Thursday, October 28, 2010

Update on The Ultimate Momentum Signal - 28th Oct. 2010

   Derivative Expiry is Here With Us !!!

On Wednesday, Nifty futures opened lower at 6088 in tandem with the losses in the Asian markets and SGX Nifty. Even though the Nifty future tried to trade higher in the morning session, it could reach only up to 6102 and thereby it left a gap of 28 points with the last traded price  of the previous day. As pointed out many a times earlier on this blog, Nifty future normally touches the previous day's last traded value on most of the days. If the last traded price is not being touched on the next trading day, it may have some significance in finding out the immediate market direction. However, readers may note that this kind of subtle gaps have very limited value in markets in a trading range than in a trending market.  Experience shows that these kinds of gaps have sometimes indicated even trend reversals. Now back to the trading scene  seen on Wednesday. The slide from the 6102 high saw the Nifty futures breaking the many lower reference points one by one in a two way trade mode to record a low of 6005.  This low of 6005 incidentally happens  to be placed just above another minor support level at 6000. The last trade was at 6031.   

Nifty Futures - Daily Chart   

The chart above shows the rounding top reversal from the 6175 resistance levels. The present weakness assumes more significance as most international markets are also experiencing some losses and higher volatility of recently. In case the present turbulence gathers itself in to a  medium term correction  we may see the Nifty futures braking the significant support at 5940 and seeking lower levels. However, many factors   like the corporate results, expiry related movements, happenings in the international markets, RBI monetary action next week etc may decide the immediate direction of the Nifty futures. As the Nifty future is still trading inside a trading range, any kind of prediction is susceptible to become wide off the mark. Traders may expect choppy and volatile trading on Thursday. 

Last Thursday is the derivative expiry day in the Indian stock markets. Many strange price movements at the stock and market levels have been seen on the derivative expiry days, albeit occasionally.  The expiry of September month Nifty futures were at the 6030 levels. One day before the derivative expiry, the October month Nifty future contract has closed at the exactly same level. Therefore, what actually happens on this expiry day seems to be beyond anybody's guess at present. However, it seems appropriate to express another risk factor that any trading signal  indicated by the Momentum Signal system could become more error prone around the derivative expiry days and especially when the Nifty futures are trading in a range.  

Nifty Fundas
The trailing PE multiple of the Nifty index have been quoting above the 25 mark for some time. The 25 PE mark  can almost  be termed as the starting point of the bubble territory. However, Wednesday's  PE multiple has just fallen below the 25 mark to 24.69.
The above table shows the latest data related  to Nifty trailing valuation, sourced from the NSE, India website.  The historical  trailing price earning ( PE Ratio ), price to book value ( PB Ratio ) and dividend yield ( DY Ratio ) of the Nifty Index  were at 24.69 3.78 and 1.04 as on 27th 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 the 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 ).

Updated Momentum Signal Spreadsheet

The updated spreadsheet showing the Momentum Signal as at the close of the trading on  27th October, 2010 is given below :
 Nifty futures and Nifty have closed with neutral Momentum Signal values for the fourth day.

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  28th October, 2010, are given in the following table. All readers are requested to take note that the table below is just a ready reckoner for the next day's Momentum Signal values and are in no way any targets for the Nifty futures or indices shown therein.

  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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