This blog spot contains discussion and analysis of stocks and securities trading in NSE and BSE. All stocks are analysed on Technical charts and an effort has been made to predict the future movement of these stocks.
As expected the Nifty, after making a confirmed double top pattern on the 30 minutes chart, came down. Though, the target for this double top formation was 4160 but there was support on the daily charts at 4200. The Nifty respected this support, made a low of exactly 4200.15 and then recovered to end the day at 4228 to close 62 points down while the BSE Sensex ended the day with a loss of 323 points. European markets were good on Friday and ended the day with gains between a percent and 2 percent. The American markets, however, were flat. Crude also remained, more or less, flat and maintained support at $100 to end the day at $101.
Seen above is the daily chart of Nifty and, as can be seen, the Nifty has now reached the bottom end of the range at 4200. It is expected to find support at these levels, unless it proves otherwise. In the bottom half of the chart is the Relative Strength Index (RSI) and that shows that it has not yet reached 40 (it is at 42, to be precise). The price at the support level and the RSI still above 40 may indicate that the support maybe respected by the markets. In case they don’t and 4200 is broken decisively on the charts then we may be staring at 3800 in the face.
Since we know that we are at the support level, this may be a good time to buy Nifty futures or Nifty calls. If the markets were to break 4200 then we shall close our long positions with a small loss. For the record, Nifty 4200 calls are trading at Rs.138/- while 4300 calls closed ar Rs.90/- per Nifty. The lot size happens to be 50 Nifties.
Update: The Rupee to Dollar exchange rate has moved up to Rs.46 to a dollar. Last time the dollar touched 46 was on Sep 29, 2006. Asian markets have opened and are trading weak with losses between 2 and 4 percent. Nifty in the Singapore market is 155 points down at 4070. Expect Nifty here too to break 4200. Do not take any long positions.
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With the Nikkie down 225 points down and the Hang Seng down roughly 350 points when our markets opened, our market was bound to open with a downward gap. The Nifty lost about 100 points in the first five minutes itself. The Nifty hovered around those levels for the next couple of hours and then started inching its way up. It had recovered only about 80 points from its lows when the news came out that the Left front had withdrawn support from the government over the nuclear deal issue. That caused the Nifty to come down again but the news was taken rather bravely by the market and by closing the Nifty had lost only 40 odd points.
It is clear now that the Nifty will remain inside a narrow range for sometime. Attached above is the 60 minutes chart of the Nifty which shows that it has now been moving within a narrow range between 4100 and 3850. One can also see that the last two troughs saw a low being made near 3900 which acts as another minor support. Confirming that the Nifty is going to stay within the range is the Relative Strength Index (RSI), which has been consistently finding resistance near 60 and support near 40 as indicated by the green arrows. A stock or, for that matter, an index can remain inside a range for hours, days and even weeks. We don’t know how long this range is going to be but since it is a very narrow range, it should be broken soon. A move outside the range should give a movement of about 200 points, depending on which side it breaks out on. While no positions are advised till the Nifty remains within this range, yet buying a 4100 call and a 3900 put (July expiry) should be a good strategy at the moment. With the Nifty at 4000 today, both should be fairly cheap. At closing, the 4100 call was available for Rs.80/- while the 3900 put was available for Rs.150/-. It amounts to an investment of Rs.230/- for unit of Nifty or Rs.11500/- per lot of Nifty. On breakout, the losing position should be closed while the other should be carried on. Since the target after breakout is only 200 points and the investment is Rs.230/- one should not expect a lot of profit from this but this is fairly safe. And if the breakout comes soon, one may gain more than expected because the time value would still be there in the option prices.
Let us talk some politics now. The Left withdrew support and yet the market went up. Why? Well, mainly because the government has already got the support of the Samajwadi Party and while it still falls a few votes short of the magic number, it may be able to get the support of a few independents and small parties before the vote of confidence. There are a lot of positives from the developments today. Firstly, the government has announced that they will go to the IAEA with the nuclear deal. If the deal goes through it will be a big positive for the markets. The Left withdrawing support may actually turn out to be good for the government. With the Left providing support, the government had not been able to introduce any reforms in the last four years. With the hurdle now out of the way, the government may actually be able to do something good for the country, provided the Samajwadi Party does not act funny. An early election would mean elections in November while according to the normal schedule elections are to be held in April-May 2009. So, a six months early election won’t be very materialistic for the markets. In fact, an early election may be good for the markets because it only reduces the time of uncertainty (except that then it could jeopardize the nuclear deal). The Prime Minister, Dr. Manmohan Singh, who is now in Japan attending the G8 summit has sent signals home that the Chinese may not oppose the nuclear deal and if the government continues the deal may go through. The US has already committed that it will help lobby India’s case with the Nuclear Suppliers Group (NSG). So, there are a lot of positives today. A lot of small investors understand the Left withdrawal to be a negative but it is more of a positive than a negative.
At the time of writing this post, the European markets are between 1 and 2% down while the Dow is about 50 points in the green. But a big positive is that the crude is slipping. It is already down to $136 a barrel and with such a sharp fall it seems the uptrend may now have ended. A proper analysis of crude would be done in tomorrow’s post.
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The Nifty today opened flat and remained so for the next 2 hours before it started slipping. It went on to make a low of 4536.25 which was very close to our support of 4530 as mentioned here. It was from here that the recovery started and what a recovery it was! A climb of more than 150 points from the day’s lows. It gave us a nice big blue candle, which was quite a relief after losing 350 points in 3 days.
Seen above is the daily chart of the Nifty. Looking at the last two candles, according to candlestick charting, we got a very good piercing pattern. A small image is also given below to help you understand what a piercing pattern is.
The criteria to recognise a piercing pattern is the following:
The body of the first candle is black (shaded); the body of the second candle is white (unshaded).
The downtrend has been evident for a good period. A long black candle occurs at the end of the trend.
The second day opens lower than the trading of the prior day.
The white candle closes more than halfway up the black candle.
If you notice these criteria, you would see that today’s pattern on the chart fits exactly with this. This may probably mean that this is the end of the downtrend, at least for sometime. For the time being, let us forget the head and shoulders pattern that we saw yesterday and hope for the best. More candlestick patterns can be read on this page.
I got a few mails today in response to the post I wrote yesterday. A lot of my readers were “disheartened” by my analysis of the markets and the ‘shuddering’ thought of the Nifty possibly going to 2600. One of them even asked me to ‘give some rays of hope’. I forgot that, like a doctor keeps giving hope and comfort to his patients and his/her family members even if the survival chances are bleak, I too, with so many blog readers, need to ‘give rays of hope’ when the markets are looking bad.
Yes, I understand that I may have painted a very grim picture yesterday but I thought my readers had to be aware of what could be a possibility. It is to be understood that it is only a possibility and not a certainty. More risk averse investors should be getting out of the markets if we were to go below 4450. And how will they exit if I don’t tell them where to exit? I have to cater to all audiences and it is my duty to bring out all possible scenarios. I admit that I may have erred by not including the positives in yesterday’s post.
Well, all is not lost yet. We have support at 4530, which held today. The three year trendline (and not the eight year trendline that one of my readers got confused with) that the Nifty might break is a very long trendline and one odd going through the line is not considered as a breakdown, it needs to be consistently below the line for a week or so to get a confirmation of a breakdown. Secondly, the head and shoulders pattern shown yesterday was on the weekly charts and took a year and 4 months to form and the target could take as long to be achieved. Markets change drastically in such a long time and such large patterns are more likely to fail than short term patterns. And today’s piercing pattern boosts our morale a little. All may not be lost yet.
In my webinar on moving averages I had mentioned that when multiple moving averages converge together or come very close to each other it means that a big movement is about to come. This is a derivative of the age old Dow Theory. One of the tenets of the Dow Theory is that ‘lines indicate movement’. By ‘lines’ Charles Dow meant the prices moving in a very narrow range or within a small rectangle. This narrow range usually indicates that a movement is about to come. About moving averages when they converge together it means the prices have been moving very close to a particular price level for long (in the present scenario the 5000 level) because of which all moving averages are also very close to each other. This indicates a ‘lull before the storm’ or that a big movement is about to come. This movement could be either up or down. On the past several occasions it has happened that after such a scenario the prices went up but they could very well go down too. This theory only states that a big movement will/may come and does not necessarily state the direction of the movement. One of my readers mistook it to mean that it meant prices would go up. In the present scenario all moving averages are pretty close to each other and they indicate that a big movement is likely anytime soon. This could be on the downside if we go below 4450 or on the upside if we cross 5300. Let us all hope for the best and let the markets decide which way they want to go.
In my post dated 27th May 2008, I had advised buying Nifty 4800, 4700 or 4600 puts or buying a 5000 call and selling 4600 or 4500 call. Let us see with the help of this table how much profit we would have made if we had followed any of those strategies on 28th May and covered the positions today with just one lot of Nifty (50 Nifties).
Such good returns in a matter of only 8 days and that too when the market is going down and with a maximum investment of only Rs.16000 odd. And all these profits are on just one lot of Nifty. One with Rs.50000/- to invest could have bought 4 to 5 lots of Nifty options and could have easily ended up with more than a lakh in just eight days. Keep watching this space for more such strategies whenever they come. Subscribe to my posts now so that you don’t miss any such profitable strategies.
The Nifty, boosted by strong Asian cues, opened in the positive today and stayed so for the first half of the day. It was probably the weak European markets, though they have also recovered by now, on opening that triggered the fall in our markets. And the fall was strong enough to bring the Nifty down by 80-85 points from its highs, thus giving us the fourth consecutive day in the red.
Seen above is the 60 minutes chart of the Nifty. While, the downtrend is clearly visible with lower highs and lower lows in place, yet there are some short-term positives visible on this short term chart. First of all, the price has now reached the downward sloping trendline which has provided support to the prices 3-4 times since the last one month. Not only that, it also reversed from the line and has shown one blue candle at the end. If we concentrate on the price movements in the last two days, 26th and 27th, we can see that the price has been making lower lows while the Relative Strength Index (RSI) during the same period has been making higher lows, thus creating a positive divergence between the price and the RSI. The same has been emphasized with the downward and upward sloping arrows. Another positive which is not visible on this chart, but is there on the daily charts, is that the RSI has found support at 40 and has flattened at that level.
An upward move could find resistance near 4900 and above that it could go on upwards to 4935 which will confirm a short term uptrend. This uptrend could take the Nifty between 4990 and 5010. A move to these levels could be used as a shorting opportunity. I think taking naked short positions is a risky game which risk averse traders should not enter into, but low risk shorting opportunities like buying puts (one could go for 4800, 4700 or 4600 June puts) or bear call spreads (e.g. buying 5000 call and selling 4600 or 4500 June call) is definitely a good opportunity. For reference sake, the 4800, 4700 and 4600 puts were available for Rs.156, Rs.118 and Rs.88 respectively at the end of the day while the 5000, 4600 and 4500 calls were available for Rs.93, Rs.320 and Rs.395 respectively.
Once again, do not be tempted to take long positions if the market does go up tomorrow. It makes sense to create long positions only if 5070-5080 levels are broken on the upside.
Uma, a small time trader herself, writes about her trading experiences in the form of a personal stock diary on her blog and it happens to be a good read. Incidentally, she also left a link to my blog on her blog. Thank you, Uma.
It was a mixed day for the Indian markets today. The markets opened on a weak note today and remained subdued for the next two to three hours. It was only at about 1pm when the markets turned in the positive but soon found resistance at higher levels and started coming down to close only 12 points in the green (Nifty) and 44 points up on BSE.
On the whole, it was a positive for the market that it recovered and closed in the green. What was not positive is the Relative Strength Index (RSI), which again failed to cross 60. It is marked by the blue circle in the chart above. The RSI, as the name suggests, measures the relative strength of the prices now with respect to its historical prices. Theoretically, RSI oscillates between 0 and 100 but 0 and 100 levels are rarely seen. RSI is considered to be oversold below 30 and overbought above 70. A lot of people prefer to say that RSI is bullish above 50 and bearish below it. I am one of the few who believes that RSI is bullish above 60 and bearish below 40. This is why I consider finding resistance at 60 a negative sign. All the strength visible on the charts now seems to be vanishing with the RSI not being able to cross 60.
There is another circle (green) marked on the RSI chart which shows that the RSI had found support at 40 in the beginning of the month. That was an early indication which showed that the prices could have broken out of the range. And that did happen. Today’s RSI is showing that the prices may fall soon, maybe as early as tomorrow. Today was the 6th consecutive close in the positive and it may show a red day soon enough. The last time we saw 6 consecutive up closes was in September 2007 (that time it was 11 consecutive up closes and that is actually quite a rarity). Such other occasions (6 or more than 6 up closes) were in Aug 2007 (8 closes), April 2007 (6 closes) and Nov-Dec 2006 (6 closes).
A downmove should find support between the 4900 and 5000 zone. However, if the Nifty were to fall below that there is a strong support at 4830 which should not be broken. A close below 4830 suggests bearishness. 4800 callsrecommended in the beginning of the month could be sold off first thing in the morning. They are gaining about Rs.100/- per unit or Rs.5000/- per lot of Nifty (50 Nifties). No stocks are being recommended today since the market may come down tomorrow and things may be cheaper on Thursday/Friday.
Let’s take a brief look at the American markets. The Dow Jones Industrial Average (DJIA) was moving within a range between 11740 and 12740. Generally, too, there is a lot of resistance at 12740. A close above 12740 yesterday was bullish and that too with a gap. However, a problem with gap days is that the markets tend to close/fill the gap as soon as possible. If this were to happen as early as today then it would be considered a false breakout and we will come back into the range. A noticeable thing on this chart is that again the RSI has not been able to cross 60. But if this breakout is correct (we shall come to know in 2-3 days) then we have a target of about 13700 on the Dow. If that happens, our markets should also remain strong.
As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the markets today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.
The Nifty, after opening went up to make a high of 4832, almost 90 points above yesterday’s close and then, like all other days lost all its gains to come 2 points below yesterday and then slightly recovered to close about 30 points in the green. In the process it made yet another doji, the third consecutive one.
As said in yesterday’s newsletter, and whenever we talk about them, dojis are a sign of indecision. It is a period when neither the bulls, nor the bears, are confident of what they, or the markets, are likely to do. In such periods, the markets keep changing hands. From the bulls to the bears and from the bears to the bulls. Nobody wants to carry her positions to the next day, lest the market should move against them. Such periods don’t last long in the markets. They are there for only a day or so. And then a decisive move comes. The fact that we have three consecutive dojis means that when the decisive move comes, it is going to be explosive. Which is why positioning ourselves in the right direction is important.
The charts don’t tell us much today (which is why we are not carrying any out today) except that instead of two, there are three dojis now and there is still a positive divergence visible. It is almost a certainty that after these dojis an explosive move is likely but the direction is unknown. Do we get any cues from the global markets? Not at the moment. Because at the time of writing this newsletter all European markets were about half a percent down (which is not too much of a cue), Dow is 16 points down and Nasdaq was slightly in the green. The only indication that we get from the charts is that it is more likely to go up than to come down.
Taking long positions in such a scenario is advisable because going up carries a higher probability than coming down. Moreover, we have a pivot low available at 4625 which becomes our stop loss for long positions. Buying calls is an even cheaper method of taking long positions where your loss is already limited and by maintaining a stop loss of 4600-4625, the loss becomes even lesser. And the profits, if the markets were to go up from here, would be phenomenal.
A surprising revelation. I carried out an analysis of the relative performance of the top eight world markets in the last four months, i.e. Dec 2007 onwards. And they rank in the following order, from the best to the worst. Taiwan, Dow Jones (USA), Kospi (Korea), FTSE (UK), Straits (Singapore), Hang Seng (Hong Kong), Nikkei (Japan) and Nifty. Considering that there are fears of recession in the USA, that is still the 2nd best ranked market. And our economy which is supposed to be the best of this lot is the worst performer. Clearly, these are times of excesses. People are being overly pessimistic and fearful. This is the time to grab the opportunities.
Today I leave you with one of the famous quotes by America's richest man and the world's greatest investor, Warren Buffett, who once said about himself and his company:
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
Happy investing!!! This is the time to become greedy.
The Dow Jones closed almost 400 points up last night and all Asian markets were up by about 3% this morning. As suggested in yesterday’s newsletter, such drastic movements in global exchanges are likely to have an effect on our markets too. As predicted, we also opened with a 3% gap but, unfortunately, that was not enough to sustain it throughout the day. All through the day the markets kept losing ground and by close they were absolutely flat.
The chart shown above is the daily chart of Nifty and is actually a repeat of an earlier chart because we have done this exercise in an earlier newsletter. We are talking about dojis here and what they signify. To understand a doji, one has to understand a candle first. Let us take the drawing given here. This shows four candles. A candle essentially consists of four prices, namely, the opening price, the high of the day, the low of the day and the closing price. The highest point of the candle is the high of the day and the lowest point in a candle is the low of the day. To determine the opening price and the closing price, one has to see whether the candle is shaded or unshaded, or in other words, filled or unfilled. If the candle is shaded or filled, it means the closing price is lower than the opening price, which means that the price has gone down during the day. Similarly, in unshaded or unfilled candles, the closing is greater than the opening which means that the price has gone up during the day. These two prices are joined together to form a rectangle. This rectangle is called the body of the candle and the lines above and below this body are called the shadows of the candle. Now, let us see what a doji is. When the opening and the closing price of a day is the same (or very close to each other), there is no body formed and that is called a doji. So, in this drawing on the first and the third day the price has come down during the day. On the second day the price has gone up during the day and the last candle is a doji.
One characteristic of a doji that they represent indecision and that is why they are usually found at short term market tops or short term market bottoms. After a doji day, prices are likely to reverse their trend for the next 2 to 3 days. Now looking at the chart of the Nifty above, we have marked all (and almost) dojis with small blue arrows. And you can see that they are, generally, found near short term market tops/bottoms. Let us look at the period in Dec 2007 and Jan 2008 more closely. It can be seen that there are a cluster of dojis at the top during this period. It is important to look at the Relative Strength Index (RSI) also along with the price. While the price, during this period, was making higher highs and higher lows, the RSI was not doing so. This means that even though the price was going up, the strength of the index was coming down. That was a very clear indication that the market could come down. And that it did in January. What was not known was the magnitude of the fall. While a level of 5200 was visible but 4450 was not expected.
Now let us look at the months of February and March. The black lines signify the tops made by the market during this time. This means that the trend is down. The trend will turn to up when we have at least one higher bottom and one higher high. A higher bottom has already been made (hopefully) and a higher top would be made if the price were to go above 4971. Is that possible in the short term? I believe, it is. Why do I say that? Well, look at the chart. We have seen two doji days including today which must signify that a short term bottom has already been made or is close by. Look at the RSI. While the price has gone on to make a lower high, but the RSI during the same period (10th Mar onwards) has made a higher high, which means that the price may be coming down but the strength is actually increasing. This is what we call a bullish or a positive divergence. So, with these indicators one can make out that the price may change its trend soon enough. All we need is a close above 4971 and we will be back in an uptrend. For investors this may be the right time to build up long positions. For short term traders too that level holds significance because that level will confirm the bullish head and shoulders pattern, the target for which is 5400. This may be the right time to buy at the money or out of the money (if you want them cheap) calls. 4800 calls are available at around 140, 5000 calls around 65 and 5200 calls near 30.
As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the markets today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.
A new feature has been introduced with effect from 3 Mar 2008. Now you can listen to an audio of all the posts written here. The link to the audio is at the end of this post. Click on ‘hear this post’ and a new window will open which will create an mp3 file and then read the post for you. Just make sure that your speakers/headphones are on. Now you can listen to the posts even in your car while driving to work, provided you have opened the page on your laptop. The biggest advantage is to the people visiting the site from their mobile phones. They can just click the link to the audio and the post will be read out to you. Great, isn't it?
Below is the 60 minutes chart of the Nifty. As seen from the chart, the Nifty comfortably breached the downtrending line which was shown on the chart yesterday. In yesterday’s newsletter we had discussed a number of negatives visible on the chart. Excerpts from that newsletter have been pasted here:
The Nifty is finding resistance near the blue downward sloping trendline which is currently near 4675.
The last pivot high was the high of the day today which is at 4734.
There is a very strong trendline near 4750 on the daily charts and that is more likely to push the Nifty back than the short term uptrend pushing it up.
The Relative Strength Index (RSI) has made a bearish head and shoulders pattern, though it has not been confirmed as yet.
Now lets look at each of the negatives one by one.
The resistance line near 4675 was broken on opening itself.
The pivot high at 4734 was also broken on opening only.
The ‘so-called very strong trendline’ also was not hard to cross and was crossed in the first hour of the day.
The head and shoulders pattern forming in the RSI was cancelled today.
So, all the negatives ‘went for a six’ today and we are left with positives alone. Is that a good enough reason to buy? Well, maybe it is. But, first of all, a little bit of analysis is required as to why the markets recovered today. Our markets were going down because the US markets were going down. There were fears of recession, which, to some extent, are still there. Because of the sub-prime crisis, the financial stocks in US suffered a lot. So much so, that JP Morgan lost 31% of its value in a period of 10 months, Goldman Sachs lost 39% in only half the time, Lehmann Bros’ stock prices came down by 52% in a period of a month and a half and the worst affected was Bear Stearns which lost 96% of its stock price. It was so badly affected that JP Morgan agreed to purchase it at only $2 per share whereas the price in Oct 2007 was $128.
Now JP Morgan has agreed to pay $10 per share as against the $2 quoted last week. This suggests that the financial stocks may not have been as badly affected as it was expected. This news made the markets bounce back a little. But have the recession fears gone? No, not yet. They will come back to haunt us again in some time. Bad news will, probably, keep trickling in in the months to come. But, for now, there are expectations that the concerns over a possible recession have stabilized.
Another reason why the markets were going down was because of concerns of the Yen carry over trade. Till a few months back, Japan had a no interest rate regime while the interest rates in US were in the range of 4-5%. This gave a very good opportunity for people to borrow money in Japanese Yen, invest in the US markets, earn a return of about 5% per annum and then return the yens interest free. Now, the interest rates in Japan have increased to about 0.5% and interest rates in US have gone down to about 2-2.5%. And the same thing is not very profitable now and with the interest rate differential decreasing and the dollar depreciating against the yen, people were in a hurry to liquidate their positions in the US and return the yens. The situation was so bad last week that a US dollar could only fetch about 95 yens. Now with the Yen to dollar ratio going back over 100, that also seems to have stabilized. So, as far as the US markets are concerned, the worst seems to have been over.
Looking at the India story now, we have seen that the GDP growth of our country has been about 8.5% and above. Sure, there are signs of this growth rate slowing down to between 7 to 7.5%. But that is still a very good growth rate, specially for an economy of our size. No other country having an economy of such size can boast of a growth rate this high except China. That is definitely a big positive for India. And this is likely to continue for a long period of time due to the demographics of India as explained in an earlier newsletter. Talking of the interest rates, US is now down to an interest rate regime of between 2-2.5% whereas India is still in the region of 7-7.5% with no likelihood of a rate cut in the immediate future. This differential is now more than 5%, a large enough differential. Now the yen case may happen in India also that the investors may borrow money in US dollars, invest in India, earn a return of 7-8%, and return in dollars with 2% interest, thus pocketing the differential. This is another reason why the money should now start chasing India. But this is all a long term story. We are still quite confident about the long term story being good for India. But what about the short term?
Yes, the markets did rise quite a bit today and in the process kicked aside all negatives. It did confirm the start of a new short term uptrend but is this the end of the bear market? Was this the bottom? Well, that can never be said with conviction until the next bottom is made. The next bottom will tell us whether this was the bottom or there are more bottoms in store. And yes, 4750 is again the level to watch. It has now turned into a strong support. Resistance comes between 5080-5100.
Nifty calls suggested yesterday would have made very good money today. A big move above 4900 tomorrow MAY signal the end of the intermediate term downtrend too. But we need to wait and watch the movement tomorrow, and more importantly, the next dip. As of now, since the short term trend has changed to up and there are chances of a possible bottom having been made, we should be buyers on any dip with a stop loss of 4480 (the previous pivot low). But be strict about the stop loss. We would not like to get caught on the wrong side of the market.
A new feature has been introduced with effect from 3 Mar 2008. Now you can listen to an audio of all the posts written here. The link to the audio is at the end of this post. Click on ‘hear this post’ and a new window will open which will create an mp3 file and then read the post for you. Just make sure that your speakers/headphones are on. Now you can listen to the posts even in your car while driving to work, provided you have opened the page on your laptop. The biggest advantage is to the people visiting the site from their mobile phones. They can just click the link to the audio and the post will be read out to you. Great, isn't it?
Gap openings seem to have become the order of the day these days. In the chart below, I have marked all the big gap open days with brown arrows and you can see how abundant they are. Gaps are like mistakes or anomalies in a chart and the prices tend to cover up their mistakes just like we humans try to cover ours. That is why you can see on the chart below that when prices open with an upward gap, more often than not, the prices tend to move down in the second half of the day. And the converse also holds when the prices open with a downward gap.
As traders who use technical analysis, it is our job to make sure that we take trades in which we have a higher probability of making profits. We can never be 100% accurate but if we increase the probability of profits (in the trades that we take) with the help of technical analysis then we’ll never go in a loss at the end of the month. But how do we increase the probability of a profit? By looking at the charts and seeing what the positives in the chart are and what are the negatives.
We are looking at the chart of Nifty everyday and are seeing that there are more negatives than positives. We know that we are in a short term downtrend, an intermediate downtrend and a possible (but still not confirmed) long term downtrend. We cannot go long and make profits, unless the trend changes to up. And that will happen sequentially, which means that first of all, the short term trend would turn upwards, then the intermediate term trend would change and then the long term trend. So, we should be willing to take positions when the short term trend changes to up. But the short term price movements are sometimes very sharp, so we have to be ready and should be waiting at the sidelines to enter whenever the short term trend changes to up. This means that we should know in advance that what is the level after which the trend will change and what is the probability that it is a true breakout. That is where technical analysis comes in handy.
Now, let us look at the positives and negatives in the chart above. The negatives first. As seen on the chart, the Nifty is finding resistance near the blue downward sloping trendline which is currently near 4675. The last pivot high was the high of the day today which is 4734. So, if the Nifty were to cross 4734, we would be in a short term uptrend. But from the chart shown in yesterday’s newsletter, we saw that there was a very strong trendline near 4750 on the daily charts and that is more likely to push the Nifty back than the short term uptrend pushing it up. And then there is the Relative Strength Index (RSI) which has made a bearish head and shoulders pattern, though it has not been confirmed as yet.
Now let us look at the positives too. One, the Nifty is finding some decent support near 4480 and it is likely that it may find support around those levels the next time it goes there. The second positive factor is the positive divergence visible between the price and the RSI. This means that the price is continuing to make lower lows while the RSI is making higher lows. This is a positive sign and signals that a change of trend MAY be near. And the third positive thing is that the last candle today is a doji which means that the opening price and the closing price of the last candle is almost same. We know that dojis are known to occur (mostly, though not always) at the end of short term declines/rallies. While dojis hold more significance on daily charts than on 60 minutes charts, yet the presence of a doji is a positive.
So, looking at the short term charts there are more positives than negatives. Yet, we cannot rule out the presence of a strong resistance line at 4750 on the daily charts. Under these circumstances, it may be advisable to wait until the price decisively breaks 4750. Though, unhedged long positions are not advisable on the Nifty now, yet buying some calls may not be a bad idea.
Seen above is the daily chart of Nifty and, as can be seen, the Nifty has now reached the bottom end of the range at 4200. It is expected to find support at these levels, unless it proves otherwise. In the bottom half of the chart is the Relative Strength Index (RSI) and that shows that it has not yet reached 40 (it is at 42, to be precise). The price at the support level and the RSI still above 40 may indicate that the support maybe respected by the markets. In case they don’t and 4200 is broken decisively on the charts then we may be staring at 3800 in the face.
