Thursday, November 11, 2010

Update on The Ultimate Momentum Signal - 12th Nov. 2010

A Day of Losses and What to Expect Now ???

Even though it was mentioned in the last post that the chance of a breakout above or below the inside day candle remains more or less equal, it was specifically said that (a) the subtle gap might act as a precursor to some weakness ahead, (b) inside day candles can be traded by entering trades at the break of both the high and the low of the candles, (c) traders may exercise caution about a break below the low of the inside day candle, as it may trap those who were expecting a breakout above 5350 level and (d) long positions need be protected  by an intraday system stop at 6216. ( High 6349 minus 2.1 % of 6349 = 6216 ).

Now, let's check out what happened in Thursday's  trade. Nifty futures opened flat on Thursday and the initial range  was of  just 20 points. The high of the day was at 6321 and the initial low was at 6300. Trading remained directionless till around 12.00 noon. However, unable to make any progress upwards, the futures broke through the low of the inside day candle to record lows between 6275 and 6280. All recoveries from these lows were unable to progress beyond 6298 level, just three points inside the previous day's candle. The failure to progress upwards attracted further selling and later on selling accelerated. Nifty futures even broke through the intraday  protective stop placed at 6216. (  High 6349 minus 2.1 % of 6349 = 6216 ).  The day's low was at 6209. Nifty futures recovered later on to close at 6237.

The long position entered in accordance with the Momentum Signal system at the 6150 levels has been exited by the system stop as on 11th November, 2011 with an approximate profit of 65 points. Traders may note that the last buy signal has resulted in a maximum favorable excursion of  around 200 points in the Nifty futures and the resistance at 6350 levels was a  known thing for the entire past month for all those who were following this blog. ( Or simply,  it would have been possible to exit with a  profit of at least 190 points !! ).

     Nifty Futures - Daily Chart  

Nifty future has closed inside the support area between 6230 to 6250. In case the support holds in Friday's trading, Nifty future may try to climb back. However, 6275 to 6300 area may act as a minor resistance now. The lower supports are at 6175 and 6085 levels. ( Please click on the chart  above for details ). Thursday's fall has effectively closed a seven point gap between the trading days of 3rd and 4th November. As the US market was also trading with losses at the time of writing this post, Nifty futures may initially trade in the lower half of Thursday's range on Friday.

Nifty Index - Weekly Chart

Even though the last week's close of the Nifty index was tentatively above the target cum resistance line drawn on the basis of the earlier breakout from the year long trading channel, it has already corrected and returned to the new trading channel. Since the latest close is in the neutral area, it better to wait till the market itself reveals the next trading direction.

 Nifty Fundas
The trailing PE multiple of the Nifty index has been quoting above the 25 mark for some time. The 25 PE mark  can almost  be termed as the starting point of the bubble territory

The above table shows the latest data related  to Nifty trailing valuation, sourced from the NSE, India website.  The historical  trailing price earning ( PE Ratio ), price to book value ( PB Ratio ) and dividend yield ( DY Ratio ) of the Nifty Index  were at 25.11,  3.89 and  1.01 as on  11th 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

he updated spreadsheet showing the Momentum Signal as at the close of the trading on  11th  November, 2010 is given below :

Nifty future and the underlying index have returned to the neutral area in accordance with the Momentum Signal system as on the close of Thursday. However, the BSE Sensex has closed still with with a positive Momentum Signal value of +60. ( Not seen in the spreadsheet above ). 
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  12th 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.

As seen in the table above, a lower close on  Friday may force the system to indicate a sell signal  with a value of -50 value. However, traders may note that a sell signal with -50 momentum signal value in a bull market has a higher tendency of becoming a whipsaw.
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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To checkout the five year history of The Momentum Signal Spreadsheet click here

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