Wednesday, January 12, 2011

Update for 12th January 2011

    Finally, A Break to the Free Fall ?

After the non stop free fall of the past five days, investors and traders were hoping at least for a break, when the markets opened on Tuesday. Nifty futures opened slightly higher and immediately traded upwards to the 5825 levels. However, trading mainly remained range bound  between 5800 and 5830, till around 2.00 PM. The outer ranges of this trading range were between 5770 and 5840. Trading seemed to be a low key affair till the 2.00 PM mark. The European markets opened at 1.30 PM with gains and were trading steady. But, instead of acting in accordance with the positive cues from the international markets, Nifty futures started to drift slowly towards the lower area of the trading range. However, the drift which started as a normal test of  the lows became a deluge of sudden selling. Nifty futures easily broke through the then day's low of 5770 and also the previous day's low of 5746. The contract even broke the three month low of 5727. It recorded a low of 5700 before any semblance recovery was indicated. A notable feature of Tuesday's trading was the fact that the Two major indices, Nifty and BSE Sensex never broke their respective November lows. The sudden down move reversed from the 5700 and 19000 levels of Nifty and Sensex respectively. The recovery from these levels were also as dramatic as the free fall. The free fall of 120 points and an equivalent recovery took just one and a half hours. The close was at 5808.  Before dealing with the next possible outcomes of this swing, let's check the charts.

 Nifty Futures - Intra-day Chart  


 
Now, how could anyone explain the strange drama staged by the markets in the late Tuesday afternoon. Since the market has encountered losses in the past five days, some kind of a positive closing was expected. That means, most traders might have taken some counter trend long positions for playing the bounce. Some others also might have taken some long  positional trades at around the three month lows. This is all explained here to show that the markets have a tendency to run the stops of even those who might take correct trading positions.  It happens mostly when the first recovery attempt from a support stalls, for lack of  fuel  ( read short covering ). A sudden sell off, which actually kills two birds with a single stone is the market's solution for this problem. This fall will provide a good opportunity to run the stops of the early bulls. ( This also gives adequate supply to smart money ). It also helps to trap the late bears who sell in to the sell off, after waiting for a long time in the market. Now, the market is set for an explosive short covering rally which may last for one or two days. ( Sometimes, markets also stage these kinds of drama at the highs too, just before sudden change of course and selling off ! )

Nifty Futures  - Daily Chart 


The late recovery has helped the formation of candle with a long bottom tail, indicating support at the lower levels. This can be explained in another way too. Market actually rejected the lower prices in the intra-day time frame by rallying immediately from the lower levels. The charts used by this site are prepared using the last traded prices and are different from the closing prices calculated and disseminated by the exchanges. Since the last half an hour saw a furious rally, the average closing prices published by the exchanges are lower and are still showing losses for the day. Therefore, on the basis of the official closing prices of  the exchanges and because of the late rally, a positive close on Wednesday can be expected normally. Barring any extraordinary events like a disastrous economic data, another scam etc, traders may look for long trades on Wednesday, especially on declines towards the 5750 area, being Monday's low. In case Nifty futures breaks above the immediate resistance area of 5850 to 5865, we may expect a rally even to the 5940 to 5950 area. However, such a rally will not be sufficient, to prove conclusively that the the down swing has ended, given the lack of interest shown by the FIIs on loading up the expensive Indian equities in the new year. Hence, traders may again look for short trades after the expected bounce.     

S&P Nifty Index Daily Chart


The daily chart of Nifty index shows the bounce from the November low even though the Nifty futures contract broke it's corresponding low by 27 points on Tuesday.

    Nifty Options Scene

The January series Nifty options Put Call ratio  deteriorated further to  a bearish looking 0.80 times as on  11th January 2011. Following the late rally, the India VIX decreased to 22.33 , losing 3.58 %. Massive additions to the January Call options were seen at the 5700 strike. Some covering of Put OI was seen at the 5800, 5900, 6000 and 6100 strikes. Additions to Put OI was seen at lower strikes from 5700 onwards. The highest number of Nifty Call option OI is still at the 6200 strike. The highest open interest ( OI ) of Put options are at the  5800 and 5700 strikes. 

 Nifty - January Series Option Pain Chart  


The Option pain chart still seems to favour the continuation of the down move because of the steepness of the right side.


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 22.98,  3.63 and  1.08  respectively as on  11th 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 third 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  11th 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. The trailing stop at 2.5 above the low of 5700 is at 5843.


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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