Fibonacci in action - Crude and Nifty

The above charts show the significance of the 61.8% Fibonacci retracement in Crude and Nifty Futures.

First Crude hit a high of around 148 in July 2008 and a low of 32 in December 2008. The 61.8% Fibonacci retracement of this fall is around 105 which proved to be a resistance for Crude in the last few weeks. In the last few days it has broken past this resistance so expect prices to rally further from here.

Nifty hit a high of 6350 in Nov 2010 and a low of 5175 in Feb 2011. The 61.8% retracement of this move is 5900 which is where the Nifty is facing resistance since the last few days.

Nifty Update

From a longer term perspective the trend is downwards. As per Dow Theory we got a sell signal at 5700. When do we get a buy, when we start seeing higher tops and higher bottoms which I feel will take some time to happen.

From a short term perspective while we are in this 5175-5589 zone we could be rangebound but if we breakdown below 5175 it is very weak for the market. 4800 is the next support which we hit in May 2010.

We have resistance at 5550-5600 zone. Time to be cautious, I would get bullish on the market if 5589 is taken out comfortably on a closing basis.

FIIs continue to sell.

Budget will provide a trigger, so let us wait and see how the market reacts rather than initiating any trades now.

Nifty Futures Update

• Nifty is in a short term uptrend now
• Nifty seems to have taken support around the 50 week EMA
• 50% retracement of fall from 6350 in Nov 2010 to 5180 in feb 2011 is 5770, 38.2% is 5632.
• Fallen a large amount so retracement s happening
• 5550 is an important number to be taken out
• Whether this uptrend is sustainable we will have to evaluate later

Keep an eye on Copper

Gold and Silver are in well established uptrends. For those who missed the trend keep an eye on Copper. As shown in the chart above Copper has overcome a key resistance which has contained prices many times in the past 5-6 years. If this breakout were to hold Copper could be the next trending commodity.

Europe Debt

The real scenario in Europe - mind boggling numbers!

Diagram Source - NYT

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.

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.

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.