Update on The Ultimate Momentum Signal - 26th July, 2010

  A Higher Open, But No Gains On Friday ... !!! 

In spite of the markets reaching new highs on last Friday, the trading remained sluggish and top heavy. The trading interest seemed to be confined to limited number of stocks, especially to the low quality stocks.  These are the classical  symptoms of  an intermediate top.  Traders and investors may consider profit booking  / disposal of the low quality cats and dogs stocks at these times. However, this process of churning can continue for some  more time before any correction may set in.   

Continuing  the positive momentum of last Thursday's late surge, the Nifty futures opened at 5475 and started trading lower. This is becoming a common pattern of trading these days. The futures hit a low of 5428  during the mid-day and closed at 5444.

Nifty Futures - Daily Chart

The Nifty futures have  traded above the supports on last trading day. It has support at the top end of the previous narrow trading range between 5360 and 5410.

S&P CNX Nifty Index -  Daily Chart

Friday's trading has lead to the formation of shooting star doji candles in the daily charts of both the  indices, Nifty and Sensex. These candles indicate selling pressure at the highs, which may lead to reversals. However, the weekly charts of the indices still showed solid white candles for the past week.

The coming week will see some hike in interest rates  by the RBI, quarterly results of the Nifty heavy weights stocks and a derivative expiry which involves the highest amounts of open interest. The Put Call Ratio ( PCR ) seems to be hovering above the 1.50 mark indicating the presence 1.5 puts for every call.  A higher PCR seems to indicate limited downside to the market for the short term, at least in the Indian context.

Updated Momentum Signal Spreadsheet

The updated spreadsheet showing the Momentum Signal as on the close of  23rd July 2010, is given below.

The Momentum Signal has returned a +100 value as last Friday.

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 26th 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.  

The trailing stop for all long positions may be set at 5360 which is 2.1 % away from the new high. Even though the market seems to have started the next leg of the rally, the closing values corresponding to sell signals have also increased. 

As the Momentum Signal is primarily a trend following system, it may indicate whipsaw signals in range bound markets. As such, 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 too. Please do write in your comments and suggestions.

Cheers and Prosperous Investing and Trading !!!

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.

© 2010 momentumsignal.blogspot.com All rights reserved.

Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.

Some Speculative Thoughts

 The Stress Test and Some Speculative Thoughts ... !!!

By the time this article appears on the web, readers might have already seen  the  results of the stress test conducted on the European Banks. Yes, out of the ninety one  banks tested, just seven banks failed in the test and those failed banks would require an additional 3.5 billion Euros ( 4.5 billion USD ) capital. 

What are these so called stress tests ? It's just like the scenario analysis used by the intelligence community. The regulators would have calculated what happens to these banks if and when one or two negative market scenarios like a 3 % negative growth in GDP or a 3% fall in prices of sovereign debts,  are played out  in the next two years or so. Obviously, most banks would make some losses but this test would bring out  which banks would be affected more and would require more capital.

Now, readers may ask what is the relevance of these tests on the traders in the Indian market ?

BSE SENSEX - Weekly Chart  

As you can see from the above weekly chart of the BSE Sensex, the Indian markets have been trading in a comparatively narrow range for almost eleven months now. We have also seen four up trends and three down trends which were symmetrical. Let's also do a scenario analysis in which the present pattern continues. In the first scenario, the Sensex is expected to fall from the present area and test the lower support line obtained by joining the lows of the pattern. If this scenario plays out, the Sensex may correct to the 16500 area. The second scenario involves the break of the lower support line of the pattern. In this case the Sensex may correct even to the 14500 area. These two scenarios involve corrections to the magnitude of 10 and 20 % respectively.

Readers may note that these scenarios are not presented here as predictions and there are so many ifs and buts involved when it comes the markets before these scenarios are actually played out. The market may do whatever it likes to do, no matter  what you expect it to do. It is even capable of trapping the maximum number participants when it reverses from the direction to which it is expected to move.        

Even though this article is written with a label "Some Speculative Thoughts" and with so many ifs and buts whistles added, these scenarios are not completely out of the realm of the possible, especially in this era of  "unusual uncertainty". Hence the importance of these stress tests.

It is advisable for all traders to stress test their positions once in a while, especially the leveraged ones ( positions on the margin ) and the derivative positions to find out whether their trading accounts are over stretched and would require additional margin.  For more information  on risk management tools  like money management and  position limits, which help traders from risk of ruin, please click here. 

Cheers and Prosperous Investing and Trading !!!

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.

           

© 2010 momentumsignal.blogspot.com All rights reserved.

Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.