Skip A Turn…..Reverse….UNO!!!

Strange title for today’s Nifty analysis??? Well these are from a card game called UNO(Some people call it crazy8 when playing with a normal pack of cards).I just finished playing some games of UNO with my 6 year old daughter(she beat me to five straight games!!! So much to speak of my IQ!!!…some times I wonder why I am tryin2trade???).Coming back to Nifty, it was Skip A Turn (for the guys caught unawares on Friday…pay in pay out on Tuesday…year end…couldn’t do much with their delivery’s…operators day out!!!).It was Reverse(for Nifty, complete U turn from Friday…its funny how the bullish bias developed on one day is immediately discarded the next day).It was UNO(yet again for us coz we come first in terms of Highest percentage fall in Asia).

Speaking of Nifty we opened gap down(it seems to be a habit now with us, we are either gap up or gap down!!!). It was no looking back from their onwards. Big Daddy RIL, did try to provide some support initially….but to no avail. What could one single guy do, when heavyweights like ONGC and Banks were not willing to tow the line….and Cipla aint my idea of someone trying to make things easy. The chart above is plain vanilla…didn’t feel like drawing to much on it!!! If u made money today, here’s a parting note:

‘‘It requires a great deal of boldness and a great deal of caution to make a great fortune, and when you have got it, it requires ten times as much wit to keep it.’’

Ralph Waldo Emerson (1803–82)

The Bear Necessities !!!

Well I shouldn’t have posted Death Cross (ominous!!!…it is a prelude to more bearishness). And speaking of bearishness, I decided to spend some time reading a book on Bear Market. Three hours of serious reading!!!(ok..so u caught me..I confess…one hour was spent on serious reading ,the next two pretending that I was still seriously reading!!!). There is an old adage, which says that knowledge can be communicated but wisdom has to be self-taught (yeah! Yeah! I am tryin my hand at wisdom!).

So I get the wisdom and you get the knowledge communicated to you by this post. Ready…..so here it goes..

Lets see what Charles Dow had to say years ago:

‘‘It is a remarkable fact in speculation that both the average price of

a number of stocks and the price of individual stocks show strong

tendencies, both in rallies and relapses, to reach one half of all the

primary movement. When a stock falls ten points in a comparatively

direct move, it is extremely likely to rally as much as five points from

the lowest. It often rallies or relapses more than half of the original

swing, but it is generally safe to wait for about half.

‘‘A Comparison of the Averages . . . shows how regularly this

movement occurs. When a recovery does not come near being one

half of a decline, it generally means that the primary movement has

not been completed and that a new low quotation will be made.’’

And now lets see what Rhea says..Rhea who???. Robert Rhea, who was a hugely

successful investment advisor during the 1930s says :

‘‘Bear markets seem to be divided into three phases: the first being

the abandonment of hopes upon which the uprush of the preceding

bull market was predicated; the second being the reflection of the

decreased earning power and reduction of dividends; and the third

representing distress liquidation of securities which must be sold to

meet living expenses. Each of these phases seems to be divided by a

secondary reaction which is often erroneously assumed to be the

beginning of a bull market.’’

I some times wonder why these guys could not say anything in plain English…maybe they wanted a few educated to understand them….that way you have more ignorant in the market(conspiracy theory at work here I guess…the less the people understand the more money they will loose!!!) Anyways, Simply put, a Bear Market in stocks comes about because the prices get too high in relation to their value. This is caused by public enthusiasm that

gradually becomes excessive, appraising stocks out of proportion to their ‘‘true’’ earnings.

It is the nature of such things to go to extremes in both directions. So, as a bull market often goes too high, so too does a bear market go too low. The excesses are caused by human emotions.

So when does a Bear Market start???

Its simple…Bear Market starts when Bull Market ends!!!(told u the KISS element!!!).

But how does one know that the Bull Market is showing THE SIGNS!!! (of declining).

• Investor sentiment is still bullish while the underlying economic structure continues to weaken.
• Price earnings ratios…crazy valuations!!!. To return to a more traditional price earnings ratio,the market need to correct.
• The Federal Reserve….. driving interest rates down… with no result, it is increasingly clear that when the economy goes south, there is little government can do to stop it.
• Gold…. the interest in gold and gold shares picks up.
• Stocks… At tops, there is what is commonly classified as ‘‘churning’’ (i.e., high volume but not much change in prices, or great irregularity in prices [some up sharply, some down sharply], plus a lot of volatility day to day).
• Unanimity of bullish forecasts. Any downturn is dismissed as temporary.
• Sharp rise in debt. Consumer debt, household debt service payments, losses by credit card issuers, bankruptcy filings and mortgage delinquencies all rise sharply.

And how does a Bear Market shows time for its hibernation???

• Bad news abundant. And the market acts contrary to the obvious.
• Stock Market. Volume tends to increase on rallies, decrease on dips.
• Confidence. Nil. Pessimistic forecasts made for the market and for business.

Ahem!!! I guess that’s enuff for a brief note.And by the way all Bears are not Sinister some are cute too. Any lessons???Yesssss……If only I had researched for this when Nifty was riding 6000 I would have been a rich man!!!! But like I always say just tryin2trade!!!!

Death Cross?????

Death Cross any takers????...dont worry I aint tryin2scare anybody(uskey liye toh nifty hi kaafi hai gabbar!!!).This is just a simple chart with a very simple observation.For people who want to read about Death Cross can read it here.......and as for me, for the time being, I am happy talkin about Life!!!

A Confluence Of Views...ADSL!!!

A dear friend, guide and a fellow trader, has sent the above chart of ADSL to me. His name is Shiree Mamgain and I fondly call him Unclee!!! He is a woodies cci freak and converted a few fellow traders to his style of trading. Together they have decided to upload their charts in a newly started blog called woodiescciindia.blog.com. The chart is a bit tough for non woodies to understand(I also don’t understand much of woodiescci!!!).But I think Unclee has provided adequate explanation.

So when he sent me this chart I thought why not I too open up ADSL and see what can I come up with. The purpose of this exercise was to demonstrate how two different people can see the same things with two different setups and come to a common logical conclusion. Now below is my chart with my explanation
Any lessons??? Yes...the software not important....its the hardware(BRAIN)!!!

A Guru Or A Mentor ??

This post got me into a bit of thinking (gray cells put to work!). I am not sure weather I will be able to express myself clearly, nevertheless I will give it a shot. When I started of two years back on this treacherous road to trading, I was desperately looking for helping hands that would pull me out from the precipice I had fallen into. There were a few hands (the world is still a good place to be in!). What I found later was that among these hands there were some who genuinely extended support (what ever knowledge they could offer they did…God bless them). Yet the other variety wanted me to keep on holding to their hand (they wanted to me to subscribe to their newsletters and call services …the prize??? they promised The Garden Of Eden!!!).

There were a whole lot of Gurus that came by, and very few Mentors. A lil bit of thinking got me to this conclusion. You see Gurus seek Disciples (meek) and Mentors seek Character (leaders). A guru needs these disciples, and they need them in hoards (this is provided by flush of new uninformed entrants to the market everyday). In the case of a Mentor, it’s the other way around. He shuns the hoards, and seeks out a few pieces of uncut rough rocks. A Guru will always give you sermons on what’s wrong with your life whereas the Mentor will show you how to put your life right. A guru will provide you with a sense of calm (his services, which he makes sure that you cant do without). A Mentor on the other hand will take away your calm make you sweat and toil. A Guru will never let you leave him (you are his milking cow!!!). A Mentor will not let you to stick to him (he has made a gem out of that rough uncut rock… his work done…and now he goes ahead to seek more such rough rocks).

The road to successful trading is not a smooth one. The treacherous journey has consumed many a souls. It’s long and a tiring journey and many of us give up mid way and seek solace in the arms of a Guru. What we need is a Mentor who teaches us to conquer the road ahead.

Don’t give up… see what lays ahead!!!!!!

The choice is yours… you need a Guru or a Mentor??? While you still ponder on, I suggest you read what Alexander Elder has to say about Gurus here. As for me.., I will be tryin2find a mentor!!!

A lil bit more about PCR !!!

Well what I am goin to publish below, are inputs added by a friend and an analyst whom I hold in great esteem.His name is Sunil Saranjame and you can find him at The Indian Market Monitor(I found it to be a no nonsense blog..so go there and enjoy!!!)

Sunil Saranjame writes :

We can use Put Call Ratio(PCR) at the extremes as a contrary indicator. PCR is bearish above 1, as there are more puts than calls, and bullish below 1 as there are more calls than puts.

e.g say 1.20 is bearish than 1.15, and 0.55 is bullish than 0.65 etc. But when things go to extreme, it is time for a reversal.

One more thing - a drawback about PCR is that we will never know, whether there are fresh positions being taken, or the existing positions are being squared up!

Thanks Sunil a valuable insight!!!!

Of Rum,Vodka and Scotch !!!!cheers!!!

Some one asked me, just the other day, what was my favorite poison? Well, my reply was that I start with Rum…move on to Vodka and finish it off with Scotch( smart alec..well I am!!!).The aftermath…bad hangover and off booze for a month(well not so smart after all!!!).Anyway did you catch my drift???

What I wanted to share is a personal dilemma something I have been tryin2rid myself off. You see we need to get our bias right (huh! easier said than done). I have been in situations where if my Intraday trade had gone against me, I suddenly decide that I am going to play the Swing. Well the swingin aint helping either so what do I do??? You guessed right…I decide to go Positional!!!!(déjà vu…anyone??).What happens next ???….mental agony(bad hangover!!!) and loss of opportunity, since money is blocked in Positions(Off booze for a month!!!).

Sad?…Yeah I know….but it has its advantages you see. Suddenly The Wife finds me to be the best of religious converts…Prayin to the LORD..Hard!!!!(she thinks I am doin for her and the kids…Hell no!!! right now my Position is more important..so pray harder!!!).Well the LORD listens but he says “Son love your losses the way you love ME”…confused??? me too.. but the LORD, as they say, speaks a different lingo then us mortals. He wanted me to love my losses deep enuff, that I take ‘em as soon as they occurred (cut your losses short!!!).

In my last two years of trading I have come to notice that this has been the core of all my misfortunes….hopefully this year I will be more careful. As for all you sinners out there, watch this lovely song Sinnerman by Nina Simone…and pray for your positions….. as for me….I am still tryin2figure out my favorite POISON!!!!

What Is Open Interest?

Everyone out of, yesterday’s hangover????. Okie.. so today I thought, let me put something on Open Interest(OI).I have many a friends who were interested in this(including me ..of course!!!).since I myself am, pretty ignorant about the topic, so decided to seek help from two of my close friends and fellow traders. The credit goes to them for making this post possible. They are Mayuresh(a musik junkie, watches more of rock vids than charts!!!) and Jimmie(OI geek.. swears by it, and the man who got me interested in OI).I have posted a chart on OI by Jimmie…you see when most of us were still tryin2figure out, to be a bull or a bear(2 b or not 2 b!!!) this guy had already taken his stand, based on OI figures. Before I begin, I’d like to tell them “Thank You Guys”. Here it goes….Beware… it might get a bit boring…but then such is the life dearies!!!

What Is Open Interest?

Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day.

It can also be defined as the total number of futures contracts or option contracts that have not yet been exercised (squared off), expired, or fulfilled by delivery.

Open Interest applies primarily to the futures market. Open Interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts.

Open Interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract.

Therefore, to determine the total Open Interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.

The Open Interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number.

How To Calculate Open Interest?

Each trade completed on the exchange has an impact upon the level of Open Interest for that day.

For example, if both parties to the trade are initiating a new position ( one new buyer and one new seller), open interest will increase by one contract.

If both traders are closing an existing or old position ( one old buyer and one old seller) Open Interest will decline by one contract.

The third and final possibility is one old trader passing off his position to a new trader ( one old buyer sells to one new buyer). In this case the Open Interest will not change.

Benefits Of Monitoring Open Interest!!!

By monitoring the changes in the Open Interest figures at the end of each trading day, some conclusions about the day’s activity can be drawn.

Increasing Open Interest means that new money is flowing into the marketplace. The result will be that the present trend (up, down or sideways) will continue.

Declining Open Interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. Here having some knowledge of Open Interest can prove useful towards the end of major market moves.

A leveling off of Open Interest following a sustained price advance, is often an early warning of the end to an up trending or bull market.

Open Interest - A Confirming Indicator???

An increase in Open Interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in Open Interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while Open Interest remains flat or declining may indicate a possible trend reversal.

The relationship between the prevailing price trend and Open Interest can be summarized by the following table.

Price	Open Interest	Interpretation
Rising	Rising	Market is Strong
Rising	Falling	Market is Weakening
Falling	Rising	Market is Weak
Falling	Falling	Market is Strengthening

How To Use Puts & Calls As Supports And Resistance???

Taking current level of index, just select the 4 calls and 4 puts from that price & current level put & call. In a way the current spot price acts as pivot. Important thing to keep in mind is select Puts & Calls in multiples of 100s and not in 50s.

For eg. : Suppose nifty spot price is at 4890

Then,

Calls: 4900, 5000,5100,5200,5300

Puts: 4800, 4700,4600,4500,4400

shall be selected.

Now just watch the Open Interest in all these options. In ascending order for calls & descending order for puts. Highest Open Interest in any call shows strong resistance and highest Open Interest in put gives idea about support. Suppose market goes beyond those call or put levels then that resistance converts in support and visa versa.

Put Call Ratio: The put call ratio tells us where market is likely to be active.. Put Call Ratio of 1 suggests neutral, below 1 is bearish, 0.8 is oversold while above 1 is bullish and above 1.25 it is getting overbought.

PCR shall always be good or above 1.25 for shorting.

Rest in terms of Open Interest of options it is same like futures. Similarly you can use Open Interest of futures in conjunction with Puts & Calls. Open Interest is higher in Puts, than Calls, and Open Interest is also increasing in futures, this indicates that market is getting ready for a fall. At that time PCR is definitely higher that 1.25.

Phew this is a long post…any lessons??? Yes…When OI Starts Talking It Pays To Listen!!! As for me I still tryin2figure out OI :)

Trade What You See And Not What You Think....!!!

Phew what a day!!! We opened firm and then started to loose ground. The first trade, Nifty Futures gave was “Fade The Gap”(I did it, got myself some loose change!!!).Well after filling the gap we made a futile attempt to claim the days high..Failed!!! , started drifting downwards and slowly bidding our time for Inflation figures(Every Friday we do that anyways!!!). The figures were bad and guess what??? We took off on bad news!!! Surprised.. well don’t be, it was just Dow Theory at play. Confused???….read on.

Today not only tested, the grit of many a professional traders, it was also a nice revision for me of what I am learning in Technical Analysis.

• Markets Discount Everything: This is the basic tenet of Dow Theory . Bad Inflation figures, spur a rally in Nifty, meant that the news was already discounted by the market (see told you na don’t be surprised).
• Moving Average Limitation: In my previous two posts, in Nifty intraday charts, I had illustrated how the Moving Average (MA) acts as a trend line and as well as a logical support and resistance, when moving in trends. If you had observed the MA today in the market, from the opening till about 2 p.m. you would have noticed that the choppy market conditions render them useless and reduce their efficacy.
• See The Broader Picture: That is why today I am posting a three day chart (might help my day trader friends to unravel why we went up crazy). We not only traced a big Inverse Head and Shoulder Pattern (IHS) spanning last three days, we also made one today (a bull within a bull!!!!).Take a look at the chart and you will get my point. The targets for both the IHS Patterns were achieved today itself. Now the big question is are we making the IHS Pattern on the daily?????? I will be tryin2figure it out this weekend……

Lets see what Nifty did today....!!!

Today was expiry day, we did not witness crazy volatility as you normally see during expiry dates.We began in a subdued manner(yes it was Dow again)and drifted down slowly tryin to bid for our time till Europe gave some signal.As you see in the chart you will see that while we drifted down MACD histogram was tracing a positive divergence.This was followed by positive crossover in MACD lines.After that the price gave a confirmation signal by breaking out of its downward trend line and almost flat 20 period Ema. The price came to retest its low and proceeded in a nice up move.Again if you notice in the chart the 20 Ema almost acted like a trend line support.During the last half hour we made a small double top confirmed by negative divergence in both the MACD and MACD lines accompanied by negative crossover in the MACD lines.The price reached the logical target of the double top and also took support at the trend line before reversing its direction.For serious students of technical analysis todays movement in Nifty was also a good illustration of the Dow Theory!!!Can you figure it out???
In all a good clean day to trade nifty..though it was very frustrating coz it was at a snails pace.If patience is not one of your virtues then today was a long boring story!!!!

Sectoral Rotation

One of the sites which I frequent daily State Of The Market had a nice post on Sectoral Rotation with an Indian Perspective.Since we talked about Relative Strength yesterday,I thought it would be right if we delve into the concept of Sectoral Rotation today.

The brief, what I present here, is one I had read in a book by Martin.J.Pring.

The stock market cycle experiences a distinct pattern of industry group rotation because of chronological nature of the business cycle.Interest sensitive groups have a tendency to lead at peaks and troughs.Where as corporations with profits that are enhanced by an increase in capital spending or commodity price inflation generally lag in overall market.

There are instances when a sudden change in the fundamentals of an industry cause a group to be uncharacteristically strong or weak during a specific cycle.It is therefore better to monitor a spectrum of groups rather a specific group.

An understanding of group rotation cycle is helpful both in assessing the maturity of a primary trend and for the purpose of stock selection.

KISS......Any Takers!!!!

The above chart is a 5 min chart of Nifty Index I downloaded from Yahoo(might not be accurate to the last tick).What I liked about today’s play was the KISS(Keep It Simple Silly) element. But then the toughest thing in life is to keep things simple.

Nifty gave the first signs of short at about 11 a.m. When it failed to confirm, the new highs. It also made a Double Top along with an Evening Star pattern. There was a negative Divergence in both the MACD lines and Histogram. An additional signal to go short was also given when the signal line in MACD crossed below its main line (marked in the chart).Additional weakness was seen when it broke below its 20 period moving average and the low formed at about 10.30 a.m. Notice how the price stayed below the trend line and also notice how the falling 20 period moving average acted as a resistance. We had first signs of recovery at about 2.00 p.m. Though we had traced a long bullish Divergence in the histogram and also had a crossover in MACD lines, but the real confirmation came when the price broke out the falling trend line and 20 period moving average simultaneously.

Wow brilliant…..did I trade it? Nope. Any lesson learnt??? Yup..I will be tryin2kiss in the future!!! Smooochhh!

Holy Cow...Blame The Dow!!!!!

Off late I am beginning to like the world Decoupled.This word was in vogue just a few months back when we were in our euphoric rise.The learned on television always had a theory that we have Decoupled from rest of the world.Indian markets are mature and have a mind of their own.Any rise in Sensex, while the Dow fell, was attributed to this Decoupling Theory and every fall suddenly was due to global weakness(Dow).Overnight our views changed from being Decoupled, to playing hookie on the sly with guess whom ??Yes it’s the Dow again sir!!! I sometimes wonder can we talk of Decoupling and being a part of the Global Economy in the same breath. Anyways there are better people to answer that, as for me I like the word Decoupled. Infact we should replace the word Divorce with Decoupled after all “We are getting Decoupled sounds so much better than getting Divorced”. What say you??!!!

Relative Strength (RS)

Relative Strength (RS) is a technical concept that measures the relationship between two securities (or assets) where one security is divided by another, and the result is plotted as a continuous line. It is often used to compare which asset to buy vis a vis another and also helps in understanding inter-market relationships. The most common use of RS is to compare the security with the market index (Nifty or Sensex). When the line is rising that means the stock is outperforming the market and vice versa. Divergence between the RS and the security, warn of latent strength and weakness. Since RS moves in trends like the price, therefore it lends itself to trend reversal techniques such as patterns, trend line breaks, and moving average crossovers. Very Important point to keep in mind is that RS is a RELATIVE indicator just as its name implies. A rising or falling line doesn’t mean the security is advancing or declining in price, it merely suggests that the said security is outperforming the broader market. Any Divergence or trend line break in RS has to be confirmed by price action. It can either be in the form of a completion of price pattern, a trend line break or an important moving average crossover. To further illustrate my point. I will use my favorite stock ONGC and also RANBAXY which has caught the fancy of many a people out there. Both the charts are self-explanatory. What I intend to show here, my friends, is that RS is a powerful tool for stock selection and also gives advance warning when it is time to move to an another security.

Diamonds are Forever!!!

The above chart was sent to me yesterday.It was a very good observation by my friend and fellow learner Jignesh Patel(Jigs).He seemed to have picked a Diamond formation.For the people who are unaware of this formation I suggest that they visit an excellent site by Thomas.N.Bulkowsky.I have found his site a treasure trove for traders who like to trade patterns.Today's move in nifty also corroborates the formation.Thanks Jigs for bringing this to my notice.

Divergence

Divergence defined “When the price of an asset and an indicator, index or other related asset move in opposite directions.” Classical Divergences are of two types Bullish and Bearish (positive and negative).

Bullish Divergence occurs when the price of a security makes a new low while the indicator starts to climb upward.

Bearish Divergence happens when the price of the security makes a new high, but the indicator fails to do the same and instead closes lower than the previous high. There is yet another type of Divergence which Martin.J. Pring refers to as Reverse Divergence also popularly known as Hidden Divergence (HD).

Technically HD is opposite of Classical Divergence. Hidden Divergence, seek higher price lows accompanied by lower indicator values during up moves and lower price highs accompanied by higher indicator values during down moves.

Yesterday I found a similar setup in ONGC. The chart above is a 25 min chart of ONGC futures the price makes a double bottom (not exactly a higher low as one would ideally want in such set ups) and all the three indicators below trace lower lows aka. Bullish HD. I entered ONGC at 1000.50 yesterday and carried it for today.

The entry was good as can be seen from today’s chart given below .I booked my profit at 1035.Sadly I missed the second half of the move. My trailing stop got hit. No complaints but yes could have been better!!!!

Magazine Cover Indicator

Magazine Cover Indicator has often been mentioned in lot of Technical Analysis books as a contrary indicator.Infact Deepak Singh of State of the Market describes it more aptly.So should we assume the worst is over for Wall Street??.Has the Dow found its bottom???

My First Entry

I think it would be a great idea to start my first entry with a song (yes I am a music freak) hence the you tube video of The Sunscreen Song by Baz Lurhman. You must watch it and see what you can learn from it. Well my flirtation with trading started just a week before the 2006 crash (from euphoria straight to depression).Boy was I wasted??? Yes I was…but then decided to move on. The journey which I thought would be short and sweet, still continues, and I don’t know where will it end? But walk, I will.

After the severe bruising I got in that crash, I decided to learn Technical Analysis (easier said than done). In my quest for knowledge I realized that a trader must traverse this path all alone. It’s lonely out there. You meet quite a few people on your way, who will leave their impressions on you but in the end you still walk alone. So was with me, in this journey I have met some very beautiful human beings who have left indelible impression on me, enriching me with their knowledge and experience. I consider my self as a novice in trading, but nevertheless I wont like to fall into the 90% crowd(losers).This blog is an attempt at Disciplining myself in maintaining records of trades, good or bad, and improve upon my trading. In the process if I am able to help any one, and share whatever little knowledge I have gathered in last two years, and also learn from all of you, I would feel honored and grateful.