A Gap Down Opening, But What Next ... ?
Last Friday, the Nifty Futures opened flat, traded flat and closed slightly in the positive territory on back of the strong gains in the stocks of the IT major TCS. The market has mostly been trading sideways for the past two days. Most equities are also trading sideways without any momentum, showing the symptoms of a top heavy market. Even though the FIIs were consistently on the buy side for the week, the market has not been able to takeoff.
The market seems to have hit the top end of the historical fundamental valuation levels achieved during normal bull market tops. ( Click here for an analysis of Nifty historical fundamentals and the Common Sense Guide to Nifty valuations ). The Historical P/E, P/B & Div. Yield values of S&P CNX NIFTY Index as on 16th July, 2010 are given in the table below. The P/E ratio of Nifty at 22.61 is at the top end of the high valuations range between the 20 to 23 range. In fact the Nifty valuation has remained between this range for the first six months of the calender year.
Nifty Futures - Daily Chart
As expected, the Nifty future has closed mostly inside the support area between the 5360 to 5400 range ( being the previous resistance area ) for the past tree trading sessions. As the US markets have suffered heavy losses on last Friday, the Nifty future is poised to open gap down on Monday. But what happens next is the most interesting part to the traders. Past experience shows that a market with high positive momentum tries to recover the losses if opened much lower than the previous trading range and if it is traded inside the range, it is even capable of testing the highs of the range. However, a weak market may open inside or near the previous trading range and then trades lower on further weakness. Since the Indian market has not yet been able to gain much after the so called breakout above the 5400 levels, it can not be classified as a market with very high positive momentum.
The trailing stop for the existing long positions remains at 5339. The next support for the Nifty future is at the 5300 - 5310 levels. The next lower support is at the 5225 levels. The 50, 100, and 200 day moving averages ( DMAs ) of the Nifty futures were at 5169, 5184 and 5099 on 16th July, 2010.
Nifty Futures - DMA Spectrum
World Markets
The US markets sold off on last Friday on the back of falling consumer confidence. The yield on two year treasuries has hit a new low on Friday indicating economic weakness ahead. The US Dow Jones Index has reversed from an area where the 50 and 200 DMAs are placed at present. The possibility of a reversal from this area was discussed in the post dated 13th July, 2010 on this blog. ( Click here to read the post dated 13th July, 2010 ).
Updated Momentum Signal Spreadsheet
The Momentum Signal has closed in the positive territory last Friday. A quote from the last update : "....the chances of the system exiting the present long position either by the activation of the trailing stop or by the indication of neutral momentum are increasing. "
Projected Momentum Signal Close Values
The projected levels of closing values corresponding to the momentum shift / neutrality / continuation as on the close of trading on 19th July, 2010 are given in the table below. The table also include the projected closing values of BSE Sensex corresponding to the momentum shift / neutrality / continuation signals.
Please click on the table to enlarge. For more info on the above table, please click here.
As seen in the above table, any close below 5383 by the Nifty future as on Monday leads to the exit of long positions. The closing values corresponding to negative momentum of -50 have also risen and are placed at 5330 and 5314 for the Nifty futures and the underlying index respectively.
All readers of this blog are requested to read the various pages describing the system and understand all the intricacies of trading the Momentum Signal and it's risk factors. Please do write in your comments and suggestions.
Cheers and Prosperous Investing and Trading !!!
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To checkout the five year history of The Momentum Signal Spreadsheet click here.
To access and/or download the free online Position Limit Calculator click here.
To checkout the five year history of The Momentum Signal Spreadsheet click here.
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