Friday, October 8, 2010

Update on The Ultimate Momentum Signal - 8th Oct. 2010

   Test of Highs' Initial Results are Out  !!!

The previous post was titled 'The Test of Highs Over, But the Outcome Remains Inconclusive.' As on the close of Wednesday's trading, the test had been over but a clearer outcome was not seen. Therefore, Nifty futures opened flat and traded flat in the first half of the trading day. It moved between the narrow range of the previous day's low and the afternoon high. ( The previous post reported that Nifty future is finding it difficult to cross the 6224 - 6227 levels, which coincided with the Tuesday's high and the Wednesday's open.) It was also written that the further progress of the rally may depend up on the progress of the market heavyweight and hitherto laggard Reliance stock because some major rally leading stocks from the Banking and IT sector s seemed to be no more interested in the rally. Readers might be curious why all these facts are being written again and again. But there is a reason. Any kind of logical market analysis requires a  a  proper understanding of  the back ground or simply what happened earlier. This kind of proper and realistic understanding is very essential and helpful in leading us to logically conclude  the possible future outcomes. Trading  is nothing but the analysis of the most possible logical outcomes and planning, executing and following up the trade in accordance with the already anticipated outcomes. ( Or else, we will be forced to simply blame the operators and use even the grand conspiracy theory !!! ) 

Now,  the market picture was like this. The market is expected to move up as indicated by  the huge premium in the Nifty futures. And the market hasn't been in any mood to go below 6175 in the consolidation so far either. Rally leaders are already tired. The laggards and second rung shares are moving up on the back  of increased expectations.  And Reliance is the last hope for the bulls. As a last ditch effort, Nifty futures rallies again above the 6224 and 6227 levels, but the rally peters out 6230. The last hope, Reliance too reverses from the 1055 levels. Now we have two possible breakout failures in hand in Nifty futures and Reliance. At these juncture, where could the market go ?  The only direction in front of the market is down. And that is exactly what happened on Thursday.  The Nifty future starts to trade downwards. The downward movement attracts new sellers. The downward movement accelerates. It breaks the 6185, 6175 and 6165 levels easily and records a low of 6134. Finally, it closes at 6144.

Nifty Futures - Daily Chart   

However, strong bull market rallies may not end with a day's selling. This is the reason why today's post is titled "Test of Highs' Initial Results are Out !". The start of a down trend can only be confirmed when the markets makes lower highs and lower lows. This may require the markets trading first below the 6090 levels and later  the 5940 levels. 

The long positions indicated at 6176 were exited as on the close on Thursday with a loss of 33 points because of the neutral indicated value of the Momentum Signal. Readers may please note that this blog had indicated that the  re-entry might be a bit tricky and the reward risk expectations are lower. 
All Time Highs

Many readers who might not have access to the 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 high of Nifty future is 6336 and that of the Nifty index is 6357. The all time high of BSE Sensex is at 21207. The recent highs were just 2 % off from the all time highs.

Nifty Valuations

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 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 25.44, 3.85 and 1.02 as on 7th 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   7th October, 2010 is given below :

The Ultimate Momentum Signal value for Nifty futures and the two indices were at +10 (Neutral Momentum) 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  8th 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.
Please do post your suggestions and comments on how this blog can be made more useful.
Cheers and Prosperous Investing and Trading !!!

To access and/or download  the free online Position Limit Calculator click here.

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 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.


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momentumsignal said...

Thanks for all the good comments.

@ Nifty direct

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