Ideal Portfolio

The CME Group publication, "Managed Futures, Portfolio Diversification Opportunities", shows a portfolio with the greatest risk and least returns comprised of 55% stocks, 45% bonds, and 0% managed futures. In contrast, a portfolio exhibiting the greatest returns and least risk, comprised 45% stocks, 35% bonds and 20% managed futures. http://www.cmegroup.com/education/files/ManagedFutures.pdf
Chicago Mercantile Exchange published a study concluding that a portfolio with 20% in managed futures yields up to 50% more than stock and bond portfolios, while possessing comparable risk.

To achieve this suggested portfolio mix, an investor should consider allocating 20% of their financial portfolio assets to a managed futures account

Dollar Index

The dollar index has broken above its 50 day moving average. From the chart above notice the inverse correlation between the dollar index and the equity markets. When the dollar index rallies the equity markets crash and vice versa.

Another sign that a top could be in place and we are all set for the next leg down of the bear market.

Nifty rangebound...sharp move expected

Nifty has been rangebound for few weeks now...traders have been getting stopped on both sides....Generally such a convergence/consolidation is followed by a sharp breakout or breakdown...who is going to take control this time bulls or bears? Probability favours the bears...

Market Update

Technically, the Nifty is showing strength, but signs of getting tired. The bull market is now running on speculation and emotion, and there is no fundamental support under the market.

The Dubai event is a good example of the kind of thing that has the potential to start a wave of selling. There are probably hundreds of them waiting in the bushes. Taken one at a time, they may only cause a momentary ripple. If too many pop out at one time, it could end in disaster.

Nifty volatile but trend is UP

The Nifty has been rangebound and volatile for the past few weeks. Currently the trend is UP and we have to respect the trend. A correction may be on the cards but that correction might come at 5200 or might come at 6000. The market is all supreme and we have to learn to follow what the market is telling us.

We can look at staying long as long as 5050 is not broken.

US heading towards bankruptcy - shorting opportunity of a lifetime

US Debt including unfunded obligations is around $100 trillion
http://www.usdebtclock.org/
http://brillig.com/debt_clock/faq.html




The Guidotti-Greenspan rule states that reserves should equal short-term external debt (one-year or less maturity)for a country to avoid going bankrupt.

The USdoes not have reserves to pay the financing costs for the enxt 12 months.

The fact of the matter is than anybody who is overleveraged be it an individual, a company or a country (like what happened in Dubai) is at high risk for bankruptcy.

The US is on the tip of a massive collapse. Great fortunes can be made by shorting the DOW/S&P. It's just a matter of time before this situation pans out.

Keep an eye on the Dollar Index

The Dollar Index and the Nifty work roughly inversely to each other....the correction in the Nifty (whenever it happens) will be observed by the Dollar index strengthening

The reason for that being as Investors flight to safer assets ...they will sell equities, crude, gold, real estate etc and move to cash (dollars)...

We definitely have some interesting times ahead...the best trending moves happen in times like this...there might be some volatility ahead but we will observe some trend soon...

Absolute return vs Benchmarking

An absolute return trading strategy is one which attempts to make the most money possible without being limited to a comparison to a typical index such as the Nifty, Dow etc.

Relative return managers are measured how they perform relative to some pre-determined benchmark like an Index.

In my opinion, benchmarking severely restricts a Portfolio Manager. You are a part of a herd and that is what we don't want to be a part of.

Is Dubai the next bubble to go bust?

Dubai is on the verge of defaulting on its 50 billion pound debt. This could be the latest bubble and trigger off the next down leg in the market.

http://www.thefirstpost.co.uk/56620,business,is-dubai-about-to-default-on-its-50bn-debt

All around we are surrounded by bubbles. Gold, crude oil, stocks. When the next leg of the bear market gets underway it is going to be a bloodbath.

Wall Street's Naked Swindle

An interesing story on how somebody with insider information at the highest level on the Bear Sterns collapse made billions using put options

http://www.rollingstone.com/politics/story/30481512/wall

DOW at 50% retracement of fall from 2007

The Dow and the S&P 500 having retraced 50% of their bear market declines and are testing major down trendlines drawn over 2007/2008 peaks.

Société Générale tells clients how to prepare for potential 'global collapse'

http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html

What is a bear market?

Anyone who invested in stocks in mid-1929 in US and held onto them would have to wait for almost his entire life before getting back to even.

Most people have only seen bull markets in the last 30-40 years and hence the bullish bias in analysts.

A prolonged bear market can be brutal and destroy a person's lifetime of investments. Today nobody can say with 100% certainty whether the current rally is a new bull amrket or a bear market rally. The nifty can be testing 2200 soon or could be touching 7000 also. We should be ready for either scenario.


All asset allocation decisions should include a strategy to profit fom falling markets.

Volatility - good or bad

It is not easy to develop a trading model that is not volatile and also gives high returns. Volatility is what creates the high returns investors want from the market in the first place. Investors become so frightened by viewing peaks and drawdowns. In systematic trading with a positive edge big swings in equity are very much anticipated and do not signal a loss of control.

Trend following models have 2 requirements: The need to preserve capital during losing periods so you can stay in the game until a winning period and the need to preserve psychological fortitude to keep playing.

Nifty trend is UP..again!

The Nifty trend is up...again....after a V shaped recovery from 4550 levels

So is it different this time? Will the Nifty continue going up without correcting significantly?

The more long lasting the trend, the more violent the end. The trend is your friend until it ends. And they ALWAYS do.

However the trend is UP now and we must respect the trend. As long as the Nifty remains above 4900 it is safe to be long.

Asset Bubbles

Central Banks worldover are stimulating the economy by printing large sums of money. That is the reason all asset prices are going up like a bubble - Gold, DOW, Emerging market equities etc. What happens to a bubble when you stop inflating it? It deflates

Someday that will happen

Back to the Nifty...We have retraced 61.8% of the fall from 5182 to 4539. So we might find some weakness for the next few days. Let's see.

120 bank failures in USA so far in 2009

5 more banks failed on Friday bringing the total to 120. The entire story can be read here:

http://www.marketwatch.com/story/another-bank-fails-in-georgia-2009-11-06?siteid=rss&rss=1


We are in the middle of the biggest recession since 1929 and what happens in the future should make 1929 look like a walk in the park. Once the current bear market rally is over in the US, the DOW should have a nice journey downwards. A jouney that will be fast and ferociious.

Patience and Discipline - key traits for trading

Jesse Livermore:-
"The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight."

What causes a market to go down?

A stock needs buying (for whatever reason - fundamentals, technicals, hedging, speculation) for it to go up

When the buying stops( for whatever reason) it falls. And it falls much faster than it takes to rise. This is what is happening now.

This cycle keeps repeating.

Nifty targets for retracement

Nifty has completed its wave 5 up peaking at 5170 levels

Target for wave down is 3916/3707/3363

Short term risk of a sharp sell-off in the coming weeks is extremely high

Another one bites the dust

CIT bankruptcy could weaken sentiments. Are we seeing a Lehman type scenario here where there was a huge crash after Lehman went bankrupt.

http://www.bloomberg.com/apps/news?pid=20601087&sid=awJj2p2GTk.I&pos=1

VIX points to increased volatility ahead

Fasten your seatbelts. CBOE Volatility Index has biggest percentage jump in a year

http://www.reuters.com/article/marketsNews/idCNN3043425420091030?rpc=44

What is VIX?

VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from this volatility by selling options. Often referred to as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.

http://www.cboe.com/micro/VIX/pricecharts.aspx

http://www.indexindicators.com/charts/sp500-vs-vix-5d-sma-params-3y-x-x/

The trend is DOWN

Imagine yourself running northwards. Suddenly you change your mind and want to run in the opposite diection. For that you slow down a bit, come to a halt and then turn and start running southwards. Gradually you build up speed till u reach your desired speed of running.

The market behaves in a similar manner. Till now it was heading higher and higher. But the momentum was waning. There were many signs of the market getting tired. It has now started heading southwards.

Will it continue southwards? It has a high probability of heading southwards all the way down to 4000/3600. This could be the correction I have been anticipating because retail had turned bullish inally. But the market might change its mind and start heading upwards again.

Keep a stop loss and trade short. There could be a lot of money waiting for you in the days ahead.

Losing Trades - Why we must Accept Them

No-one can make winning calls 100% of the time, no matter how good a trader they are.

Losing trades are part of the game. The key to success is to manage your losses by cutting them early and keeping them small, whilst either letting your winning trades run for as long as possible, or making sure they at least exceed your losing trades.

Let me give you a few scenarios to demonstrate this point:

Trader A is a short-term trader who looks for 20 Nifty points per trade and uses a stop loss of 120 points to give himself every chance of hitting these targets. His winning success ratio is an impressive 90% and he averages 10 trades per week.

Trader B is also a short-term trader but he is much more cautious. He looks for profits of 25 points and uses a stop loss of 10 points. His success ratio is just 50% and he also averages 10 trades per week.

Trader C is more of a position trader. He looks for profits of 150 points per trade and uses a stop loss of 25 points. His success ratio is just 20%, ie 80% of his trades are losing trades, and he too averages 10 trades per week.

Which trader is the most profitable?

Well let's work it out:

Trader A, who has the highest amount of winning trades (and probably the biggest ego), averages 60 points per week.

Trader B, who is only right 50% of the time, averages 75 points per week.

Trader C, who is only able to identify winning trades 20% of the time, averages 100 points per week.

The point I want to make is that you don't need to spend your time looking for trading methods that have very high success ratios. Losing trades are not necessarily a bad thing. As long as your winning trades more than compensate for your losing ones, you are always going to come out ahead, even with a relatively low success ratio.

Happy Diwali!

May your happiness & prosperity rise like the Sensex, worries crash like the US Dollar, Health be as stable as Gold. Happy Diwali to All!

Diwali 2008 vs Diwali 2009

What a change in sentiment between Diwali 2008 and Diwali 2009.

Diwali 2008 everyone was morose and convinced the bear market is here to stay. It also coincided with the best time to enter the market and would have given 100% returns in 12 months

Diwali 2009 - everyone is happy and bullish. People's PMS and Mutual fund investments arecoming back to positive (basically 0% return over 4 years but people are still relived to have no losses). The last few bears are turning bullish.

Conclusion - be careful. We might be entering the last leg of the bull rally

When I say might it is because as a trader we have to be open to both possibilities. that is the beauty of stop losses.

Currently I am long in the Nifty and riding the rally. How do we know the market has turned bearish and time to go short? The market will tell us - and I will let you know. Just keep watching this space.

Smart money vs Retail

The market is expected to TOP between 5300-6000 before the crash downwards to 3600 levels...but for the top to happen the insitutions need to offload the stocks to retail...so when a flurry of IPO starts & NFO starts....the crash should start...Ultimately the market is a very efficient mechanism of transferring money from retail to the hands of the big Institutions

Have you ever thought who was buying to drive the market up from 2200 to 5100? Ask 100 of your friends, relatives, local brokers etc...all were bearish...its the smart money which always makes money...

Retail will enter now as the social mood is bullish...once again observe the 100 people around you...all are running for the IPOs and NFOs...once again very close to the top...markets are the same today as they were 100 years ago and will be the same way 100 years from now...

Jesse Livermore's Trading Rules

Here are the stock trading rules that made Jesse Livermore's one of the world's greatest fortunes. Many successful stock and commodity traders still base their methods on these rules.

Livermore constructed his rules over several years, while learning by trial and error what worked on the markets. He was guided by one of his favorite principles:

"There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."

Trading Rules
Buy rising stocks and sell falling stocks.
Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it's rising you should be long, if it's falling you should be short.
Co-ordinate your trading activity with pivot points.
Only enter a trade after the action of the market confirms your opinion and then enter promptly.
Continue with trades that show you a profit, end trades that show a loss.
End trades when it is clear that the trend you are profiting from is over.
In any sector, trade the leading stock - the one showing the strongest trend.
Never average losses by, for example, buying more of a stock that has fallen.
Never meet a margin call - get out of the trade.
Go long when stocks reach a new high. Sell short when they reach a new low.

Other Useful Trading Guidance
Don't become an involuntary investor by holding onto stocks whose price has fallen.
A stock is never too high to buy and never too low to short.
Markets are never wrong - opinions often are.
The highest profits are made in trades that show a profit right from the start.
No trading rules will deliver a profit 100 percent of the time.

Let your profits run!

One of the biigest mistakes made by traders is to take profits early. Visualise this scenario...3 months of average losses and winners...2% loss, 3% gain, 2% loss, 2% loss etc...so basically nothing at the end of 3 months or maybe 10% down....a trade comes and you are 10% in-the money. 9 out of 10 people will book the profits before their system tells them to. And that trade is the trade of the year that gives them the 30% move they have been dreaming of.

They say you never get poor taking profits. True. But you never get rich too.

Follow your system. Cut your losses and let your profits run. In most cases you will exit lower than the peak...but those 2-3 big trades in a year will make your day and make trading so worthwhile and profitable.

Nifty UP move continues

Nifty continues its move up and broke out of a narrow range it has been in for the last few days. The trend is clearly UP and its best to stay with the trend till the market tells us that the trend is now DOWN. The trend is your friend till the end when it bends!

The next target for this up move is 5300.

Stay Long or be wrong!

The current trend for the Nifty is UP. There is no point fighting the trend. Most of the retail investors or fund/wealth managers i interact with are convinced of a crash. So they are sitting on the sidelines or the more aggressive ones are short. No one can rule out a crash and i personally feel a correction will happen after Nifty reaches the 5500-6000 territory but it is best to let the market tell us that.

the Nifty has tested 5000 yesterday. If it closes above 5000 convincingly next week there will be euphoria. Retail who has been left out of the rally will throw their towels and jump in. The climb from 5000-5500 may be very swift.

As of now the trend is UP - so the current motto is Stay Long or be wrong.

Nifty targets based on Elliott wave count

1) Long term target for the Nifty based on Elliot wave count and Fibonacci predictions

We are now part of the 3rd wave which started in October 2008. Targets are 13,000 for this wave and 20,000 for the 5th wave over the next 5-10 years



2) Short term target for the Nifty based on Elliot wave count and Fibonacci predictions



We are now part of the 5th wave in the smaller timeframe. The target for this move is in the 5400-5600 region



Please note - these are projections. However the market is a strange creature and does what it wants. It is prudent to trade with stop losses with the intention to protect capital.

SP500 at PE of 129

The PE of the S&P500 is 129...an all time high.

Pls click here to see an interesting chart of PE for the last 80 years...it normally remains upto 25...a very good indicator of the kind of crash that lies ahead in the US markets....
http://www.chartoftheday.com/20090821.htm?T

Nifty bearish

Nifty has become bearish on 18 August...We have been rangebound between 3900 and 4700...a move outside these points will decide the intermediate direction of the market....we are at a critical juncture now....but as of now the trend appears bearish...

Colonial bank fails - 6th largest failure in history

US banks seems to still be having trouble. Colonial bank failed on August 14th - the 6th largest bank failure in hsitory.

http://money.cnn.com/2009/08/14/news/companies/colonial_bancgroup/?postversion=2009081500

My sense is we are just at the tip of the iceberg as far as US is concerned. US is in a very bad hsape and there will be many more bank failures in the coming months. The charts are extremely bearish and the current rally seems to have got the fundamentalists bullish again. They might cry very loudly...again!

In Asia, China seems to have an intermediate top in place. The next few weeks could see a sharp correction. China govt has pumped in so much credit in the system that a crash is imminent.

Nifty to continue uptrend if goes above 4590

Thursday and Friday's decline in the Nifty appears to be a pullback. The trend is currently UP. If the Nifty crosses 4590 on the upside the uptrend will be confirmed and traders can inititate fresh longs. A break over 4730 which the Nifty has tested thrice and failed in the past will result in a massive short covering and taking the Nifty to new highs.

This is the ideal scenario on the upside.

If the Nifty moves sideways and continues to go down, failing to cross 4590, we might see some downwards momentum.

Overall, the trend in Nifty is UP over the medium and longer horizons. The DOW is bearish over the longer horizon. While a major correction in the DOW or Asian markets will always result in the Nifty correcting short term, at some point the Nifty is going to decouple from the DOW and other global markets and continue its upward trajectory.

50% US mortgages underwater by 2011

The next wave of declines in the housing market in the US seems ready to unveil.
About half of US mortgages will have negative equity (price of the house less than the amount owed to the bank) by 2011. The entire article can be read here

http://www.reuters.com/article/businessNews/idUSTRE5745JP20090805

The bear market in the USA might be here to stay!

Excess liquidity in China

The entire financial meltdown which started in 2008 was due to excess liquidity. it was a credit crisis. Credit is cyclical and periods of excess credit will be followed by meltdowns. Govt will again increase credit to solve the problem and once again we will have excess credit and then a meltdown.

China is having a strong rally currently. The chinese banks have pumped so much liquidity into the system and are lending at levels far higher than 2007-2008. One shudders to imagine the kind of crash the Chinese stock market is setting itself up

Nifty bearish in short term

As I write this post Nifty is at 3918. Nifty could easily decline to 3700-3750 levels as part of a 38% retracement of the rise from 2300 levels to 4700 levels.

Large US corporate bankruptcies accelerate

The bad news continues from the West despite the govt printing money like nobody's business.
http://www.reuters.com/article/wtUSInvestingNews/idUSN1628717520090616

The long term charts for India are very bullish, but in the short term the direction looks downwards.

Return of the bears!

Todays breakdown from the trading range of the last 2 weeks has important ramifications:

1) Nifty has broken below 34 day EMA. If this hold this could be bearish
2) Nifty had formed a head-and-shoulder pattern and it has broken down. The target could be 3600 levels
3) If we break the low of 26 may - 4090 then this could further reinforce the bear market. The gap that was created by the gap-up on 18 May looms ahead.
4) There is a global sell-off happening

Elliot wave enthusiasts are talking of wave 3 of 3 which is the most brutal.

This could prove to be the end of one hell of a bear market rally. We seem to be back in bear-land. Be prepared to make money by shorting!

We are in a manipulated bull market

There is an interesting article on how greed at Goldman Sachs is linked to ruin of millions of people and economies.

George Bush’s last Secretary of the Treasury was a former CEO of Goldman.
Bill Clinton’s Secretary of the Treasury, Robert Rubin, spend 26 years at Goldman before becoming Chairman of Citigroup and they got 300 billion from Paulson.
Goldman employees paid nearly $1 million to elect Obama.

The entire article is here:

http://www.correntewire.com/great_american_bubble_machine_0

Nifty has support at 4100

Nifty today touched a low of 4155 before bouncing back....It has significant support at 4100....Below 4100 it could retest the lows before the gap up happened on 19 May i.e. go down to the 3600 levels..

Its a cycle!

Fear and greed in action. Investment banks in UK are again hiring traders with aggressive bonuses..are we ready to start the cycle again?
http://www.ft.com/cms/s/0/13ce71c6-5fdd-11de-a09b-00144feabdc0.html

Beware of misleading headlines

I just saw a headline Real Estate up 170% in 3 months

Say a stock falls from Rs 100 to Rs 10...ie 90%
Then it rises from Rs 10 to Rs 27...ie by 170%

It is still down 63% from its peak
Most people don't realise this...they just read the headline that real estate is up 170% and think the next bull market is underway

So please treat such attention grabbing headlines with caution

Nifty breaks out of range

Nifty has broken out of the trading range 4450-4580 which it had been confined to for many days. It had broken out a few times before too only to come back into the range again. Let us see if it comes back into the range or continues its downard journey to 4097 and below!

Strange phenomenon

In rising (bull) markets, people are hoping for a correction because they didn't get the change to buy.

In falling (bear) markets, peope are hoping for the market to rise because they didn't get the chance to sell.

As I write this article the Nifty Futures is trading at 4669.

Most people are nodding wisely and saying the market will correct. What if it continues to 6000? These people will eventually jump on only to find the market fall after they have jumped on. This cycle will keep repeating itself.

Nifty is back in the range

Nifty is back in the range from 4450-4580. It broke upwards on the 4th and downwards on the 8th but both times returned soon into the range. There will be a breakout or breakdown soon. Time will tell which way Nifty decides to go. As always, we will try to follow it rather than predict which way it goes!

A few trending stocks make all the market's gains

Testing on historical data across stocks in Sensex, Nifty, dow, FTSE has proved the following:

1)Most stocks (about 70%) underperform the Index during the course of their lifetime.

2) A small subset produces all of the markets total gains.

This is because losses cannot be greater than -100% but returns can be far greater than +100%.

Every investor in the market feels he can outperform the market. Please analyse your portfolio and see the overall CAGR (compounded annual growth rate) from the time you FIRST started investing till date. You will be very lucky if it is more than 7-8%. It is probably better to put money in a FD. or switch to momentum based trading if you fancy 50% plus a year.

Nifty trading - 2009 performance so far

Results of Nifty trading in 2009 using short term high probability momentum trading based on Technical Analysis:

January 2009 - 14.8%
February 2009 - 0.6%
March 2009 - 4.8%
April 2009 - 22.1%
May 2009 - 12.6%

2009 YTD - 54.9%

Treat the market as thy friend and not thy enemy

This is to all those who were short on the market before the Nifty hit the circut on 18 May 2009....short covering further propelled the Nifty to higher highs. As of 1 June close, the Nifty is at 4549. Those who were short have lost substantial amount of their capital and many have got wiped out...once again.

The current momentum is up both in the short and intermediate time frame.

Listen to what the market is saying. Elliott wave enthusiasts are predicting the Sensex will touch 100,000 in 15 years. Retail investors have once again got interested in the market. FIIs are pumping in money again.

Whether such a scenario of Sensex 100,000 pans out or not, try and FOLLOW the market rather than PREDICT or OUTSMART it. Buy-and-hold doesn't work as timing the market is impossible. THE CAGR (Compounded Annual growth rate) for a buy-and-hold strategy in most cases works out to be less than a Fixed Deposit.

The Nifty started at a base level of 1000 in 1995 and is currently at 4000. The CAGR for this works out to be around 10% before taxes. Can you outsmart the market and make more than 10% CAGR by following buy-and-hold strategy? If yes maybe Warren Buffet needs your help cause he too is facing problems with this strategy.

Bear Rally?

The Nifty has rallied smartly in the past few weeks from a low of 2525 on 6 March to 3687 on May 16. The media is glorifying this by saying this is a 46% increase. A few points regarding this:

1) If something falls from a high like say 6000 to 2200 any rise above that from 2200 will be a huge percentage gain. But it is still a huge drop from the 6000 levels
2) There are very few "lucky souls" who bought at 2200 levels when the market was gripped with fear
3)So is this the start of a bull amrket. if one were to do a simple Fibonacci Retracement Analysis from the high of jan 2008 to the fall to 2228 on 27 October 2008 one will observe that 3800 levels is a 38.2% retracement of the fall.

A bear market is characterised by strong rallies. 30-40% up moves are very common from the lows. Only time will tell whether this is a bull market starting or a bear market rally. As a day trader, frankly I don't care. But my advise to traders and investors is to be careful and always have your stops in place.

The market is a beast

Someone once said the objective of a bull market is to advance as far as possible without any people getting in. A bear market falls as low as possible without many people getting out. The typical investor gets interested in the market at the top of every bull trend and get scared out at the bottoms. Also at the beginning of a bull market most people are traders. At the top they were all investors.

This is the reason 95% of people lose money in the market.

Buy-and-hold doesn't work except for a lucky few.

Question: How do we make money then?
Answer: Short term momentum trading using Technical Analysis

Nifty continues its upward momentum

Nifty Futures is in an uptrend, closing the day at 3652. This uptrend started on 20 March when Nifty was 2768. Is this a bear rally? Not an easy quetion. Nifty faces huge support at 3200. If it breaks 3200 it will be a downtrend. Obviously this 3200 figure will change with time.

This recent rally reinforces the need for a stop loss. All the traders who were short on the market without stops are now facing margin calls and still hoping for a test of 2200. Only time will tell if that will happen but the message is "protect your capital". Keep your stops in place.

Socionomics

Major stock market trends mirror the ups and downs of society’s overall mood state – or social mood, as it is termed it in the new science called socionomics. A rising (bull) market indicates improving social mood, while a falling (bear) market signals that society’s overall mood is worsening.

Of course, social mood as the driving force behind stocks, economy and cultural trends turns the conventional idea of causality completely on its head. For example, it means that investor confidence doesn't follow the trend in the stock market; instead, stock market trends follow investor confidence. News doesn't create stock market trends; social mood determines both the character of human events and the trend in stocks.

The entire article can be found here:
http://www.elliottwave.com/freeupdates/archives/2009/04/30/Swine-Flu-and-Elliott-Wave-Analysis-Updated.aspx

Nifty to test 3500

Nifty has been in a trading range from 3300 to 3500 for the past 2 weeks. Today will be a day to see if the 3500 resistamce holds or there is a dip. If 3500 breaks then it will be a continuation of the momentum which is UP now.

Nifty to gap down today

US and European shares have fallen sharply after the biggest bank in the US reported a big increase in the amount it needed to cover bad debt.

http://news.bbc.co.uk/1/hi/business/8009280.stm

The news on the street is as follows:

The entire U.S. banking system is in a state of utter chaos! Among what we’re hearing:

16 of the biggest 19 banks are virtually insolvent


If just two of those banks go under, the FDIC is finished


The crisis is much bigger than anyone has admitted thus far — with upwards of $5 trillion at risk!

The recent rally in the Nifty may be just a bear rally and the momentum may change from today. Interesting times and high volatility ahead!

Patience is key for Systematic Trading

On Wednesday my Nifty Intraday setup made 130 points. With 2x leverage thats 8%. In one single day.
Feb and March have been overall slow months giving about 2-3% per month. Which by itself is not bad. But April has been amazing so far and up 10% already. The thing about any systematic trading setup is to be disciplined and have patience. Over a 6-12 month horizon you will get these moves of 8-10% each which help make trading so worthwhile. Getting 50% plus a year is very easy with Nifty Intraday trading. Just manage your risk and be patient - the market will reward you.

A happy holiday weekend to all!

Nifty in an intermediate uptrend

The Nifty on Thursday has closed above its 34 day Moving average. The intermediate trend is up. This could change but as of now the trend is upwards and positional traders should trade with the trend.

Whether this is a bear rally or bull move time will tell and these discussions are best left to the "experts" on TV.

Ours is not to reason why
Ours is just to trade...let other cry

The bear market we are in has completely destroyed the long-held belief that you can “buy and hold” your way to real wealth. It has become a short-term trading market, and those investors who understand that… and can act on it… will have a chance to prosper this year.

News that could make Nifty retest 2200

US threatens bankruptcy for GM, Chrysler. The entire article can be read here.

http://online.wsj.com/article/SB123845591244871499.html#mod=rss_whats_news_us_business

The Nifty is currently in a short term downtrend. If it breaks 2900 it could go much lower.

buy the dip, sell the rip

3 words that have made most people poor: buy-and-hold
6 words that can make you rich: buy the dip, sell the rip

Even Warren Buffet has changed his style - he dumped Procter & Gamble in December.
Stop investing, start trading. You will be rich soon!

US markets rally

the S&P500 rose 7 percent, reacting to a new bank rescue plan.

http://www.ft.com/cms/s/0/7e0a2e32-17a7-11de-8c9d-0000779fd2ac.html

Back home, the Nifty has already rallied significantly in the last 10 days. There is significant resistance at the 3000 level. It will be interesting to see if it holds.

Greedy bankers to face 90% tax

There is a proposal to impose 90% taxes on bankers who earn huge bonuses.
The article can be read here
http://www.ft.com/cms/s/0/4ff2f77e-1584-11de-b9a9-0000779fd2ac.html

There is tremendous amount of greed in Wall street. Ultimately everything in life can be be viewed as a game of fear and greed.

Back home, the Nifty has been rangebound for the last few days. We should see some direction soon again.

Trend Following

A trend following setup CANNOT answer the following questions:

1) Why the market is going up or down
2) How long it will continue going up or down
3) How much it will go up or down

What a trend following setup CAN do:
Make money for you in a systematic way based on probabilities and momentum and help eliminate emotions like fear and greed.

It is boring but makes money at the end of the day. Amen!

At the time of this post I am long on the Nifty. The positions seems to be working against me and will probably end in a loss - which happens in 50% of the cases. But the setup still makes money when traded with discipline.

The toughest part of trading

The toughest part of trading is controlling one's emotions and being disciplined. If one is constantly wondering whether to buy or once in a trade whether to sell then it is not sytematic trading. It is random. It is like entering a casino and playing one round of black jack and then going to the next slot machine and trying one's luck there. Blowing up one's precious capital is guaranteed- its a matter of when.

How does one conquer one's emotions - trading a systematic plan. Have clear rules which are not written but carved in stone. The rules should be like this

Go Long: Condition 1
Stop Loss: Condition 2
Exit: Condition 3

Go Short: Condition 4
Stop Loss: Condition 5
Exit: Condition 6

Position Sizing/Money management: Condition 7

Such a system needs to be back tested, forward tested and traded live to build confidence.

Once one develops such a system the comfort level is immense. Trading will be more stress free than relaxing on the beach.

Happy trading!!

Nifty extremely bearish

The Nifty is extremely bearish now...all indicators are pointing downwards and the current momentum is down...Initiate or stay short!

RBS taps UK Treasury for £25.5bn

Problems continue in major UK bank RBS...the entire story can be read here

http://www.ft.com/cms/s/0/ae796b5c-03d7-11de-845b-000077b07658.html

One wonders if such a day will arrive in the Indian banking scenario too?

Recession hits America

On a lighter note...

“Ali Baba and the Forty Thieves” is now ‘Ali Baba and the Thirty Thieves… 10 were laid off!

“Batman and Robin” is now “Batman and Pedro”. Batman fired Robin and hired Pedro because Pedro was willing to work twice the hours at the same rate!

Women are finally marrying for love! And not money!

Q: With the current market turmoil, what's the easiest way to make a small fortune?
A: Start off with a large one.

Q: What's the difference between an American and a Zimbabwean?
A: In a few weeks, nothing.

The credit crunch is getting bad isn't it? I mean, I let my brother borrow $10 a couple of weeks back, it turns out I'm now America 's third biggest lender.

Banking Woes continue - stay short!

Problems with global banking giants continue. Citi shares tumbled to below USD2 on Friday. Citigroup is pressing the US government to agree on a new capital injection that would increase the authorities’ stake in the troubled bank to about 40 per cent but stop short of an outright nationalisation. The entire story can be read here
http://www.ft.com/cms/s/0/806418a0-0140-11de-8f6e-000077b07658.html

The other side of the Atlantic RBS is cutting its balance sheet by 25%. The entire story can be read here
http://www.ft.com/cms/s/0/55253388-0125-11de-8f6e-000077b07658.html

How do we as traders profit from this?
Keep an eye on the Bank Nifty in India. It has been trending for the last many months and is still giving great short term moves..long and short. For the unprofessional trader, obviously it is safer to remain short.

Power of Compounding

Lets get back to the basics...high school maths...simple interest vs compound interest. 10 lacs invested now and compounded at 30% per annum will get multiplied to 250 crores in 30 years. However if one withdraws the 30% every year i.e. withdraws 3 lacs every year the principal at the end of 30 years will remain 10 lacs.

What do we take away from this?
1) Compounding is an amazing thing - if you want to be worth 250 crores in 30 years start now with 10 lacs
2) How does one get 30% per annum...technical analysis and trend following....30% a year is very easy using this.

Nifty breaks out of trading range

The Nifty broke out of the trading range at 14:05 today...2875 had proved to be resistance for the last 4 weeks...Short term trend is up now...

Two sides, two opinions - we'll make profits both ways

Stock market Bulls are thumping their chests, convinced we’ve reached a turning point for the economy.

With interest rates low, … bailouts, stimulus packages , recovery is almost here. And since the market always moves up ahead the economy, the time to buy is now.

But the Bears are equally convinced that we haven’t seen the worst — for the economy or the market — just quite yet.
They point to soaring job losses, corporate profits falling like a rock and sour consumer confidence as proof that now is not the time to buy.

Frankly, I don’t know which side is right, and I don’t care.

The diversity of opinions — coupled with all the uncertainty about the economy — virtually guarantees continued volatility in the stock market.

And I will trade the volatility on both sides of the market to make myself — and members of my services — a whole lot richer.

Nifty in narrow range

The Nifty has been trading in a very narrow range of 2662 to 2875 since 12 January 2009. Most day traders would be happy to break even for this period. The Nifty is bound to breakout or breakdown from this range. It is imminent.

What is Recession??? ?

The story is about a man who once upon a time was selling hot dogs by the roadside. He was illiterate, so he never read newspapers. He was hard of hearing, so he never listened to the radio. His eyes were weak, so he never watched television. But enthusiastically, he sold lots of hot dogs. He was smart enough to offer some attractive schemes to increase his sales. His sales and profit went up. He ordered more & more raw materials and buns and use to sell more. He recruited few more supporting staff to serve more customers. He started offering home deliveries. Eventually he got himself a bigger and better store. As his business was growing, the son, who had recently graduated from college, joined his father.

Then something strange happened.

The son asked, "dad, aren't you aware of the great recession that is coming our way?" the father replied, "no, but tell me about it." the son said, "the international situation is terrible. The domestic situation is even worse. We should be prepared for the coming bad times" the man thought that since his son had been to college, read the papers, listened to the radio and watched TV, he ought to know and his advice should not be taken lightly. So the next day onwards, the father cut down the his raw material order and buns, took down the colorful sign board, removed all the special schemes he was offering to the customers and was no longer as enthusiastic. He reduced his staff strength by giving layoffs. Very soon, fewer and fewer people bothered to stop at his hot dog stand. And his sales started coming down rapidly, same happened to his profit. The father said to his son, "Son, you were right. We are in the middle of a recession and crisis. I am glad you warned me ahead of time".

" What can we take away from this story??

How many times we confuse intelligence with good judgment?
Choose your advisers carefully but use your own judgment

People are so disullusioned with the stock market they feel it is impossible to make money from the market. The same people will reeenter just before the peak of the next bull market and lose their shirts again.

Money is there to be made...right here, right now! Trade the Nifty professionally and get over your recession woes!

Fall in love with the Nifty

Barclays has jumped 73% yesterday
http://www.reuters.com/article/marketsNews/idCALQ63846120090126?rpc=44
How does one deal with this kind of volatility?
1) Be real time in the market....EOD charts don't work...trading is a full time job
2)Avoid stock specific risk by trading in the Nifty. Stock movements tend to cyclical, news driven or rangebound for considerable periods of time.

Some features of Nifty:
1) Very very very liquid...daily volumes in Nifty are 3 times ALL other stocks put together
2)Daily movement capped at 10%...which anyways is extremely rare
3) Trending for a large part of the time...some stocks are trending...others are stagnant...but Nifty always gives you the moves...long or short
4) Index is the weighted average of the 50 most liquid names in India...so well diversified anyways
5) All FIIs and Mutual funds have an exposure on index and index stocks
6) You can play both sides of the market and profit from rallies as well as corrections

Start trading in the Nifty...professionally and not speculation...Nifty main rab dikhne lagega!

Using options to manage risk

Trading in Options has a lot of myths. If done professionally, Option trading offers traders the following advantages:
1) Can manage risk much better than by trading in Futures
2) Limits downside risk with unlimited upside potential
For example say someone is Long Nifty Futures and we have a gap down of 500 points like on 17 October 2007...this is a huge drawdown to the portfolio. But if one were to be holding a long call having paid a premium of 40 points then one would hardly blink an eye.

So by trading in options one can ride the trend and also limit downside risk. Because of this limit to risk one can leverage 3x-5x comfortably and still sleep like a baby at night!!

Nifty options are extremely liquid...this is critical to Options trading....not all stock specific counters are liquid...so if starting off new in this try to stick to Nifty.

Banks shares collapse 80% in 2 weeks in UK

UK banks like Lloyds, RBS & Barclays have crashed 80% in 2 weeks.
http://money.ninemsn.com.au/article.aspx?id=719871
The banking sector everywhere is extremely weak...shorting the Bank Nifty or individual Bank stocks in India with stop loss in place might result in extraordinary returns in the coming months...

Do we need a 85% hit rate in trading?

Yesterday I went for the CNBC Investor Camp in Kolkata. It was a pleasure listening to Sudarshan Sukhani speak who according to me is one of the best Technical Analysts in India. He has a very rational mind and converts his thoughts into an actionable trading plan.

I was interacting with some of the other delegates. Most people seem to want to know:

1) When will the Nifty reach 6000 levels again


I never believe in predicting tops and bottoms. It is easier to trade with the momentum without worrying about tops and bottoms. One can make a lot of money even if the Nifty oscillates between 2500 and 3500 for the rest of our lives.. Someone asked me what my hit rate was....I said 50%....most people want a higher hit rate..But what is more important than the hit rate is the risk reward ratio....keep the losses small on the losers and let the winners run...this will result in lots of profits.

Bank Nifty

Am short on Bank Nifty Futures at 4550...it is currently at 4082...for those having a bearish view on Banks (I am sure there are some bravehearts who are still bullish) the Bank Nifty Futures provides a convenient way of gaining from the fall while avoiding stock specific risk.

A move from 4500 to 4000 levels is a 10% fall on an unleveraged investment. Which is amazing for a 5-10 period horizon. The Bank Nifty is a very trending index and once can get these moves (up and down, though its always safer to trade in the direction of the trend) quite frequently on this index.

The momentum in Bank Nifty is extremely bearish. There is still scope to ride the downward trend.

As always keep lot sizes under control and stop losses in place.

Recession Humor

1. The US has made a new weapon that destroys people but keeps the building standing,. Its called the stock market - Jay Leno

2. Do you have any idea how cheap stocks are ?? Wall Street is now being called Wal Mart Street - Jay Leno

3.. The difference between a pigeon and a London investment banker . The pigeon can still make a deposit on a BMW

4. What's the difference between a guy who lost everything in Las Vegas and an investment banker ? -A tie

5. The problem with investment bank balance sheet is that on the left side nothing's right and on the right side nothing's left.

6. I want to warn people from Nigeria who might be watching our show, if you get any e mails from Washington asking for money, it's a scam. Don't fall for it - Jay Leno

7. Bush was asked about the credit crunch. He said it was his favourite candy bar - Jay Leno

8. The rescue bill was about 450 pages. President Bush's copy is even thicker. They had to include pictures -Jay Leno

9. President Bush's response was to meet some small business owners in San Antonio last week. The small business owners are General Motors, General Electric and Century 21. - Jay Leno

10. What worries me most about the credit crunch, is that if one of my cheques is returned stamped 'insufficient funds'. I won't know whether that refers to mine or the bank's.


NEW STOCK MARKET TERMS

CEO --Chief Embezzlement Officer.

CFO -- Corporate Fraud Officer.

BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry.

VALUE INVESTING -- The art of buying low and selling lower.

P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.

BROKER -- What my broker has made me.

STANDARD & POOR -- Your life in a nutshell.

STOCK ANALYST -- Idiot who just downgraded your stock.

STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves..

FINANCIAL PLANNER -- A guy whose phone has been disconnected.

MARKET CORRECTION -- The day after you buy stocks.
CASH FLOW-- The movement your money makes as it disappears down the toilet.

YAHOO -- What you yell after selling it to some poor sucker for $240 per share.

WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.

INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a nuthouse.

PROFIT -- An archaic word no longer in use.

Nifty very bearish...Go short!

The Nifty has turned extremely bearish across all timeframes..it has also broken 2700 which was a critical support....please exit all longs in stocks and futures...get out of long calls and short puts.....can short futures or long puts as long as Nifty remains below 2830...As before maintain stop losses n keep leverage low. Good luck!

Goodbye RBS

Bad scene on the banking front
http://finance.yahoo.com/news/RBS-expects-fullyear-loss-up-apf-14097594.html
RBS shares are battered from 300 pence to 13 pence...
Keep an eye for shorts on individual banks or Bank Nifty index in India as a similar story should/might unfold here....as usual keep lot sizes low and stop losses in place....
Stories unfolding now like Lehman, Satyam, RBS, Citi, Unitech are a clarion call to people of the buy-and-hold long term investor mentality.....who consider trading "risky".....keep your leverage under control and stops in place....and let the 95% people with investor mentality transfer all their wealth to the 5% with trading mentality...

Timeframes

Continuing on my previous post on timeframes, I have found momentum trading to be the most profitable and easy to trade. By having a timeframe of few days to a few weeks it is easy to spot and ride a trend even in these volatile markets. What may appear rangebound and directionless to someone with a longer timeframe will appear trending to someone with a smaller timeframe. It takes many hours (more likely years) of research and backtesting to arrive at the correct timeframe. But once you arrive at your sweet spot, its a smooth ride.

Timeframes for trading

Often one hears one Technical Analyst being bullish (going long) on Nifty while another being bearish (going short). While this may appear confusing and paradoxical it is possible both will eventually end up making money. The reason being each person trades in his own timeframe. Broadly speaking the following timeframes exist:

1) Long term traders : timeframe of greater than 3 months
2) Momentum traders: timeframe of 1 week to 3 months
3) Day traders: all positions squared off by 330pm
4) Scalpers: They enter and exit markets in a matter of few minutes

The key is to identify your timeframe and trade according to a well tested sytematic plan. Then watch those Nifty points pile up!

Nifty bearish again

Nifty futures closed at 2740 levels...all indicators are now bearish...while I can't predict how low the market will go or whether it will indeed go much lower..the momentum is downwards now....go short, keep stop losses and enjoy the ride for as long as it lasts....