Friday, August 29, 2008
For the Nifty, resistance comes around 4400, then at 4500. The Index must make an effort to touch and cross 4400. A decisive close above 4400, that is sustained for three days will be the first sign that the trend is moving from down to up. Till this happens, we assume that the trend remains down.
Within this broad scenario, trading tactics must be defined. A sharp dip is a reason to take profits on short positions, maybe even take a small long position. The same applies if you see a rally. Take profits, then on signs of weakness consider going short. Not all trades will make money. That's okay. The idea is to ensure that your profits are more than your losses.
Thursday, August 28, 2008
Having touched 4200, a target metioned in this blog earlier, the big question is: What are the possible scenarios for the coming days ?
Scenario #1: Most Likely. The Index has fallen almost 450 points from its peak. It has corrected 50% of the rally from 3800 to 4650. This is a good location for some support to come in. the Index sees some kind of a rally with resistance coming in at 4280 (minor), then 4400. At some point, the rally should face selling, and the primary down trend may reassert itself.
Scenario #2: Maybe. The Nifty tries to rally, does not quite succeed with 4280 coming in as resistance. A breakdown below 4200 sees 4150, then 4000, then 3800.
Take a view, then be disciplined and follow it. If you are looking for a rally, wait for the market to move up, then buy on dips with proper stop losses. If you are looking for a decline, then wait for the market to turn down from resistance, and then take positions.
Wednesday, August 27, 2008
This is quite unusual, for the Index to move in such narrow ranges. A big strong move is coming. The direction of this move is unknown.
A move below 4280 should see the beginning of a down move that could take the Nifty down to 4150. On the upside, a rally should face resistance at 4400, then 4450. Wait for the market to show its hand.
With every passing day, option premiums continue to fall. While implied volatility has not yet gone below 30 (for Nifty September & October options), it continues to decline.
Traders may like to set up a strangle:
Buy 4300 September PUT
Buy 4400 September Call
We are buying the Call for 4400 strike so that the cost of the call remains a little lower.
Management of this trade:
Stay with the strangle till the end of September. Either it will make money or the investment may become zero. Since risk is high, invest only such amounts that can become zero without causing you discomfort.
NOIDA on August 30
I will be paticipating in the CNBC Investor Camp scheduled for August 30, Saturday at NOIDA, NCR.
Tuesday, August 26, 2008
A 60 point range for the Nifty cannot be sustained for long. This narrow movement will give way to a large explosive move. But before the move takes place, it is difficult to determine the direction of the move.
Here are some pointers.
After reaching 4600+, the Nifty moved into a small range between 4600 to 4500. Eventually, it broke down from this range. A second range developed between 4400 and 4500. This one also broke on the downside. Now, we have a third range. If the Nfity were to move below 4280, we should expect lower levels, maybe 4150.
The other possibility is that of an up move. Traders should go long on a move above 4340. The first resistance is at 4400, then at 4500.
The range between 4280 and 4340 is some kind of a "dead zone". Avoid trading inside this zone. Buy above 4340, sell below 4280. It is possible that the market may go through a false breakout / breakdown. It is okay to be stopped out and reverse direction. If you get stopped out for a second time, then step aside since the market may not be willing to reward.
My first post for the day" New math for the Rich" is just below this one. Scroll down and read it. the post is in good humor.
$55 billion is less than the cost of color photocopies.
Bloomberg.com reports that Citibank, the bank that has suffered losses of $55 billion in the subprime crisis is cutting down on color photocopies to keep control on expenses. The Bank also dismissed 14,000 employees in the first half of this year, for the sake of keeping losses down.
Now, I do think that the old maths was better. If citibank had dismissed a few dozen of the greedy, they could be enjoying color photo copies, while the world could be saved from a recession. If....
That's not all. The financial wizards are really going through hardships. Citibank has also said that business meals must not exceed 50 pounds (Rs 4000/-) per person. Surely, it is the duty of the world to keep these financial big wigs in the style they are expecting. This is almost like socialism! What next ? In these difficult times, the banks will now demand that taxi rides should be pre-approved. Well, this wish has been granted by Deutsch bank which now asks its financial wizards to take approval before taking a taxi.
Thankfully, not all financial brains believe that people are equal. Countrywide, the loan finance company that went bankrupt, paid its CEO, Mozillo, a sum of $110 million as severance pay to ask him to leave the bankrupt company. That's New Maths.
Monday, August 25, 2008
This is reflected in falling volatility. Historical Volatility (HV) is a decent enough measure of the presence or absence of volatile conditions. On July 31, HV was 50.9, today it is 29.81. The decerase in volatility is a reflection of the dull markets that we are in.
Low volatility means:
Less opportunities for day trading & swing trading since market moves are small.
Less opportunities to sell options since the premiums are low.
More opportunities to buy options since premiums are low. This is a double edged weapon, since the Index / Share may not move at all, thereby making even the low cost option into a total loss.
How low can volatility go ?
For the Nifty, the low band is around 20. Thus, volatility can continue to fall from 29 at persent to 20. This means we should expect more of the dull, range bound markets.
What comes after low volatility ?
The Market comes back to life after a period of low volatility. This could mean big moves, but the direction is unknown. Yet, by following the market, it is usually possible to determine the direction of the big move as it starts. Patience!
Selling option spreads (inspite of low premiums) could bring in some revenue, since volatility may continue to fall. Do not sell naked options, because an explosion in volatility in the wrong direction can cause large losses.
After a few more days of low volatility and ranges, it may be worthwhile to buy option spreads - calls and puts both. Risk is that both of these could expire worthless if volatility remains low till end of september. The reward is a big jump in price of call or put if the market takes a directional jump. To balance the risk, invest only such amounts that you can easily accept as a total loss.
Watch the charts for early warning on the direction of the breakout from the low volatility zone. take small positions in that direction, with proper stops. Do not mind getting stopped out if the anticipated move does not occur. When it does move, your trade should become very rewarding.
Sunday, August 24, 2008
For most of last week, the direction was down. On Friday, a sense of at least a short term low has come about. The Nifty is now much healthier having seen a 400 point correction - almost 50% of the rally. Then, buying should be considered if momentum is favorable. "Favorable' momentum can be defined in many ways.
1. Prices move above the initial intra day range set up in the first half hour. If there is a big gap open, then this idea may not be valid.
2. A big gap open sets the tone for the day's direction. Trade entry is done after a period of consolidation or on a dip.
3. During the course of the day, momentum indicators like the RSI or Stochastics reach the lower support levels, giving an opportunity for low risk buying. While this happens, prices maintain some strength, remain above the open, or the previous day's close.
This is not all. You can work out a number of ideas which will define strength / intra day dips in an envionment of strength.
Trading with momentum enables the trader to ride these short term waves. As usual, the waves may be false, hence all trades should be protected with stops.
Saturday, August 23, 2008
1. This is by far the worst financial crisis since the Great Depression, not as severe as the Great Depression but second only to it.
2. Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of US and global stock markets.
3. While the rest of the world will experience a severe growth slowdown only one step removed from a global recession.
That's not all. Jim Rogers, hedge fund star who correctly predicted the rise of China, says in an interview on August 19: http://www.moneymorning.com/2008/08/19/jim-rogers/
This how the interview starts:
U.S. financial debacle is now so ingrained – and a so-called “Super Crash” so likely – that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away – if it ever is, Rogers said.
Well, we will leave it like this. While no one can predict the future, it does seem that the bear market has some time to go before we see an end.
Friday, August 22, 2008
The Very long term:
This is a long term bull market. Such secular bull runs last for 18 to 20 years. We started in 2003, so there is a long way to go. To classify this trend, we will call it " long-lasting".
Within this long lasting bull run, there will be many bull and bear cycles. We will call such moves - Primary trend.
Currently, the primary trend is down. This is a bear market.
Moves that last three weeks to three months inside a primary trend are called intermediate movements. We had an intermediate uptrend that pushed up the Index 22% in one month. This trend is completed, and the intermediate trend is now sideways or down, dpending on how you measure the swings. Some of this is subjective.
Within the intermediate trend, we have minor moves, but we are not concerned about these moves here, although as traders, the minor moves are of great relevance, when trading.
If we are in a long lasting bull market, why are prices not going up ?
Within the long lasting market, prices will move up and down - both. We are in the down cycle. It may last for another one year. Then, a revival may start which could take one or even two years before touching the highs made in January 2008. Also, if you bought RNRL at 250, it may take five years before you get those levels.
Has the bear market found its lows in July 2008, at 3800 ?
Too early to say this. At 4325, we are just 500 points away from this low. Another crash or debacle can bring us down to those levels, rather quickly. Also, bear markets must be given time to complete their purpose - remove all excesses from the system. Seven months is not enough.
If this is a Long Lasting bull market, then more money will be made by bulls.
Patience is the key.
Also, your ability to finance your purchases. If you are investing on leverage, then it is unlikely that you will benefit from the long lasting bull market.
Finally, the quality of your equity holdings. The portfolio with blue chips will benefit much more than a portfolio with all sorts of momentum stocks.
Thursday, August 21, 2008
Puru Saxena (http://www.purusaxena.com/) quoted in fullermoney.com, says:
Lets face it, the era of easy money and cheap oil has come to an end. And if my assessment is correct, this transformation will have a significant impact on the global economy.
..... In the current circumstances, I suspect it will be extremely difficult for the central banks to further expand credit growth, thereby inflating their way out of trouble.
.....it may only be a matter of time before foreign holders of US Treasuries start liquidating their holdings. When that occurs, long-term interest-rates in the US would rise rapidly and the Federal Reserve would have no other option but to raise its Fed Funds rate.
My Notes: if the US consumers spend less (because they borrow less) the belt tightening will affect most economies including India & China.
A New carry Trade
The yen carry trade was very popular in which funds & traders borrowed in yen at half percent interest, then used the funds to trade or speculate in currencies, commodities, whatever. A new carry trade is now in the making. This is the crude to equities carry trade. Oil rich economies are earning money they never dreamt about. Earlier, a barrel of crude fetched $30. So, one barrel of crude could buy $30 worth of equities in world markets. Now,the same barrel fetches $100, getting equities worth $100. So, for owners of oil reserves, equity is cheaper than ever. Not just equity, but also property.
From http://ftalphaville.ft.com/ : So great is the power of high-priced crude, the world’s oil reserves ($135tn) could buy the S&P 500 Index 11 times over... Oil producers are being offered a “once-in-a-lifetime opportunity” to build up weightings in global equities at a time when nobody else wants to buy.
My Notes: We should consider buying oil shares on dips, as a hedge - ONGC, Cairn, Essar Oil, Reliance.
Marc Faber (Dr Doom) reveals his personal holdings.
From http://ftalphaville.ft.com/ :
From a personal perspective, says Faber, of his total assets, about 5 per cent is in equities, 8 per cent in gold, 8 per cent in real estate and related investments and the rest is split between US and euro fixed-interest securities.
Faber suggests accumulating gold from here on down to possibly $600/oz. While not necessarily forecasting such a drop (from the current level of about $820/oz), he notes the metal could.
So in typically cheery mode, Faber says, “let us assume the financial system blows up”. Large deposits could become worthless overnight. But if you own shares of companies — even though they may decline in value — you will still own these shares since they are a certificate of ownership and not liabilities of someone else.
So, no matter how negative a stance one might have toward equities, at this point the ownership of some solid companies might be more desirable than being a creditor in a financial system that may not be able to pay at some point in the future.
My Notes: Gold, Blue chip equities (not for trading but long term ownership), Property, bank Fixed Deposits (PSU Banks), funds for trading, - this is how an individual's asset allocation could work out.
Nobel Laureates Predict Credit Crisis to Keep Hurting Growth - (http://www.bloomberg.com/)
Myron Scholes and Daniel McFadden predicted the yearlong credit squeeze will inflict more pain on the world economy and financial markets.
"The crisis is not over and I'm not exactly sure when it's going to end,''
My Notes: As Investors and traders, we can simply follow the market to make some money, but more so to protect our capital. In this time, capital preservation is more important than aggressive trading.
Wednesday, August 20, 2008
Now, the understanding is that the NSG will approve the safegaurds. Thus, this news should be discounted. But, in the short term, a sudden euphoria could easily see markets move up. If you are long, then such conditions are perfect to take some profits. If you wish to buy, then buying in euphoria is not a good idea.
Sometimes, the market gets disconnected from reality. The impact of inflation is real, but the market ignores it. While the benefits from the nuclear deal will flow in after maybe 10 years, or more. Yet, the market behaves as if the deal will produce milk, honey and gold from today itself.
An earlier post on the market is below. Just move your mouse.
The stochastics seems to have reached an area where resistance was faced on earlier occassions. It is reasonable to expect that the Nifty is likely to face resistance again, with the possibility of a consolidation or a decline. Also note that during the Sept - December 2007 period, this indicator stayed in the resistance zone for three months, but there was no correction or dip. This is the nature of momentum indicators. They will correctly forecast tops and bottoms when markets are range bound, but fail when markets are trending.
We have to ask ourselves: what is the condition of the market now ? If it is trending then the indicator will have little or no forecasting value. The answer is: markets are in a range. Then, we should expect the indicator to catch tops and bottoms. Again, there is no assurance, that is why the trader uses proper money management to protect himself.
To return to the main point: the outlook now seems to be that the Market will be facing resistance at higher levels with a strong chance of a consoldation or a dip.
Can this analysis be wrong ? Sure. Why not ?
What actionable ideas do we get from this analysis ?
Open you charts expecting more downside momentum. If you get a buy signal, take it since we could be wrong, but, trade with lower volume, keep tighter stops, plan for profit targets. if you get a sell signal, trade with normal volumes, keep stops a little wider, plan for bigger moves.
Tuesday, August 19, 2008
What did the market know about tomorrow to surge today ?
We do not have the answer. But, the Nifty did go back into the narrow trading range of yesterday. A breakout from this range is again awaited, the move could be either up or down. If you were short (as you should have been) then there may be some pain ahead if the Index decides to move up tomorrow.
For the short term, the Nifty have touched the downside target which was mentioned on Friday:
Price Target Range: 4355 - 4225
Time range: August 18 to August 21
Both, Price and Time targets have been met.
Short term: A rally may be possible. Follow the momentum. Keep stop losses in case the trades do not work out.
Inermediate Trend: It does appear that the intermedaite up trend that started from 3790 may be complete. My software targets are 4075 - 3975 on the downside. The estimated time is aroound the first week of September.
Now, remember, targets are just that. There will always some targets that goes wrong.
This post is addressed to the first group of traders.
You think you are working hard in trading ? You wake up early in the morning, start CNBC. You talk to your friends and colleagues about the market while getting ready. In the office, you stay glued to the trading screen with one eye and CNBC with the other eye. After market, you again waitch CNBC, then talk to your friends, broker & colleagues about the market. You watch the American markets while having dinner, then you stay glued to the TV as Udayan wraps up the day's action. Then the news, finally closing bell on CNBC - for the American markets. Exhausted, you go to bed after the US markets close.
Work ? All of this sounds like fun.
Who is making the sactifice ? Your wife, children, your immediate family. Often, new traders become strangers in their own house. Application of mind and understanding the markets is one thing - this requires reading & studying which newcomers never do.
So, use the remote. A smile on your wife's face is worth a hundred closing bells on the US market. And for studying, buy books on technical analysis and read them - again and again. Luckily, Kapil from Vision Books publishes American editions at Indian prices (low cost). get them at www.visionbooksindia.com, or call them at : 91-11-2386 2201, 2386 2935
Monday, August 18, 2008
At 4400, the Nifty is no longer in an 'overbought' position. Thus, after a four day decline, the narrow range day could be the signal for a reversal of the short term trend. On the other side, we have the Nifty standing on support at 4400. Support should hold. But, if it does not hold, then we have two technical factors - breakdown of support and breakdown from a narrow range day. Together, these factors could easily see the Nifty fall to 4330, or even to 4200.
Remember all analysis is useless if it cannot be put into actionable ideas. Now, based on these two scenarios, we can develop a short term action plan. We do not have a directional bias now. Two days ago, we felt that the Markets could slide, and that did come about. Today, the market is evenly poised, for reasons explained earlier in this note.
Since we are ready to buy as well as to sell, we will let he market decide the course of action for us. if tomorrow morning price action suggests strength, we will be buyers. If there is weakness in early morning, then we will go with that momentum and become sellers. A buy should see the Nifty to 4500, at the least. A sell should see 4330 or even 4200. This is just one part of the plan. Keeping a protective stop is another part.
I should write more tonight, so keep visiting.
Sunday, August 17, 2008
No economy can live beyond its means in perpetuity. Yet....the US thought it was different.
..... [My Note: In India, we have heard "This time is different" many times during the last one year of bull market excesses. Careful when you hear it again]
With equity markets now in bear-market territory in most parts of the world, it is tempting to conclude that the worst is over. I am suspicious of that prognosis.....
..... [My Note: The bear market in India has more way to go. It could be a range or maybe a test of lows. We do not know that.]
I could envision the dollar actually stabilizing or possibly even rallying into year end 2008 before resuming its decline in 2009 due to America’s still outsized current account deficit.
.....[My Note: For Indian IT stocks there may be pain starting in 2009 if the Dollar starts weakening then. Markets will often discount such events before they occur.]
– a marked deceleration in global growth leading to a related improvement in the supply-demand imbalance in commodities.
.....[My Note: Good news since crude may come down, Bad news since world economies may be in recession. Not sure what the net effect will be.]
Indian GDP growth could fall below the 7% threshold in 2009
.....[My Notes: The RBI is correct in fighting inflation even at the cost of lower growth. While Growth in India has benefited mainly the super rich, Inflation hurts the poor and the middle class.]
Undisciplined risk taking has been a central element of this crisis.
.....[My Notes: At the risk of repeating again, proprietary trading by investment banks has been at the root of the financial crisis. For this simple reason, avoid brokers which have such activities. The best brokers do not do any proprietary F&O . Go with them. Why take unneccesary risk ?]
Financial and economic crises often define some of history’s greatest turning points. They can be the ultimate in painful learning experiences.
You can read the entire report Here
Friday, August 15, 2008
A correction was anticipated. This has come about. At 4430, the Nifty is much healthier than it was at 4640. So far so good. My technical tools suggests a price and time target for this small correction. This is given below:
Price Target Range: 4355 - 4225
Time range: August 18 to August 21
This suggests that a low point should be made between 4355 and 4225 in price, and between August 18 and August 21 in time. Usually, one of the two targets(time or price) are hit, in a small number of cases, both are touched.
Now, these targets are just that - numbers. There is no assurance that these will be met. Empirical evidence suggests that these targets have some forecasting value, but require proper money management to be of any benefit.
There is also the concept of overshoot. If the Nifty were to fall below the lower end - 4225, the signal will be more weakness since support did not hold.
On the chart, the Index has significant resistance at 4600 - 4700 which will not be easy to cross. The basic theme then is a range bound market. At dips, there is a buying opportunity since we have the possibility of some up move till it reaches resistance. Near 4600, avoid any buying.
I should point out that my short term trading is based exclusilvely on mechanical trading systems. The targets given above are used to develop a directional call for swing trades & for taking up option positions. This means, currently, I do not have any long positions in my swing trades. Next week, I will try to build some long positions if I get buy setups, since a short term cyclical low may also be expected. I keep a stop for all swing trades, always.
How will I get buy setups ? Search for stocks in an uptrend which are currently seeing a correction. Few stocks may qualify but that's okay. There is no need to venture if there are no signals.
As usual, my request is to keep visiting, I should add more during the weekend.
I have a new entry on Trading Plans at the Wealth Blog. Read It Here
www.abnormalreturns.com offers these gems (picked up from different blogs):
Alan Greenspan is going to keep calling a bottom in the housing market until he is correct.
Good news, the stock market is less overvalued than it used to be.
Inflation surges, but “Recession kills inflation.”
The S&P is now “outperforming” indices in the so-called Bric countries (down 12 per cent instead of Brazil’s 15 per cent, China’s 54 per cent and Russia and India’s circa-20 per cent).
Value managers are preaching patience in light of recent underperformance.
Investing rules to live by: “If Jim Cramer likes the CEO and says buy, you should sell.”
The Russian economy is set-up to profit a diminishing number of individuals.
(And, India ?? )
Keep visiting, with three days for holidays, I hope to write a lot.
Wednesday, August 13, 2008
We are now at the top of a trading range that may have resistance around 4600 - 4700. If the uptrend is very strong, the Market will break through this resistance and move up. In case, momentum is normal or weak, we should expect a correction to the downside. Thus, buying is suggested only after a correction or after a decisive breakout with confirmation.
More Power to Gamble.
For reasons known only to itself, the NSE has decided to add 39 new stocks in the F&O segment, bringing the toal to 270+. India has the largest number of single stock futures for trading. Readers should ask themselves: why does no other country have these instruments in such numbers ? Answer: Because authorities (except in india) understand that single stock futures are like gambling, with no social or economic purpose.
Divergence between Short term outlook and Long term Trend
The price of everything discusses a book "‘When Markets Collide: investment strategies for the age of global economic change’ (McGraw-Hill, 2008) by Mohamed El-Erian, a veteran of the IMF, the Harvard Management Company, and most recently bond giant Pimco.
The short term trend is: : Oil is falling becasue of world wide receission, Gold has broken down from $850 support again due to lack of demand, the Dollar is getting stronger.
But, will you bet on these short term trends continuing ? NO. Oil is a pershing commodity - its price will go up in the long term. Same for Gold. As for the Dollar, the weakness in the currency will show sooner or later. Thuis there is a divergence between the short term trend and long term direction.
Next time when you hear some one on TV saying crude is down by 1 dollar or whatever, so share prices will go up, ask yourself, will crude fall in the long term ? If crude is likely to be in a long term bull market, then what about equities ? There are no clear answers to these questions, except by fund managers on TV who have a simple message: Please buy since that is the only way their funds will make money. (It is not about you!).
A Dozen thoughts on Trading Stress
Brett Steenbarger, Trading Coach offers these thoughts. here are a few:
* Everyone has a stop-loss level: For some, it's a price; for others, it's a pain threshold.
* The best traders have a passion for markets; the worst have a passion for trading.
* The best traders are not relaxed *and* they are not anxious. They are alert.
* Deep down, traders who don't prepare don't feel they deserve to win. We always gravitate toward our just desserts.
* The measure of a trader is how hard he or she works when markets are closed.
Tuesday, August 12, 2008
"To the curious incident of the dog in the night-time."
"The dog did nothing in the night-time."
"That was the curious incident," remarked Sherlock Holmes.
This is one of the 10 most famous quotations from Sherlock Holmes.
What is the curious incident of the retail investors ? There are no retail investors in the market.
That is the curious incident.
It seems that the current rally is fuelled by speculators & professional traders. A trend can be started by speculators but needs public participation to sustain. This is clearly absent. The absense shows itself in low volumes, vacant stock broker offices, market responses to any kind of pessimism (markets fall, thus suggesting that markets have not yet reached a bottom).
On the charts, we have seen the inability of the Nifty to sustian itself above 4600 overhead resistance. Yesterday, the Nifty closed above 4600. We suggested that the Index must close above 4600 for at least three days to confirm a breakout. This did not happen as the Nifty went back to close below 4600 again. This resistance is acting as a big barrier. A strong, momntum driven market does not bother about overhead resistance. But, the Nifty is not able to cross this resistance, giving a message - bull are tired.
For the short term, the Nify is locked inside a narrow range between 4500 to 4600. A move out of this range will give a trading opportunity. Buy above 4600, sell below 4500. You will also note that I give a lot of emphasis on cycles of contraction and expansion. In fact, Trend Mechanic (http://www.technicaltrends.com/) the software that I use for analysis has a lot of specially designed features for locating contraction / expansion.
Monday, August 11, 2008
Momentum clearly favors the bulls. It is possible that we may see some kind of correction after this 800 point rally. It is also possible that there may be a dip or choppy range bound moves. With all of this, the Intemediate trend remains up, thus buying on dips seems to be the best approach.
With every passing day, the market is reaching a point where buyers may face a loss of momentum. Thus, buying should be done on dips, to ensure relatively low risk.
Nifty futures moved inside a range of just 55 points, probably the lowest range in many days. Low volatility, as I have explained many times, is followed by high volatility. A breakout / breakdown should be expected in the next one or two days. Such conditions are ideal for purchase of straddles or strangles using Options.
In my wealth building blog, I discuss How to manage an investment idea with an actual example for SASKEN.
I hope to post once again before the evening ends! Keep visitng.
Sunday, August 10, 2008
Crude Prices. The Big Picture says: Crude is falling because of demand destruction - this implies a recession in the world economy. A decline to 110 is possible.
My Notes: I had suggested earlier that a breakdown from 120 should see crude come down to 108 - it is nice to note that better analysts share the same view. This decline will still be a correction in an ongoing bull market for crude. Remember, crude is a commodity where the supply is dwindling, day after day.
Pension Funds managed by Wall Street. The Aleph Blog is concerned about a proposal that will allow pension funds for employees to be managed by Wall Street. Sounds familiar ? This is similar to a proposal in India to allow a few large fund managers to manage the provident funds money of millions of Indians. Aleph Blog says that the only way Wall Street can assure higher return is by taking higher risk. The Blog writes: "Ask this: how would you feel today if the plan sponsors ...... adopted highly risky investment strategies? You would worry."
My notes: I worry for India, since the Govt seems to think that Dalal Street has all the answers to the problems facing this country.
Momentum Trading: This research paper analyzes different aspects of trading with momentum, then comes to an interesting conclusion: In summary, momentum trading seems to work, offering several paths to excess returns.
My Notes: Thank You! Technical Analysis for short term traders is about going with the momentum. When research confirms this method, I am gratified to get confirmation that what I do for a living really does work.
Psychology in Trading. Brett Steenbarger , an excellent trading coach, agrees to the importance of psychology in trading, but the actual rules for trading are equally important.
He says: "In general, I would say that traders tend to overweight the importance of psychology in their results and underweight trading mechanics: how they execute trade ideas (getting good entry prices, not chasing moves; ensuring that each trade has a favorable reward-to-risk profile) and how they set and follow criteria for exiting trades (price targets as well as stop losses). To be sure, psychological factors can interfere with the implementation of those mechanics, but many traders simply lack sound rules for entering and exiting positions and instead make decisions impulsively, on the fly."
My Notes: Read these lines again and again. You must have a trading plan, to get started in this business.
Saturday, August 9, 2008
The Investor Base Becomes Fundamentally-Driven
....But at the bottom, even long-term fundamental investors are questioning their sanity. investors with short time horizons have long since left the scene, and investor with intermediate time horizons are selling. In one sense investors with short time horizons tend to predominate at tops, and investors with long time horizons dominate at bottoms.
....The market pays a lot of attention to shorts, attributing to them powers far beyond the capital that they control.
....Long-term fundamental investors who have the freedom to go to cash begin deploying cash into equities, at least, those few that haven’t morphed into permabears.
Changes in Corporate Behavior
....Primary IPOs don’t get done, and what few that get done are only the highest quality.
....There are more earnings disappointments, and guidance goes lower for the future. The bottom is close when disappointments hit, and the stock barely reacts, as if the market were saying “So what else is new?”
(My notes: This has not yet happened in India. A minor decline in operating ratios saw the Reliance Comm stock fall 20%).
....Implied volatility is high, as is actual volatility. Investors are pulling their hair, biting their tongues, and retreating from the market. The market gets scared easily, and it is not hard to make the market go up or down a lot.
David Merkel, who wrote this piece then makes a summary:
No Bottom Yet
There are some reasons for optimism in the present environment. Shorts are feared. Value investors are seeing more and more ideas that are intriguing. Credit-sensitive names have been hurt. The yield curve has a positive slope. Short interest is pretty high. But a bottom is not with us yet, for the following reasons:
Implied volatility is low.
Corporate defaults are not at crisis levels yet.
Housing prices still have further to fall.
Bear markets have duration, and this one has been pretty short so far.
Leverage hasn’t decreased much. In particular, the investment banks need to de-lever, including the synthetic leverage in their swap books.
The Fed is not adding liquidity to the system.
I don’t sense true panic among investors yet. Not enough neophytes have left the game.
Well, we should not argue with the Market. If the Market is moving higher, so be it. The two points that prevent me from saying 'bear market s over" are:
First, Not enough time has been spent on the downside. After a four and half year bull run, six months of a bear market are not eonough.
Second, Capitulation has not taken place. There are investors / Traders all over the place. Most participants continue to stay in the Market. Surely, a bear market does not end with cheer and joy.
All technical analysis MUST conclude with actionable ideas. So, here are my action plan:
1. Go with the intermediate trend. This trend is UP, so try to buy on dips / breakouts / consolidation.
2. Since there is uncertainty about the end or otherwise of the Bear Market, stay with blue chips. This means, while I will trade in stocks like Reliance & Tata Steel, I avoid RPL, RNRL, Ispat, Ansal, Parasvanath, ....... in fact, all of the so-called momentum stocks.
I should point out that much of my trading is Intra Day, mainly in Index Futures. This is done through mechanical trading strategies. The action plan outlined above refers to positions that I take mainly for swing trading.
Friday, August 8, 2008
Lord Overstone, one of England's best known authorities on banking, in the 19th century,said, " no warning can save a people determined to grow suddenly rich.". Remember, the Tech bubble. People wanted to get rich quickly, then and there. Most people venturing into short term trading think of their attempt as "I am going to make money, even as everybody else loses".
I would humbly submit that New Traders have a lack of knowledge about trading, are totally ignorant about the markets,. yet, they are willing and able to spend good money to prove that they are expert traders. The end result is already foreseen. All of the Novices fall away, nursing large losses.
Think carefuly. When you want to be an engineer, you go to engineering college, then become an assistant, then after 7 or 8 years from the time you started college, you finally become an engineer.
What are your efforts when you wish to become a trader ? One day you decide to trade, the next day you become a trader. The market welcomes such people since they wll soon give all their funds to smart money.
Here are some steps that should take you on the path to trading success:
1. Learn the business. Read books, listen to experts, browse the web (of course, read this blog!).
2. Start small. Your loss in any single trade should not exceed 1% (one percent) of your trading capital. if you lose 10% in a month, stop trading for that month. Start again the next month.
3. Always, have a trading plan. Write down the plan.
4. Remember, losses are the cost of doing business. Do not worry about small losses. Losses are inevitable. But, you have to keep these losses under control. Worry about losing money that exceeds your limits.
5. The key to successful trading is: a number of small losses, and, few large profits. The profits take care of the losses as well as provide a positive return.
Thursday, August 7, 2008
What happened ?
Prosecutors said, the owners were hiding tens of millions of dollars in customer trading losses. Later, their goal was to sell Refco at a price that would pay off the accumulated debt and ensure them a profit.
In addition to hiding losses, prosecutors said Bennett and Grant (owners) lied to Refco's lenders and investors about whether the firm had a proprietary trading operation. They also inflated revenue and moved expenses off Refco's books, prosecutors said.
Warning: Avoid brokerage companies in India that have proprietary trading operations in F&O. Ask yourself, why should the broker himself trade in F&O using high leverage and public funds ? If he is so keen on trading, let him set up a seperate trading entity, deposit margin like all other traders and keep his own trading and public funds at arms length.
Almost all the problems currently in the USA and Europe have come about because of proprietary trading with high leverage. In India, a wise regulator will ban such trading. Till that happens, stay away from brokers who trade on their own account. Most good brokers in India do not do so. Stay with them.
This is my second post for the evening. To read the first post, discussing the Nifty, scroll down.
The chart patterns made in the last two days do not help the bulls. Both days have seen DOJI - where the open and close are roughly equal. A DOJI suggests indecision in the market. Both days have also seen long upper shadows. The shadow is created when the price moves up but meets with resistance, quickly retreating back. The shadow, when visible at the top of a rally is indicating that the bulls are slowly losing their strength.
This then is no time to start buying. If you have plus (long) positions, then consider taking profits / loss. A move below 4500 will indicate that the short term trend may have turned down.
Fresh long positions should be created when the Nifty is able to move above 4600 decisively. This requires a close above 4600 for more than one day.
Then, the area between 4500 and 4600 is some kind of a no trade zone.
The price of crude fell to $118 - a three month low. We have to see the decline in context of a rally from $60 to $147. In this context, the decline is probably a correction rather than a bear market. Of course, we can be wrong. But the benefit of doubt should go to the trend, which has been up for the past two years.
Keep visiting, I hope to post again before midnight.
Wednesday, August 6, 2008
The primary trend is down, while the Intermediate trend is up. Soon enough, these trends will merge into a single stream. So, what will happen ? Will the primary trend change to UP, or will the intermediate trend change to down ?
We do not have the answers to these questions. We do know that charts will probably alert us to any of the two happenings.
A pivot low has been made at 4150. While the Nifty remains above this number, the intermediate trend remains up. The minor trend changes to down, if the Nfity were to close below 4400.
Sounds confusing, doesn't it ? Because the Trader needs to know: what should I trade ? All of this 'If and But's' make very good reading but do not provide actionable advice to traders.
The Trader has two courses of action, both of which will prove to be correct provided she exercises prudent money management.
First, go with the primary trend. This is a bear market. The strong resistance encountered by the Nifty at predetermined resistance zones tells us that the bulls are exhausted. Day traders can go short below 4500, while swing traders should sell below 4400. An initial stop loss should be somewhere above today's high - 4616.
Second, remain with the intermediate trend, which is UP. Day Traders should buy the first signs of strength with stops below that day's low. Swing Traders should buy before close of trade if the day is closing strong, or, buy above the high of the previous day. Stops will be below 4400. A minor down trend starts below 4400, thus long positions are not advised once a down move starts.
If the trade goes in your favor, good for you. If you find yourself in the wrong direction, the stops will ensure that your losses are manageable. You will be ready for another trade.
With some thought, you can develop another trading plan. All such plans will be successful if you know when to get out if you are wrong.
Tuesday, August 5, 2008
What Next ?
My software gives a target range of 4480 to 4610 for this up move. We have already touched 4480, thus we may be looking at 4610 approximately. Now, these numbers are just targets. They are not a definitive future event. We can build two scenarios based on these target numbers.
First, the Nifty does touch 4600+ and faces resistance. This is a likely scenario since there is a lot of previous resistance around the 4600 number. Second, the Nifty touches 4600 then continues to move up. This is an overshoot - prices going beyond the target. Such an event tells us that the trend is stronger than what is 'normal'.
Of Course, a third, less likely scenario is for the Nifty to suddenly fall, not touching 4600 at all. If this happens, we will have to wait for the index to go below 4400 to confirm a short term down move.
How do you trade such moves ? Analysis is just one part of the trading business. Much more important is tactics (when to enter, how to manage the stops, exit rules), position sizing (increase volumes when trading with the trend), stock selection (Buying Hindalco in a bull market still loses money). Reading, learning and education is also an important part of trading.
The rewards from trading are (a) An independent business (b) pursuit of an intellectually satisfying work, and, (c) money to do something that you always wanted to do. (How many people have work that they enjoy ?).
For the past week or so, you have been suggesting buying. Come on Sudarshan, you have been so bearish, what changed in the past few days ?
Well, the charts changed.
To critics of change, I quote Keynes:
"When the facts change, I change my mind - What do you do, Sir ?"
The intermediate trend is UP, so traders should buy. The primary trend remains down.
When will the primary trend change ?
The classic method is when new highs are made in the Nifty, that is when the Nifty goes above 6350. That event should be a long way ahead. So, why worry ? Enjoy the up trend while it lasts.
The daily chart for the Nifty suggests a bullish pattern in the making - an inverted head and shoulder. If confirmed, we may be looking at a target of 5100 plus. Wow !
[I hope to add one or two more posts today evening, so keep visitng.]
Monday, August 4, 2008
Second, Traders can adjust to uncertain trading environment by modifying their bet size - the volume. Trade small when the technical position is unclear.
After Friday's big rally, today was expected to be uncertain, even a narrower range. Both turned out to be true. As explained over the weekend, with the Nifty in an intermediate up trend, the strategy should be to buy on dips. This strategy should have given small rewards today.
Monday has seen a narrow range in trading, yet again. We should expect the contraction to lead to an expansion in prices, soon enough (maybe tomorrow). Given the intermediate up trend, prices should break on the upside. A move below 4380 will suggest short term weakness. Short Term Traders should identify early morning momentum, then look to buy while the Nifty stays above 4380. What happens if the Index goes below 4380 ? Well, you can stay away, or take a short position fully understanding that the short position is counter to the intermediate up trend.
This is the second post for Monday. The first post can be read by scrolling below.
I thought things would be bad enough but they turned out to be a lot worse. ...
The Fed’s primary job is really quite simple: Protect the integrity of the U.S. financial system. In this they have sadly failed. The Fed and the Treasury have moved to bail out large financial corporations under the smoke screen of a liquidity crisis. As is increasingly realized, it was not a liquidity crisis primarily, but a solvency crisis. Marked to market 6 months ago, Bear Stearns and Lehman were bankrupt as are Fannie and Freddie today. The bailouts are really providing what amounts to capital to insolvent firms.......
We have been collectively living beyond the planet’s means by over-consuming finite resources.
We run a serious risk of a meltdown in confidence in leadership totally unlike anything we have seen since World War II.
....the fundamental global outlook is substantially worse than expected. Our advice until now was very simple: take as little risk as possible except for emerging markets. Now it is even simpler: take as little risk as possible.
In the short term, slowing world economic growth combines with credit, currency, and inflation problems to dominate the outlook and offer poor prospects for emerging markets and commodities.
Longer term, the reverse is true and they look like the assets to own.
My Notes: The Author's summary is: There is more pain likely. The bear market is far from over. It may go all the way into 2010 or even 2011.
Sunday, August 3, 2008
After providng a review of the forecast made in January 2008 ( came true on most counts), the author tells us:
As we go forward, I expect that there will be more and more individuals, businesses and governments that will be unable to repay their debt, because of indirect impacts of higher oil prices flowing through the economy. Eventually, the US government will have to make a decision as to what to do about all these defaults. The most obvious options would seem to be:
(1) Prop up as many as possible
(2) Let the chips fall where they may
Either of these would seem to have the potential to lead to serious disruption. If the "prop up as many as possible" approach is used, it theoretically could lead to a high inflation rate, high interest rates, and a severe drop in the dollar. I would expect imports of all kinds to drop, including petroleum imports. This could lead to parts of the country losing liquid fuels because the pipeline structure cannot easily distribute a much smaller fuel supply. The decline in imports other than oil could also be a major problem because we manufacture so little ourselves.
If a "let the chips fall where they may approach" is followed, it is possible that bankruptcies will cascade through the system. If there are inadequate funds in the FDIC, and banks are simply allowed to fail, this would have very negative consequences. One can think of a lot of other organizations that might need propping up--states with a lot of debt, like California; Fannie Mae and Freddie Mac; auto manufacturers; airlines; LNG terminals; independent oil refineries; and pension funds, to name a few. "
Wisely, the author says he cannot be sure of what will eventually happen:
"How much of this will happen in the next two quarters? I don't know. It is likely that Ben Bernanke and Henry Paulson have some ideas I haven't thought of, and there is a way out of this predicament. I don't have all of the answers. It is likely to be an interesting rest of 2008."
This is my third post for the weekend, two more are found below this one.
So, today is an attempt to relook the chart for the Nifty which represents the Indian Market , without any preconceived bias.
A four and half year bull market is visible from a low of 920 in April 2003 to a high of 6350 in January 2008. From the January highs, the decline to 3800 in July is a bear market, in terms of points lost (2500 points) and percentage (46% retracement of the entire bull move, and 39% decline from the top - 2500 points of fall is 39% of 6350). The momentum of the decline, the breaking of repeated support levels, makes this decline a bear market.
So far so good. But, all of this is history. While technical analysis does not try to predict the future, it does try to say where the market is now. This is significant information, since if the analysis suggests that the market is in an up trend, then we should buy, and so on....
The last leg of the decline from 5300 to 3800 was marked by lower highs and lower lows, with not even one correction moving above the previous high. This was a strong message that the market is weak.
This pattern has been broken, with a minor high at 4540 made on July 24, which was higher than two earlier minor highs, 4215 (July 11) and 4325 (June 26). We now have a pattern of higher highs. To begin an intermediate up trend, we require a second pattern - higher lows. On July 29, a sharp correction saw the Nifty make a low of 4159, and the index has since moved up to record higher levels. Thus, the 4159 low is now a minor low, higher than the earlier low at 3800. The pattern of higher highs and higher lows is complete.
The current chart pattern tells us that we are in an intermediate up trend. This uptrend stands cancelled if and when the Nifty closes below 4159. The level of 4159 will change over time.
We may well be in a primary bear market. If this is so, then at some point the intermediate uptrend will break down. But, traders should follow the intermediate trend, meaning that most of their trades should be in the direction of the intermediate trend.
It is also possible that the up trend may break down after a false rally, or even quicker, starting from Monday itself. In such cases, traders will face small losses. This is what is called a whipsaw. That's the way trading works.
Friday, August 1, 2008
"We can identify 4350 as resistance and 4300 as support. A move beyond these levels will be the first sign that the Index is moving towards a directional move. When this happens, take a position in the direction of the breakdown / breakout. "
Today, the Nifty opened lower, below 4300, thus giving us a breakdown. Then, the unusual happened. The Index started a recovery, eventually moving up above 4350. Often, while breaking out of a narrow range such "double" breakouts are possible. First a false move, then the "real" move. Now, my perception has been that the markets were likely to break down. But, the market gave a clear message by going above 4350: I am going up! We do not argue with the market, ever. The market is supreme.
In my Day Trading, I use a service called "Day Vinayak" - provided by my website: www.technicaltrends.com . The first trade today, was a short position. This position was closed with a loss of 20 points at 4287 approx. A buy signal was given at 4287. This buy signal was closed at 3:20 in the afternoon at 4432, for a gain of 145 points. The gain was remarkable. Now, we took both the signals. My perception does not influence my day trading, since the market can change its view and we have to follow the market. Short term trading is about momentum.