Monday, February 28, 2011

Update for 28th February 2011

    Markets Waiting for Direction from the Budget !

  • Here is a quote from the last post : "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."
  • Last Friday's trading range was confined to the first levels of support and resistance given in the above quote.
  • After the Thursday's derivative expiry lead free fall, Nifty futures opened higher on Friday. 
  • The futures contracts tried to test the previous day's close immediately after the open. It then tried to test the resistances above.
  • As expected, Nifty futures reversed from the reference level of 5350 and moved towards the lower reference level of 5225.
  • It seems that many market participants are waiting to take a view on the market after the presentation of the union budget on 28the Feb.
  • Therefore, some short covering came in to market which caused the market to recover and close at almost exactly at the opening levels. 

   Nifty Futures - Intra-day Chart

       Nifty Futures  - Daily Chart 

  • Last Friday's trading has lead to the formation of a long legged doji indicating indecision by the the market.
  • It is normal for markets waiting for significant price moving events to trade sideways and form dojis.
  • Here is another quote from one of the posts of the previous week : "Although the union budget might become a non-event from the market's point  of view, it might still attract some avoidable event risk. Therefore, traders are advised to keep only very light positions,  preferably of the long option type. The increase in the India VIX also points in to the direction of the market's self adjustment to face the perceived event risk associated with the budget. The increase in implied volatility ( IV ) as indicated by the India VIX may affect the profitability of any such long option positions negatively, if no significant movements happen in the market after the budget." 
  • Now let's check out the weekly chart of the Nifty index before doing a scenario analysis.
 S&P CNX Nifty Index - Weekly Chart

  • As indicated in one of the posts some two weeks back, our preferred scenario for the market then was of some more sideways trading in the shaded area ( see the chart above ) and a test of support from the upward moving bottom line of the previous trading range. This support is presently placed at an approximate index level of 5150. Though this scenario remains still as a possibility, the probability this scenario remaining as the most preferred is diminishing due to the oil spike.
  • Therefore, a lackluster budget and the continuation of high oil prices or another oil spike mayl force the market to break the above mentioned support. In this scenario, market is expected to test the May 2010 low of 4786 to 4800 levels in the Nifty index.
  • In the best case scenario of an extraordinarily good budget, supported by some easing of oil prices may help the market to test the 5550 to 5600 levels once again.  
  • The following weekly chart is marked with these there possible scenarios for easy identification.      
  S&P CNX Nifty Index - Weekly Chart 2

  • Even after a correction of 20 % in the trailing Price Earning Ratio ( PE Ratio ) from a high of 25 plus to just over the 20 levels, the Nifty index still remains as one of the most expensive stock indices in the world. Therefore, some more erosion of the high valuation can naturally be expected, especially  in a scenario of rising inflation and a central bank ( read RBI ) which has failed completely in inflation management.  A lackluster union budget may lead to further PE multiple erosion as already stated.
 Nifty Options Scene   

The March series Nifty Options Put Call ratio ( PCR )  declined slightly to end at a normal 1.39 times on  Friday. The India VIX index  closed lower at 27.27, losing 3.3 %.

 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 20.31, 3.36 and  1.17 respectively as on  25th 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 has again indicated a sell by closing with a value of -50 as on Friday.

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 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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