The picture given below consisting of nine charts (read from 1 to 9 in that order) is from one of my scalping trades I did last week. The idea here to show is that if we keep things simple like trend lines and good old Dow Theory of HH’s and HL’s and vice versa we can have good trading set ups. The biggest drawback to this system; is believing in the system itself. Who the hell wants a simple set up like this when we have a wide gamut of indicators to choose from! KISS …any takers????
Sunday, November 30, 2008
I am going to be very short and sweet with my weekend analysis of Nifty. The weekly chart below has an Inside Bar. Logically the high 2790 and the low 2633 need to be broken on either side to take the position, with the stop placed at the high or low of the IB depending upon the direction of the trade. 2835 and 2870 are stiff resistances in case of upward breakout. Below 2633 we have 2590/50 and once again all important 2500. No real bullish signals from the RSI and MACD yet.
The daily chart below has our triangle intact, so not commenting much about it till we get the direction of the breakout. The 20 periods MA is at 2830 and is likely to provide some resistance whereas the support is at 2640/50. There is a range contraction happening, waiting for a break!
The hourly chart below is where we have all the action happening, at least some clues there. This is the fourth time we are knocking on the red dashed trend line. It is said (just said its not the law) that if price knocks on a trend line three or more times the chances of it breaking become high. We have a good support underneath at 2710/25 by the way of two converging MA’s; the 20 and the 50 MA. A break above 2780, the price might attempt to aim for the 200 periods MA at approximately 3030 levels. The flip side is the stiff resistance at 2870 and 2960, add to that a lil negative divergence we are seeing on the MACD histogram.
We are now days reacting more to global cues and overnight news, so much care has to be taken in taking positions as all these opening gaps are really making the charts all the more difficult to interpret.
All substance is energy in motion. It lives and flows. Money is symbolically a golden, flowing stream of concretized vital energy.
-"THE MAGICAL WORK OF THE SOUL"
Given below is an example of one of the ways of interpreting the ADX. Nope I won’t go into more details about ADX; in fact you can read it here in one of my earlier write ups. The chart below is a 2 minute chart I use for scalping (not one of my favorite time frames but once in a while I do fall into the lure of day trading. Boy do we ever learn!). Please do not go into the minor details of timeframe or the pattern etc, this chart is purely for illustrative purpose on how one can use the ADX for active trading.
NOR dread nor hope attend
A dying animal;
A man awaits his end
Dreading and hoping all;
Many times he died,
Many times rose again.
A great man in his pride
Confronting murderous men
Casts derision upon
Suppression of breath;
He knows death to the bone --
Man has created death.
A very eventful week passed us by and a lot of lessons to be learned, but will we? Yes, I am talking about the gory incident that happened in Mumbai. Innocent lives extinguished. Why? Just because some misguided youth happen to think that this is the way it should be; because the powers that govern us think this is the right thing.
We say this is the work of Islamic terrorism; terrorism in the guise of religious beliefs. No, it is not. Terrorism is just plain terrorism; there is nothing Islamic to it or for that matter there are no Islamic terrorists, Hindu terrorists or Christian militia. I really doubt if there is any religion, or faith, which openly advocates terrorism as a way of life. Faith doesn’t breed terrorists, politics does. If you are an English language student and the next time you need a good example of an oxymoron, the best one you would find is ‘a noble politician’.
It’s rather easy nowadays to breed terrorists. The recipe is quite simple; so simple that we could have small manufacturing units everywhere, even in your neighborhood. All one needs is the right ingredients and you have yourself a good terrorist. The ingredients aren’t very hard to find.
Take a few young guys, low on luck and from poor families. First make them feel that they are really wasted. After doing this successfully, make them feel that they can redeem themselves and make their existence purposeful. Throw in some good clothes, some easy money and of course the most important thing the GUN! Make them feel every bit of a MAN!
Holding a gun gives men a strange sense of being a real MAN! Once you have all this in place, toss in a few lessons on religious bigotry. The rewards: Nirvana, Heaven, Jannat, etc. and the real reward of it all – Money! Money, that is promised to the poor family (Come on fella, you have a chance of being a good child. You couldn’t provide your family with your useless life at least provide them one with your death), and voila you have yourself a Terrorist!
Why am I writing all this? I am saddened by what has happened. Like you, I feel sick and want to vent out. Yes, this is what I will do, and like you, I will forget about it on Monday, when life takes it normal course and I go about worrying for my daily bread.
I don’t want to blame anybody, any caste, or any religion, for what has happened. I just want to blame ourselves for we have failed to bring about the change in our social fabric. We have abused the best weapon we have to bring about the change: our VOTE. We have failed to exercise our ballot judiciously. We have chosen people responsible for all this. We shun change because it’s painful. We have become comfortably numb. We shake out of this numbness once in a while when confronted with events like these (terror attacks); only to go back to being comfortably numb until another attack happens. Some might accuse me of being a pseudo secular…..nope I am just tryin2b humane!
Tuesday, November 25, 2008
Hmm…just another news based gap that got sold into. CITI! They said never sleeps…! And now it looks like its desperately tryin harder not to drop dead once for all….all those sleepless years do take their toll! Any lessons? Yeah one must always make sure one has enuff sleep…! Bad joke? Yeah it is ....need to work on my humor too. Anyway let me just leave CITI and their problems and concentrate on our own markets.
We continued from where we left of on Friday, a strong close of DOW lead to a strong opening of the Asian markets and we followed. Yesterday’s news about bailout of the CITI, again lead to global euphoria and we as usual, in our exuberance opened gap up but sold out pretty fast too! Like I said the road ahead is paved with a lot of resistances and that too pretty mean types, just news won’t help, we need solid push and that comes with conviction… a commodity which the bulls are lacking and bears seem to have aplenty. The daily chart below looks like a picture of calm but much turbulence going underneath it. Tough job to even break out of the 20 periods moving average .Any break below 2550 might trigger a sell off whereas a break above 2960 might lead us to higher grounds that is if you consider 3060, a ground high enuff (some meanies are there with abundant supply), clear that and we speak again.
Turbulence! I mentioned earlier is more visible in the hourly chart; we have broken down from a channel (if u prefer, you can call it a bear flag, to each to his own as long as you believe in your OWN!). This was preceded by a failure to hold on to the 50 periods MA, once that flopped, 20 periods MA looked like a cake walk for the eager bears. If we don’t have any surprises from Dow overnight then tomorrow 2665 and 2725 itself might be a Herculean task for the bulls. Speaking about the supports…2625/2600 and 2550, as if they really matter (pardon my cynicism coz past action has shown all supports getting blown without a whimper). Actually what really matters is only 2500 and how we react there!!!
"You have within you right now, everything you need to deal with whatever the world can throw at you." Brian Tracy
Sunday, November 23, 2008
I had come across a very good example of Hidden Bearish Divergence or Reverse Negative Divergence as Martin J Pring likes to call em. Thought I will share the chart with friends who visit here often. A brief about the divergences is also given below for the uninitiated. I hope it helps.
Divergence is often said to be a leading indicator. Divergence is price action measured in relationship to various indicators ie., MACD, CCI, RSI, Stochastic and others or in relationship to another instrument or measure of the market. Treat Divergence as an indicator and not a signal. Like everything else it needs to be confirmed by THE PRICE! Yes they do occasionally fail too; The Hounds of Baskerville signal, a name given to such failures by Dr. Alexander Elder.
There are 2 basic types of Divergence.
1-Price is making higher highs while the indicator is not: Bearish
2-Price is making lower lows while the indicator is not: Bullish
3-Indicator is making higher highs while price is not: Bearish
4-Indicator is making lower lows while the price is not: Bullish
2500 holds and so does the hope for the last of the Mohicans (bulls). I do get to keep my faith for a while (remember how I kept on harping about 2500 in all my previous posts) as the all red week, ends with a ray of hope. Time to scream Reversal! Nope that happens only above 3250! So what do we have? Well for starters we have a new range of almost 750 points (for traders to flirt with) from 2500 to 3250, which on breaking on either side would have a swing of at least 500 odd points. Another interesting thing has happened in the last week. The Sensex has made a new 3 year low close and nifty hasn’t. In fact if you plot the Sensex and Nifty chart on closing basis (a line chart) you will see we have a LL in Sensex and a teeny weenie HL in Nifty. Frankly I don’t know what to make out of it (remember I am just a guy who is into his baby steps), all I could think was of the DOW tenet; The Averages Must Confirm Each Other!
Let’s take a quick peek at the weekly chart below and see what it has in store for us. Yeah! Yeah the support is the 2500 (by this I mean just the intraday penetrations wont help the bears but a close below 2500 is needed). And as for the resistances, the lesser said the better, for they are in plenty and they are mean. 2860/2950 and 3030 are their for starters, take your pick! Speaking of the chart, not a Rembrandt in strict sense but I guess it will do for what I am tryin2see. The MACD lines are still not into a buy, the RSI is a tad below 30 (signaling oversold for the time being) is yet to break its trend line to signal a concrete buy. But most importantly none of these two indicators are showing any signs of positive divergence (remember a positive divergence on weekly charts is one of the most powerful signals and it aint happening yet).
Moving on to the daily chart; not really something the bulls would like to see. Quiet a paradox here; I have pasted a line chart of the recent move on closing basis. Paradox? Well the closing (Line chart) shows, what many would see it as a double bottom (I feel it’s a bit premature for that coz for a DB to confirm it must break above the intermediate pivot), I would rather say it’s a successful retest of the Low for the time being! But when we move to the conventional bar chart we have a triangle in the making (used some pink lines here for the Technicolor effect!) which is looking more bearish in its connotations and is more likely to break to the down side (Yes we wait for THE CONFIRMATION!). Confused? At least I am! The 20 period MA overhead at 2835 odd levels is likely to play a spoil sport. The MACD lines not giving any clear signal yet.
Time to go long? Why not, as long as 2500 holds there is hope…. Positional Long…I don’t think so! We are in a trading range and must trade with shoot and scoot mentality, tighter stops, as things get too volatile. Now days we are reacting to the global chills and spills and with so much of negative news coming in everyday its getting scary to even hold overnight positions. O boy it’s so hard to keep your faith alive in these tryin times. As for me I am just tryin2trade!!!
"People rarely succeed unless they have fun in what they are doing."
Wednesday, November 19, 2008
Someone had aptly said that there are no resistances in a bull market and there are no supports in a bear market. This seems to be playing unusually well nowadays, we are banging on to the resistances only to be pushed back and when we come to supports they just plop.
Let’s take a brief look at today’s action and see what we can see for tomorrow. The chart on the left is the hourly chart, we can see a series of LH’s and LL’s in the making…yup…downtrend…no marks for guessing that. Every rise on the hourly chart is barely making it to the 20 periods MA and reverting. All intraday pullbacks are met with strong line of supply and eager bears ready to unleash new shorts. Hourly chart doesn’t show any supports below, other than the trend line below, but I am beginning to doubt weather it would hold.
The daily chart on the right shows we have just managed to close above 61.8% retracement, the last point of hope for all the leftover bulls! Like I have been often saying that for me the game is over if we break and trade below 2500 (its here where we would start eating into our tail!). And if we talk about the up moves from here…man….we need to really do better than the intraday upswings we’ve been doing so far. It is a painful exercise now starting with 2695/2700 to 2770 to 2860 to 2950 to 3060 and …..Zzzz…the story goes on!
I am not a great fan of day trading but there are times when I do flirt with intra day moves and today was one such day. The profit on the short side could have been more, had I not closed the trade earlier. Anyway posting below the 5 min chart of nifty future (it’s not complete as we had still more than an hour’s of trading left) annotated for reference, what I liked about today was that for a change I just DID what I SAW!!! A good lesson in; Trade what you see and not what you think…and as for the chart…..don’t you just think it’s a Rembrandt!!! any takers???
"The minute you settle for less than you deserve, you get even less than you settled for."
Sunday, November 16, 2008
Today I had a nice discussion with a few friends and it all veered down to identifying the trend and its reversal. Well we discussed everything from trend lines, moving averages, to indicators and oscillators. Everyone had their own personal choices; like I always say different strokes for different folks! I personally find the good old Dow Theory the best for this. The good old higher highs and higher lows or the lower highs and lower lows sequence the best way to identify the trends. It sounds too simple but then I guess in TA simpler is what works! The element of KISS rulez!!! Please do take a look at the chart below and try to see if watching this action makes a difference to your trading. What I am talking about? Just look at the chart below and maybe you can see your MONA LISA!!!
Chart courtesy of Trading Strategies.
"I am great believer in luck and I find that the harder I work the more I have of it."
Not much of change in weekly perspective of nifty from last week. We have drifted into a range and breaking either side will generate a new trend. Incidentally we are tiring at resistances and on the contrary breaking supports very easily. If we have to safely assume we have reversed the trend then we need to close and trade above 3250!
A brief look at the nifty weekly chart below shows we not only struggled at 23.6% (approximately at 3225) retracement of the fall from January highs to October lows, but we have also closed below the 61.8% (approximately at 3030) retracement from 2003 lows to 2008 highs.
The daily chart below shows that we are still struggling to conquer and close consistently above the 20 period MA. We are moving in tight ranges but unfortunately the bias is down. We have a bull flag happening, marked in pink lines but that only gets confirmed once we trade above 3070/3115 levels which of course is also near the 3160 levels we are hoping for our inverse H&S breakout. And speaking of pattern failure we will negate the flag pattern if we fall below 2750. I am still betting on 2700/2750 to hold (wishful thinking again!) and as far as going to down to check the lows I am of the view till 2500 is safe; no worries! For now 2750 and 2950 is the new range we have made, and between this range we have 2860/70 an important pivot, if once crossed would give a fast 100 points to the upside.
Once again I wish to reiterate with so much of wild swings in global markets and news based openings and falls (which is what we are doing off late) just make sure if in doubt the just be OUT and for people who are in; the magic word coined long long time back is use STOPS!
"Everyone has his burden. What counts is how you carry it."
Thursday, November 13, 2008
We have a holiday today, so I guess lucky to have avoided another fall considering the weak global markets around us. Today also saw the release of Inflation Figures which surprisingly have reverted to single digits. A cause of celeberation? Why not? A small rally? Sure! Isn’t it how we reacted to IIP numbers yesterday before plummeting.
The range mentioned on my last weekend post 2850 to 3250 for a breakout on either side held well. Now the bias shifts to 2750/2700, last hope for bulls because any break below 2700 is surely going to be testing time for the bulls. A quick glance at the daily chart of nifty shows we had reacted to our long term trend line and snapped back. It has also become too much of a work for the bulls to even stay and close above the 20 periods MA (drawn in green). We have closed again at the 38.2 percent retracement, much will depend on who takes control from here. The hoping bulls are looking to pullback from here, and draw, what looks like an inverted complex H&S pattern with a breakout above 3160 (drawn on closing basis on the chart) can’t really blame them, as I have been often saying Hope lays eternal in a bull’s heart! The overhead resistances which I find are much harder to overcome now are at 2950/3050. Where as the supports which are so easily taken out are at 2750/2650. SO we can say that our range has shifted with a negative bias for now.
If the bulls are allowed liberties to see their inverse H&S then the bears are also allowed the same like seeing their double top in the hourly chart of which they have broken the neckline and eyeing 2550/2600. No wonder it is said the market gives each everything what they desire you just have to be smart to take it at the right time! The hourly shows the convergence of two MA’s, the 20 and 50 converging at approximately 2960/70 levels which turns to resistance for now. As usual we need to take the step by step approach. In the eventuality of opening gap down tomorrow and if we see 2685/2700 holding then one can safely go long with a very tight stop at 2650. For the people who want to plays safe the best is to stay put till we take out 2950/3050 convincingly. And for shorts the stops should be at 2970/75.
Quo Vadis? I don’t know just follow the flow!!!
"Ability is what you're capable of doing. Motivation determines what you do. Attitude determines how well you do it."
Sunday, November 9, 2008
A friend of mine forwarded me a very nice and a practical write up on the ADX by Ty Young. I have reproduced below certain points he has discussed in the article. For a detailed study along with chart examples and a short video on the same can be viewed here. Additional reading on the ADX can be done at Investopedia and at Stockcharts.
J. Welles Wilder developed the Average Directional Index (ADX) to evaluate the strength of a current trend, be it up or down. It's important to determine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other. The ADX is derived from two other indicators, also developed by Wilder, called the Positive Directional Indicator (sometimes written +DI) and the Negative Directional Indicator (-DI).
• The DI’s and the ADX are displayed on a scale which has a range of 0 – 100.
• When the +DI is above the -DI, a bullish market is implied. It’s vice versa in case of –DI being above the +DI.
• True Directional Movement is the Difference between the +DI (14) and the – DI (14). “The more directional the movement of an index, the greater will be the difference between the DI’s”; in other words, after the DI’s cross and their difference increases they begin to “pull away” from each other (the gap widens), while subsequently, the ADX continues to rise – implying a “trending” market.
• If the price is criss-crossing in a sideways direction, then the gap would be narrowing – implying a “non-trending” market.
• In essence, the ADX is smoothing the action calculated by the DI’s.
The ADX just shows us the strength of the market; it doesn’t tell us the direction of the market. For direction we see the +DI and the –DI. Though merely crossing of the DI’s shouldn’t be taken as an absolute signal, it should be treated as an early warning signal and subjected to the guidelines below:
• If the ADX reading is below 20 or the ADX drops below both DI’s - a “weak trend” or a “non-trending” market is implied. Therefore a “non-trending” system should be used for confirmation, i.e., oscillators, such as MACD or Stochastics.
• When the ADX drops below 10, the current trend is virtually dead. Be ready for the beginning of a new trend – bullish or bearish; the ADX doesn’t distinguish the direction. Use your other indicators to make this decision. However, after a period of consolidation, a “new” trend may resume in the previous direction.
• An ADX reading above 20 implies the “beginning” of a new trend; whereas; a rise above 25 implies a “trending” market.
• IF the ADX rises above the 40 level, the market is even stronger; however…
• If the ADX subsequently drops below the 40 level, it’s an early indication that the market is weakening, which frequently leads to a reversal.
• Subsequently, a turndown at the lower levels (without reaching the 40 line) is generally a retracement or consolidation signal (not a reversal signal). Look for confirmation and trade accordingly.
• After the DI’s cross and their difference increases; in other words, as they begin to “pull away” from each other; better yet, the gap widens, while subsequently, the ADX continues to rise – trending market strength is implied.
• Once the ADX breaks above the +DI and the –DI, a retracement or reversal is on the horizon.
As is it with all the indicators here also the same warning goes that one must always look for conformation from the PRICE!