Wednesday, November 24, 2010

Update for 24th November 2010

Great Escape II, But Will it Last ?


It is said that no trader can control the market and therefore, what a trader can do in preparation of  trading is to decide about what he will do as when market undergoes through or acts in accordance with the various anticipated scenarios. Here is an example which would have  turned in very good profits in Tuesday's trading. Sell Nifty futures if futures falls below the 5940 reference point and stays there. The reader might be curious why this is brought up now. Some selective quotes from the previous update will solve the problem. And here are the quotes :

"In spite of the recovery and a close above the major support of 5940, the fact remains that the market is still in a down trend and the latest close is still in the bear territory. Even though the European markets were trading positively when the Indian markets closed, the western financial stocks and commodities were losing in the overnight trade on the back of increasing fears about the sovereign debt problem and the bail out of the Ireland economy. Therefore, another retest of the support below and even a resumption of the downtrend itself can not be ruled out as of now." "Therefore, traders may watch the market action near and just above the highs of Monday's candle as well as at the support level at 5940 - 5950 on Tuesday, depending upon the market conditions to gain insights on trading." 

The first quote was given as the background information. The second quote was about the two anticipated scenarios of strength and weakness. However the required trade action was not included for want of real time  knowledge of the available market conditions. Let's sum it up ! " Let the market do it's thing ! We are prepared to do our thing ! "

Nifty Futures - Intra-day Line Chart 



The earlier reported overnight weaknesses were reflecting in the Asian markets at the time of Indian market opening on Tuesday. The SGX Nifty futures were already quoting 50 points down from the previous day's close in the morning. Nifty futures opened lower at 5968 and traded between 5940 and 5965 for most of the morning session. Even though the opening was with a gap, no attempts to trade to the previous day's close were seen on Tuesday. Now the question is : Why the fade trade wasn't attempted by the day traders  against the   lower open ? The answer is : Traders generally avoid a fade trade against the dominant trend of the market. Since the Nifty futures were trading in a tight range, there only two kinds of trades possible in the morning session. One, try to trade the range by buying at the bottom and selling at the top and vice versa. And the other was to wait till the market resolves itself from range and trade for the range expansion. By around noon, market resolved the logjam by breaking below the 5940 mark. It started like a test of  the 5905 - 5910 level but the Korean war clouds helped the deep sell off record a low of  5821. Since the fall was felt to be a bit overdone, the market was bought off and the recovery even reached the 5960 levels by the afternoon. However, it seemed that the bulls booked their day's profits as indicated by mild correction seen in the last half an hour of trading.

Nifty Futures - Daily Chart     

     
Since the Nifty future has already been trading through the 5940 reference point for the past three days, traders may consider that the importance of this reference point might have been lost to some extent. In spite of the Tuesday's recovery, the downtrend may continue further because of the impending derivative expiry and other bearish cues.

Nifty November Series -  Option Pain Chart


The Put Call Ratio of Nifty November series options has further deteriorated to a below normal 0.73 as on Tuesday. Huge call writing were seen at the 5900 and 6000 strikes. The 5900 calls saw an addition of 20.4 lakhs open interest whereas the additions at the 6000 strikes were to the tune of 16.7 lakhs. Some minor addition to the put open interest was seen at the 5800 strike. Therefore,  the lower PCR, new call writing and  the skewed option pain chart all points to a lower close on the expiry day at present. An expiry between  the 5800 and 5900 strikes is very much possible as of now. The overnight losses in the European and US markets also confirm this scenario. In such a scenario, traders may use 6030,6000,5965 and 5940 levels as the higher reference points. The presently available lower reference points are Friday's close of  5875 and the low of 5860, Tuesday's low of 5820 and the 100 DMA at around the 5750 levels.

Nifty Trailing Fundamentals    


The historical  trailing price earning ( PE Ratio ), price to book value ( PB Ratio ) and dividend yield ( DY Ratio ) of the Nifty Index  were at 23.69,  3.74 and  1.05 as on  23rd  November 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  23rd  November, 2010 is given below :


The Momentum Signal values of the Nifty Future, Nifty Index and BSE Sensex were at -100 as on Tuesday'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  24th 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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