google.com, pub-7808368332557457, DIRECT, f08c47fec0942fa0 The Ultimate Momentum Signal: 02/01/2010 - 03/01/2010

Sunday, February 28, 2010

What If...... Some Speculative Thoughts


 What If The History Repeats Itself?
 Some Speculative Thoughts...

The Chinese sometimes say "May you live in interesting times..."
Even though the origin of the proverb may be disputed, what does it mean ?
 
Well it doesn't mean that they are expressing best wishes !
It is actually a curse !!!  And the proverb is sometimes called the "Chinese Curse." 

It seems that  we have been living through "very interesting times" for the past few years.  The bubbles in the all the asset, credit and currency markets burst in the past two years and we are supposed to be well on a recovery. Since something like the recent synchronized bursting of bubbles in different markets happened only in the 1930s let us look at the charts of Dow Jones Industrial Average  (DJIA) from those distant pasts.

Dow Jones Industrial Average - Weekly - Years 1929 - 1930     

Chart 1

Thursday, February 25, 2010

Update on The Ultimate Momentum Signal

Is the Breakout imminent ? 
                                                                                Nifty Future - 20 Minutes

         

  

 <<< Nifty Future - Hourly


The Nifty futures traded sideways for another day as usual ! As pointed out in the previous posts, not only the daily moving averages but also the hourly and 20 minutes moving averages are converging to   a narrow band,  increasing the chances of a break out in either direction. The Budget or a trigger from the world markets can   add fuel to the breakout.
                                                                        

Wednesday, February 24, 2010

Update on The Ultimate Momentum Signal


Nifty Futures Daily and True Range (TR) Averages 


The Nifty  future is trading absolutely flat nowadays. It closed at 4867.2 points on 28th  January, 2010, the expiry day of January series. Today, the future closed at 4866.1 points, almost equal to the last settlement level.  It hasn't moved much during the month. The above chart also includes a panel

Update on The Ultimate Momentum Signal

                Nifty Futures Daily 













Nifty futures traded sideways as expected. At the time of writing, the US markets were trading at their lowest levels in five days, which  raises the risk of downward breakout of the futures from the continuation bear flag kind of formation. All daily moving averages are seemingly converging which adds the risk of big movements in either direction.

Monday, February 22, 2010

Update on The Ultimate Momentum Signal

       
    Nifty Futures - Daily Chart

 






     








The Nifty future is still trading sideways. The future is trading above it's 200 day moving average at 4707 but below 50 and 100 day moving averages placed at 5040 and 5014 respectively. The market seems to be waiting  for the next trigger which may either be the union budget or any other overseas trigger.

Sunday, February 21, 2010

The Ultimate Risk Analysis


 Playing the Expectations Game !

What are your expectations from the trading business? It is a business where extraordinary profits are possible. (That is why we are in it.)  But the question is why extraordinary  profits are possible in trading. It is because it is a business where extraordinary losses are also possible.

After all, the business of trading, especially the derivative trading is a zero sum game! A trader's profits are another one's losses. If you are to consider the considerable costs of trading, which adds up to substantial sums over a period, it is actually a negative expectations game!. It is always better to have a realistic understanding of the  eventualities one may encounter in the business to avoid the risk of ruin. Therefore, here are some of the  pieces of advice or rules I have picked up over a period,  even  though  the sources and the contexts have been forgotten.

You  can  pick  any  one  of  these rules or all  of  them!  They  are  all different  but  they are  all  saying  the one thing !!

  • Expect the unexpected !
  • If anything can go wrong, it will  !!
  • Hope for the best, but prepare for the worst !!!




All in a day's Trade
We are all normal people. As we are normal, we expect a normal trading day, OK! The Nifty may trade higher, lower or do both and close higher, lower or end near the yesterday's close. As normal people our memory spans are also short. We have a tendency to forget the times on which the liquidity dried up completely on the one side of the trade and the index moved one way beyond all expectations.  Therefore, let us refresh our memory or load it afresh with some real history. Here comes the Nifty history which explains why the above high sounding cliches are applicable to trading.


S&P CNX Nifty - Daily Returns in Per cent
( On a daily close to close basis )

Chart 1

The above is the graph of daily returns obtained by the S&P CNX Nifty index calculated as a percentage change over the previous days close. Here are some observations about the chart.
  •  Volatility increases and decreases in clusters.
  •  Large negative returns are accompanied by large positive returns in the cluster and vice versa.
  •  Most of the daily returns are confined to a +/- 5 % range.
  •  There are significant numbers of  extraordinary returns in the data.  That is, Nifty is capable of making extraordinary movements in a day's time. 
  • Some of these extreme movements were the result of one-off events like the general election results in 2004 and 2009.
The three extreme data points of both, the positive as well as the negative returns during the period are shown in the following chart.

S&P CNX Nifty - Highest Three Positive and Negative  Daily Returns

Table 1

 S&P CNX Nifty Daily Returns ( + / - Signs Removed )

Now let us see the above data from another angle by removing the positive and negative signs from the data to get an even better view of the daily movements on a close to close basis.


Chart 2

The above chart reiterates our earlier observations. So far we have examined the Nifty on a daily close to close to basis. However, such an analysis is more suitable for investors than the traders.  It is seen that the close to close to analysis eliminates the intraday extremes of the index and those extremes are more pertinent to traders, especially to those who have to manage their intraday risk and use stop losses. Therefore, let us use a technical analysis tool called the True Range ( TR ).

According to the Wikipedia the True Range is a technical analysis tool developed by J. Welles Wilder. and the following is a copy of it's description from the Wikipedia.

"The range of a day's trading is simply high − low. The true range extends it to yesterday's closing price if it was outside of today's range.

Or, in plain English, true range is the largest of the
  • most recent period's high less the most recent period's low
  • absolute value of (the most recent period's high less the previous close) or
  • absolute value of (the most recent period's low less the previous close)."
  •  
S&P CNX Nifty Daily True Range ( TR ) 

The following chart shows the daily true ranges of the Nifty index for the same period.

Chart 3

Here are some basic observations made after a comparison of the daily returns chart (without the + / - signs) and the true range chart :
  • There are more extreme data points in the TR chart than in the daily returns chart.
  • There are eight TR values which are higher than 10% in the TR chart whereas there are only three similar values in the daily returns chart.
  • The TR data points are significantly higher than the daily returns chart and therefore a Nifty futures trader is susceptible to significantly higher risks.
The three extreme data points of TR both the highest as well as the  lowest during the period are shown in the following chart.

S&P CNX Nifty - Highest and Lowest True Range Values

Table 2

Now, how much is the margin for the Nifty futures? On an average it is around ten percent. It doesn't require much extrapolation to find that on all days the index has returned a TR of ten percent or more , at least one side of the traders would have lost their entire margins. The brokers would start their margin calls and by the time the trader either remits the margin or the broker squares off the position the losses might have become even higher. I have seen people becoming frozen or paralyzed and incapable of taking  any decisions on such days. Thankfully the broker  takes the decision and squares off the positions but mostly at the worst possible prices.

As we have seen the worst let us see what is the normal or 'the new normal ' values of daily returns and the true range. The following table shows the average, median and the geometric mean of both the daily returns and the true range for the sample period.

S&P CNX Nifty - Average, Median and Geometric Mean of Daily Returns and TR

 Chart 3

It is observed that the geometric mean of the daily returns and the average, median and geometric mean of TR are nearly identical at around 2.6 % of the previous day's closing value.

What are the key takeaways from the above statistics? They are very simple.

  • Don't take big leveraged positions in the market. Even small positions can lead to extraordinary  losses in trading.
  • It is better to avoid market turmoil due to the expected event risks like election results, union budgets etc by keeping no positions or only positions of long options.   
  • Trading is a business in which any skills or advantages of a trader is used by him to build substantial profits over a period and not a wham bam game.
  • Even if a trader is using all the risk control methods described in the page named Position Limits, the trader may be susceptible to significantly higher risks due to totally unanticipated events or any other reasons. Therefore, keeping a part of the trading capital as a reserve is a prudent option.
The Tail Piece

Is it mandatory to have tail piece towards the end  of any discussion?  Even if it is not mandatory or  if it is totally unnecessary, I am having an inclination to add  a tail piece. Because, there is a very apt tail piece available! 

Here is a new job description. Measure the heights of 2775 people ( equal to the sample size of the trading days ) randomly and pass the collected  data through the processes we used for analyzing the Nifty closing prices. We may find that the average, median and geometric mean of the new data may fall anywhere between five or six feet. This is comparable to similar values obtained by us with respect to the Nifty in the Chart 3.

However, the question is whether we will be able find people with heights of seven to nine times the average in the sample or anywhere else. But why?  For example the true range is having an average  of 2.63 ( Table 3) and an extreme value of 22.55 ( Table 2 ) and the ratio between them is 1: 8.5. Anyone knows that finding a human being with a height which is  8.5 times the average is an absolute impossibility. Statisticians say that the data like the heights of people is distributed normally. It simply means that most of the data points will be near the average and chances of finding a 45 feet human being is impossible.

Statisticians say that financial data series like equity  prices or indices have long tails. This simply means that  most of the  data points when plotted on a graph will fall near the average but some of the data points will be very far away from the average and those points may  look like long tails in the graph !!

That brings us back to question of whether the discussion needed a tail piece. And it is settled now !
Beware of long tails in trading !! And sometimes the tail may wag the dog as well !!!

Cheers and Prosperous Investing and Trading!!!
    © All rights reserved.

Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.

Update on The Ultimate Momentum Signal

                                                                                     Nifty Future Weekly Moving Averages
For the week ended 19th February, 2010 the Nifty futures opened and closed almost at the same place and returned a doji candlestick indicating indecision. It is normal for the markets to trade sideways before major events like union budget etc. The future is trading between it's 50 week moving average at 4486 and 20 week moving average at 5000. These moving averages may act as support and resistance in case of an     average budget being presented on the 26th of  February, 2010.  


Thursday, February 18, 2010

Update on The Ultimate Momentum Signal



                          Nifty Futures
 

After the run up on the 16th Feb. 2010, the market has traded sideways yesterday and today. In the  candlesticks charts, the formation of a doji followed by an evening star indicates indecision.  The Momentum Signal is still giving a +50 value indicating upward momentum.



                                    
       The Updated Momentum Signal Spreadsheet 

The Nifty Heavy Weights


Who are they? Where are they trading?

The S&P CNX Nifty consists of  fifty heavy weight issues. ( Nifty Fifty = Nif + ty  =  Nifty !!).

The Nifty being a free float weighted index, let us examine which issues  have the highest weights and where
they are trading in relation with their 200 day moving averages. The following chart shows the ten heavyweights who have a combined weight of more than 50 % of the Nifty. They are the majority and so the Nifty moves to the direction of the heavies in general.

Nifty Heavies, Their Rank, Price And 200 Day Moving Average

You can click on the chart to enlarge. 

Wednesday, February 17, 2010

Update on The Ultimate Momentum Signal



 The Updated Momentum Signal Spreadsheet

Here is the updated spreadsheet showing the Momentum Signal as on the close of 17th, Feb. 2010.


You can click on the chart to enlarge.

Tuesday, February 16, 2010

The Ultimate Risk Management - Position Limits



Preservation of the Trading Capital.
Money Management and Position Limiting.


Jungle Rules
Have you ever heard the rules of the jungle? 



 
If you haven't heard them, here are the rules. 

( Well if you have heard them, please bear with me, here is a repeat! )

Rule No. 1 : There are no rules.
Rule No. 2 : There are no more rules.

Update on The Ultimate Momentum Signal

The market rallied today and closed almost at the high. The Momentum Signal has indicated a buy. The Signal has been giving neutral values for the last two days and these neutral values meant either a pause in the downward momentum or a momentum shift.  The latest chart of the S&P CNX Nifty is given below:

 S&P CNX Nifty


It seems that the index has not yet  broken the the bear flag pattern. However,  the present pattern can also be interpreted as a round bottom formation. You can see an example of a round top formation  in the chart. The problem with chart patterns is that an analyst will only see the patterns he wishes see on a chart.

As posted earlier the futures may encounter resistances at 4950, 5003 and 5015 being the previous minor high, 20 week moving average and 100 day moving average respectively.

The Updated Momentum Signal Spreadsheet 

Here is the updated spreadsheet showing the Momentum Signal as on the close of 16th, Feb. 2010.




 Projected Momentum Signal Close Values

The projected levels of closing values required for momentum shift / neutrality / continuation as on the close  of trading as on 17th, Feb. 2010 are given in the table below. 
 
 
 

© All rights reserved.

Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.

Monday, February 15, 2010

Update on The Ultimate Momentum Signal

Here is the updated spreadsheet showing the Momentum Signal as on the close of today, the 15th, Feb. 2010.  

 

Sunday, February 14, 2010

Update on The Ultimate Momentum Signal

Here is the updated spreadsheet showing the Momentum Signal as on the close of 11th, February  2010.  



As you can observe from the above spreadsheet, the signal has indicated a -10 value which means either a  pause in the downward momentum or neutral momentum before a momentum shift.

Wednesday, February 10, 2010

Update on The Ultimate Momentum Signal

Here is the updated spreadsheet showing the Momentum Signal as on the close of today, the 10th, Feb. 2010. 

 

The projected levels of closing values required for momentum shift / continuation as on the close on  tomorrow, the 11th, Feb. 2010 is given in the table below.

Tuesday, February 9, 2010

Update on The Ultimate Momentum Signal

Here is the updated spreadsheet showing the Momentum Signal as on the close of today, the 9th, Feb. 2010.

 

The projected levels of closing values required for momentum shift / continuation as on the close on  tomorrow, the 10th, Feb. 2010 is given in the table below.

Monday, February 8, 2010

The Ultimate Fundamental Analysis - S&P Nifty


One may wonder why a blog, which claims to be the source of The Ultimate Momentum Signal (based on technical analysis) is now talking about The Ultimate Fundamental Analysis of S&P Nifty Index.

The reasons are:
  • History repeats itself, even though participants, sectors, investing styles, fashions, fads etc may change in each bull / bear markets.
  • There will always be analysts, especially the TV variety, who will always say 'this time it's different.'
  • It's always better to have a meaningful understanding of the market from another perspective.
  • It may help us to make an intelligent guess about the different phases through which each bull/bear market may pass through and the present phase of the market from the fundamental perspective.
Now let us check out the Nifty from the perspectives of historical  Price Earnings Ratio, Price to Book Value Ratio and the Dividend Yield. The data for this analysis is available for the past eleven years only.

Nifty  Historical Price Earning Ratio
 


Update on The Ultimate Momentum Signal

Here is the updated spreadsheet showing the Momentum Signal as on the close of today, the 8th, Feb. 2010.


Friday, February 5, 2010

Update on The Ultimate Momentum Signal

As pointed out in the yesterday's post, downward momentum has accelerated today. The latest Momentum Signal is at -100 which can be seen from the snapshot below:

Thursday, February 4, 2010

Update on The Ultimate Momentum Signal

Here is the latest snapshot of The Ultimate Momentum Signal spreadsheet.


Some More on the Ultimate Momentum Signal


The history session is over for now. It's time to write something more about the Ultimate Momentum Signal and it's characters.

Well it is just like any other oscillator. It travels between -100 to +100, wherein -100 indicates maximum downward momentum and +100 the opposite. Trades are to be entered only when the momentum shifts from

Tuesday, February 2, 2010

More on the Momentum Signal

They say "Necessity is the mother of all inventions". My experience says that it is a fundamental truth. This is the story of the market forcing me to invent the Ultimate Momentum Signal.

In the early nineties I tried to trade Reliance and Tisco as a hobby. It took me no time to

The Ultimate Momentum Signal for Position Trading Nifty Futures & Options
This blog by momentumsignal will discuss position trading of the Nifty Futures and Options in the Indian markets  using The Ultimate Momentum Signal for Nifty Futures, a proprietary multi-factor trading signal and and it's risk management rules. The The Ultimate Momentum Signal and the  risk management rules were invented after a research of more than ten years.