Friday, January 14, 2011

Update for 14th January 2011

     Will the Down Trend Continue ?

In the previous post we advised that traders may again look for short trades after the completion of  the bounce. This is a quote from the update for 12th January, which was also reproduced in the last post ." 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."  

The last post also added the following : " .... option OI data seems to suggest that another down move is still possible towards the 5600 strike, on the completion of the present short covering rally."  

Therefore, anyone following the regular updates of the Momentum Signal trading system  could  have again  made a profit of around 100 points in the Nifty futures, by entering in to a short trade at or near the indicated resistance at 5865. 

Now, let's check the market action of Thursday. On Thursday morning, Infosys declared it's less than expected ( even though it seemed that the fault was with the analysts ! ) quarterly results . Infosys and the IT pack were the strongest group of equities in the indices and the last hope of the bulls. Once the market heavy weight Infosys lost more than 3 % at the opening, the bounce back failed at the first resistance of 5865 itself. Therefore, Nifty futures sold off  to the 5750 area and closed at 5761.

Nifty Futures - Intra-day Chart 

Nifty Futures  - Daily Chart 

Now, let's try to find an answer to our first question : Will the downtrend continue ? According to the available indications so far, the chances of the market breaking the 5700 mark is higher than a recovery from this level for the reasons described below :
  • Market is still trading in the bearish higher high, lower low, lower high pattern.
  • The December rally lacked volumes, especially the move above 6090.
  • The first trading day of new year saw one of the unusually lowest volumes near the swing high.
  • The down moves have comparatively higher volumes than the up moves.
  • Indian markets are still quoting at expensive valuations, anticipating a 25 % profit growth.
  • The rising inflation and interest rates would certainly affect the expected profit growth.
  • The Indian market is falling at a time when most other markets are trading strong. Any reversal of other markets may lead to further FII selling in the Indian markets.
  • Market is testing the 5700 levels for the third time, and it has a higher probability of breaking the support.
  • Option open interest data also suggest a possible break of the 5700 support and a move towards the 5600 level. 
However, a word of caution too. The market itself has to decide whether it wants go down or not. Even the best guesses may fail when it come to market.

In case the Nifty future breaks the 5700 levels, the next supports are at the 5550 and 5600 levels, being the previous high before the channel breakout and the 200 DMA of the contract respectively.  

    Nifty Options Scene   

The January series Nifty options Put Call ratio  decreased to  a  bearish looking 0.76 times as on  13th January 2011. Following the Thursday's fall , the India VIX  increased to 23.15, up 8.13 %. Significant  additions to the January Call options ( or call writing ) were seen at the 5700, 5800, 5900, 6000 and 6100 strikes. The highest number of Nifty Call option OI is still at the 6200 strike. Some additions to Put option OI were seen at the 5700 and 5600 strikes. The highest open interest ( OI ) of Put options has remained at the 5600 strike as on Thursday.  This option OI data seems to suggest that another down move is still possible towards the 5600 strike.

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 22.92,  3.63 and  1.08  respectively as on  13th 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 fifth 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  14th 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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