Introducing A Blog On Investing!

Manish Chauhan writes about investing principles in general. I am sure friends who like to pursue a more fundamental approach towards equities will find his blog interesting. He also delves into Insurance and general investing strategies. Please read him at Finance-and-Investing.blogspot.com and Enjoy!

Weekend Views On Nifty!!!

We have had an exciting week full of wild intraday swings. Let us now see how we stand on weekly basis. The weekly chart below shows that our pullback stalled at 23.6 percent retracement, approximately at 3240 (drawn in red) calculated from point B to C marked on the chart (this ABC marking has nothing to do with any Elliot count, lest some people scream at me for getting the wrong wave count!). We have also closed below the critical 61.8 percent retracement, approximately at 3030 (drawn in blue) levels drawn from early 2003 to the top of Jan 2008. So what does it tell us? Well the broader range for now is defined as 2850 and 3250. Though 3025/50 is an important level, we really need to take out 3250 if we want to be ambitious enough to test the upper channel line at 3650/700! Anything below 2850 will put the bulls on a back foot and put pressure on 2650/2600, where I feel lays the make or break of this rally or pullback as some prefer to call it!

On the Daily chart below we have a 2 bar reversal of sorts, see the last two bars! Another interesting point is that we have retraced to 38.2 percent of the current rally and held to it for the last two days. The nearest 20 period MA is critically poised at 3030 levels approximately and is bound to provide some resistance, above that again the channel line resistance will stare at us at 3150. Keeping up with our step by step approach, let us first surpass these levels before we get talking again!

The hourly chart shows the nice double bottom (our 2B reversal on the daily), and the price is nicely nesting upon the two converging 20 and 50 period MA’s ready to take a short at then 200 period MA overhead. This a sort of convergence of strong supports; a double bottom at 38.2 percent retracement, two MA’s lined up, this should hold nicely till proven otherwise. Remember that Technical Analysis is all about probabilities!

"You will become as small as your controlling desire; as great as your dominant aspiration."

James Allen

Nifty Recap For The Day!!!

YES! We did pause for a breather yesterday, and now hopefully it shouldn’t turn to gasping, considering the fact we have made an outside reversal bar /bearish engulfing (in oriental context) on the daily chart yesterday.

A quick analysis of today’s action, Nifty was weak from the morning trade itself, courtesy the weak global cues. The late afternoon surge by bulls was met by severe resistance and now we are sitting on 38.2% retracement of the recent rally. We have a good support at 2750, from where another push can be expected by the bulls. It won’t be a bad idea to go long if you see 2725/50 holding; small position, small stop for a target of 2950/3000 for starters! Anything below 2600 can mean attempting to retest the bottom…but we will come to it later, like I said step by step!!!

One of the most helpful things that anybody can learn is to give up trying to catch the last eighth - or the first. These are two most expensive eighths in the world...Larry Livingston

Nifty Recap For The Day!!!

Voila! Our step by step approach to things worked wonderfully, its better this way, than to get excited and throw caution to the winds. I didn’t update the blog yesterday; anyways what was written on the weekend post has played out to perfection. We have approached the so called area 3175/3200 by slowly overtaking the resistances at 3050 and 3150. If you have observed the intraday action for last three days, we have had good dips and range bound moves for most part of the day, before surging in the late afternoon trades to give ourselves higher closes at the end of each day. This action has also bought down the nearest 20 period MA (on the EOD), and that is what we have kissed today. Logically we should see a reaction here, considering the fact that this is also the trend line resistance.

We are getting overbought on the hourly (chart on your left), the MACD histogram is sloping down. The crossover of the 20 and 50 periods moving averages at 2950 is a good area of support on the hourly charts, though now 3050 also might hold the fort. As far as the Daily chart is concerned, like mentioned earlier that we have approached the resistance zone and it would be a good idea to catch a breather before attempting the next up move to 3300/3350!

Another point of concern is that in all our excitement of this furious run up we have to ponder upon a few unfilled gaps we have left below. The sooner they are closed the better for us.

“The good fighters of old first put themselves beyond the possibility of defeat and then waited for an opportunity of defeating the enemy. To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.”

Sun Tzu’s “Art of War”

Weekend Views On Nifty!!!

In my last post I had mentioned that we should take step by step approach rather than jumping to fancy targets in Nifty. On Thursday it was written that 2920/50 was resistance number one, and we did make a high of 2922 and paused. The Price action had given a good buy last week but the indicators are yet to signal a buy, so if some one is waiting for a buy signal from the indicators, has already lost a significant part of the move. Now there are only two things the price can do, either it pauses (making some range bound moves) and try and make a base for itself, so the Indicators have enough time to come into buy mode and set the stage for the next up move. Secondly the price can keep on going high…in this case however the move will soon loose steam and once again we start from point number one. We all agree that Price action is supreme, at the same time I am not berating the indicators. In fact there is a way to look at this whole thing and I quote from a nice article I read once (sorry can’t remember the author) and here it goes; when an indicator or oscillator gives you a buy signal when price is also at an objective demand (support) level, that buy signal is likely to work. The key is to only take those buy signals and ignore the rest. In doing this, we are filtering an indicator through the laws of supply and demand and this is the key in using any indicator or oscillator.

Anyway moving on to the weekly chart of Nifty, we have a nice engulfing bar (impulse is blue, so removes the censure against buying). The RSI and Stochastics are both lining up for a bullish crossover, MACD though still hasn’t really got excited yet. 3025/50 is pit stop number one and above that 3200/3250 is another possibility. Any gravity defying targets can wait till we clear these two. However as for the supports I am of personal opinion that breaking 2500 will signal a fast and furious retest of the previous lows.

The Daily chart below also conveys the same picture, the closest MA (the 20 period; green line) is just above the channel resistance line. This what the price is going to test for now, let’s call this as area 3175/3200! The MACD lines are yet to give the bullish crossover, and thought the +DI and the –DI have started to move towards each other it’s the ADX that’s still above 50 which is cause of some concern! Any way before we come to this area the path looks like this 2950/3050! As for the down side I am once again betting everything on 2500 though hoping that 2650/2700 should also hold the fort.

I think it’s generally a good idea that when you put on a trade, it should be so small that it seems almost a waste of your time. Always trade a level that seems too small...Mark Ritchie

RSI! A Different Perspective!

This week end I had time for some leisurely and informative reading. Yesterday I had posted some stuff on MACD, today I am posting some thing on RSI. I found this a little fascinating, will see how it fares though when looking for trade set ups. Devised by Welles Wilder in 1977, the Relative Strength Index (RSI) is one of the best known technical indicators. The RSI is a momentum oscillator measuring the rate of price change. The RSI can help a trader identify when price is overextended in one direction or another; these levels are generally accepted as overbought or oversold. I myself have been using it for OB and OS levels and looking for price patterns in RSI, which I find give you a sort of a forewarning. Another good way is to look for Divergences (Regular & Hidden) in RSI. However, the RSI is much more than a simple overbought/oversold indicator. It can be used to anticipate trend change and identify high profit, low risk trade opportunities. Andrew Cardwell, president of Cardwell Financial Group Inc. has taught his RSI course to many individual traders across America and Europe. Following are the concepts he uses while using RSI in trading.

TREND ANALYSIS WITH MOVING AVERAGES

1. Close Price
2. RSI Value
3. Simple (S), Weighted (W), Exponential (E)
4. Suggested Values for Moving Averages to be applied to both the Price and the RSI:
1. Standard (Intermediate-Long Term) 9 & 45 (S/W/E)
2. Short Term 4/20 (S/E)
3. Short Term Overbought/Oversold SMA 3 (RSI 3)
5. Guide Lines for Moving Average Interpretation
1. RSI Positive (+)/ Close Positive (+)= Trend is Up
2. RSI Negative (-)/ Close Positive (+)=Trend is Sideways /UP
3. RSI Positive (+) / Close Negative (-)=Trend is Sideways/ Down
4. RSI Negative (-) / Close Negative (-)=Trend is Down

*Here RSI Positive and Close Positive mean that both the RSI and Price are trading above their respective moving averages and vice versa in case of negative close.

BASIC TREND ANALYSIS GUIDELINES USING RSI

Uptrends	Downtrends
1. 80 – 40 RSI Range	1. 60 – 20 RSI Range
2. Bearish Divergence	2. Bullish Divergence
3. Positive Reversals	3. Negative Reversals
4. Spike Bottoms (RSI & Price)	4. Spike Tops (RSI & Price)
5. Moving Averages Positive (Close, S9 > W45	5. Moving Averages Negative (Close, S9 <>

6. Moving Averages Positive (RSI, S9 > W45

6. Moving Averages Negative (RSI S9 <>

7. Intermediate Moving Averages Positive: EMA45 (RSI) > 50 Level Close > EMA45 (Close)

7. Intermediate Moving Averages Negative: EMA45 (RSI) > 50 Level Close > EMA45 (Close)

I hope the above piece is useful to readers, I just share what I feel can be of some interest to people the way it has been to me. Some basic reading about RSI can be done here.

A good trader has to have three things; a chronic inability to accept things at face value, to feel continuously unsettled, and to have humility...Michael Steinhardt

MACD! Some Addittional Rules!

The Moving Average Convergence-Divergence (MACD) is a timing model, which was invented during the late 1970s by Gerald Appel, has become one of the most popular of technical tools, used by short- and longer-term investors in the stock, bond, and other investment markets. It is a featured indicator on virtually every computer-based technical trading program and trading platform. MACD is an indicator for all seasons. Many of us use MACD for simple crossovers or looking for Divergences but there are certain very significant supplementary additions to the basic rules relating to MACD buy/sell signals which Gerald Appel describes in his book Technical Analysis: Power Tools For Active Investors. These are as following:

• Buy signals are much more reliable when the MACD has crossed from above to below 0 at some time since the most recent sell signal. The MACD does not have to be below 0 at the time of the buy signal, but it should have been below 0 at some time since the start of the recent decline.

• Sell signals are more reliable when the MACD has crossed from below to above 0 at some time since the most recent buy signal. The MACD does not have to be above 0 at the time of the sell signal, but it should have been above 0 at some time since the start of the most recent advance.

• During very strong market periods, usually during the early and best stages of bull markets, the MACD will retreat during market reactions to a level just above 0. In this case, you can shade the previous rules a bit as you might if the MACD tops out just below 0 during a bear market or severe intermediate decline. Most often, however, the 0 crossing condition should be respected.

A very important rule, if there are no divergences – means that MACD lines and Price lines are moving in conjunction and trends of the markets are favorable with Price rising above its MA you can ignore the first sell signal generated by the MACD. YOU SHOULD HOWEVER TAKE THE SECOND SELL SIGNAL!!!

The above rules help you in setting procedures by which you can buy weakness and sell strength rather than buying and selling every change in minor trend and this also reduces the frequency of trading.

In addition to above Gerald Appel also advocates the following:

• You should maintain at least two MACD combinations: a faster one for buying and a slower one for selling.

• When market trends are very positive, buy very fast and sell very slow. You can employ the 6–19 combination for buying, or you can employ the somewhat more reliable 12–26 combination. The 19- to 39-day combination is used for selling.

• When market trends are neutral to somewhat positive, buy fast and sell slow. Use the 12–26 combination for buying. Use the 19–39 combination for selling.

• When market trends are clearly negative, buy fast and sell fast. You can use the 12–26 MACD combination for both buying and selling, in which case you will sometimes be selling before the slower-moving 19- to 39-day MACD has crossed from below to above 0. However, unless a stop-out takes place, the 12–26 MACD lines should generally rise above 0 as a precondition for a sell.

Hope this little write up is useful to friends who like me are avid users of MACD in their technical analysis. Some basic information on MACD can be found here.