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Tuesday, October 19, 2010

Update on The Ultimate Momentum Signal - 19th Oct. 2010

  The Support at 6093 Still Holding !!!

The Indian stock markets have started the call auction open method from Monday. Call auction open method is initially applicable to all stocks in the two major indices, NSE Nifty and BSE Sensex. This kind of open involves a seven to eight minutes period of order acceptance to arrive at a consensus or equilibrium price at which maximum trade quantity is possible. This equilibrium price is accepted as open price and the trades at the open price are confirmed by 9.15 AM. 

The normal market opens at 9.15 AM. However, today's experiment with the new system saw some awkward price movements and open prices in some stocks which in turn lead to unrealistic Nifty index values. Irrespective of the Nifty index open at 6113, Nifty futures opened lower at 6074 on Monday. It immediately started to sell off and the market recorded a low 6008 which was very near to the first support of 6000 mentioned in the earlier post.  The recovery in the Nifty futures started when the European indices opened lower and started to recover.  After spending a very long time ( on intraday basis ) below the  6050 levels, Nifty futures started to rally in the late afternoon and went inside the previous day's trading range and then above the support levels at 6083 and 6093. This lead to further short covering and Nifty futures closed almost at the highs of the day at 6133. The close also coincided with the previous support /resistance reference level of 6134. 


Nifty Futures - Daily Chart


The above chart shows that most of the trading in the last two weeks were done in the range between 6093 and 6230. It is also seen that in the last two occasions when the futures tried to go beyond the range, it has succeeded to some extent. But the gain or loss thereof were not held.  Or in other words we have two breakout failures in which the bulls and bears were trapped respectively. Accordingly, if Nifty futures is not being sold off further below the 6083 support on Tuesday for some reason or the other, it may be confirmed that the break of 6083 support has failed and it was a bear trap, at least for the time being. Now,  how could traders analyse the present situation ? First, we may draw a support at the Monday's low as a reference point. We may also draw a resistance line at the highest high at 6318. Since the broader trading range has been marked for now, lets' use the old refrence points at 6083, 6093, 6134, 6150, 6175, 6193, and 6230 to mark the middle part of the range. If the Nifty future is able to trade and hold above the 6175 mark, then it may try to test the higher resistances at 6230, 6250 or even further. If the future is unable to move beyond the 6150 to 6175 area, then it may retest the lower ends of the range.

 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 almost 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 25.07, 3.82 and 1.03 as on 18th 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 ).
 
If you would observe the PE ratios of 15th and 18th October and compare them, it is seen that the ratio has  slightly decreased while the Nifty index has gone up by 0.22 %. Now, how could this happen ? The reason for this reduction is the profit growth achieved by those index companies which have released the quarterly results so far. This point is explained for the simple reason that PE ratios or any such valuation ratios are not some thing written on stone and all these tools are amenable in a dynamic setting.     

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  18th October, 2010 is given below :
 
 
The Momentum Signal is still giving a value of -100 for Monday's closings. This is why  it was particularly mentioned in the previous post 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." It is also to be noted that the dynamic stop of 2.1 % from the maximum favorable point  ( ie. Mondays low of 6008 ) would have hit during the end of the trading day at 6134 levels.  

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  19th 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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