Wednesday, October 6, 2010

Update on The Ultimate Momentum Signal - 6th Oct. 2010

  Two Day's Consolidation Over, The Rally can Resume Now !!!

Nifty future was expected to open flat to negative on Tuesday because of the previous day's profit booking and moderate losses in the international bourses.  As expected, Nifty future opened flat at 6181 and the day's low of 6169 was recorded at the open itself.  Since the market had gained so much in a short time, it had to spent some time to consolidate. It is even normal for a market to test the previous resistance to see whether  the said level acts as a support. On Tuesday, Nifty futures broke the previous day's low in this process of consolidation but the break was limited to a meager 7 points. This blog has been writing that a 10 or 12 points break of any significant reference points ( read resistance, support etc. ) in the Nifty futures is not a confirmed break out or break down. As such, the futures moved up and traded in a two way / sideways mode for the whole trading day. However, the close was at the lower end of the narrow trading range at 6175. 

 Nifty Futures - Daily Chart
Nifty futures have completed the two days long consolidation without giving up any of the gains it made  in the  previous week as the last two closes have coincided with close of last Friday. ( 6175 - 6177 ) As the European and the US markets are gaining overnight, we may expect a higher opening and a test of rally high of 6248 on Wednesday. We may even see a breakout above the rally high if the momentum persists. Traders may watch out for the market heavy weight and laggard Reliance stock on Wednesday.

Nifty Valuations

The above table shows the latest data related  to Nifty historical valuations as seen from the NSE, India website.  The trailing PE multiple of Nifty index is still quoting above the 25 mark. The historical price earning ( PE Ratio ), price to book value ( PB Ratio ) and dividend yield ( DY Ratio ) of the Nifty Index  were at 25.55, 3.87 and 1.02 as on 5th 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 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   5th October, 2010 is given below :

The Momentum Signal has indicated +100 value in respect of the Nifty Futures and +50 in respect of the two tracked indices.  The huge premium of 35 points in the Nifty futures is the reason for this disparity.

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  6th 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.
Stop loss for the re-entered long position is at   6116, which is 2.1 % below the high of 6248.

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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