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.
Showing posts with label Technical Analysis. Show all posts
Showing posts with label Technical Analysis. Show all posts
I had to go out in the evening somewhere and have just returned home and we are already closing in on midnight. While I have access to internet and charts at home, detailed analysis is likely to take time. So, will not go into any commentaries of any sort today. Will just throw in a couple of charts and leave a few comments on the charts itself.
Nifty Daily Chart
Nifty 30 minutes Chart
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Let us understand technical analysis in a different way today. We always knew that technical analysis is the study of charts and trying to predict the future. But does it work? Is it accurate? How often does it work? What is the probability of making a profit every time? What is the probability of being profitable after a year? Well, we have all the answers here. Come, let us understand probability in very simple terms.
We all have been studying since grade 6 that probability means the likelihood or chance of an event happening or not happening. We all know the example of the flipping of a coin and throwing a dice or drawing a card. For those who don’t know, here it is. When we flip a coin, only two possible things can happen. Either we get a heads or a tail. Since there is one chance of getting a heads out of 2 outcomes, the probability is ½ or 0.5. Similarly the probability of getting a six on the throw of a dice is 1/6 or 0.1667, the probability of drawing a card of hearts from a pack of cards is 13/52 or 0.25 and the probability of drawing an ace is 4/52 or 0.0769.
But, have we ever thought what is the probability of making a profit if we pick up a stock at random? Let us see what the possible outcomes are when we buy a stock. It can either go up or come down. Which means the probability of making a profit is ½ or 0.5 or 50%, which is a very high probability. Then why do we do so much of research and ask people to give us tips or spend hours looking at charts? Just for a simple reason that we want to increase our probability of making a profit to 0.7-0.8 or 70-80%. But, does it help us? Are we able to increase our profits? Actually speaking, no. Believe me, we are still better off picking up stocks at random and let the probability remain at 50%. I will give you a very simple formula. You pick up any stock at random, have a well-defined exit strategy and an equally well defined profit booking strategy. Let us say that our rules are that we will pick up a stock at random and book a profit if the price goes up by 10% and keep a stop loss 5% below our purchase price. Believe me, with such a strategy, you will never never make a loss.
Is the above system acceptable? It is not very difficult to follow. All we have to do is to book our profits and losses as defined by our rules. I am sure, we can all follow these simple set of rules to make profits. But, before you go ahead and implement it, let us talk about the drawbacks also. Over the years that I have been involved in the stock markets, I have not only studied technical analysis, I have studied human psychology too (as it works in the stock markets). I have learnt that the drawbacks lie in your mind. Firstly, you will never be able to come to terms with the fact that you have made money. You will always be thinking that it was this system that made money. The thrill of investing in the stock markets will be missing because the decisions are automatic and not your own. Secondly, you will be tempted to book profits at 9% (or lower) instead of 10% while when it comes to executing your stop losses, you will be reluctant to do so even at 8%. Thirdly, the returns are too low – only 2.5% on your total investment. You get more in a savings account. And last, the system will work well in bull markets and will be terrible in bear markets. God save you from the bear markets if you follow this system.
So, is fundamental option the best option? Well, it does help. But it has its own drawbacks. Fundamental analysis tells you whether to buy or not to buy a stock. But it has no clearly defined entry and exit strategies. So, you may never know when to book profits and when to cut your losses. The human psychology is such that it forces you to take your profits quickly before your profits turn into losses. And if you are in a loss, you will keep riding your losses because you are thinking that you had done proper research and that sooner or later the price should follow the fundamentals, so you keep holding on to your losing positions. No doubt, on some stocks you can get profits many times your investment but in some you could lose a lot too.
That leaves us with technical analysis. Technical analysis has well defined entry and exit levels and with proper discipline you can continue to ride your profits and cut your losses early and you can make a lot of money. But like any other method, this has its own set of drawbacks. The hit rate is not very good. If you choose 10 stocks, it is likely that only 3 or 4 calls out of those 10 will come out to be correct. But the advantage is that those 3 or 4 calls give you enough profits to cover not only all your losses from the remaining 6-7 calls but also gives you enough profits to give you a good return. Many technical analysts keep trying to develop methods which will give maximum profits. I am currently developing a system which will give me small profits but the hit rate would be between 85-90%. The details of the system are ready and I am currently testing it with my own money to fine tune it a little and it can then be given to a few selected subscribers who are disciplined enough to follow it and once they have also tested it for sometime and some more fine tuning is done, it can be shared with all others. This system, for convenience sake, shall be referred to as 'System A' from now on.
We should consider our trading to be a business. The objective of any business is to make money and that’s what will be the objective of our business. Like in any other business you will have some centers which will be your profit centers (which give you lots of profits) and some as your cost centers (which earn no profits but only cost you money). The objective is to maximize the profits from your profit centers and minimize the costs in your cost centres. Similarly, in this trading business there will be some stocks which will give you a lot of profits and some which will only give you losses. So, as long as you maximize the profits and minimize the losses, you will end up in a profit. And that is what technical analysis helps us achieve. Helps us to ride our profits and minimize our losses.
We have learnt today that there are many methods which help us to make profits. But all of them have their own advantages and disadvantages. Within Technical Analysis (which I consider to be the best, though this is a debatable topic) too, there are many methods but the Dow Theory is the oldest and the easiest method of technical analysis. According to Martin Pring, as mentioned on buddycom, if an investor had invested $44 in the Dow in 1897 and liquidated his position after 93 years in Jan 1990 (pure buy and hold strategy, as happens in fundamental analysis), he would have got $2,500 after 93 years i.e. 56.82 times his investment, while another investor who invested and liquidated at the same times and who sold on every sell signal and bought on every buy signal would have got $51,268, a whopping 1165.18 times of his initial investment. That is the power of technical analysis and that shows how our probability of profitability increases with technical analysis. And technical analysis requires only one skill. Discipline.
The markets opened with a small positive bias near the highs of the day but could not sustain those highs and it wasn’t very long before they started slipping down. They made some attempt to recover in the mid-afternoon but failed and closed at the lows of the day.
Above is the 30 minutes chart of the Nifty. As seen from the chart, it currently stands at support at the blue trendline, which has been providing support to the prices for the last fortnight. There is nothing bearish about the prices as of now. What is worrying is the bottom half of the chart. That is where the bearishness is visible. While the price has gone on to make a higher low, the Relative Strength Index (RSI) has actually gone below its previous low, which is giving a bearish signal. One must be careful at these levels as the markets can come down because of this bearish divergence between the price and the RSI.
There are two things that can happen now. Either the Nifty can decide to break the trendline by going below 5150 and come down to test its lower supports (marked by the dashed brown lines at 5080, 5020, 4995 and 4950). Or, alternatively, it may move between 5150 and 5180 for a better part of the day tomorrow so that the RSI cools down some more and comes between 40 and 50 and then go on to resume the uptrend. What it will finally decide to do, we’ll only come to know by seeing the price movement tomorrow morning. If the market does decide to go up and crosses its most recent high at 5230, then we are looking at a resistance near 5300.
Divis Labs seems to have made a bullish head and shoulders pattern on its daily chart. The only hitch seems to be that the right shoulder is not very well formed. But what is heartening is, is the fact that the breakout was confirmed with a big spurt in volumes. This seems to give us a small confirmation that the breakout (and the pattern) may not be false. Consider buying at current levels with a stop loss of 1360 for a target of between 1750 and 1800.
A similar pattern seems to have been made on this daily chart of Praj Industries. Likewise, it seems to be a good buy at current levels with a stop loss of 165 for a target of near 270. Just like the chart of Divis Labs, this chart too has confirmed the completion of the head and shoulders pattern with huge volumes.
I must apologize for not posting anything on the site except for the webinar for the last two days. It was a busy few days for me since Saturday. Anyways, I am back now and, hopefully, should continue to be regular like always.
Yesterday and today morning was nervous for the markets. The RBI credit policy announcement was supposed to come out today and a major percentage of the market was expecting a hike in the repo rates to control the inflation. A hike in the repo rates would have been negative for the markets. Fortunately, the nervousness subsided and a thrusting upmove came about when the credit policy was announced and it was made public that only the CRR would see a hike of 25 basis points while the repo and reverse repo rates would be left untouched.
This upmove today was significant in the sense that it crossed the 200 day simple moving average (the green line) today. The 200 day moving average determines the trend in the long term. The price above the 200 day moving average indicates bullishness while it suggests bearishness of the prices are below it. This move should find some resistance near 5300 near the blue trendline, though, according to our earlier post, the target still remains 5441.
Cipla has broken through its upward sloping trendline with the Relative Strength Index (RSI) showing a stronger dip than the price. This may not be very good for this pharma stock. Consider closing long positions.
This is the weekly chart of Hero Honda. Now that this range has been broken, we can look at some nice upmove for this auto stock. Consider buying on a pullback to 800 with a stop loss of 725 for a target near 960.
Sterlite Industries seems to have broken through the line at which it was finding resistance. With a stop loss of 800, it seems to be a good buy at current levels for a target of near 1040.
Tata Motors, on its weekly charts, has been moving within a range of 600 and 840 for over a year now. Now that it is at the bottom of the range, it seems to be a good time to pick up this stock for a target between 800 and 840.
For all those lovers of Tata Power out there (I hope you are reading, Mr. GK), this seems to be a good time to pick up the stock (or hold it if already holding) when it has broken through its resistance line at 1360. With a stop loss of 1300, one can expect a target of near 1700.
Today was again a flat day for the Nifty with a slight negative bias. No breakouts out of the range, just stayed within it but closed near the bottom of the range at 5000. As suggested yesterday, a move below 5000 could take the Nifty to a level of 4930-4940. There is another support at 4900 and the next one at 4830. We shall have to see which support the Nifty decides to respect, if at all it were to go below 5000. An upmove shall be productive only if it were to cross 5080.
But what I found interesting in this 30 minutes chart of the Nifty was that the Relative Strength Index (RSI) seems to be finding support at 40. This may be good for the market if it decides not to break down.
Today was also the F&O expiry day. That was expected to bring high volatility and choppiness into the market. But the kind of volatility that was expected did not come about. Maybe it was because of the low volumes and open interest this month which was caused by the nervousness in the markets.
As expected, our recommendations yesterday did not go right today because the broader market remained weak. That was what we had warned yesterday that though some buying signals were there, the reader has to use her own discretion whether to take the trade or not because we were expecting the broader market to come down.
No stocks being discussed today since the Nifty is showing signs of weakness and taking long positions now may hurt our financial health. We shall wait for the Nifty to give us a buy signal before taking any long positions.
As expected, the Nifty did go down today. During the day the Nifty did try to go up but could not go above yesterday’s close. It did manage to reach there but turned down again to close near the lows of the day.
Today we have the 30 minutes chart of Nifty with us. In the last 3 days we have seen that the Nifty has remained within a very narrow range. It may be consolidating within the range. What will happen after the consolidation is over is anybody’s guess. It has support between 5000 and 5010 and resistance between 5070 and 5075. This gives us a total range of 75 points. Once the Nifty decides to move outside this range then it gives us a target of another 75 points in the direction of the breakout. Of course, these targets can easily be overshot too depending on the momentum.
Let us look at the pros and cons of this range. The pros first. The Nifty had gone up about 450 points in the current rally, on the daily charts, without any meaningful correction. A correction/consolidation is healthy for the market. We want the Nifty to consolidate and catch up its breath before it starts running again. We don’t want it to keep running, become breathless and then collapse. So in that regard this consolidation will be good for the market and the results will be known once the Nifty crosses 5080.
And the cons? The latest rally, which was today’s rally, failed to reach its earlier highs near 5070-5080 and that signifies that there is weakness in the markets at higher levels. Another interesting observation on the charts is that it has made a small bearish/inverted head and shoulders pattern within this range. This pattern, though, has not been confirmed yet. A break below 5000 will confirm this pattern. The target for this bearish head and shoulders pattern will be about 4940. At this point, there seem to be more negatives than positives in the short term.
There are a few charts which are giving buy signals and have been discussed below. But one’s own discretion is required because we are expecting the broader market to come down a little. Please note that some of these stocks may be available at a cheaper rate in a day or two but the buying signals remain valid till the stop loss level is hit.
Aditya Birla Nuvo is showing some signs of improvement, as can be seen from this daily chart. What looks positive for the stock is the support for the Relative Strength Index (RSI) near 40, as marked by the circle. A move above 1500, which may or may not come tomorrow, should be positive for this textiles stock. A stop loss of 1375 will be prudent while waiting for a target of close to 1700, where it will meet the resistance line.
Arvind Mills, on the daily charts, has broken through its resistance line accompanied by huge volumes. This is bullish for the stock. The RSI is close to 80 and it is generally advised to wait for a pullback before buying. But seeing the chart, we can see that Arvind Mills has closed near the highs of the day without showing any signs of a pullback. Under these circumstances, it can be bought at the current levels with a stop below 50 for a target of between 65 and 67.
Hindustan Constructions has been moving within a narrow range between 110 and 140 since the last month and a half. It is now near the top of the range and may break out of this range. If it does it gives us a target of close to 170. A stop loss below 125 may be safe. But this stock should be bought only if it were to go above 140. Ignore the movements in the first 30 minutes as they are subject to volatile movements more because of global cues than because of technical or fundamental reasons.
Another very interesting chart of Jindal Steel. As can be seen from the chart, the price has been making lower highs while the RSI has been making highs at almost the same level, if not higher. This is known as a bullish/positive divergence when the price is going down but the RSI is going up. Now it is close to its resistance near 2300 after a pattern which looks like a double bottom formation. Not only that the RSI which was finding resistance near the line has broken through it which gives an indication that maybe the price will follow. Buy only if it crosses above 2300 with a stop loss of 2100 for a target somewhere close to 2750.
Petronet LNG has been in a narrow range between 60 and 80 for a better part of this calendar year. It now seems to have broken out of the range, while the volumes, though increasing, remain significantly low. Not the kind of volumes one would expect to see with a breakout. So, one can take a risk using her own discretion to buy near current levels with a stop loss near 74 for a target of near 100.
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 fall 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 apex (end) of the triangle has been reached. Above 4800, the Nifty should have broken out of the triangle. And it did and stayed above 4800 for about an hour or so. But it did not give us the kind of ‘explosive’ move that we were looking for. If it does not then we shall consider this to be a false breakout. If it does go above 4800 tomorrow, which seems improbable at the moment, then we shall again be looking for that ‘explosive move’.
The world markets are in a bad shape. The Dow Jones was down about 2% while the Nasdaq was down about 3% on Friday. The Asian markets, which were all in the green on Friday, reacted sharply on Monday with the Nikkei (Japan) and Hang Seng (Hong Kong) down in excess of 3%, the Singapore Straits almost there, and the Indonesian markets down by 1.4%. The Chinese markets were the biggest losers and the Shanghai index lost almost 6% on Monday. The European markets, at 6pm IST on Monday, were down about a percent each.
The triangle remains valid between the levels of 4700 and 4770 now. Any move outside these boundaries, without any explosive move, will mean that the triangle is not valid. In all probability, unless the American markets do well on Monday night and the Asian markets do brilliantly on Tuesday morning, Nifty will open between 100-150 points down. This means that we shall be looking at an opening figure of around 4650. And that is already outside the limits of the triangle. So either an explosive down move may come which may take us all the way down to 4480 or we should find support near 4630. If we do find support at 4630 then that invalidates the triangle pattern.
But what is it if it is not a triangle. Let us look at some other scenarios as well. For that refer to the chart above. This is the daily chart of the Nifty. You can see two blue rectangles here. These are the two ranges that the Nifty is moving in. One is a broader range between 4480 and 4980 and the other is a range within this range between 4630 and 4830. One interesting point that comes to mind is this smaller range is exactly in the centre of the bigger range. The mid point of both these ranges happens to be at 4730. So, 4730 is a key pivotal point below which the markets remain bearish and above which they turn bullish. So, if the triangle is not valid then we are looking to move between these two ranges. A move outside the broader range only will signify a clear trend for the Nifty.
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.
On almost a daily basis, we are seeing one or two up days in the Nifty followed by one or two down days. This happens within a range. We have also been observing since the last three weeks that the Nifty has been making higher lows and lower highs, signs that it is going inside a contracting triangle. This triangle has been drawn in the 60 minutes chart shown below.
This triangle will be broken soon, especially since we are now approaching the apex (end) of the triangle. A move below 4650 or, on the other side, above 4830 will signify the end of this triangle and that will bring us back in the broader range between 4480 (and more recently, 4625) and 4970 which has been shown by the dotted brown lines. Assuming that this triangle is broken out on the upside at a level of 4830 then we get a target of approximately 5450. But before that we would still have to cross 4970. So, while a target of 5450 is possible but some amount of resistance should be expected near 4970.
Why have we been stuck in this trading range for such a long time? If we remember correctly the market fell sometime in Jan and now it is April. We are in the 3rd month now. Well, to be precise 77 days (calendar days, not trading days) have already gone by since we made that low of 4448 on the Nifty. I actually did an analysis of the major falls that we have seen in this bull market which started in 2003. The markets have seen major lows in May 2004, Jan 2005, June 2006, Mar 2007 and now Jan 2008. The last four times the markets came out of the consolidation the quickest (39 days) in Apr 2007 and the slowest (161 days) in June 2005. On an average the consolidation lasted for 81 days. So, that suggests we should soon be out of this range, maybe another week or two. The other occasions have also seen corrections of more than 30% but they were slower. This time we lost about 30% in a week. And a longer consolidation/base-building is expected.
We are going to be stuck in a range. It often happens that the markets may move out of a range just to get into another range. We should only buy when the markets are giving us a signal that a move out of the range is likely and that the probability of a profitable trade is higher. Of course, if the market moves against us we can get stopped out too. Getting stopped out is always possible but that is a risk one has to take if one intends winning the game of profitable stock trading.
Whenever we trade in the markets, we either make a profit or we make a loss. Without any research and doing blind trades, our probability of making a profit is 50% (though, many of us would disagree, since more often than not, markets end up giving a loss rather than a profit). With Technical Analysis, we tend to increase our probability of making profitable trades, though only marginally. Technical Analysis helps us increase the probability to about 70%. And if we follow it religiously, we end up in the green over a period of time. Sometimes, markets do go against us even after proper fundamental and technical research. At those times, it is best to get out of losing trades with pre-decided stop losses. In volatile markets, such as these days, all our research may go for a six and these are the sort of days where stop losses come in handy. But to take profits from the markets, one has to accept losses too. That is a risk which one HAS to take.
The Nifty, as predicted in my earlier newsletters, is likely to remain in the broad range of 4500 to 5500 for sometime. A clear direction of the market can be predicted only after one of these levels has been broken. Till then, global and domestic events will keep disturbing the direction of the markets. In other words, till the global situation does not stabilise, we are likely to remain within this range and volatile movements, including gap up or gap down openings, are to be expected. In the long term the market is expected to remain bullish (at least till the time Nifty remains above 4500) and investors should buy on every dip. Traders should remain cautious with stop losses and should hedge their positions, or stay out of the market completely.
Hero Honda seems to be making an inverted head and shoulders pattern and a break through the trendline should confirm this pattern. Ignoring the movement in the first 15 minutes tomorrow, if it crosses above 710 after that then this pattern should be confirmed. One could consider buying it above 710 with a stop loss below 680 for a target of about 800.
IDBI seems to have broken out of this consolidation pattern and looks like it has started its upmove. A buy above 128 with a stop loss below 115 should give us a decent target of around 150. Avoid taking positions within the first 15 minutes of the opening of markets.
Same goes for Indian Hotels. This is looking very bullish to me. It not only seems to have broken out of the consolidation pattern but also has broken its downtrending line, which suggests that the uptrend may have resumed in this. Not sure about the price, but the RSI (Relative Strength Index) making an inverted head and shoulders pattern seems to confirm that the downtrend may be over. One could consider buying it above 142 with a stop loss below 125 for a target of 170.
I wonder whether this price chart of Tata Tea can be termed as an inverted head and shoulders pattern or not. Even if we consider that it is not a bullish head and shoulders pattern, then also it seems to have finished its downtrend. Not giving any targets as such, but buying it above 800 tomorrow with a stop below 740 should be a profitable move. It may face resistance between 950 and 1000.
Union Bank seems to have made a clear inverted head and shoulders pattern. Buying above 215 with a stop loss of 195 should be profitable for one who buys it. The target for this pattern could be between 260 and 270. It may face minor resistances near 225 and 235. While buying this should be profitable, yet one should be very careful because it is often said that "Clearer the pattern, the more likely it is to fail."
Nifty 30 minutes Chart 
