Friday, October 29, 2010

Update on The Ultimate Momentum Signal - 29th Oct. 2010

    Derivative Expiry Over and Out !!!

The Americans call the derivative expiry days like ours as a 'triple witching day'. My readers might be curious why this name is brought up now. It's simple. At least for today, this author has received a free license to use this alternative expression,  'triple witching day', without the necessary explanation. Anyone who has seen the market movements of Thursday afternoon doesn't require any explanation for this nomenclature. Nor does he can forget the new American expression for a derivative expiry day.

Now let's do a bit of scenario analysis  which could happen to anyone at any time. It's a dark night. There are no street lights. You are driving your car on a country road full of turns and even potholes. Suddenly your car's headlights are off. What would you do. "Hey, it is a nonbrainer. !! "  I would automatically brake and stop the car and think about it only after wards. " Now the question is: "Hey Hey Hey, why at all this simple bed time story is here ?". " Hey, We are all traders and we don't want stories " " ... and we are only  looking for trades."   But the answer is " Hey, Thursday's market was exactly like the situation in which you were driving and and your head llights just went off. "   " Yeah, Got it, but what is the moral of the story ? " " Not much, just stay away from trading when you are doubtful about the scenario." 

Now a bit of 'I told you so'... quoted from the last post. "   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 Futures - Daily Chart  

Nifty futures opened flat on Thursday. It recorded a high of 6049 and tested the previous day's low right in the morning. Later it started to recover but the trading was mostly confined between 6010 and 6040 in the morning session. Later in the afternoon, the futures broke above the morning session's high and rallied up to 6084. This high incidentally coincides with the previous support/resistance line of 6083. The correction from this high saw the futures tumbling like a house of cards. Just after the 3.00 PM mark when the clock for  finding out the weighted average price for the derivative settlement starts, the Nifty futures lost more than 50 points in less than  two minutes flat. The October month futures recorded a low of 5976 and the settlement was at 5988. The strangest factor seen on Thursday was the heavy premium of 88 points at which the November futures were seen quoting at over the October series.  This seems to be highest premium ever seen in respect of Nifty futures. The Momentum Signal system has again indicated a sell signal as on Thursday.  However, this sell signal is subject to the earlier indicated additional risk factor which is reproduced here. ".... 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 has 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. Thursday's  PE multiple has been  quoting at  24.59.

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 24.59 3.76 and 1.04 as on 28th 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  28th October, 2010 is given below :
The Momentum Signal has indicated a sell as on Thursday.
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  29th 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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To checkout the five year history of The Momentum Signal Spreadsheet click here
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Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information and educational purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.


Anonymous said...

I must say, there was very little useful information in this post, but I did learn a few things. Thanks.
Let us rejoice if this post actually makes it by the forum admins. There's really no harm here. I'm just drunk :)
There once was a time when I blogged about this stuff like crazy. Not many people came to my blogs.
This page lacks some funny comments. Know any jokes?

Never trust anything that bleeds for five days and doesn't die.

momentumsignal said...

"There's really no harm here."

Thanks for the compliment ;-))