Thursday, March 17, 2011

Update for 17th March 2011

Can Indian Stock Markets Become a Safe Haven ?

  • Indian stock markets continued with the positive momentum of the previous day on Wednesday. Nifty futures opened slightly higher at 5477 and rallied to 5553 before settling for the day at 5529.
  • However, Nifty future has not yet broken out of the trading range between 5350 and 5550.
  • Though the general feeling or feedback being obtained from the screen and the charts  is pointing towards  a test of the upper resistances, the increasing uncertainty in Japan and elsewhere in the middle east may affect the positive indications at any time.
  • European and U S stocks are plunging at the time of this post. Now the pertinent question is whether the Indian stock markets can become an isolated safe haven in the face of all round turbulence ?
  • Even as the options markets ( March series ) are suggesting strong support for Nifty at around the 5400 strike, this author is forced to answer the above question negatively.
  • Experience says that no market can remain isolated for long times and sooner or later all markets will be affected in panic situations. Experience also shows that the best stocks and markets also recover fast at the first sign of recoveries. 
  • Now here are some quotes from the previous post which might be still relevant :
  • "The triggers 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. "
  • "... 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 Futures - Intra-day Chart

    Nifty Futures  - Daily Chart 

  • The daily chart of the Nifty futures clearly shows that the contract is still stuck in the same trading range between 5350 and 5400 as seen on the extreme left side of the chart. 

  Nifty Futures  - Daily Chart - A Closer Look

  • A closer view at the same chart allows us to have alternative views of the chart patterns being developed at present.
  • Two patterns, namely a symmetrical triangle and an ascending triangle can be seen in the chart at present, in addition to the earlier mentioned flat trading range.
  • The resistance from the symmetrical triangle pattern coincides with the 5550 boundary of the trading range at present. The authenticity of the symmetrical triangle is a bit questionable due to the lack of adequate testing of the highs of the pattern at different intervals.
  • The ascending triangle seems to be better formed and developed so far and therefore requires better attention. The higher resistance from this pattern is at the 5635 to 5650 range at present.    
  • The ascending triangle pattern is generally considered  as a bearish pattern and a break of the lower boundary may lead to a swing target lower by the equal height of the triangle at the widest point. The height of the ascending triangle as above was about 375 to 400 points.
  • However, in the unlikely scenario of  an upper breakout, Nifty futures may encounter resistance at the 5680 and 5800 levels.
 Nifty Options Scene   

The March series Nifty Options Put Call ratio ( PCR )  increased  to close at 1.42 times on Wednesday.  The Put Call ratio is  implying the mild bullish nature of the markets as on Wednesday.  The India VIX index crashed by 6.53 % following the rally and closed at 24.89.   The 5700, 5500 and 5600 strikes have kept their positions as the strikes with the highest level of March Nifty Call OI as on Wednesday.  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 more Put writing was seen at the 5500 and 5400 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 21.10, 3.49 and  1.13 respectively as on  16th 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 some minor negative values as on Wednesday. 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  17th 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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