Futures and Options and Sensex

Its nice to be right ! When you predict that the markets are going to go a particular way and markets oblige ! If you see my previous posts on 27th October and 11th October, both predicting an upmove, we indeed went into an upmove from the very next day... Actually in technical analysis it is much easier to predict the short term bottoms than to predict the tops...so it was not too much rocket science predicting the bottoms...but yes it indeed feels nice, to be a good student of the markets...

If you notice that most the upmoves and downmoves are based around the series of F&O. So once the series are over on the last thursday of every month, the positions are cut and new positions are built, which I am sure have a lot of role to play how the markets behave in the next series. For e.g. once this series got over on Wednesday we have started ourupmove...and this phenomenon is noticed across many series as well...a word of caution though that in many series a trend that starts at the beginning of the series gets reversed after the first 5-6 days!!! 

So is the worst over? Well its very difficult to answer it...if you read the newspapers or hear the experts on TV, all of them seem to be indicating that the worst is yet to come. However what I am worried about is some of the statements coming from the worlds leading institutes predicting that the worst might be over for the developed countries but the worst is yet to come for the emerging economies!!!

From an index perspective, we still are in a negative trend!!! and it will take a lot to get out from here...infact we cannot say that we are out of the woods till such time we test the bottoms and the bottom holds....now with the RBI's move of cutting repo rate the markets are expected to take the cue and rally for some time, however till the time we are over 3100 on the Nifty we would not be even in a small uptrend...so these small sharp rallies need to be played but played with a lot of caution...infact I think its a nice time to rejig ones portfolios and start building some nice solid portfolios, that would give long term results. For e.g. in my previous posts I had written about TISCO, which was trading at crazy valuations at 150!!! This would have meant that if one would have picked TISCO at 150, he / she would have got 11-12% risk free dividend income throughout !!! no wonder that it bounced back 40% from those levels within a couple of days (as such valuations do not last for long). So its time to enjoy the uptrend as long as it lasts, and perhaps hope that the levels of 7600 are not breached, if and when the markets come to retest the bottoms!!

When will this bear market end?

As mentioned in the previous post, a technical bounceback of the sensex is on the cards imminently. As all the technical parameters are also showing an oversold scenario. With the US markets ending their losing streak on Friday, Monday onwards we can expect some traction in our markets as well...Not to say that we cant fall further but it would be preceded by some gains on the indexes. It is also interesting to note that stocks (even some mid and large caps) have started to quote at dividend yields of 10% +, that basically means a 10% return with appreciation on capital (assuming cos keep on growing) For me personally, Friday was the day of shopping, wherein good opportunities were available at very very reasonable rates. Also another point to note is that not all stocks would bottom out at the same time. For e.g. SBI had formed a bottom at 1000, when the markets were at 12-13000. Now with the markets at 10,500 SBI is sitting pretty at 1350 odd. So if one sees value it might not be such a bad idea to nibble a little..... carefully though!!!

I am free....Free Falling...

Its actually quite interesting to witness a bear market in its full form. For people like me who have been into equities now for around 5 years, this is the first touch with a good bear market...What actually I am more interested in is how this bear market will end. It reminds me of a beautiful article by Ramesh Damani, wherein he clearly says

The primary markets would be bone dry, you will see a fall because now the public is dumping bluechips. So while there is no art-form to decide between the second and third phase, generally the more the desperation in the market, the more people there will be who say I am never going to come back in the stock market. Generally, it's a good time to start thinking about stocks again when the public gets fearful, you want to be greedy in terms of buying stock.

I dont think that this position is reached just yet. People still think that money can be made in the stock markets. . though I think that point is not too far away... Now with NASDAQ down 7% tonight, our markets would definitely react with a 5-10% drop tomorrow.

So when is this going to stop...well as I had said in my post of yesterday if we break below 12800, then there is a chance that we would see lower bottoms. So it cannot be a case of double bottom reversal. It looks like a case of lower tops and lower bottoms, which basically means the bear market continues...

New Series...New Hope?

With the new series begining on Friday with a huge drop, the picture does not look good at all. However as I have said earlier that all is not lost ...it never is... with the new series there are some positives that can be taken heart from...

1) US package seems to be getting the  approval and on Monday this should come as a good news

2) Oil is trading in a range and not going out of reach.

3) Inflation in the country is not running away either...it is showing signs of stagnating and coming to December, the base effect would take place and the inflation would come down below the 10% levels.

4) The PE multiples are trading at a lower range of around 12. 

5) Double bottom seems to have been formed on the technical charts

Keeping all these factors in mind, we need not be completely despondent. Having said that we have to keep an eye on the 12800 mark on the sensex, which was the earlier low. If we break this and fall below it then it is a definite sign of worry. However if we go above this then there is a strong chance that we might have seen the bottom. (though I personally dont think so)

If you have a look at the charts we are still way below in the negative territory (with the red line breaking below the black line). Till the time we see Nifty crossing 4250 mark, we would be still having a negative trend.

So what should be done now...well wait for Monday...it might give us a whipsaw with the markets moving up a bit...but it would need to be seen to what extent do they go up...

Short lived enthusiasm...downturn started from Monday

image courtesy: Indiabulls
(MACD of Nifty still below 0, indicating short term weakness)

After the spectacular rise on Friday across the global markets, many a people were led to believe that the worst is over. US financial aid package will bring an end to all the woes and things will be line. However the question is are they? Well in my previous post I had written that we are still not out the woods just yet till the time we start trading above 4300 convincingly... That reading still stands. From the technical charts one thing is clear that we are in a downturn. The parameters have not improved and Fridays one day gain was not sufficient to wipe out the losses that we have been incurring for the past 8 months now! Also since this series will end on today we can pin our hopes only on the next series to see whether there is a revival.

NIFTY STILL NOT OUT OF THE WOODS

Although the rally on NIFTY of around 200 points on Friday did a lot of good to the shaken sentiments of the investors, technically speaking we are not out of the woods just yet. The charts show that we are still trading in the negative territory and the trend is still negative in the near term... . So what does this mean, should one aggressively go out there and take long positions...in my humble opinion definitely not...though many many people would be tempted to do so...I think till the time we cross 4300 and stay there decisively till such time the clouds of negativity would not have blown over our markets...I think its best to sit out of these pullbacks for some time...as these tend to be very short. Same is the case when we are in a secular bull market, and there are corrections ...people tend to jump in at the first occassion only to get trapped. The very very short term horizon (1-2 days) is still positive, but how far will it carry the markets is yet to be known...also another factor is the expiry on Thursday...Usually series that take a negative or positive turn during the middle of the series, end on the same note...hence going by that indicator it is best to wait and watch and take positions only when the markets give you a confirmed signal

End of Midcaps? Not quite....

The other day there was an interview of Shankar Sharma on CNBC TV 18, wherein Shankar was mentioning that Mid Caps story had peaked out in 2005. Well it is true that Midcaps have underperformed compared to the large caps in the fall of 2008, however the recovery of these stocks is always more sharper and quicker than the blue chips. So even if your favourite midcap is down 30-40%, the chances that it will shoot up 10-20% in one day are always there. A recent eg can be the recovery on Thursday, wherein the market moved up by 3% whereas midcaps such as Indiabulls etc recovered to the tune of 12% in one single session! Also another interesting point is that midcaps would tend to overcorrect in big falls. Hence lets say a midcap with 100% growth rate might be available at sub 10 PE's and thats always a screaming buy!!! I had written in my post on 17th august, that Largecaps will outperform midcaps in the short run, that has a reason...when the money is moving out the markets in a rapid pace, the investments typically happen in large caps. Only when there is no longer value in them do the midcaps start to shine. And even small amounts of money infusion causes them to trade 10-15% higher in single trading session.

NIFTY STILL POSTIVE BUT NOT INDIVIDUAL STOCKS

Nifty is still moving in the positive territory of the MACD curve, even though there has been some downturn in the last few days. Thursdays fall can be attributed to the inflation that has gone beyond the 12% curve to hit 12.44%, this is been quoted as the highest inflation figure in the last 12 years! quite obviously it was the trigger for the markets shed off some recent gains. Intersting thing to note is though nifty and large caps such as Reliance Industries, ICICI bank, Bharti Airtel, ITC, Hindustan Unilever (HLL), State Bank of India (SBI) is still positive some of the individual stocks stocks specially the mid caps (and some exceptions in the large cap e.g. Infosys Technologies, Reliance Petroleum etc) have moved into negative MACD. This is not a good sign as the recovery that had happened was a slow one, so if the stocks donot recover quickly then we might again see prolonged sideways float of these stocks, with a negative bias. Although personally I donot see that these will crumble the way they did in the first of this year, yet the fall in midcaps is never a soft landing and they tend to lose as much as 5-20% in a single day also. So where do we go from here.... my sense is this series is safe and we do not have much to fear. However if the large caps move in the positive zone while the small and mid caps lag behind then it is not the ideal market that the retail investor would want to be in. So as of now the big boys are looking in a better shape to weather the storm!!!

Peace returns to the markets

finally after the turmoil of the last few months, some semblance of calmness is returning to the markets. This period is typically characterised by periods of small movements on the markets and very few of the steep declines. Most of the stocks have broken above the zero level of MACD and started to enter the positive territory. If the same trend is to be believed we look safe for august and typically the months after august are considered good for the markets in any case. If the earnings continue to grow as they have then the markets dont have much to fear in the coming months as the growth in earnings will start pushing the PE up in any case. Also since the PE contracted in the months of Jan-July from a sensex average of 21 to sensex avg of around 12, the PE expansion should also help stocks move up and quote PE's of above 10 atleast for good individual stocks. Good times cant be far ahead!!!

SENSEX POSITIVE SERIES

image courtesy: indiabulls

So finally markets have risen... thankfully to the relief of many of the investors and traders alike. It was long awaited and least anticipated. Crude falling and politics is being cited as the factors, but actually are they the real factors? Well crude to a certain extent does help in improving the situation, wherein the prices are coming to more reasonable levels, but other factors I am not so sure about. In my opinion its a question of series play as well, wherein a particular series is set up in such a way that it has more chances of going up rather than going down. If you read my post written on June 24, titled RBI Rate Hike and its Effects, I had mentioned that we must not lose hope on the markets and the July series might surprise us on the positive. Well thats what exactly happened. The trades (of Futures and Options) in the July series had become so tempting that it was a jackpot time for people to make money going against the trend. Also at the same time individual stocks had become so tempting that it was impossible not to buy into them.

Even after the fall of Friday, which was because of factors outside the business purview, the trend is not broken. The MACD for 14 days is finally coming from a negative to a zero zone, and thats the good news. Once it breaks into the positive zone it will be a good signal. Some of the stocks have already moved into the positive zone and in the fall of Friday those stocks actually did not go down. This is not to say that markets cannot go down, but the technicals arent looking bad for a upmove so lets hope that the August series as good as the July one!!!

Technical Bounceback of Sensex

Sensex and Nifty were long overdue for a technical bounce back. The 14 day RSI had gone below 30 and the markets were still not looking like bouncing back. All this added upto the pressure on the shorts and the valve erupted with a 750 point odd bounceback. Its a different story that the very next day 500 odd of it was shaved back. So where are we now. Well the picture still hasn't improved a lot. Still the MACD is below even the average trend line, so even in the overall negative territory we haven't moved into the relief zone. But I have noticed one thing that is good. All the stocks post the rally of 700 points are showing increasing accumulation pattern. That is definitely not bad news for the markets. How it pans out over a couple of weeks is to be seen.

Chart of Nifty with RSI rebounding from lows of 25

Image courtesy: Indiabulls

PIVOT POINT TRADING

Pivot point forms an important aspect of trading in the markets. It is a simple yet effective way of calculating where the resistances / supports are likely to come. It gives an indication of where one should set up and when keeping in mind the calculations, traders can set up entry / exits. The way pivot points are calculated are fairly simple.

There usually are 3 points of resistances and 3 points of supports. The centre point forms the Pivot. Any deviation upwards from the pivot point forms the 1st resistance point while a downward point from the pivot point will form the 1st support point. For the sake of simplicity we can call the Pivot point as P, Resistance points as (Re1, Re2, Re3) and Support points as (Su1, Su2, Su3).

Pivot point is calculated as a simple average of (Previous days high, Previous day low, Previous days closing). The formula to calculate Re1, Re2, Re3 and Su1, Su2, Su3 is also based on calculations of these parameters.

Pivot = (High+Close+Low)/3

Re1 = 2*Pivot - Low

Su1 = 2* Pivot - High

BASICS OF TECHNICAL ANALYSIS

What are the most basic parameters that I look out for before making any investment. I am sure there are many other parameters that one can look for, but these are the ones that I have relied on and they have worked for me.

1) MA: Moving averages are the most basic and most simple and sometimes the most easily overlooked. It presents a simple case of how the stock is performing compared to its price performance in the last 7 days, 15 days, 30 days, 100 days, 200 days etc. It is a simple way to see the support and resistance levels in the long run, while in the short run its an effective way to gauge actually whether the stock is weak or strong. I usually follow that if a stock is trading above its 15 day MA then it can be safely assumed to be in an uptrend. Ofcourse just using MA is simplistic but its the first of the many indicators that can be looked into before entering into a trade.

2) MACD: Moving average conversion and divergence; this is a very critical parameter that I use when evaluating whether the stock is in a upward trend or downward trend. This indicator is best used to enter or exit a stock, specially when the trend lines are changing from negative to positive territory or vice versa. Also this gives a sense whether to stay invested in a stock or exit it depending on the positivity or negativity of the trend.

3) RSI: Relative Strength index. RSI is an important parameter telling us about the potential of the movement of the stock upward or downward based on the principle of scrips being overbought or oversold. RSI has certain benchmark limits which tell us whether the stock has a potential upside left in the rally. If the stock breaches certain RSI limits usually kept at 70 (usually indicating overbought) and 30 (usually indicating oversold) . its a potential entry or exit signal if it agrees with the other technical parameters. But depending on markets (and in my experience) it usually breahces 80 and 204)

Volumes: Usually they say that volumes precede the price. Well to a certain degree it is true, and I think more true with small cap and mid caps. Whenever there is a sudden spurt in volumes it will be accompanied with the fluctuation in price for the scrip (offcourse exceptions in the Indian markets are there, wherein bogus stocks also achieve high volumes but lets leave them for the moment). For a genuine scrip, if the accumulation / distribution shows a trend increase, it should also show a price increase accompanying it.

TECHNICAL ANALYSIS IS A MUST

Now once you are convinced about the fundamentals of the company, that would include among other things, the earnings, the profit record, the profitability, the growth perspective, the reserves, the industry scenario, quality of management etc amongst others then comes the analysis of the technicals. Technical parameters are equally important as fundamental parameters to enter into a trade. Although one might argue that technical parameters are more importnat if one is making a short term trade. But i feel that they also play an important role when one is initiating longer trades. It doesnt hurt if you get the stock 5% cheaper does it!