Sunday, November 21, 2010

Update for 22nd November 2010

Nifty Futures' 5940 Support Broken At Last

Last Thursday, Nifty futures pierced the almost two month old support at 5940 by some 15 points and rallied 120 points. Since the bounce was from a major support it was expected that it may extend to some more time, even though the resumption of the downtrend was not all ruled out. As such it was indicated that Nifty futures may test at least the immediate resistance at 6080 - 6090 levels. However this expectation was belied by the market action on Friday. Now, let's examine this episode for any key takeaways or lessons. The first point to be considered is that it is always better to trade in the direction of the dominant trend which at this time is downward. The second lesson is that even if we enter in to a counter trend trade, it should be managed with very tight stop losses and any profit should be protected either by part booking or by hedging. The third lesson is that only the most nimble traders should enter in to a counter trend trade and the position limit should either be lower or to be reduced after entering in to the trade.  The fourth general lesson is that all supports and resistances will break after being utilised or misutilised many times. 

The so called subtle gaps ( so called because this author is not aware of any other name for the said incident in the technical analysis literature )  have been explained on various posts on this blog. At the cost of repetition, here is the explanation once more !  Generally speaking, major indices like Nifty, Sensex and it's derivatives like Nifty futures reaches the last traded price or/and the adjusted closing price of a day on the following day. Now if the last traded price or the closing price is not reached on the following day, it leaves a so called subtle gap. These subtle gaps are not very common in the Indian context. Experience shows that such subtle gaps occurring at or near the rally highs have indicated imminent weakness and corrections.

Nifty Futures - Daily Chart 

The daily chart of the Nifty futures shown above is marked with three instances of the so called subtle gaps. It is also seen that market fell off on the second day of these gaps after every such instance in the present downtrend. However, a word of caution too. These gaps may have lesser predictive powers in respect of single stocks and stocks and indices trading in ranges. These indications may fail too. It is also to be noted that instances of such gaps are very common in some indices elsewhere and may not have much value especially in the Hong Kong and Japanese markets where the trading hours are lesser and are with breaks in between.

Nifty futures opened lower on last Friday and once again tested the support at  the 5940 level in the morning session. This kind of a retest is also common for any market which reverses from a support or resistance. And the futures remained above the support till around 2.50 PM. However, a bout of sudden selling of unknown origin by hindsight, since the FIIs and DIIs have reportedly bought on Friday, saw the Nifty future breaking the two month old support. The selling might have been based on the evolving fluid political situation as on Friday and also because of the concerns about the proposal for cancellation of some  telecom licenses issued in 2008. The latter issue might affect the banking sector adversely in addition to it's direct adverse effects on some selected listed companies which might have investments in the telecom sector. 

Any market which sees a break of a significant and generally well known support or resistance would normally attract  a lot of reactionary trades. As such, the break of the support at 5940 was traded ferociously and the futures reached a low of 5860 with in a very short time. A recovery saw the futures trading up to the 5900 mark. The last trade was at 5875. The following is the Friday's intra day chart of Nifty Futures.

Nifty Futures - Intra-Day Line Chart   

Since the Nifty futures have closed below the support level, let's check out the possible outcomes. The following chart shows the various daily moving averages of the Nifty futures as on last Friday.

Nifty Futures - Various Moving Averages

The chart shows that the 20, 50, 100 and 200 DMAs of Nifty futures are presently placed at 6140, 6078, 5752 and 5437 respectively. As the 50 DMA has been broken, the next support may be available at the 100 DMA at 5752. The 20 and 50 DMAs at 6078 and 6140 may act as the resistances in case of a reversal.

Nifty Index Weekly Chart

The weekly chart of the Nifty index also shows the support available from the top boundary of earlier year old upward moving trading channel between the 5700 and 5800 levels.

The Big Picture - Nifty Futures Monthly Chart

The monthly chart of the Nifty futures covers the trading period of 47 months from January 2007 till November 2010. It shows the double top reversal seen at present. It also shows the formation of last two monthly candles with their tails placed on the top side indicating resistance and selling. The last two candles can be termed as a doji and a shooting star both indicating reversals.

Meanwhile, the selling seen at the end of last week seems to have been a localised affair. The German Dax index has reached a new rally high at the end of last week.The US market has also traded to the positive area in the last two days of the past week. The CBOE Vix index, alternatively known as the fear index and the volatility index, has also closed at the recent lows last week indicating positive expectations from the investors. 

Therefore, an early or mid-week bounce can not at all be ruled out in the Indian markets. In case of  a bounce back, traders may carefully watch the 5940 - 5950 area for  a better understanding of the market action. If the market recovers above the earlier support of 5940,  it may lead to  a case of  breakout failure and result in  a bout of short covering. In such an instance the market may test 6090 - 6100 levels easily. In the light of the peculiar situation, Nifty future may also sell off further to reach the next major support at around the 5750 levels. In the latter scenario, the market is expected to make a bounce from the support level to test  even the 5940 mark.     

A less than normal Put Call ratio of 0.75 seen in the November Nifty options series and a whole lot of leveraged stock futures positions taken at the higher levels may add to the woes of the local market in the expiry week. The following chart of November Series Nifty Option Pain also shows that the dis-favour against the call options.         

November Series Nifty Option Pain Chart

Generally, it is accepted that the option writers are smarter and are capable of  taking the least hit from the option markets. The option pain chart just shows the total losses option writers would make at each strike price in a graphical manner. The above chart shows that the option writers may make  lesser losses in  case of the downtrend continuing than on a resumption of  the uptrend. This is just another way of explaining and confirming the effect of the the lesser than normal Put Call Ratio ( PCR ). The present position of Option open interest favours an expiry between 5900 and 6000.  However, these positions can change in a very dynamic fashion at any time.

Updated Momentum Signal Spreadsheet

he updated spreadsheet showing the Momentum Signal as at the close of the trading on  19th  November, 2010 is given below :

The Momentum Signal values of the Nifty Future, Nifty Index and BSE Sensex were at -100 as on  Friday's close. 
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  21st November, 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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vijaykishorbabu said...

Very good and elaborate analysis. Thanks

intraday tips said...

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to thank to you a lot for sharing this.

momentumsignal said...

Thanks ....