Sunday, November 14, 2010

Update on The Ultimate Momentum Signal - 15th Nov. 2010

Is This an Intermediate Term Correction ?

The out of the blue sell off encountered by the Indian stock market in the last two trading days of the past week has already taken out all the gains which came in the Diwali week. It seems that a lower than expected IIP number and some poor quarterly results have added fuel to the fire. Now the important question before the traders and the investors is that whether this sudden sell off is a precursor to an intermediate term correction. 

Last Friday, Nifty futures opened slightly below the previous trading day's range and  a morning's intraday  low of 6185 was established. This low was just above the 6175 support as shown in the daily charts of the Nifty futures. The recovery from this low went above the initial highs of the day and reached 6241 before noon. However, the recovery to the previous day's last traded price seems to have been used by the market participants as a selling opportunity. The market slowly went in to a slide from this high on the back of  the losses in the international markets. The lesser than expected  IIP data seemed to be adding to the woes of the market. As the trading progressed, the selling accelerated with high volumes and Nifty future recorded it's low of 6074 in  the last minutes of Friday. The last trade was at 6084.

  Nifty Futures - Daily Chart     

By hindsight, it appears that the Nifty future's rally beyond the 6325 level, that too unaccompanied by any new highs in the indices, was a bull trap. The speed and the volume shown by the sell off seem to be proving this fact. As such, traders may classify the present chart pattern as a reversal from a double top. As the fall has already traveled a long area, the market may be poised for a mid week recovery from the immediate supports available anywhere between  the 6000 and 5940 levels.  However, it remains to be seen whether any such recovery might be able to recover beyond the 6175 to 6200 levels.  The next higher resistance is at the 6250 level. Therefore, traders may look out for the expected bounce and then take it from there if the recovery fails.  An intermediate term downtrend before the end of the year can not be ruled out as of now.

Nifty Index - Weekly Chart    

The weekly chart of the Nifty index shows a bearish engulfing pattern indicating a possible trend reversal. The immediate support for the index is at the previous minor low at the 5930 levels. The next support  for the index might be at the 5700 levels. 

BSE Sensex  - Daily Chart

The lower panel of the above daily chart of the BSE Sensex shows the Average Directional Index ( ADX ). It is seen that a cross over of +DI and -DI indicating a trend change has happened after a long period of two and a half months. 

 Nifty Fundas
The trailing PE multiple of the Nifty index has been quoting above the 25 mark for some time now. The 25 PE mark  can almost  be termed as the starting point of the bubble territory. However, the latest sell off has been instrumental in bringing down the trailing PE to lower than the 25 mark. 

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 24.62,  3.82 and  1.03 as on  12th 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  12th  November, 2010 is given below :
The last Friday's lower closes have forced the Momentum Signal to indicate a sell with a value of -50.

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  15th 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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Mutual Funds said...

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momentumsignal said...