Sunday, October 17, 2010

Update on The Ultimate Momentum Signal - 18th Oct. 2010

The Third Test of the Support at 6093 !!!

The last post on this blog said that if Nifty future is unable to trade higher than the minor resistance level of 5230, then it may revisit the supports at 6093 and 6083. Last Friday, Nifty futures opened at 6205 and recorded the day's high of 6225 in the initial minutes itself. From thereon, the futures started to sell off just as the IT stocks attracted selling. It was amazing to watch that Nifty futures halting at every minor supports which were discussed on this blog earlier. Nifty futures paused at 6175, 6150, 6134 and 6093 on the way down. However, as the selling was a bit more powerful than when the futures tested 6093 on the previous occassion, a slightly lower low of 6076 was recorded on Friday. ( Also think about the fact  that a minor infraction of 10 or 12 points of any support or resistance in the Nifty futures is not a  confirmation  for a breakout or  breakdown ). The futures finally closed at 6083 in alignment with the last Tuesday's low. The Momentum Signal value has also fallen to the -100 levels indicating a sell.

Nifty Futures - Daily Chart  

The above chart shows three tests of the highs and the lows of the current trading range of Nifty futures. As  seen in the chart, the third test of the 5230 - 5250 area could be called a success as the futures went on to record a new high of  6318. It was altogether another matter that the test of high failed immediately and it lead to the test of lows of the trading range. Now, experience shows that the third test of any reference point ( support or resistance ) has a higher chance of success. And result of this third test of the lows will be  known only on Monday's trading. As such traders may exercise  extreme caution in holding long positions and especially the leveraged ones. However, no major international market  was seen selling off on last Thursday or Friday. The reason for the current sell off seems to be the biggest ever IPO of Coal India which starts on Monday. This IPO is capable of absorbing a lot of liquidity from the system. Meanwhile, RBI has started to talk against the appreciation of the Indian currency and it seems that the Bank may have already started intervention in the currency markets.

All these facts are brought to the attention of the readers just because of the special situation in which the Indian market alone is going through a mild sell-off and this sell-off  has lead to the precarious positioning of Nifty futures at a ten day support level. If the futures opens inside the current trading range, traders may watch whether Nifty future is able to trade above the earlier mentioned minor resistances at 6134, 6150 ad 6175 to get a better understanding of the market direction. If the Nifty future opens inside the range, breaks the  lower supports and stays below the support levels, then it may revisit the lower supports at the 6000 and 5940 levels. If the future opens below the present trading range, climbs inside the range and stays there, then  it may mean that the third test of lows may have failed. 

Nifty Index - Weekly Chart         

The weekly chart of the Nifty index clearly shows that the Index has reached the breakout targets discussed on this blog earlier and is experiencing selling at higher levels indicated by the two red candles with their tails placed at the top and a close at the bi-weekly low.

 All Time Highs

Many readers who might not have access to the historical charts might be interested in knowing the all time highs of the Indian stock market indices. The above table shows the all time highs of Nifty futures (then current month ), S&P Nifty and BSE Sensex and the dates on which the highs were recorded. The all time intraday high of Nifty future is 6336 and that of the Nifty index is 6357. The highest closing prices of futures and the index were at 6288 and 6289 respectively.

Nifty Fundas

Together with the strong rally and non stop gains in the broader markets, the trailing valuations levels of the Nifty index have climbed in to the bubbles territory. 

The above table shows the latest data related  to Nifty trailing valuation, sourced from the NSE, India website.  The trailing PE multiple of Nifty index is still quoting above an expensive 25 mark. The historical  trailing price earning ( PE Ratio ), price to book value ( PB Ratio ) and dividend yield ( DY Ratio ) of the Nifty Index  were at 25.2, 3.81 and 1.03 as on 15th October 2010. Readers may please note that the periods in which the Nifty index traded above a historical PE Ratio of 25 were limited to just  two occasions in the years 2000 and 2007-08. And both such periods coincided with highs just before the burst of the then bull markets. ( More information and analysis on Nifty historical valuation is available from the "Nifty Fundas" page of this blog ).

This information is being provided for the benefit of long term investors only. For traders, they can enjoy the rally till it lasts. It may be noted that markets can remain overvalued and overbought for significant periods  which can be much beyond our expectations. 
Updated Momentum Signal Spreadsheet

The updated spreadsheet showing the Momentum Signal as at the close of the trading on  15th October, 2010 is given below :

Last Friday's lowest close in two weeks has forced the Momentum Signal to indicate the maximum negative value of -100 in respect of the Nifty futures and the two major indices , Nifty and Sensex. However, traders may note that the Momentum Signal System, like any other trend following systems, is susceptible to whipsaws in ranged markets. As such a break of the support at the 6083 levels in the Nifty future is the most  essential for the actual confirmation of this sell signal.
Projected Momentum Signal Close Values

The projected levels Momentum Signal values applicable to various ranges of closing values of the current month Nifty Futures, Nifty Index and the BSE Sensex,  as at the close of next trading day, ie. as on  18th October, 2010, are given in the following table.
   Please click on the table to enlarge. For more info on the above table,  please click here.

All readers are requested to read the Risk Factors, Risk Analysis, Position Limits and FAQs pages of this blog to have a reasonable understanding of the system. Please do post your suggestions and comments on how this blog can be made more useful.
Cheers and Prosperous Investing and Trading !!!

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