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Thursday, August 26, 2010

Update on The Ultimate Momentum Signal - 26th Aug. 2010

   Is it the start of a big sell off ?

On Wednesday, the Nifty futures opened at 5495, slightly below the last traded price of the previous trading day. It never touched the  previous session's last traded price of 5508 and left a small subtle gap of 5 points in Wednesday's trading. As this blog has pointed out earlier, this kind of subtle gaps in the Nifty futures and the widely followed indices can act as indicators of trend change. During the session, the futures almost recorded a low of 5465 in the initial hours and tried to recover. However, the intraday recoveries failed to cross 5500 and finally the futures closed at 5465 near the day's low.

Even though this blog opined in one of the previous posts that the derivative settlement of the  Nifty futures may be near the 5500 strike levels than near or above 5550, according to the latest open interest data, it seems that it may even settle lower than the latest close but above the 5400 strike. It is seen that the open interest of the current month 5500 Nifty calls has increased during the penultimate day indicating heavy  selling. Similarly, the open interest of the 5500 puts has diminished significantly indicating the same.  

Is it the start of a big sell off ?

Even though it is not possible to conclude that the present correction is the start of of a big sell off, let us consider the facts pertaining to the question which were discussed in the various posts on this blog during the past month.
  • The easy liquidity driven FII buying is the only reason for the present uptrend.
  • Nifty index has reached a historical price earnings multiple of 23 times. The intermediate trend highs of the Nifty index during the past eleven years have mostly coincided with these kind of valuation.
  • The Nifty index has stayed above these valuations levels only twice in the past eleven years.
  • The Nifty index is correcting from the top end of an upward moving channel in which it has been trading for the past year.
  • The last three times it reversed from the top end  of the channel, the ensuing corrections were of the magnitude of 10 percentage points.
  • The present high of 5550 also coincides with the February 2008 high of the index which it achieved in the technical rebound  after the first down leg of  previous big bear market.
  • According to some leading indicators, India Inc growth may be moderating and the RBI is certainly on an interest rate raising  expedition.
  • All major developed market indices are technically  very weak at present.     
However, the confirmation of a downtrend is to be signaled  by the formation of lower lows and lower highs in the Nifty chart.

Nifty Futures - Daily Chart 



The lower panel of the above chart shows the various daily moving averages ( DMAs ) of   the Nifty futures.  The 20, 50,100 and 200 DMAs of the futures are placed at 5456, 5389, 5263 and 5167 respectively as on 25th August 2010. The futures may get supports at these various DMAs and other previous lows in case of  a mild correction.

Updated Momentum Signal Spreadsheet

The updated spreadsheet showing the Momentum Signal as at the close of the trading on   25th August, 2010 is given below : 


The Momentum Signal in respect of the Nifty and Sensex indices have reached  the sell area value of -50 on Wednesday. However, the Momentum Signal returned a neutral value  in case of the Nifty futures.

Projected Momentum Signal Close Values

The projected levels Momentum Signal values applicable to various ranges of closing values of the Nifty Futures, Nifty Index and the BSE Sensex,  as at the close of next trading day, ie. as on  26th August, 2010, are given in the following table.

  Please click on the table to enlarge. For more info on the above table,  please click here.  

As matter of abundant caution, it is reiterated that the market may still be range bound by all effects and therefore, the risks of the system indicating whipsaw signals are extremely high if the markets remain range bound.

"Readers of this blog may please note the following  'Risk Factor' which is being  repeated almost daily these days. The markets may be trading in small ranges at the top end of a slow climb and for all practical purposes the trading may remain range bound. Range bound markets are not suitable for the  profitable trading of the Momentum Signal system."
 
"As the Momentum Signal is primarily a trend following system, it may indicate whipsaw signals in range bound markets. As such, all readers of this blog are requested to read the various pages describing the system and understand all the intricacies of trading the Momentum Signal and it's risk factors too. Please do write in your comments and suggestions."

Cheers and Prosperous Investing and Trading !!!

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