Happy New Year

My best wishes to readers for a happy, prosperous New Year.
Today's trading (December 31) saw the Nifty trade in a narrow range, with the daily range being the narrowest in seven days. Market was confused.

A trading range between 2800 and 3150 is visible on the daily chart. A breakout from this range should give a strong, trending move.

The Mid Point of this range is around 2975. If the Nifty were to close above the mid point, it will be an indication of some strength. Aggressive traders can take long positions, but they should exit on any close below 2975. If the Nifty were to oscillate around 2975, then these traders could be in and out many times resulting in whipsaws.

PNB remains a strong stock, outperforming the Nifty as well as the Bank Nifty. Traders could select this stock as a buy on dips candidate. Avoid going short. On signs of 'overbought' or 'weakness', stay away. On signs of 'Oversold' or 'Strength', buy.

The Nifty creates a question mark.

My last six posts have been on market psychology (to use a generic term). They have not discussed the current market conditions.
This is so because each trader must find his/her own method of trading in the market. Adapting to the market is an art, so this column tries to help you become a master in the art.

I assume that many readers are keen to read my views on the market. So here it is.

Last week the Nifty started a down trend. The five week up move failed to cross the previous intermediate high. Therefore, the intermediate down trend remains intact. If and when the Nifty goes above 3115 - 3165, an uptrend will be confirmed. The immediate target for such an up move will be 3500, while the trend could go on to 3800.
Will this happen ? I do not know. Frankly, I do not need to know. The trend is down until the resistance levels are crossed.
Will the Nifty make new lows ? Maybe.
Remember, markets can do many moves that can puzzle us. For example, it is possible that the Nifty may go above 3165, signal an up move then fall to reach 2100. Again, I am just saying that the market can do whatever it wants.

We trade by defining our responses to the market. As an example: I will go long above 3165 with a stop below 2950. I will move this stop up by 25 points after every day. If the Nifty touches 3450 or close by, I will take profits on at least 50% of my position.

We Never say: I have bought today and I will sell at 3800. Why did I buy today ? How can I say that the Nifty will reach 3800? What happens if the Nifty starts falling after I buy ?

Have Fun!

Not About Math and Financial Formulas

The Wall Street Journal describes the rise and fall of the AIG financial services division. AIG is the insurance company that was given a $156 billion bailout , 10 times more than the auto companies. AIG was an innovator in derivatives strategies. They made a lot of money with this.

Quote:

The firm developed innovative solutions for its clients, including new methods to free up cash, get rid of debt and guard against rising interest rates or currency fluctuations.........

At the end, though, the story of Financial Products is not about math and financial formulas. It is a parable about people who thought they could outwit competitors and market forces alike, and who behaved as though they were uniquely positioned to sidestep the disasters that had destroyed so many financial dreams before them.

UnQuote

Why do I write about the mishaps in large companies ? Because many of their people behaved as if they were God. Finally, their pride destroyed them.
Traders must prevent their egos from taking over their sense of judgment. If a trade is not going your way, review it, if neccessary take a loss and close it. Do not say "This will work out eventually" or "The Market will do what I want".

Always understand that risk can be more than anticipated. Therefore, protect yourself from losses. Always undertrade. (No overtrading, ever!)

The NY times makes us smile

DID you hear the one about the stockbroker who’s been sleeping like a baby? Every hour, he wakes up and cries.
That was before he read that Somali pirates were issuing a new ransom-backed security to buy Citigroup. Moody’s rated it AAA, Henry M. Paulson Jr. deemed the pirates “fundamentally sound,” and Bernard L. Madoff will safeguard the returns.

There is more, in a feature titled "I’m Penniless, but the Laugh’s on Them ", in the new York Times. You can read it Here.

Trying to forecast the market

There is an inverse correlation between crude, commodity prices, interest rates and stock prices. This is what the theory is. The idea is the stock markets prosper when companies have lower input costs. Therefore, markets should move up when crude / interest rates etc move down.
The assertion is: Since both crude and interest rates are down, stock markets should move up.
This theory may not work in current market conditions since crude / interest may be falling due to reduced demand. The decline in their prices may not positively affect the market.
These discussions can go on and on without any result. Since trading is based only on actionable ideas, I never participate in such theoritical exercises. It is a waste of time (for me, that is).

After all of this theory, suppose the market refuses to go up. Then, what are you going to do about it ? Not much.

The same problem applies to a randomly selected indicator, such as the 50 week moving average. (see comments for earlier posts). the writer's idea is that prices will revert back to the mean, in this case the 50 week MA. Nifty is at 2860 while 50 week MA is at 4200+. Therefore it means that prices should work their way towards the MA. Now, here is a thought. Let the market move between 2000 and 2700 for the next one year. The 50 week MA will come down to 2500 approx. Then the Nifty can move up from 2000 to 2500, satisfying the reversion to mean concept. But, frankly, this entire process will mean nothing.

Price is the one and only true indicator of market direction. It is not easy, but it works.

Some More Madoff

The $50 billion Ponzi scheme by Mr Madoff has caught world wide attention, including this modest blog.
In comments, Mr Bikramjeet Singh said "The superlative returns offered by Madoff were always seen with an eye of suspicion from the very beginning, but for the greed of getting higher and higher returns. Many of the investors should rather blame their greed rather than anything or anybody else."
While this observation makes a lot of sense, it is not factually correct as far as the Madoff scheme is concerned.

The investments with Mr Madoff offered normal, modest returns. The returns were 'assured' which was the real attraction. Investors thought Mr Madoff had developed a strategy of obtaining reasonable returns on a steady basis. There was no greed here. What worked was Mr Madoff's reputation as an astute / reliable trader.

Paul Krugman, noble prize winner this year, talks about the Madoff failure in his blog here . Mr Krugman says :
"Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
After all, that’s why so many people trusted Mr. Madoff."

My Notes: Indian investment bankers, brokers and analysts are no different. If some one is making a lot of money, or claiming to make a lot of money, our friends immediately start singing praises. This happened in the IT boom in 2000, and, again in the 2008 bear market. I have always viewed with suspicion, claims made by the rich. For this reason, I rely on charts for my decision making. Charts represent human psychology - a much better barometer of market movement. At least, it is superior to the 'lies, damned lies and statistics' given out by the analysts.

The Double Edged Sword

The Chairman of OakTreeCapital has written a memo to his investors which is available here .
His theme is: Volatility + Leverage = Dynamite

Excerpts from the Memo:
Quote
It’s no coincidence that today’s financial crisis was kicked off at highly leveraged banks and investment banks. ......

If you’re doing something novel, unproven, risky, volatile or potentially life-threatening, you shouldn’t seek to maximize returns. Instead, err on the side of caution. The key to survival lies in what Warren Buffett constantly harps on: margin of safety. ......

Leverage doesn’t add value or make an investment better. Like everything else in the investment world other than pure skill, leverage is a two-edged sword – in fact, probably the ultimate two-edged sword. It helps when you’re right and hurts when you’re wrong. ........

The riskier the underlying assets, the less leverage should be used to buy them. Conservative assumptions on this subject will keep you from maximizing gains but possibly save your financial life in bad times.

UnQuote

My Notes: Derivatives are highly leveraged assets. When you take positions in the F&O segment, you are taking on a lot of leverage. As I have warned on CNBC many, many times, only professional traders should trade in the Futures & Options segment.

Different Strokes

Is it possible for two traders to have different views on the Market, and, then for both to make money ?
Sounds impossible, doesn't it ?
But, the answer is YES. There are thousands (or hundreds of thousands) of traders for any given market. Each of them has different views on the market, but all of them can make money in the same market, inspite of having contradictory views. Here is how.

An Example:
The market is currently at 2922. Trader A is bullish on the market. He buys with a stop below 2850. He does not plan to go short if the market fails to rally.
Trader B is bearish on the market. He sells with a stop above 3000. Trader B says that he will go long if the market trades above 3050.
The market falls to 2700. Trader A is stopped out for a loss of 72 points while Trader B makes 222 points.
Now, the market rallies to 2750. Trader A is long at 2750 with a stop below 2700. This time the rally persists, with the market reaching 2950, where Trader A exits. He makes 200 points on this trade. Trader B stays away since he does not have the proper buy signals.
After deducting the loss in the first trade, trader has made 128 points, while Trader B has made 222 points. Both have made money.

What made money ? Think carefuly. Both traders made money since they practised proper money management and followed their rules. Now think again: what makes money in trading? Hint: Answer is disciplined trading (NOT buy and sell 'Calls').

Markets slip, just a bit

After two days of narrow range days (Friday and Monday), the Nifty decided to take a directional call, moving below the lows of these two NR days. As the Nifty slipped, the short term trend has changed to down. Traders should follow this trend. The Intermediate trend will change to down if the Nifty were to close below 2950.

What are signs of trend reversal ? A reader asked this question. I have tried to answer it in my blog entry: The End of a Trend.

Nouriel Roubini on the stock market

Intervie with Nouriel Roubini: The $700 Billion Bailout Isn’t Enough (from U.S. News & World Report )
December 18, 2008

Quote

Do you think stocks have bottomed?
No, I don't think so. Of course, in the last few weeks we have been in another bear market rally, but bear market rallies have occurred for the last 12 months. Markets rally after shocks, and then shocks come and they fall further. But I see another downside to U.S. and global equities of at least 15 to 20 percent from current levels for three reasons. One is that the news about the economy—both in the U.S. and abroad—is going to be much worse then expected. The numbers have been just awful, and they are going to get worse. Two, there is still a lot of delusion about what earnings are going to be in 2009. And three, I think that there are going to be many more financial shocks, other large institutions going bust—highly leveraged institutions like hedge funds.

Unquote

My View: I have felt that the current up move is a bear market rally. Bear or Bull, a rally should be used to buy. The charts will often give us signs of trend exhaustion. To change our view from bullish to bearish we have to wait for a change in trend. This has not happened yet.

I hope to write more posts, so keep visiting.

Dip or Bear Market ?

One day after exhilaration comes despair. The Nifty fell 80+ points after the US markets had rallied overnight. So, what's going on ? yesterday, this column was talking about 3200, maybe 4000. What should be the view today ?

We assume that today's market decline is just a correction in an up move, rather than the start of a new bear trend. Why ?
With the market moving in one direction - up, over the past week, it was not really a surprise to see a day of large down move. First, we are in a bear market so declines should come easily. Second, the market was quite 'overbought' - with a negative divergence visible in the RSI.
Today's high at 3073 also has some significance. Assuming that the Nifty does not go above this number tomorrow, the 3073 level will become a pivot high. Then, a reaffirmation of the up move will require the Nifty to close above 3073. A close below 2950 will confirm a short term down move.

The Public is Missing:
I am thinking most of the current activity is from institutional investors; the public is still "not even looking" at their brokerage accounts. Most will enter at the top of this rally, at which point we should be getting out ?

A market that goes up is in a bull trend

Keeps up going up, doesn't it ?
The Nifty seems to have decided on a one way track - up. Just eight weeks ago, the Index made a panic low at 2200. Since then, much water has flown through the Ganga. At 3065, the Nifty is up 27% from its lowest close, and,a whopping 40% above the 2200 lows. That's an up trend. An up trend is bullish.

Is this the end of the bear market ? Frankly, I doubt it. But, while the market moves up, we have to go with the flow, which is up. The Nifty can go to 3200 (seems likely), and maybe all the way to 3700 or even 4000. If it can fall from 6350 to 2200, it can also go up! After all, the Market will always surprise us!

Argue with the Market ? No, not us !

The intermediate trend is up. The minor trend is up. The primary trend is down, as we remain in a bear market.
The Nifty faces strong resistance between 2900 and 3000. After a 20% rally from 2500 to 3000, the Index may either consolidate or go through a dip.

NARROW RANGE (NR) + A DOJI
The Nifty made a near Doji today, opening and closing at almost the same levels. It also made a narrow range. The Index has been in narrow range patterns for the last three days, suggesting the possibility of a big move soon enough. We cannot say what the direction of the move will be - up or down. In an uptrend, the move out of a narrow range bar should be up. But, the primary trend remains down, while the market is inside a resistance zone. Thus, traders should be willing and ready to trade in whatever direction the market breaks into.

This also means that we should not argue with the market. If market is moving up, trend is up. we cannot, and, should not try the force our views on the market.

Not Good News here

Chinese electricity output fell 9.6% in November (Bloomberg)
Industrial production is plunging around the world as demand dries up. China’s electricity output fell by 9.6 percent in November from a year earlier, today’s figures showed. Pig- iron production fell 16.2 percent. Raw steel declined 12.4 percent. Steel products tumbled 11 percent.

(U.S.) States running out of unemployment funds (NY Times)
With unemployment claims reaching their highest levels in decades, states are running out of money to pay benefits, and some are turning to the federal government for loans or increasing taxes on businesses to make the payments.

Public turning away from Equities (Wall Street Journal)
The dissolution of the investment banks and the collapse of several credit markets already ensured that the next several years would see a reduction in leverage-induced returns. But the drumbeat of news is pointing to another result: A long-term pullback from Wall Street by an investing public that now sees the rules of the game changing on a daily basis.

Up or Down ?

The US markets were choppy and volatile in Friday's trading. Bloomberg reports:
The S&P500 increased 0.7 percent to 879.73 after falling as much as 2.6 percent. The index swung between gains and losses at least 30 times and jumped more than 1 percent in the final four minutes of trading.

The same article goes on to say:
New York University Professor Nouriel Roubini, who predicted the global financial crisis, said shares will keep falling.
“I’m still quite bearish on U.S. and global equities,” he said in an interview with Bloomberg Television. “They’ve fallen a lot, but they might surprise on the downside. U.S. and global equities could be 15-to-20 percent lower before they start to recover toward the end of next year.”

Indian stock markets were an outstanding performer on Friday. An open saw the Nifty gap down by 100 points. Asian markets were down, while the 2900 level seemed to be offering strong resistance. On CNBC, my suggestion was to avoid any buying. I also suggested that traders who have built long positions may consider taking profits and wait for a dip to reenter. As the day developed, the Nifty rallied, finally recovering from its early morning losses, closing unchanged.
The intermediate uptrend remains up. This trend changes to sideways if the Nifty closes below 2800. Position traders should hold to their buying. The 2800 levels will change and move up if the Nifty rallies.

Suddenly, the mood is changing

The gloom and doom seems to have gone, at least partially from the blogs that I read.
The Wall Street Journal Blog says:
Still, one gets the sense that the tide is turning, at least among the investing cognoscenti (those that have their shirts, that is). ...... “maybe we take a pause here, but the risk longer-term is to be out of the market rather than in it.”

My Notes: Does this sound like a bear market rally ? Sudden Optimism rather than a base
building process. Yet, as traders, if the market is going up, we wan to be long.

-----------------------------------------------------------------------------------------
There is a prolonger bear market ahead: (From Bloomberg)

A global stock slump may have further to go, according to Tobin’s Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier said.
The S&P may plunge another 55 percent to a trough of 400 by 2014, the strategist said.
Before the trough in 2014, investors are likely to see a so-called bear market rally for the next two years as central bank actions delay the onset of deflation, he said.

My Notes: The relevant part is the forecast for a bear market rally lasting two years. This is interesting since this is almost like having a decent bull market which may not exceed 2008 highs, but could still provide returns.

Choppy Market ends with gains

The mechanical trend indicators are suggesting an up move, at least for the short term. Traders should look to buy on dips. This is not easy to do since the up move is coming while the primary trend remains down. With all the reservations, short selling should be avoided by swing + position traders while the short term trend remains up.

The Nifty is still above the trading range boundaries - 2550 to 2750. Now, this can change. But while the Index remains above the range, we should follow the charts and take long positions. A close below 2700 will be the first sign that the up move is floundering. The mid point of the trading range is 2650. A close below 2650 will suggest that the up breakout may have failed. Till this happens (if at all), stay with long positions.

Is Nifty 2000 still possible ?
Yes, it is. The current up move is considered as a bear market rally. After a 4000 point decline, a rally can come any time. This is what seems to be taking place.

Stocks to Watch:
Stocks that have out performed the market should be watched for a buy on dips strategy. These include: GVK power, Andhra Bank, Tata telecom (ttml), IVRCL Infra, tata steel. (I own tata steel shares)

Do the Markets Discount ?

The U.S. markets rally on Friday. Here are comments from the WSJ blog:
"The worst jobs data in decades was, as it turns out, priced into the market — at least for one day. After an early selloff that never quite equaled the hysterics surrounding the loss of 533,000 in nonfarm payrolls in November, the market started to rebuild, steadily putting together gains in the face of economic weakness. It completes a week where three trading sessions were marked by a resilient effort by buyers despite poor economic reports."

The same scenario is playing out in India where the setbacks on account of Mumbai have been faced by a resilent market. Friday's decline could just be a dip before a final breakout from the trading range.

A Bullish head and shoulder is visible on the 15 minute chart of the S&P 500 - the American benchmark index. A similar pattern is viisble on the 60 minute chart for the Nifty. It does appear that markets all over the world are coupled (moving together), with patterns suggesting an imminent breakout that could lead to higher prices. The breakouts have not happened, they could be false - all of these concerns are met by systematic trading principles.

Nifty sees a breakout

One of the nice things about technical trading is our flexibility. Rather than tell the market what it should do, technical traders follow the market. While this is difficult to do, in the long run, it pays money.

The Nifty was in a trading range between 2555 and 2755. A close above 2755 today was a clear signal that the Index is breaking out from the range. The target for this breakout is 2950. Traders should be long at close of trade today. What is the stop loss? It is 2647 today's low, or, 2555 the support line of the trading range. The two stops are for different trader profiles. The closer stop is for the swing trader, while the wider stop is for the position trader.

Is this the start of the bull market ?

Not really. It is possible that the Nifty may see a strong bear rally, reach 3200 and then start a drift down to 2000. I, of course, cannot say that this will happen, but there is a strong probability, so who knows ?
We should also be open to the possibility that the Nifty may be building a base at current levels that is between 2500 and 3200. The Index could move inside this range for many weeks, or even months.

So, how do we trade ?

The trading range breakout tells us to go long. Search for dips on intra day charts. Buy with proper stops. maybe we will get a tarditional year end rally. have fun!

Warren Buffet tells us:
"Cash combined with courage in a crisis is priceless."

Markets remain inside narrow range

For the tenth day, the Nifty remains inside a narrow range between 2550 and 2750.

A move out of this range is likely to give us a trending move. Then, a close above 2755 is a signal to buy. Below 2555, we should expect lower levels. Inside this range there are few opportunities for trading.

Investors and Position Traders ask the question: Is it time to buy ? The asnwer is: we do not have any patterns yet that suggest a base buliding process has been completed. Now it is quite possible that the current move in the Nifty between 2250 and 3250 may be part of a basing process. We will know this only when the Index moves abov 3250. We will get some early warning. A move above the current trading range will represent such a warning. Till we do have convincing proof of bottoming out, it is wise to stay away. You can nibble at stocks that you like - blue chips only. But, if you have spare cash, keep it spare.


Less bad is Good (from fullermoney.com)

Bad news can be taken in stride if it is not as bad as investors had expected. Good news can disappoint if investors were expecting better. If the economy is only as bad as investors currently expect, then stocks should begin to stabilize in our view. Only if the economy is worse than expected, despite policymakers' efforts, do we see a break below the 2002 lows (in the USA).

Trading Range, Again

The Nifty responded well to the large declines in the US markets, closing Tuesday with only minor losses.

The Index has two technical patterns currently under development:

First, a rising wedge / rising flag pattern whicch was broken on the downside yesterday. This is a bearish pattern, giving a target of approximately 2100. Now, the pattern probabilities are (a) It may be a failure with the Nifty rallying up, (b) it may not reach its target, (c) It may be a successful pattern.

I assume the pattern is valid unless proved otherwise. A close above 2900 will cancel the flag.

Second, the Index is also in a trading range, between 2555 and 2755. A move out of the range should give a 200 point trend. If the Nifty closes above 2755, then the target is 2955 which will also cancel the flag (see above). Then, a close above 2755 is an early warning sign of a bullish reversal.

Traders always decide upon a systematic course of action. Apply money management rules and then let the maket decide if it wants to reward us. Markets can do anything, so have an open mind.

Decline once again, lower levels likely

The Nifty closed at 2686.05, down 69.05 points, lower by -2.51%.
An outside day is made today. This pattern was made at the top of a minor rally. It is likely to be a reversal pattern. Coming days should see a decline in prices.


NIFTY Patterns

The minor rally in the Nifty saw a move that came close to 2900 resistance (today's high was 2832). As expected, the 2900 zone did act as resistance, with the Nifty giving up all the gains made in the last 2 days.

The small rally in the Index looks more like a rising wedge / rising flag. Such patterns come half way in a trend. The down move was 600 points, from 3200 to 2600. A breakdown at 2700 now gives us a target of 2100 approx. Targets are just that, estimates of what may happen. They do not assure any outcome. But we do get a roadmap.

What can go wrong ? If the Nifty were to close above 2900 we will have to look at the scenario once again. Till then, we assume the down trend is intact.