Tuesday, September 7, 2010

Update on The Ultimate Momentum Signal - 7th Sept. 2010

   Nifty At A New 31 Month High ... !!! 

Here is a quote from the last post :

"As the markets all over the world have gained in the past week, another test of the highs by the Nifty future is anticipated possibly on Monday itself or in the early part of the new week. Further direction of the market seems to depend on the outcome of the test."

The Nifty futures opened just above the minor resistance of 5505 and rallied right from  the open on Monday as expected. The surprising fact was that the Nifty futures never even paused at the resistance level at 5550 and continued in the non volatile manner of a trend day. As the market has broken out above the 5550 mark and closed above the mark with very good turnover let us take a holistic view of the markets. 

Nifty Futures - Daily Chart     

As is common these days the market may spend some time for consolidation at the new trading range. A trading holiday in the US markets on Monday may lead to other markets trading flat in the absence of  cues. This factor may also give some weight to the argument for a consolidation. In case of a consolidation or minor correction, previous resistance points at 5545 and 5505 may act as supports to the futures. All other supports are shown in the chart above.

S&P CNX Nifty Index - Weekly Chart

The weekly chart of the Nifty index is given above. As seen in the chart ,the Nifty index has consistently been trading inside rising trend channel for the past eleven months. Therefore, the top end of the trend channel may offer considerable resistance to the current rally at 5600 to 5650 levels. 

The alternate scenario of a breakout above the rising trend channel was discussed in the post dated 23rd August, 2010 and the relevant parts are reproduced below :

" Due to the slowing recovery in the developed markets and the extreme cheap money policies followed almost all over the world, the FIIs are piling up on assets, even in the marginal emerging markets where economic growth is prevalent. It seems that these momentum pursuers are not concerned about the valuations.  The Nifty index is trading at a historical PE multiple of 23 plus now. Historically, it has remained steadfastly above these levels  only in  periods when retail euphoria and  asset price bubbles were present. The last two occasions it happened were in the years 2000 and  2008. 

Therefore, another bout of irrational exuberance and the resultant asset  price bubble is perfectly feasible.  It is reported that, even now, at these rich valuation  levels,  retail participation is lacking. Any further rally instigated by the FII  buying may attract the media  hype and the  retail crowd. Yeah, any asset price bubble has to end by trapping the retail crowd to hold the bag !"
The PE multiple ( historical or trailing ) of Nifty index as on 6th September 2010 has risen to  23.46 as seen in the table below :
           Source : NSE, India       

The Nifty Index has reached the top end of the historical or trailing PE multiple at which many intermediate tops of the previous bull markets were formed. For more information on historical fundamentals of the Nifty index please read " Nifty Fundas " page and other posts under the label " Nifty Fundamental Analysis " of this blog. Exercising a good bit of caution by the investors and traders may seem to be called for as valuations have become rich. 

Updated Momentum Signal Spreadsheet

The updated spreadsheet showing the Momentum Signal as at the close of the trading on  6th  September, 2010 is given below :

Both the tracked indices, Nifty and Sensex, and the Nifty futures have closed in the territory with Momentum Signal values of +100 with new buy signals. ( Please also read the Risk Factors which may be applicable to the current market conditions being repeated in the last paragraphs of  all the posts at present. )

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  7th September, 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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