Friday, February 25, 2011

Update for 25th February 2011

   Market Breaks the Trading Range and Dives !

  • This blog had been warning that the upward momentum is waning and market is finding it very tough to break out above the supply zone between 5550 and 5600. It was also indicated that if the market is unable to move upwards, it will certainly test the lower supports and even break the lower supports. 
  • The last post even said that though the Put writers may try to defend the 5400 level, it was too early to decide that the expiry may happen above the 5400 level, because of the rising crude oil prices.
  • It was also indicated that the break from the trading range may happen in one of the last three days of the week. The only question which was left at the time writing that post was whether the Put writers would be able to defend the5400 level till the close of expiry.
  • Since now we know that the Put sellers were unable to defend the 5400 level, let's examine what happened actually in Thursday's trading.
     Nifty Futures - Intra-day Chart 

  • You might have heard some of the so called experts saying that Options have some superiority over plain futures positions.
  • Well here is one of them. If you are short on Put options and you feel that the underlying is gonna fall, you can also short the underlying or it's futures to hedge the short put option position. Eg: you shorted the 5400 Put option at Rs. 75 on the hope that the expiry would be above 5400. However, on the last day of the settlement, you found that the market is breaking down from the trading range and therefore, you also established a short position of equal number of Nifty futures at 5400. 
  • In fact this process is called 'conversion' in which you converted a naked short put option position in to a covered put writing position. The result of this operation is the exact same as that of your original position. In the end you made a profit of Rs 75 less some commissions.  ( Some words of caution too. In the real world of trading, not many positions could be converted profitably just like in the example. For example if the Nifty future would have recovered beyond 5475 and closed at say at 5600, the result would have been a loss of 125 points plus commissions. Moreover, it is not ideal to hedge short  options with the underlying which has just about double the movement ( delta ) of the short options price wise in normal market days. )
  • Now the purpose of this discussion is this. When a widely known and defended support is taken or broken, the previous defenders may also join the sellers to take down the market. This may happen in the opposite direction too!
  • Since the reason for the sell off has been explained from both the points of view, ie technical and fundamental (for fundamental reasons see the previous post ), no more commentaries on the day's trading are added.   

      Nifty Futures  - Daily Chart 
  • The immediate minor resistances above the market are at the 5350, 5400 and 5450 levels. The lower minor supports are at 5225, 5175 and 5125.      
 Nifty Options Scene    

The March series Nifty Options Put Call ratio ( PCR )  was at a normal 1.48 times on  Thursday, may be because of the long outstanding long term options ( LEAPS ). The India VIX index  closed higher at 28.2, gaining 6.21 %.

 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 20.15, 3.33 and  1.18 respectively as on  24th February 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 in respect of Nifty, BSE Sensex and Nifty futures have closed with 0 value indicating neutral momentum.

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  25th February, 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 also requested to go through The Signal, Entries and Exits, Position Limits, Risk Factors, Risk Analysis,  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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