Monday, July 27, 2009

A choppy, sideways trend

The Nifty topped out in June, and since then it has essentially been sideways. True, we saw a sharp decline, then a V shaped rally. But, at the end of it all, we are almost where we were in mid June, suggesting that the market trend is really choppy / sideways.

Indicators can help us in identifying the trend. Sometimes, the indicator will go wrong, and, you can end up on the wrong side. That's where your judgement comes in. But, often, an indicator will provide a sense of direction, answering the question: is it a trending market or a range bound market?

Three indicators normally used for this purpose are: ADX, VHF (vertical horizontal filter) and R-Sqaured. There are many more, and it is easy to create your own trend-notrend indicator if you have the appropriate software. Let us look at the Nifty with RSquared:

Examine the chart carefully. What happened after the indicator touched the lower levels of the 'no trend' area? Can you detect a cycle of contraction - expansion - contraction ? Currently, the indicator is at the lowest extreme suggesting that the process of contraction is now going to change into expansion.

1 comment:

Anupam said...

Dear Mr Sukhani,

As always you are so humble to share your vast knowledge base. Thanks for teaching us. One request, can you pls let us give some reference where we can find r-squared chart(as some provided by ichart/yahoo) or how we can do it(i mean formula or set up) ourselves using excel or some prog language like c++ or java. would be great if you give us some references.

Anupam Majumdar