is “no market for young men”. Maybe now I am over 50 it is my time! Yet my forecast of the S&P bottoming at 400 is still met with utter derision. I have been underweight global equities since the end of 1996 and overweight government bonds. Meanwhile US 10y bond yields have fallen from 7% to 1¾%, a hair’s breadth from our longstanding 1½% target. Similarly, in my very humble opinion, S&P at 400 is almost inevitable."

A Trading range in the Nifty is visible, well defined, offers opportunities for significant trading gains when it breaks out of the range.

Broadly, resistance line is around5200, support around 4700 and the range has become fairly wide, almost two months.

Chart below:

Choppy Market likely with down bias. We have seen U.S. markets lose all their early morning gains and close lower. This is likely to affect our markets today. We also have F&O expiry - a day when trading should be avoided.

Bloomberg today has an article titled "Euro Area options are shrinking fast". It seems that we may reach a "Lehman Moment" suddenly.

Volatile markets require (a) reduced volumes (b) quick closure of profitable trades (there is no available trend, so do not wait for a big move).

My suggestion is to trade a move out of the 4750 - 5165 trading range. Rohit asks "Then is it a good idea to buy a 4700 put and a 5200 call, because either we go up a lot or we fall, a lot"

My Notes: Yes, it is. Since we have almost a month for October expiry, buy October 4800 put and 5200 call. This is slightly bearish because current prices are closer to 4800 than to 5200, but that seems fair given the bear market.

The September F&O expiry takes place tomorrow. The settlement started on August 26, Friday, opening at 4844. We closed today at 4948. Barring unforseen events, it seems reasonable to assume that tomorrow's close should be above 4844. To this extent, the September month was a period of consolidation.

The month of September has seen a narrow range movement in the Nifty. Remember, after contraction comes expansion. This tells us to expect large moves in October.

The Nity itself remains in a bear market. The sign of an intermediate up move will be the cross above the 50 day moving average. For the Nifty, this may take some time since the average currently stands at 5166. This is also the zone of resistance for the Nifty. We can safely assume that a rally above 5165 will be the signal of a change in the trend to up.

Much more interesting is the trading range in the Nifty with support at 4750 and resistance at 5165. If and when this zone breaks, we can expect a significant trade from the breakout / breakdown.

Here is an excellent lesson on Creeper Intraday moves by Corey Rosenbloom. I urge you to read the full lesson. The summary is:
A Creeper intraday move is a one sided move in a security. The trend is completely in one side, without pullbacks.Prices creep in the trend direction. Since there is no pullback, there is no opportunity to enter the trend. There are no reversal signs so there is no question of fading the trend. When traders encounter a Creeper: how should they trade. The best way Corey says is to use a simple moving average as a stop. Enter the trade with a stop around a 20(for example) period MA. A similar stop can be obtained by drawing a trend line. Stay in the trade while the MA or the trendline is not broken.

You do not see me on TV since I am on a holday.

Gold Bees: Building a position in Gold through the Gold Bees is an excellent idea. The SIP route is the best way. Invest a fixed amount everymonth, on a fixed date.

Rocky has a number of queries which require a fair amount of time to respond.

Sasi has a question on ORB: For ex: "If ATR of Nifty is 100 and Nifty opens with a gap of 80 points and further moves 20points in 1st 15 mins(total of 100 pts up)and breaks above the high of 15 mins. Psychologically it difficult to go long at this point for Intraday trader. "

My Notes: First, the ATR is an average of the range. Some days will have low range and some will have more. If the ATR is 100, surely some days may have a range of even 150 or higher. If the gap is substantial, then (a) wait for a pullback / consolidation, (b) take the intiial trade only if the stoploss is within your limits.

Active traders already realize that the short term trend is up. If you are a short term trader, then most momentum methods have given a buy signal, yesterday itself. More interesting is the immediate future: How long will this trend last? Well, in the Nifty, we have minor resistance at 5020 and significant resistance around 5165. These are the two levels where the short term trend can face difficulties. There is the possibility that today may have been the top of a one half day rally. If the market consolidates tomorrow, then a move towards 5020 and higher is possible. Therefore, a buy on dips strategy remains valid until today's low - 4906 holds. This may be considered as short term support.

With strong rallies in the American markets, we can assume that the Nifty will have a gap open. A big gap has two possibilities: the gap will be filled, or, strong momentum will take the move forward. The 15 minute rule can be used to control your trades. If the gap is going to be filled, then price has to go lower, meaning that it will break the 15 minute low. Therefore, this low then becomes a stoploss, a selling level as well as a support level. Given today's SGX Nifty price, it may be wise to (a) look for a dip to the 15 minute lows for a buying on dips opportunity / (b) buy above the 15 minute high with a stop below the low.

This is tuesday morning. I am discussing yesterday, two different trades that I took. First, we have the Nifty. At 3 PM, yesterday, the 60 minute chart gave a buy signal (Nifty around 4860).  Short term trend was up, supported by a rally from deeply oversold in momentum. I took the trade. I am long in the Nifty - a swing trade.

Then at 5.15 PM, I looked at Gold and Silver. I am not upbeat on Silver, so Gold is my preferred trading instrument. My 180 minute chart closes its bar at 6 PM so any signal that comes will be available at 6 PM. But, I am in front of my screen, I wanted a trade 'NOW'. I am a fairly proficient technical trader, so I know all the tricks. I changed my trading screen to a 15 minute chart. Now, Gold was inside a trading range, which actually means that trading signals were coming quickly and often. Never trade when prices are inside a trading range. In my desire to get some action, I easily forgot this basic rule. Well, these things do not have a happy ending. I took six trades, was exhausted by the absurdity of what I was doing, then gave up at 9.30 PM. Two breakeven, three losers, one winner. 

Meanwhile, the 180 minute chart did  not give a buy yesterday, since the shorter trend change to up was not supported by momentum or the longer trend.

Reader experiences are welcome.

Monday is the start of a new week, yet, the sharp down moves of the previous week are likely to cast a long shadow over this week's price movements.

The Nifty had a choppy day on Friday. A gap down, then a rally, then down, then up, then down - this is what I would describe as choppy. Today could be slightly different. It is possible that the market may remain choppy in the early hours then determine a trend which takes it to the close.

I am tracking Gold for a swing trade. The short term trend is down on my chart - 180 minutes. A change of trend or a breakdown after a consolidation will give trading opportunities. Silver is a classic story of how fast markets can move on any one side. The rally took 3 months to reach 65,500, then the decline to 52000 took just 2 days. The message is: Always have an exit plan.

Reliance broke down from a trading range giving a target of approx 685. The 685 to 600 area is a location where Reliance has lot of support. The summary is: Buying around 685 may be a low risk investing idea.

Chart below:

View from the monthly chart for the Nifty shows a congestion zone developed in 2009 between 4700 and 5300 approximately. This gives a message: the 4700 area has held for many months in 2009. If, and, of course, this is a big IF - the 4700 support cracks we could expect a free fall in the Index.

Chart below:

Watch the Hang Seng: Big Picture suggests tracking the Hang Seng Index which it says represents the risk appetite of investors. The full article and chart can be found here. This is an interesting thought. Can the Hang Seng be a leading index?

Fear is the key. Excellent insight for investors comes from A Dash of Insight. You can read it here. Jeff Miller says "To emphasize, if the market was always right, you could never gain an advantage. Making strong returns involves stepping up when the market is wrong. The greater the irrational fear, the more difficult it is."
There is more.  "Here is the challenge for investors: If you are going to buy when others are fearful and sell when they are greedy, how do you know when to act?" The answer is to use data -  "to focus on the numbers -- earnings, the current GDP growth rate, the huge risk premium indicating that stocks are cheap by historical measures."
Finally, "Investors need not and should not go "all in" but neither should they go "all out."

Shape of Trading. The author of a new book "A History of Greed" discusses his book in the blog naked capitalism. He says "We should be asking whether Wall Street – that is, the financial community – is justified at all in its present size"  ...   "Speculation has to be seriously limited to small institutions through the use of higher capital requirements.  " ....  "

My Notes: The purpose of finance is to lubricate the wheels of the economy. In the Market Economy, finance has becomes the reason for existence. This is likely to change in the next few years, as finance will again take a back seat, with the truly productive sectors of the economy coming on the forefront. This is good news for traders, since manipulation / chaos will reduce in the markets.

In just two days, Silver prices have fallen from 65,500 to 56,500 - that's 3 months of gains, gone in 2 days!

Gold has performed much better, and, I remain bullish on Gold. I continue to hold a small position, but, I am in no rush to buy more. Let the yellow metal correct, and then there will be opportunities to go long. In my trading, today, I went short in Gold, then took profits at the target. Chart below:

For the swing trader, there are signs of buying emerging in the Nifty.  As I write this at 1.42 PM, the signs are only tentative, but I have picked up Nifty and Bank Nifty calls based on the upturn in short term momentum. If the market closes weak, I may exit these positions today itself.

I maintained my short positions while the market moved up. In previous posts, I have explained that I keep these positions in a seperate settlement month so as to keep a dividing wall between swing trades and position trades.

I do not have any confusion on the trend - we are in a bear market. Yet, for short trm traders, there are opportunities on both sides, depending upon the environment.

In my early morning post, I had mentioned that today was likely to be choppy, therefore I did not consider any ORB trades.

Gold is now trading in a narrow range. I am tracking the end of day charts, waiting for a clear pattern. I will post my charts over the weekend.

Once the Nifty fell below 5050 which was the low of the wide range bullish bar, to me, the intermediate trend asserted itself, with the relief rally over. I have trend short positions continuing for the past many weeks. A panic bottom is probably required to reduce short side exposure. So far, that has not come about.

Failed patterns: The Nifty was making a bullish head and shoulder which did not come about. In the same fashion, a number of stocks were having similar bullish patterns. With the collapse of the Nifty, individual stocks have (a) gone through similar failures or (b) have seen declines but prices remain above the right shoulder therefore the pattern is not yet cancelled. In either case, it is the Nifty which controls the overall sentiment, therefore, buying is best avoided.

The Nifty has seen two successful ORB (opening range breakout) days - on Tuesday, and, Thursday. This is as good as it gets. After trend days, intraday choppines is usual. While there is no rule, I would think that we may be in for a number of days with choppy intraday movements.

Stocks and Silver are getting slammed as the world moves away from risk. The Nifty saw a dramatic decline all the way to 4900. All trends see some kind of corrections. The rally from 4700 to 5200 was a correction of this bear market - a relief rally.The Intermediate bear trend seems to have finally asserted itself, with the relief rally probably complete. The Nifty seems on way to challenge its earlier low of 4700, and, eventually break below it.

A large head and shoulder pattern earlier discussed on this blog has an approximate target of 4000. This pattern remains valid.

For investors, the wise trade is to do nothing - just hold on to your cash. For traders, it is wise to follow short term charts and go with the intermediate trend which will change to down, if and when the Nifty closes below 4900.

On Wednesday(Yesterday), the Nify retreated back from the 5165 resistance line. The close was mildly lower but it is reasonable to expect lower levels today, with deep declines in the U.S. markets overnight. The Nifty now offers a number of possibilities:

1. A bullish head and shoulder pattern in development remains possible so far the Index stays above 4900. With every passing day, the neckline will become stronger resistance, but the pattern is not yet cancelled.

2. The current up move is over, with the Nifty rally coming to an end. Short positions may be taken for the intermediate term, using the 5200 round figure as a mental stop. The downtrend gets confirmed below 4900.

3. Nifty remains between 5165 and 4900 making a long trading range. A move out of this range will give a tradeable opportunity.

No matter what the Index does, traders should do such visualisation.  This exercise gives a view on the Nifty which is essential for short term traders.

Rocky has posted a number of similar comments relatng to Range Expansion. Hi Rocky, I did reply to your question on Sept 15. Please read the post . Range Expansion is a valid means of making a partial or complete exit for day traders and swing traders. Since day trading is limited by time, any big thrusting move in our favor should be used to take profits. The concept is not needed for trend trading, because trends are not limited by any time constarints.

In the post on trading a bullish head and shoulder pattern, I suggested keeping a stoploss below the low of yesterday - because yesterday(tuesday) was a wide range trending day. avv says "Very useful post. I have a question with stop loss setting. The average true range on nifty (14days) is about 115. In that circumstances won't the chances of one getting stopped out with 5050 stop loss almost guaranteed? Does stop loss has to be multiple of ATR to avoid getting stopped due to noise?"

My Notes: A stoploss can be any one of many methods. Each of the methods will give equally satisfactory results - the purpose is to protect against unneccessary losses. It is important to be consistent. For the head and shoulder pattern, the wide range day should hold if upside momentum is going to continue. On this basis, I suggested a stop below the low, which is 5035. The classical stop is below the right shoulder - 4900, but this stop is too wide and certainly represents a failure of the pattern much before it is reached.

Peter Brandt has an excellent blog where he discusses chart pattern trading. The idea of keeping a stop closer to the neckline comes from his book - Diary of a Professional Commodity Trader. I found that keeping the stop closer to the neckline makes the trading of head and shoulder patterns, much easier.

On ATR stops, if you develop a system based on using the ATR as a stop, you should have a multiple of the ATR - say 2 times the ATR. In the case of the head and shoulder, a move below the wide range bar will negate the upside momentum, so the ATR is not used here.

Sify Technologies
Sify is listed in the U.S. exchanges and has been discussed today in the blog - Tischendorf Letter . I know that Sify was a child of the dot com bubble in the year 2000. Then the stocks were forgotten. Now, maybe a revival is in the offing. I request readers to share their knowledge on Sify and Rediff. [The post mentioned above has a kind reference to this blog].

You may also like to read this post from the same blog: Great Traders offer no excuses. Once you reach this post, you will find links to many other posts on trading psychology. go ahead, read them, the market is dull today, so make the best of your time.

In the morning, I suggested a trading plan using multiple positions. smit asks "sir what about trader playing with one lot only".

My Notes: First, the correct term is 'trading' and not 'playing'. I have a big problem when TV anchors ask me "how should you be playing xyz...". The concept of playing trivalizes the serious business of trading. Ok, Sorry about that!
If you trade with only one lot, there are two options - First, trade the mini  nifty. The mini consists of 20 units as against 50 for the standard contract. Therefore, you can trade three mini contracts eventually. Second, take the first trade and skip the rest.

Referring to the bullish head and shoulder pattern: Rohit asks "Also will this upmove be sharp and one sided in straight line or we will go up and down and reach there." Rohit has two other thoughtfull comments on the market. He feels that it is better to short at higher levels than to take a long trade now.

My Notes: Fair enough. We all trade according to our methods. I cannot say if the Nifty will go up. For all I know the 5165 resistance may hold. Therefore, I cannot say if we will have a straight line advance or a jagged up move. What I can say is : Here is a pattern. This is how I will trade it. I have said this here.

The Nifty is back again at 5150, which is the resistance for the Index over the past one month. If the Index clears this resistance to close above it, we also have confirmation of a bullish head and shoulder pattern which then gives a target of - hold your breath -5600. Markets can do whatever they want.

Position Sizing: Money in trading comes from management of risk which covers stop losses, quantitiy, pyramiding, trailing stops and profit targets. The quantity and pyramiding can be taken as Position Sizing.
We have been discussing the bullish head and shoulder pattern for some days. Here is a complete trading plan to manage the H&S trade.

1. Trade in October Nifty futures/ October Nifty 5000 calls
2. Determine the quantity that you plan to trade in. It should be possible to trade one third quantity at any time.
3. On a breakout above 5165, take a position for one third the quantity. Your stop will be Tuesday's low, i.e. 5050.
4. The possible loss as per 3 above is 115 points. Calculate the money loss. If you have taken 50 Nifty (this is 1/3rd) then the money loss will be 50 * 115 = 5750 Rupees. This loss should not be more than 1% of your trading capital. If it exceeds 1% then go back to 2 and recalculate the quantity.
5. Add one third of the quantity on a close above 5165. the close should be in the top 20% of the day's range. Add the quantity just before the close.
6. Your stop for the second lot in 5 above will be the low of the day in which you added the quantity.
7. Buy the balance one third once the Nifty crosses 5250 and pulls back. Stop will be low of the pullback.
8. Exit the first lot when the Nifty crosses 5300. Exit the second lot with a parabolic SAR stop. Exit the third lot at the 5600 target or a 3 day trailing stop of lows once the Nifty crosses 5500.

Okay, this is as good a plan as any to trade a chart pattern. The entire focus is on managing your risk. I gave this as an example, although it is perfectly valid. Traders can modify the plan, change it to their needs or simply discard the idea - your choice.

On yesterday's NR7 and my suggestion that expansion should follow, Balu says "Perfect prediction.. expansion on the very first day after nr7"

My Notes: Thanks for the kind words, Balu. But, there is no prediction involved in technical analysis. TA is about probability. Only the Good Lord can predict the future. Who else knows what the next moment will bring? So, as a market technician, I never claim to predict anything. Readers should also be aware that they are NOT predicting, but discussing probablilty.

For the NR7, there is a fair chance that this pattern leads to expansion. Therefore, we should take the trade with proper risk management. Suppose, after NR7, instead of expansion, a choppy day comes about. Does that mean (a) I did not predict well, (b) the NR7 is an ineffective pattern, or, (c) technical analysis doesnt work.

I know that readers will understand that neither of the three options is fair or valid. If the pattern does not work on any given day, that is probability for you. On some days it makes money, on some days it does not. Finally, the money made should be more than the money lost.

Again, I realize that Balu was simply discussing the benefits of using a pattern, and, this post appreciates his comment which enabled me to highlight an important point.

Reader views are welcome.

Monday saw an NR7 - the narrowest range in seven days. Narrow ranges are a sign of contraction. What follows should be expansion. I am giving the Nifty chart with NR7 days highlighted.

The markets are becoming dull, and that should be fine with traders. Every day is not expected to come with fireworks. The Nifty is in a trading range - I am looking at 4900 to 5150 as the range boundary. As time goes by, new patterns will emerge and trades will come. But for the past two adys, it has been relatively calm - very little trading. This includes Gold and Silver, where I have not identified any pattern. So, it is quite for me.

I had given a chart for a bullish head and shoulder pattern. Sasi asks "what will be the target on the downside for a failed bullish head and shoulder pattern".

My Notes: Please remember that this pattern has not been confirmed yet. Confirmation comes on a close above 5165 approx. A failure of the pattern will come in only after the pattern is confirmed. If there is no pattern, then, there will be no failure - nothing to fail. Assuming that the Nifty closes above 5165 and the pattern is confirmed, when will the failure occur? When prices move below the right shoulder - around 4900. There are no rules for setting targets for failed patterns except that a strong move may be expected in the opposite direction. A minimum move should be the difference between neckline and right shoulder, 5165 - 4900 = 265 points giving 4635 as a target.

Readers must be aware of the rogue trader in UBS, UK who landed up with a $2 billion loss. That is almost 10,000 crores Indian Rupees. I have been reading a lot of blog posts on this issue and three points emerge:

1. It is not easy to lose $2 billion. The exposure required to lose $2 billion must have been quite large.

2. Banks are much less intelligent than the impression they give. Bankers behave as if they know the world (and control it). But, the reality is otherwise. Where were the control systems of UBS? How could such a loss emerge? I read that the trader informed management about this loss, meaning that the control mechanisms had failed to detect it on their own.

3. Rogue traders emerge because managemnt allows them to do so.While these traders are making money for the company, the management turns a blind eye to their risky ventures. It is only when the trader blows up that management begins to cry aloud. In fact, in all fairness, instead of the trader, it is a different set of people who should be in jail.

Who are these traders? "young, smart with a burning desire to move ahead". Well, this reads like a recipe for disaster, sooner or later. A trader should, by definition, be conservative.

This week, I have suggested that I will be looking to buy the Nifty with stop at 4900. My view was of support around the 4900 zone. Fortunately, the Nifty gave two up moves, which has resulted in rpofitable trades. Since I was only a buyer, I could focus on the buy signals that came in intra day charts. Please understand that I have no control over what the Nifty actually does. I have control only over my actions. My actions were: buy if the opportunity arises, then keep a stop. The market could easily have slipped below 4900, stopping me out. In fact, after stopping me the Nifty could then have started an up move all over again.

My point is: Once I have a view based on charts, my trading plan becomes easy and clear. I will be wrong, and, quite ofen I am. That is not a worry. What is important is to have a plan. Then probability will eventually work in my favor.

For many days, I have not been trading in Gold and Silver since I have a bullish view while markets were not giving any buy signals. Then, yesterday, Silver finally made a symetrical triangle suggesting a sell signal. The chart was posted in real time in this blog. That pattern gave me a view. I have taken the short sell. It may or may not make money. That is not within my control at all.

To sum up: I am perfectly content to wait - for patterns that give me a view. if there is no view, there is no urgency to trade.

A blog  (sorry, I missed out which one) , suggests a simple test to determine if intraday activity outperforms any after hours system.

Before the open, every morning, write down your trades for the day assuming that you will not be monitoring the market during trading hours. Write down your reasons, the entry level, exit level and whatever else. Track the results of this simulation after a few weeks and compare it with your actual intraday trades.

I think the point is that the less stressed , no intra day monitoring trades may perform better.

The Nifty continues its slow move up. A suggestion to buy with a stop below 4900 has turned out to be profitable. Readers must understand that often such suggestions will lose money. The profits come because of probability - more money is made and less money is lost over a long period thus giving positive expectations for a trading method.

1. Set a daily limit for losses. If you are trading in more than one instrument, have a limit for each instrument, as well as a total limit. once that amount is touched, stop trading for the day. No exceptions.

2. Markets open at 9.15 AM. Have a view before the open. Then revise the view, if neccessary by 9.30 AM. In another half hour, say 10 AM, you know if you are in sync with the market or out of sync. If you have a losing trade in the first 45 minutes and your views are not in sync, take that day off. Work on your charts, paper trade, do research but do not trade.

3. If market is moving according to your view, then increase your trading volume. Take advantage of good days by being aggressive.

4. Trade in multiple positions, so that you can take some profits if there is a Range Expansion (RE) in your favor. An RE bar is visible on the chart for its unusual length. As a simple rule, it should be atleast twice the average range, almost certainly closing in the top 20% (if trend is up) or bottom 20% (if trend is down).

With two down days, on Monday and Tuesday, the Nifty found support just above 4900.  The Nifty is in some kind of a range between 4900 and 5100. This could mean a rally towards the 5100 resistance level. For swing traders, it is possible to buy sept calls with a stop below 4900. I continue to maintain short positions using October options. These positions will not be affected by the short term trend of the Nifty. For these day trades / swing trades I take positions in the September series.

Yesterday, Tuesday, Gold moved in a narrow range, suggesting a period of contraction. As I have explained in this blog many times, periods of contraction are followed by expansion. This narrow range is developing inside a small range with resistance at 28400 and support at 27500. These are levels for the swing trader.

The S&P500 rallied to close higher on Monday. This is leading to a better morning in Asia, and, probably in India. Monday was a narrow range day. Today's gap up could lead to a trend day with higher levels by the close. In Sepember futures, support comes in at 4958 approx. I think, buying is possible with 4935 as a stoploss. Please understand that these are indicative levels before the market opens. Traders should have their own plan available, after watching the first 15 minutes of the market.

With Monday's decline, the possibility of an inverted (bullish) head and shoulde also exists in the Nifty. Earlier, Balu had commented on this possibility. With a stop below 4900, call buying may be considered.

TraderbyBirth says
"Sir, I am a big fan of yours and follow you everyday.I have purchsed everonn @430 on August 29th and it touched a high 450+ the next day and the news of MD bribery case came out on Monday.I am unable to get out of this scrip.What should I do now? Its very painful to take the losses due to such scams.Can I average it at this level? Please suggest.Right now it is @443."

My Notes: Today's close for Everonn was 243 (not 443). See, when the market is punishing a stock for corporate governance issues, it is likely that the stock may remain out of favor for some time. Traders have to take their own decision on exiting the trades that they take. Exits are a very personal issue. We are in a bear market. Usually, it is wise to stay with blue chips, in conservative sectors like FMCG, Pharma, IT. In any case, please do not average a losing trade.

Banks, NBFC, Development finance institutions are three major groups in the Financial stocks category. Analysts continue to hype up the 'immense' value and growth prospects of this sector.

So I start thinking. What do the financial stocks do? They make money from the spread between borrowing and lending rates. They are an important part of the economy. An inefficient fianncial sector can become a big drag on the economy, but does this mean that an efficient financials sector can be a stock market leader? What will ensure above average performance from a business that essentially trades in spreads?

Banks are utilities matching borrowers and savers, providing payment services, facilitating hedging etc. The value added comes from reducing the cost of doing so. Paul Volcker questioned the role of finance: “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence." - Satyajit Das. (Read interview here. )

Well, this is what I thought, although Mr Das explains it much better. He says  - "Confucius wrote that: “The superior man understands what is right; the inferior man understands what will sell.”

The financial services sector saw an enormous boom for the last 30-35 years. I feel their golden period has come to an end. What value addition do these people do? Of course, they pay themselves extraordinary salaries and bonus, but what do they do for the economy?

For this reason - my inability to understand their business model, I have not been a fan of NBFC and development finance companies. I understand what banks do, and, if they do it well they make fair return on capital. However, our friends keep on pushing the NBFC's and the DFI's. Good for them. As investors, we can choose our investments. Think about it.

Monday morning shows the SGX at 4962 (at 7.51 AM). If this is how the market opens, then we will open almost 80 points lower. The CNX-IT index may outperform while the Banks could lead lower. After a gap open, a day trade probably comes only out of an intra day consolidation.

On the impact of a rally in the Dollar Index, Tarique Anwar says" The net effect has to be negative equities. Some amount of rally could be digested, but a massive rally, means there is very high risk aversion in global players. In that case every stock market in the world should be selling off. Every dollar peak has corresponded to a bottom in Nifty"

I think the key term used is Risk Aversion. Perhaps, Gold and Silver will also benefit from a risk off trade.

One way to trade the Dollar Index is to buy the USD and sell the Euro. Almost 65% of the weightage in the Dollar Index comes from the Euro. In India, the trader can buy Rupee-USD contract and sell the Rupee-Euro contract. This cancels out the rupee and creates a synthetic Long Dollar Short Euro position. I hope I have got the arithmetic right.

Pi suggests that commodity importers should benefit inspite of Rupee depreciation since commodity prices may fall much more than the depreciaiton. This is a reasonable proposition. Bulk imports come in Coal, Fertilisers, Crude.


 

The Dollar Index is on the verge of a breakout from a consolidation. The current consolidation is a mirror image of a similar process in 2008 which led to a breakout from 77 to 88. See chart below

A rally in the Dollar Index means:
(a) A decline in the value of the Rupee.
(b) A rally in the Dollar Index could mean a rally in IT stocks - Infosys, Wipro, TCS, HCL Tech, also to a lesser extent, the mid cap IT group.
(c) In the short term, FII inflows may decrease because of the adverse exchange environment.
(d) Companies with large US$ borrowings may find their borrowings have gone up in Rupee terms. Bharti Airtel may be one such company.
(e)A rising dollar eventually produces lower commodity prices. Lower commodity prices, in turn, lead to lower input costs for Indian companies. The lower costs will be offset by the costs of the rising dollar. I am not sure what the net effect will be.

Readers are requested to explain what the exact implcations of a dollar index rally is. Please share your knowledge.

Sunday morning is a good time to share philosophical ideas on investing.

As I undestand, investing is all about value. We put hard earned money in an asset when we perceive  value in the price. There is very little market timing. It is a coincidence that value usually comes about when markets are recovering from bear trends.

Investing decisions can be based on value in the market as a whole, or value in individual stocks. If I think that the market itself has value, then buying an index fund, or even a diversified equity fund would be a good investment idea. I use long term charts to determine if the market has value - currently, to me, the answer is - not yet.

What about individual stocks? Many stocks may offer attarctive prices to the investor, irrespective of market conditions, or because of bear market conditions. Investors willing to put money in these stocks can consider an SIP - systematic investment plan, investing every month on fixed dates.

All investors, whenever they invest should consider these issues:

1. What is your risk tolerance? Investing requires the understanding that stocks can continue going lower. There is also normal market volatility which moves stock prices up or down. You should not pretend to be an investor when what you are doing is actually trading.

2. Selection of stocks. How do you select a stock? You should write down the reasons for selection. If the basis changes then be prepared to exit. Again, make sure that the reasons are not just technical. "I am buying because prices have crossed the 50 day MA " - this is not an investment idea - it is a trading strategy. An investment idea could be: "Markets can go down another 20%. I will be a buyer in Reliance at 750, understanding that it could touch 600. I will do an SIP in this stock. The basis for buying Reliance is its position as India's largest private sector company available at half the price as compared to its high. I will review the position after every quarter. If the funds / analysts become negative on Reliance then I will reconsider".

Since there is a lot of subjectivity in the buying decision as outlined above, I prefer to wait for deep value, as well as a consolidation on long term charts. This often results in missing opportunities. So, for each investor, the process needs to be personalised.

What do readers say?

Well, we had a down day today, so the 4700 support and 5200 resistance appears to get a bit more confirmed. I believe we remain in a bear market. Bear market rallies can be sharp and swift. At some point, these rallies will face resistance. If we go above 5200, the market will be giving a message of strength, at least in the short term.

I am not appearing on TV since I am taking some time off - a few weeks.

Ananthan Thangavel writing in Seeking Alpha (read it Here ) says that the Gold market may be ready for a decline. He gives these reasons:

1. Market Sentiment Too Bullish
2. Volatility Too Great
3. Retail Buyers Too Bullish
4. Buyers Expecting QE3
5. Equities Not Negatively Correlated to Gold

Mr Thangavel concludes:

We believe maintaining a neutral stance on gold at this time is a prudent posture. We would look to establish short exposure on a sustained crack in prices, but with current gold volatility at an all-time high, such a position is risky. Unfortunately, shorting hysteria is ten times as difficult as buying fear, and picking an entry and exit point on a short gold trade is very difficult. However, as the September Fed meeting approaches, the gold market should begin pricing in the reduced chance of quantitative easing, and prices should begin to fall, possibly using the catalyst of the Fed’s September statement.

My Notes: Maybe. If Gold starts to make a top, it should come up on the charts. Also, it is not easy to go short in a metal which is prone to so much volatility. Much easier to exit out of long positions.

The Nifty has rallied strongly, almost 450 points from its 4700 low. Now, the Index faces strong resistance as it tries to cross the 5200 gap. It is possible that the market may struggle to cross this threshold for some days. The short term trend is up so dips should find support. This means that rallies will face resistance at the 5200 threshold, while dips should find support because the short term is up. This leads to a choppy market scenario.

Answers:

Rocky asks:  "want to clarify sthing like in real time technical analysis the chart showing 5 min, 15 min and so-on suppose if we took a position @ 9;25 and position going against our favour so we have to wait till 9;30 in span of 4 min the prices can be moved an where so how to tackle this situation. "

My Notes: There is a trading time frame. This is the time frame used for taking entry and exit decisions. You can have other time frames on your chart as part of your strategy, but there will be one, clearly understood trading period. If this period is 15 minutes, then you are expected to wait for the 15 minute period to be over before taking any trading decisions.
Suppose you are trading on 15 minutes. You have a rule that you will sell below the low of the current bar if XYZ happens. At 9.25 you notice there is a strong chance of XYZ happening and prices are falling. So, they could be lower by 9.30 when your 15 minute ends. But, no one knows what the next 5 minutes will bring. Maybe a sharp rally will cancel the XYZ pattern by 9.30 or even create a long legged DOJI which will not be violated on the downside, or something else..

Therefore, the trader who is working on a specific time frame should wait for the timeframe to be completed before taking action. If you have a stoploss or target, then that value can be triggered anytime. But, if you have a rule based on the bars in the time frame, then you have to wait for the bars to be completed.

The Index could remain in this range for some days. if it does breakout, then there are interesting possibilities on the upside. Chart below.

Sudhin asks "could you please explain how we are to fix the high and lows for calculating the fiboancci levels, for example in ril we have a low in place but how do we fix the high, as we have around 4-5 swing highs up to Jan 6th, if you could put up a chart it would be of great help. "

Please refer to the chart below. When drawing retracements to identify pullbacks in a downtrend, select the lowest low. I have marked this point. Now, move to the left of this low and select two or more swing high points. when two points are together, select only one of them. In this way, you draw retracements from a number of significant highs to one fixed low.By this time your chart is full of lines. That is fine. You are looking for clusters - areas where two or more levels come close. It is these clusters that should provide targets / resistance. Two charts - first, example of selecting the swing points, then the retracement levels (full of lines). retraecment chart shows possible levels from December 10.

Yesterday, at 9 PM, on the hourly chart, Gold was making a bearish head and shoulder with a target that should have given almost 650 points - a lot. The neckline was at 28100. I took the short trade, Gold went down by about 150 points, then rallied, and this panicked me. As it is, I have a long term view that is bullish, so my short positions had low conviciton, I suppose. I exited at my enrty point, the trade was a break-even.

Today, I find the decline continued, hit the target of 27450. Last week, I had taken a similar downside trade - I had posted the chart in real time. Yesterday, I just could not bear the short trade. I wonder why this weakness? All of this is psychology, I suppose. Readers opinions are welcome. Chart when the trade was taken, then chart as of today.

The Swiss Franc(CHF) was perceived as a safe haven currency. Yesterday, the Swiss National Bank (SNB) intervened in a dramatic way to weaken the Franc, which has been rallying like crazy due to European investors searching out a safe-haven.
The Franc had rallied to a parity of 1 against the Euro. Such rapid expansion of currentcy was hurting Swiss business. Finally the SNB said that it will maintain the swiss franc at 1.2 against the Euro, no matter how much resources it has to give. This was a devaluation of 20% from the parity which the Franc had touched.
Now, a weakened Franc is no longer a safe-haven. CHF‟s appeal as a safe haven is diminishing given the SNB‟s attempts to weaken the currency. Hence, we could see a situation where gold strengthens and CHF weakens going forward.
This increases the safe-haven appeal of gold, which has a finite supply.

Markets all over the world are rejoicing the intraday rally in U.S. markets on Tuesday. The S&P saw a low of 1135 in premarket trading, then went on the close at 1165, quite impressive. It does appear that Indian markets quite often forecast what the U.S. will do. Notice the sharp late afternoon rally in the Nifty when it crossed 5000 (day's high, till then) to close at 5060.

Gold is down, while Equities are up. World is now in the 'risk on' phase. How long this will last is anybody's guess. For short term traders, the Nifty has closed above its 20 day MA. That is a sign of strength. It is usually wise to go with the trend, in this case the short term trend is up.

Reliance is now touching its 50 day MA, as pointed out by Sudhin. The stock is liekly to outperform, should be treated as a buy on dips security.

Adapted from the SMB blog, read original post here.

Traders should identify a stock that due to technical and fundamental reasons has traded pretty much in one direction for months. That stock becomes your ATM. Keep it on your screen, know how it moves, feels and reacts. Since the stock has a clearly defined direction, you trade it only on one side. There is a lot to be said for having a directional view every day. SMB often refers to such stocks as 'stocks in play'.

Heromoto is one such stock. Long term charts are bullish. Fundamentals are good.I have shown the chart a few days earlier. Since then, stock prices have rallied handsomely.

Gold is also 'in play'.

How about more ideas from readers?

Nouriel Roubini, economist, famous for predicting the 2008 crash writes an article titled 'Is Capitalism Doomed?'. He says that the massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession.

CEO Joseph Ackermann of Deutsche Bank said that Europe's sovereign debt crisis will stunt bank profits for years and could kill off the weakest. This spooked the DAX which fell almos 4% on Monday.

JP Morgan says: Stock mutual funds are having their worst year since 1998 relative to their benchmarks, as higher volatility makes it harder to pick stocks.  Among 2,806 funds tracked by the brokerage, 47 percent underperformed their benchmarks by more than 2.5 percentage points this year, the most since the 55 percent recorded in 1998.  

Regular readers know that I am a big fan of volatility cycles. These are essentially cycles of expansion and contraction. When the Nifty rallied from 4700 to 5080, there were large range bars which were the expansion phase. Once we have expansion, the next phase should be that of contraction which probably started on Friday and continued yesterday. Today (tuesday) should continue as part of that contraction.

We are traders. We undertand that the market follows patterns but each instance of the pattern is likely to be different in some way. This means that my expectation of contracting markets is broadly correct, yet today need not follow the expectation since each new day is unique. So, what could change? Expansion, obviously! While chances of an expansion today appear dim, there could be sharp move up or down. In fact, the worthwhile trade today will be if the market decides to go into an expansion. If we remain in a narrow range, trading is likely to remain choppy.

If you found this a bit difficult to read, do excuse me, but read it again!

Morning Markets:
With the U.S. Markets falling on Friday (influenced by a poor jobs report), Asia has opened lower. The SGX suggests an open around 4975, which if it comes about in actual trading will be around 65 points lower than Friday's close.
Large gaps will always raise the question: Is the gap comleting the move or is there more to come? Answers to this question will come as the trading day develops. Therefore, a hurried trade on a gap open may not be the best idea.
India's tea party. Bloomberg has an excellent article on the demands by Indians for better governance. Read it Here.

The 20 day moving average may be used as the benchmark to determine if the short term trend is up or down. On Friday, the Nifty rallied to touch the 20 day average before closing below it. The test was done, but the average acted as resistance. If and when prices close above this average, we can assume that the short term trend has turned up. have a look at the Nifty chart below:

Well, charts do work. two days ago, I gave the chart for gold. Today, prices have broken out. Remember, that I have given two trades for Gold in real time. Means, that the trades were given as they were developing. Readers should not misunderstand this statement. It is not to praise myself . I make many mistakes. I am showing that charts work. Here is how the latest trade worked out:

Day traders / short term traders should have a view on market movement before the market actually opens. How will it be like today? Should I expect (a) trend day, (b) volatile day with tradeable swings (c) a narrow range day (d) choppy day where the swings are not likely to be tradeable, or (e) an unknown day with no clear advance indications.

A lot of days will be unknown (e), which is fine because often there is no clear indication to trade. On such days, do not trade that instrument. Trading is done on (a) and (b), and avoided on other types of days.

Today, Friday, I expect (d), so little or no trading in Nifty until patterns emerge intraday.

Open a chart, then apply four different indicators. Now, you have five charts on the screen (price + 4 indicators). Add a few studies on the price chart, like Bollinger bands, fib retracements, averages...). What do you get? I will show you an example:

There was a question on heromoto (I could not locate that exact comment ) in which I was asked why it was bullish for me. Here is the chart explaining the reason why I am upbeat.