Wednesday, March 16, 2011

Update for 16th March 2011

Reliance Saves the Day, But What Next ?

  • In the previous post we had stated that Nifty future may still reverse from the swing highs as the contracts had been trading range bound manner for some times. We showed that the 14 Day ADX index and the open interest data of Nifty march series option contracts were also supporting this scenario.
  • Therefore, irrespective of the Japanese tragedy, there was a real  possibility of the Nifty futures reversing from the resistances and retesting the lower boundaries of the old trading channel.
  • Nifty futures opened deep in the red at 5390 on Tuesday. After recording a low of 5375 in the morning session, the contracts recovered to a high of 5505 before closing at 5461 on Tuesday.
  • The actual credit for the extraordinary resilience shown by the Indian stock market on Tuesday goes to the market heavyweight stock Reliance, which gained 1.73 %.
  • Other factors which might have helped the market in containing the losses on Tuesday are the perceived support from the writers of huge Put option positions at the 5400 and 5300 strikes and the absence of huge leveraged weak long positions, which might have been cleaned out in the previous settlement.  
  • Now a general comment on huge gap down openings. This trading tip is given only as a general comment and may not become correct at all times. Generally speaking, if a market which has been experiencing positive momentum till the previous day makes a huge gap down opening, it has a better tendency to trade higher for some times or even resume the previous uptrend.
  • The above observation is valid in the opposite situations of huge gap up openings happening in weak markets. However, as a matter of abundant caution, it may also be noted that this general observation may fail in cases where the market reverses the earlier trend and starts an opposite trend.
  • As Nifty future has again closed right in the middle of the trading range between 5350 and 5550, it can move either way before breaking out either way. 

  Nifty Futures - Intra-day Chart

    Nifty Futures  - Daily Chart 

  • Nifty future has again closed in the neutral territory as on Tuesday. In case of an all round recovery in the world markets, Nifty future may regain the positive momentum and test the previous swing highs.
  • However, traders may note that Reliance stock might not able to lead the rally singlehandedly and therefore, participation by other stocks is a necessity for the continuation of  the uptrend.
  • The trigger for the start of a downtrend is also rising in accordance with the Momentum Signal system. Moreover as has been observed  sometimes in the past, markets have a propensity to revisit the panic lows. Therefore, a revisit of the lower supports can not be ruled out even if the market gains on Wednesday on a rebound.  

 Nifty Options Scene   

The March series Nifty Options Put Call ratio ( PCR )  decreased  to close at 1.32 times on  Tuesday.  The Put Call ratio has retained the mild bullish nature even after the fall and recovery.  The India VIX index  jumped by 14.29 % following the panic opening and closed at 26.63.   The 5700, 5500 and 5600 strikes have kept their positions as the strikes with the highest level of March Nifty Call OI as on Tuesday.  The corresponding strikes for Put OI are 5400, 5300 and 5200.  This data may be indicating the possibility of an immediate trading range between 5300 and 5700. Some covering of  open Put options were seen at the strikes of 5500 and 5400. Some Call writing was also seen at the 5700, 5500, and 5600 strikes. The implied volatility of Nifty options as indicated by the India VIX has been hovering in the 20 plus mark for some time  even as the  market is generally trading range bound. It seems that the improvement in India VIX and the neutral nature of the markets has lead to a situation where the option writers are taking it as a field day for writing straddles and strangles. However, in case of any breakout happening in the market ,especially towards the lower side, that might force the option writers running for cover. This might aggravate the condition of the market as seen on the last derivative expiry day. 

 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 20.87, 3.45 and  1.14 respectively as on  15th March, 2011.  ( More information and a long term analysis on Nifty historical valuation are available from the "Nifty Fundas" page ). 

 Latest Ultimate Momentum Signal 

The Momentum Signal ended up in the neutral territory with a value of perfect ' 0 ' on Tuesday. All readers are once again requested to note that the Momentum Signal trading system is susceptible to whipsaw trades in  ranged markets as is being observed now. 

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  16th March, 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.
Click on the table above for an enlarged view.

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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