Tuesday, January 11, 2011

Update for 11th January 2011

   How Long the Free Fall  will Continue ?

How long the free fall will continue ? This is the question faced by investors and traders on the close of the trading as on Monday, 10th January, 2010. Nifty futures have fallen by 313 points  ( 5.15 % ) in the last two days without any meaningful pullback whatsoever. And it's been a long time since the market has seen such  uni-directional moves. The market has also lost continuously for the past five trading days. It seems that the FIIs ( read fund managers ) were just waiting for January to arrive before starting a bout of profit booking, after securing their year end bonuses. It seems that the floodgates of FIIs selling are open now. The free fall of the market observed in the last two days seems to indicate that the low of 5727 recorded by the Nifty futures in November and again reinforced by the December low of 5748, may not hold in the new year.  If these lows do not hold, where are the lower supports ? Let's check the various charts before trying to find an answer.

Nifty Futures - Intra-day Chart   




Before the opening of the trade on Monday, it seemed that the prevailing consensus amongst the analysts were mainly pointing towards a bounce. Nifty futures opened higher at 5925 in accordance with the expectations, but immediately upon the open, the contract broke the previous day's low and tested the lower support of 5860. From thereon, it seemed that the bounce or recovery was playing out. as expected. But the recovery stalled  at around the 5910 level and the free fall started. The futures lost almost 100 points before some intra-day recovery set in from the 5810 level. But this recovery also didn't last. The next bout of selling saw the Nifty contracts falling another 100 points from the 5850 level in the last two hours of the day. The day's low was at 5746 and the close was at  5757. 

Nifty Futures  - Daily Chart 


Nifty future is hanging just above it's three month lows. The ferocity of the free fall still indicates a break of this monthly lows in the near term. However, as the market has become oversold, the chances of a bounce can not be written off. In case of  a bounce, the contract may encounter resistances at 5810, 5860, 5910 and around the 5950 levels. The lower supports for Nifty futures are at the 5600 and 5550 levels being the 200 DMA and the highs before the breakout. If we assume that this leg of the downswing also travels an equivalent  625 points which  the previous downswing which started at 6350 and ended at 5725 recorded, then, the next target could be around 5585. ( ie 6210 - 625 = 5885 ).  A fall to this area will also negate the excesses which happened from last September onwards. Therefore, the area between 5550 and 5610 becomes a reasonable level at which the market may pause and try for a recovery. ( However, market being the market, all calculations may go awry ! And when it comes to the excesses, markets are capable of doing it on both the sides ! ).

S&P Nifty Index Daily Chart


The above chart shows the breakout in September and the support extended by the upward moving lower boundary of new trading range ( upper boundary of the old trading range ). If the markets breaks the previously mentioned supports at the 5550 to 5600 area, it is possible that Nifty may revisit the lower boundary of the previous trading range at around the 5100 to 5200 levels. This is just a medium term possibility as the bull markets have a tendency to correct around 20 % from the highs, before starting to trend up again.  This is expressed just as a possibility and not as a trading recommendation.
    Nifty Options Scene

The January series Nifty options Put Call ratio further deteriorated to  a bearish looking 0.83 times as on  10th January 2011. The India VIX rose to 23.16, up another 11.4 %. Massive additions to the January Call options were seen at the 5800, 5900 and 6000 strikes. Some covering of Put OI was seen at the 5900, 6000, 6100 and 6200 strikes. Additions to Put OI was seen at the 5600, 5700 and 5800 strikes.  The highest number of Nifty Call option OI is still at the 6200 strike. The highest open interest ( OI ) of Put options is still at the 5800 strike. 
 
 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 23.01,  3.63 and  1.08  respectively as on  10th 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 closed with a value of -100, indicating maximum negative momentum for the second day..
 
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.
 
The short position in Nifty futures may be held with a trailing stop at 2.5 % above the lows.

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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