Friday, January 28, 2011

Update for 28th January 2011

    A Close Below the 200 DMA, But What Now ?

Following the formation of a bearish engulfing candle on last Tuesday, which indicated further weakness, Nifty futures made further losses on the derivative expiry day and closed below the 200 day simple moving average ( 200 DMA ). However, the February month Nifty future contract closed at 5730 for the day, almost coinciding with the 200 DMA of 5725. This author had indicated in the previous post that the derivative expiry might lead to further market pressures, especially because of the the heavy losses suffered by long position holders in the settlement. It was also indicated that the expiry might be between 5600 and 5700 as per the indications from the Nifty options open interest data. As indicated in the previous post, the market heavy weight Reliance broke the 950 support on Thursday and this factor also contributed for the market's close below the 200 DMA.

Nifty Futures - Intra-day Chart    


On Thursday, Nifty futures opened slightly higher in accordance with  the cues from the SGX Nifty contracts. However, the Nifty contracts attracted selling right from the opening bell and were in a slow slide for the whole trading day. Now, it is anybody's guess whether the market was supported by the 5600 Put sellers  at the 5600 strike or the low close was only because of the derivative expiry. Since the market has closed below the major support of 200 DMA, lets check what happened the last time the same thing happened. 

Nifty Futures - Daily Moving Averages Chart 

The chart also covers the previous break of the 200 DMA which happened in May 2010. ( Please see the marked area on the left side of the chart ). After hovering below and just above the average for a two week period, market recovered and rallied in last May. Therefore, a recovery from the 5550 area, being the previous high, can not totally be ruled out  as of now. However, the present macro economic conditions do not seem to support an immediate rally to new highs as of now. Unlike the previous occasion,  economic fundamentals like, the growing current account and fiscal deficits, galloping inflation, still rising interest rates, slowing corporate profit growth and above all, the rising trust deficit caused by the various scandals, all point towards lower valuation metrics and this may lead to a bearish to sideways markets at present. Therefore, even if the markets recover above the 200 DMA, it is more likely that the market may spend more time in more or less sideways trading than going in to a run away rally mode. It may require more time  before all these negatives play out and the corporate profit growth returns to a higher plane.

 Nifty Futures  - Daily Chart     

The daily chart shows the break of the 200 DMA by the market on the third attempt. This blogger have written many a times in the past that a  third test of a support or resistance has a higher chance of breaking the said support or resistance. The lower supports for the markets are available at the 5550, 5450 and the 5350 levels. The resistance is at the 5775 level. If the correction prolongs for a long period, the chances of the market revisiting the 5200 - 5250 area may become a reality. However, it may be noted that it is normal for the markets to correct some 20 % from the highs even in very strong long term bull markets. Even if the market corrects to the 5100 mark, it will still be inside the customary 20 % correction mark and therefore, it might not necessarily indicate the end of the present bull market.

  Nifty Options Scene  

The February series Nifty options Put Call ratio ( PCR )  closed at a respectable 1.22  times on Thursday. However, following the sell off in the market, the India VIX  closed higher at 22.09, up  6.3%.  The highest number of February series Nifty Call option open interest  ( OI )  is at the 5800 strike. The highest  February series Put options OI is at the 5500 strike as on  Thursday. This option OI data seems to suggest that market participants are expecting the market to trade in a wide range between 5500 and 5800 in the immediate future. However, these indications may change in accordance with changes in the market at any time before the expiry. 

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 21.64,  3.53 and  1.11  respectively as on  27h January 2011.  Readers may please note that some decrease in the PE multiple is possible at present, due to the increasing profits figures being reported by the corporates in the quarterly results season. ( 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 :

Momentum Signal has indicated another sell as on the close of trading on Thursday. Readers may please note that these reentries may involve higher than normal risk because of the fact that the present downtrend was originally indicated almost a month back. 

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  28th 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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1 comment:

பின்னோக்கி said...

very good and in depth analysis. Thanks