Tuesday, February 28, 2012

The Nature of Corrections

The Nifty remains in an uptrend – I believe it is in the beginning stages of a bull market. Like all market cycles, there will be corrections, dips in the ongoing up move.

Now, markets are not made to order. We cannot order a correction that suits us. What we know is that all markets correct. The current decline in the Nifty is part of a correction, that is part of the natural cycle of optimism(exuberance) and pessimism.

Yesterday, just before markets closed, Udayan asked me on CNBC, “have you taken any long positions?”. I explained that since we are in a bull market, after a sharp decline I have just taken some long positions, and, if the markets open lower the next day, I will close the positions immediately.

There is a reason why Udayan is the star of all market anchors. He understands the markets – that much is obvious, but he also understands how each of his analysts thinks, trades and behaves. My view has been consistent – we are in a strong uptrend. If this is so, then Udayan correctly surmised that I may well be looking to go long.

My description of yesterday’s conversation and the thinking behind it was to explain the nature of corrections. I  think readers are now smart enough to get the meaning.


Sunday, February 26, 2012

Markets in consolidation

After a blistering rally that took the Nifty up by more than twenty percent, markets are in a stage of consolidation. While there is logical support at 5400, it is for the market to decide where support will come, finally.

A more important question is: is this a bull market? The answer is based on market behavior so far - prices above 200 day ma, pattern of higher highs, higher lows, and, gains of more than 20% from its lows. Therefore, based on this evidence, I aasume that the current decline is a correction / consolidation in a newly born bull market.

Even as we are bullish, short term traders should buy only when the trend changes to up. The signals will come on short term time frames.

An interesting piece of news is about the sesa goa - sterlite merger. While there are many reasons to justify this action, I am not a fan of financial engineering as a means of value addition. It is hard work that adds value, not investment bankers.

Wednesday, February 22, 2012

Start of a Correction

Today’s sharp decline in the Nifty saw the Index move below 5545. The 5545 level was an earlier swing low on shorter time frames. When the market breaks below a swing point (high or low), it is giving a message. When lows are broken, the charts begin a process of lower lows, and, eventually, lower highs. This is not bullish.

Therefore, once 5545 was taken out, all short term positions should be closed. Aggressive traders should take short positions.

What may have began is a correction of the up move. At this point, it is difficult to say the extent of the decline. Much easier is to identify the support levels – 5400.

Corrections are counter trend movements, therefore, they are difficult to trade. Short term traders should go with the flow, it is on the downside, but have modest expectations since these declines can be mixed with choppy movements.

Saturday, February 18, 2012

Nifty gains twenty two percent in 55 days

There are many definitions of a bull market. Some of the more commonly used are:

1. A bull market exists when the close is above its 200 day simple moving average.

2. A bull market is confirmed when prices move up 20 percent higher than the lowest low of the bear market.

3. The Dow Theory says that a bull market signal is received when prices go above rhe high of the previous intermediate top.

For the Nifty, all three of the rules have been fulfilled. The Index is trading well above its 200 day moving average. Prices are more than 20% higher than the lowest low recorded at 4530, and, we have seen a pattern of higher intermediate levels when the Nifty crossed above 5400.

Then, we are in a bull market. Our bullish stance however started when the Nifty crossed 4630 and has continued ever since. We did not wait for a thousand point rally to go long. One reason is that our view is based on momentum - since momentum continued to be favorable to the bulls, we remained bullish.

There will come a time when momentum will slacken, then it may actually turn negative. What will be our stance then? We will assume we continue in a bull market, unless proved otherwise. Any counter trend moves will be just that - against the trend.

Friday, February 17, 2012

Enter the Good News

After a 1000 point rally in the Nifty, good news has started coming in. Here is a sample:

More Good economic News: Jobless claims fall to four year low

Shanghai Stock Exchange made a Decisive Step

Why the Stock market just keeps going up


India on Cusp of New Bull Market

Tuesday, February 14, 2012

Becoming a full time trader

Here is an email that expresses a desire to switch from a stable job to full time trading.

Hi Sudarshan,
Currently working in a software company but wanted to switch to trading as a fulltime profession.
Here is a brief info about my trading experience:
I started trading since oct, 2008. first time i lost lot of money and stepped back for a few months to analyse my mistakes and learned more by reading books and watching the market. Similarly I attempted 3 times, everytime the amount of loss came down. This time I am in profit :)
earlier I was trading in stock futures, this time I liked commodities. I started around june 2011 with 2lakhs of capital, and made about 1lakh profit by dec, 2011. everytime, my main objective was to avoid losses, and that worked well.
 everyday, I spend a few hours on analysing the market after i come back from office. I take a position if I find a good opportunity.
Please share your thoughts on whether i am in a right position for a switch:
I've saved 1yr worth of living expenses and 10lakhs as capital. Do you think I need to save more? how much should it be approximately?
Any other advice you may want to share? 
My Notes:

I think you are well on the way to become a consistently profitable trader. You have the most essential requirement for successful trading - an aversion to losses. After your first attempt resulted in losses, you stepped back and studied. I hope the new traders reading this follow your example
Your switch from F&O to commodities is just a matter of tactics. Such moves will keep on coming during your trading career, it is not of importance.
Let me discuss your desire to switch from part time trading to a full time trader. As a full time trader, you will have more time to spend on research and analysis. You will also be completely focused on trading rather than on your current job. 
So, should you make the switch? Here are the drawbacks. Rs 10 lakhs in trading capital is not enough to create an income stream that will replace your current compensation from your job (whatever that amount is). You will need a lot of luck to earn enough to meet your expenses and Luck really should not be part of trading plans.
You really want to have the best of both the worlds. Continue with you present job and remain a part time trader. As your trading quality improves, you may consider increasing your volumes. Slowly!. 

Monday, February 13, 2012

Return from Holiday

I had taken time off for almost three weeks. I am glad to be back at my trading desk. This also gives me the opportunity to re-start blogging!

My grateful thanks to all friends who conveyed their best wishes on my son's marriage.

Overbought markets can remain overbought for long periods of time.

The first issue is: what defines overbought? The easiest definition is to use a bounded momentum indicator which has overbought and oversold levels. Examples of such indicators include the RSI, Stochastics & CCI. When the indicator value goes above the predetermined overbought value, the security is considered overbought.

What I mentioned above is the theory. In actual practice, markets in trading ranges can be considered overbought and oversold. Markets in trends are just that - markets in trend. If a market is in an uptrend then it is supposed to go up. Where is the question of being overbought?

Once the trader decides that a market is in an uptrend, overbought levels in an indicator confirm the strength of the trend. if the indicator becomes overbought and prices keep on moving up, the message is: this is a strong trend.


The concept of overbought and oversold markets is valid in trading ranges. Once a market is in a trend, overbought indicator readings is actually a confirmation of the trend.