Thursday, November 25, 2010

Update for 25th November 2010

Another Scam and Another Sell Off !!!

In the last update it was written that the below normal Put Call Ratio ( PCR ), new call writing and overnight losses in the western market may hinder the Nifty futures' second great escape before the expiry on Thursday. It was also indicated to traders that the reference levels for intra-day real time technical analysis of Nifty futures are at 6000, 5965, 5940, 5875, 5860 and 5820. 

This seems to be a season of scams. And it seems that there is no lack of negative news for the market to sell off day by day. On Tuesday, it was the Korean war clouds. And on Wednesday, it was a turn of corruption and alleged loan scams. There were some unconfirmed news reports over the weekend about some shortages in some of the older annuity schemes of LIC and of some kind of investigation on against investment professionals of LIC. However, it was never felt that the issue might lead to a sudden sell-off of the financials as happened on Wednesday.

Irrespective of the news, a trader following the earlier reference levels could have traded  very profitably on Wednesday. The intra-day market action of Nifty futures is captured by the following chart with the earlier mentioned reference levels.

Nifty Futures - Intra-day Line Chart  

On Wednesday morning, the Asian markets were trading mostly flat. The SGX Nifty contracts were also indicating a flat to positive opening. Nifty futures opened at 5945  and spent the initial hour of trading in the 5940 to 5965 range. Even in this time short time frame, Nifty futures initially tested the 5940 level and subsequently tested the 5965 levels. It again tested the 5940 level and upon finding that no selling is being  attracted below the level for the time being, it tried to break above the 5965 level. However, breakout above this level was struggling to cross the resistance area between 5990 and 6000. As such the futures again tested the 5940 support and tried to rally. On failure of this rally to 5975, the only direction available for the future to  trade became down below the 5940 level. Just like on the previous day, this break below 5940 seemed to be a test of 5905 - 5915 levels. Therefore the futures recovered from this support area to test the 5940 resistance again. And then came the news of the scam and and the rest is history. Nifty futures sold off in a hurry and reached almost reached the lower reference level of 5820. The future recovered from this level to reach another reference level at 5975 and the final close was at the other reference level at 5960.  

Nifty Futures - Daily Chart

It is some times said that panic lows are almost always revisited by the markets. ( Readers may please ignore the 'almost always' part form the previous sentence for their own good ! ). Well, Wednesday's market action seems to prove the said comment.

Nifty November Series -  Option Pain Chart
All the data related to the option markets here are based only on the Nifty November series and therefore these figures may not tally with the figures for option markets available with other public sources.  The Put Call Ratio ( PCR ) of the Nifty November series ended at 0.70 as on Wednesday. This figure is somewhat unusually low for Indian markets. It is seen that Indian markets are more vulnerable to fall when the the PCR is comparatively lower than when it is higher than 1. Call writing to the tune of 14.67 lakhs were seen at the 6000 strike. However, the increase in the call open interest ( OI ) at the 5900 level was only 2 lakhs. The 6000 Nifty Puts saw a reduction in the OI to the tune of 7.64 lakhs. Put OI at 5900 and 5800 increased by 4.97 and 5.17 lakhs in Wednesday's trading. The highest OI for the puts were at the 5900 and 5800 levels and the corresponding figures for the calls were at the 6000 and 6100 strikes. Guessing by the OI figures of Nifty November options, an expiry at around the 5900 strike seems to be probable at present. The Option Pain chart above  ( click here to read the post in which an explanation of 'option pain' is avalable ) shows that the expiry could be any where between 5900 and 6000 levels and probably near 5900. However, all these are subject to change in the real market, especially based on new information and news.

Based on the better economic data releases, European and US markets are trading in the positive territory overnight. As the first panic of the latest scam has been played out and depending upon the quantum of any amounts and companies  involved, market may try to trade positively and try to close around the 5900 mark on Thursday. Traders may still use the earlier indicated reference levels of 6000, 5965, 5940, 5900, 5875, 5860, 5820 and 5750 for Thursday's trading too. 

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 23.41,  3.70 and  1.06 as on  24th  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  24th  November, 2010 is given below :
The Momentum Signal values of the Nifty Future, Nifty Index and BSE Sensex were at -100 as on Wednesday'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  25th 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 !!!

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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