Sunday, January 9, 2011

Update for 10th January 2011

      The Strong Stocks too Join the Bandwagon ?

It was common knowledge that banks and other interest sensitives were weak and the market was being held up by some strong stocks from a few sectors like, IT, FMCG, Pharma and some selected commodity stocks. Therefore, the best case scenario for the Indian stock market in the short term was a period of sideways to positive trading, in which period, the growing fundamentals may justify the extant high valuations of the pivotals. However, no one could have anticipated the kind of the capitulation seen on last Friday in the Indian stock market. By hindsight, we can attribute the gains achieved in late December, which also came with very low volumes, to those fund managers who wanted to ensure their fat year end bonuses and nothing more. Now, the Indian stock markets are certainly under performing most other stock markets because of the internal problems faced by the economy and due to the relatively high historical valuations. I had written in the very first post of this year that "the Indian stock markets are still quoting at relatively higher historical  valuation levels due to the perceived growth potential and ....the fundamentals of Indian stock markets may be affected by the tight liquidity, rising inflation and interest rates, political instabilities, the ever decreasing standards of governance both at the corporate and political spheres etc, albeit in phases." But while writing that post, I never expected that the market may encounter the roadblocks within such a short time !

Friday's Market Action :  Nifty futures opened slightly lower at 6065 and just managed to touch the previous day's last traded price. Thereafter, the contract started to drift slowly towards the lower supports or reference points. As usual,  the bank stocks sold off initially. Nifty futures managed to stay above the 6030 level in the initial stages. However, the break of this minor support saw the futures testing the next minor support at 6000 and staying between 6000 and 6030 for the next two hours or so. Once the 6000 mark was broken, the decline accelerated and Nifty futures reached a low of 5891 in the last half an hour of trading. The important point noted was that the contract never got any meaningful support at the 5940 level. The contract closed at 5896 for the week.


Nifty Futures - Intra-day Chart   






Nifty Futures  - Daily Chart 


The magnitude of the last Friday's fall is exhibited by the extra long last candle which by it's range has equaled the trading range of the previous four trading days. As the market has already lost heavily  in the  four trading sessions continuously, a pause or a recovery can be expected in the first two trading days of the new week. In case the market falls significantly without any recovery in the first one or two trading days of the week, the chances of a fast and furious short covering rally may also increase. If the market do not undergo further heavy losses on Monday, the reference levels at  5940, 6000 and 6030, may act as minor resistances in the intra-day time frames. The next supports are at 5860 and 5775. The 6030 level may act as a resistance even in the day time frame chart. This resistance also coincides with the 50 DMA at 6035. 


Nifty Futures  - Daily DMAs Chart 


The chart above shows the various daily moving averages of Nifty Futures. The 10, 20, 50, 100 and 200 day moving averages ( DMA )of Nifty futures are presently placed at 6077, 6020, 6035, 5951 and 5601 respectively. On the previous two occassions when the futures contarcts breached the 100 DMA, it took support at the average and recovered. ( See the chart above ). However, according to the experience gained earlier, a third test of any major support or resistance has higher chances of breaching that reference level.  As such, the chances of the market breaching the 100 DMA in the coming weeks has risen. In case of a breach of the 100 DMA, Nifty future may test the lower 200 DMA.

S&P CNX Nifty Index - Weekly Chart


A bearish engulfing candle covering the range of the previous two weeks is seen in the weekly chart of the underlying Nifty index. Therefore,  the chances of the market testing the upward rising upper boundary of the previous trading channel is very high. Incidentally, Nifty futures had took support at this  boundary line in conjunction with the then 100 DMAs on the previous two occasions.  The support from this boundary line is available at around the 5750 to the 5775 level in the coming week. These levels also coincides with the lows of November and December months. 

    Nifty Options Scene

Consequent to major losses in the market, the January series Nifty options Put Call ratio fell  significantly  to  a bearish looking 0.89 times as on 7th January 2011. The India VIX rose to 20.82, up 14.4 %. Massive additions to the January Call options were seen at the 5900, 6000, 6100 and 6200 strikes. Some covering of Put OI was seen at the 6000, 6100 and 6200 strikes. Additions to Put OI was seen at the 5800 strike.  The highest number of Nifty Call option OI is still at the 6200 strike. The highest open interest ( OI ) of Put options has moved down to 5800 from the 6000 strike where it had rested on the previous day. The following option Pain chart also seemed to have undergone a significant change as on Friday. The Call option pain part of the chart ( right hand side ) has become much steeper, following the massive call writing. The  Put option pain part ( left ) has become less steeper and seem to be indicating bearishness.
 

 Nifty January Option Pain Chart
 


Nifty Trailing Fundamentals     
 
 

The trailing Price Earnings Ratio  ( PE Ratio ), Price to Book Value ( PB Ratio ) and Dividend Yield ( DY Ratio ) of the Nifty Index  were at 23.56,  3.72 and  1.06  respectively as on  7th January 2011. ( More information and a long term analysis on Nifty historical valuation are available from the "Nifty Fundas" page ). 


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 :
 

 
The Momentum Signal has also moved in to the negative area with a value of -100, indicating a sell as on last Friday. As the market has already fallen significantly in a short span of time, traders may look for higher  levls to initiate sells to reduce the risk from short positions at present.
 
Projected Momentum Signal Close Values

The projected levels of 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  10th January, 2011, 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 the figures are not intended to be interpreted as 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.

Readers are requested to go through the Risk Factors, Risk Analysis, Position Limits and FAQs pages to gain a reasonable understanding of the trading system. Please do post your  comments and suggestions on how new  posts can be made more useful.
 
Cheers and Prosperous Investing and Trading !!!

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