Tuesday, November 16, 2010

Update on The Ultimate Momentum Signal - 16th Nov. 2010

The Rebound is On !!!

In the last post, it was mentioned that the fall has already traveled a long distance and as such, traders may look out for a rebound from the lower supports. Even though the lower supports mentioned were at the 5940 to 6000 levels, it seems that, Nifty future has already started the rebound from the higher support levels  between the 6050 - 6090 levels. Now let's see how this reversal could have been identified in the intraday time frame.  

The chart below is a snapshot of the intraday chart of the Nifty future and the underlying index available to the public from the NSE, India website. The chart shows the trading of the morning session till 12.00 Noon. The dark brown line indicates the Nifty futures and the orange line represents the Nifty index. As the chart shows, Nifty futures opened flat and sold off almost

Nifty Futures - Intraday Line Chart

Original Picture Source : NSE India 

immediately  to establish a low of 6065 in the opening minutes. A recovery from there saw the futures trading up to a high of 6112. It again sold off and a lower low of 6060 was established by 10.20 AM. In this process it also broke a support line drawn on the intraday chart at the initial low of 6065. Nifty futures recovered from this new low and traded above the said support line for a short period. It broke the support for a second time but again it recovered and started to trade above the support line. In this process the Nifty future has already indicated two signals of reversal, viz. (1) a minor intraday support broken twice but instead of attracting more sellers, the market has recovered  to trade above the support line, and (2) the market has already formed a double bottom below the minor support and if you consider the morning low too, it might be reversing from a triple low. A trader watching the market action carefully may treat this as a low risk long entry. The next step of the market breaking above the falling trend line confirms the reversal and more and more traders are inclined to trade long from thereon. Nifty futures went on to record a higher intraday high at around 6122. Another sell off from this high was arrested at the 6075 levels forcing the sellers to cover up at higher levels. The market went on to record another intraday high at 6149 before ending the trade at 6134.   

Nifty Future - Daily Chart  

The daily chart shows the recovery from the support area at the 6050 to 6090 levels. Nifty futures have resistances at  the 6175 and 6250 levels. As already stated in the previous post, the fate of the present rebound will most probably be decided at either of these resistance levels. An intermediate correction can be confirmed only if the market reverses from these resistances and breaks the support at the 5940 levels. The probability of an intermediate level correction is still reasonably strong as indicated by the bearish engulfing pattern in the weekly chart and the higher volumes seen in the sell off.  Traders may, therefore look out for any eventuality including the petering out of the rebound to the occurrence of another sharp short covering rally.

 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.

Now the author of this blog feels that he owes an explanation to the fall of the trailing  PE multiple seen in the Monday's fundas when the market actually went in the opposite direction and gained. The trailing PE as on last Friday was at 24.62. The Nifty index gained 0.82 % on Monday. Naturally, the trailing PE might have risen by an equivalent percent to reach  24.82. But the Monday's trailing PE is only 24.39 which is lower by a huge 1.75 % points than our estimated PE of 24.82. Now this author can only guess to explain this anomaly. Tata Steel declared it's quarterly results in the weekend. The company had made huge losses in the corresponding quarter last year. However, the company has declared very good profits for the latest quarter. The replacement of last year's  losses of the company with this year's positive figures might have given a significant change to trailing four quarter EPS of the index in the weekend. The most important lesson from this discussion is that none of the figures or ratios are fixed or written on stones when it comes to the market and everything can be dynamic.   
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 24.39,  3.86 and  1.02 as on  15th 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  15th  November, 2010 is given below :
The Momentum Signal values of the Nifty Future and BSE Sensex were at -100 as on Monday's close. However, the signal value in reasoect of the Nifty index was higher at -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  16th 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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