Tuesday, December 7, 2010

Update for 7th December 2010

   A Breakout, It's Failure and What Next ?

It's been proven again that support and resistances can be found out only by keen observation of the market action and not by applying any simple mathematical formulas as advised many others. It was being indicated on this site that Nifty future has resistances at 6030 and 6090 levels for the past three or four trading days. Now, please check out what happened in trading in the last three days. Nifty futures traded below the indicated resistance of 6030 for most of last Thursday and Friday and the daily highs were very near to 6030. And on Monday, Nifty futures broke out above the 6030 level and went straight to the next resistance of 6090 and recorded a high of 6094. The buy signal originated by the Momentum Signal trading system in the Nifty futures at the 5982 level as on 1st December 2010 achieved a maximum favorable excursion of 110 points. Or put in simple English, the long  position entered at 5982 could have been sold at the 5090 resistance level leading to clear profit of 100 Nifty points.  

Nifty Futures - Intra-day Chart        

The intra-day chart of the Nifty futures shows the breakout and it's failure. As stated earlier, Nifty futures broke out above the 6030 level by opening higher at 6035 and rallying to the next resistance level of 6090. It also recorded a low of 6030 in the morning session. But what happened after the reaching the resistance was a bit beyond the expectancy of most traders.  May be the market was already showing this possibility as indicated by the  lack of volume and enthusiasm  in trading in the previous two trading days . This was also mentioned in the previous post. A small correction of 20 or 30 points is always expected from most resistances. But what started as a minor pull back from the 6094 high soon became a breakout failure trapping everyone who bought the breakout. Some times these kinds of breakout failures are also called bull traps. Once the Nifty futures broke the 6040 - 6030 breakout area, the contract never even tried to trade higher than 6030 and went straight to the last Thursday's low of 5990. The trading for the day ended at 5992.

Nifty Futures - Daily Chart   

The breakout failure is seen as the  long tail on top of the last candle in the daily chart. Traders may use the previously indicated reference points of 5860, 5900, 5940, 5990 ( new ), 6030 and 6090 for Tuesday's trading. Even if Nifty futures comes down to the 5940 level, it may retain some of the positive momentum. However, it is not always advisable to use reentries using the Momentum Signal system. It  is always better to catch the first movement after the buy signal than waiting for a reentry,  because such reentries might be associated with higher risk.
The European markets closed flat amid rising fears of the sovereign debt crisis.  The US market was trading with mild losses at the time of this post. As the market is still trading in the positive momentum area, Tuesday's market direction will be tricky. If the intra-day trend is continued on Tuesday morning Nifty future may again test the 5940 reference area.
Nifty Option  Scene       
The December series Nifty options Put Call Ratio ( PCR ) deteriorated slightly to 1.26 on  Monday. Significant additions to the Put open interest were seen again at the  6000 and 6100 strikes on  Friday.  Some reduction in Put OI was seen at the 5800 strike.   The Call open interest additions were seen at the 6000 , 6100, 6200 and 6400 strikes. 

Nifty Trailing Fundamentals 

The trailing fundamentals remained almost the same at the previous day's figures.  The trailing Price Earnings Ratio  ( PE Ratio ), Price to Book Value ( PB Ratio ) and Dividend Yield ( DY Ratio ) of the Nifty Index  were at 23.88,  3.77 and  1.04 as on  6th December 2010. Readers may please note that the periods in which the trailing PE Ratio of  the Nifty index persistently  stayed above the 25 mark  were limited to just  two occasions in the years 2000 and 2007-08. And both these periods coincided with the highs or bubble periods 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 ).  

Latest Ultimate Momentum Signal

The updated Momentum Signal spreadsheet showing the latest signal values of the current month Nifty future and the Nifty index is given below :

Nifty future and the underlying index, Nifty closed with a lower Momentum Signal value of +50 as on Monday. However. BSE Sensex still retained a better Momentum Signal value of +100, perhaps helped by the market heavy weight Reliance stock.

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  7th December, 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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