Nifty outlook for 16 march

A further radiation threat from nuclear reactors caused almost 110 point gap down opening in Nifty today, which went further down to ~ 150 point.

Nifty recover from there and presented a perfect buying opportunity @ 10:26 AM when it crossed from lower BOLL Band to UPPER band. Exit signal from this position can be taken from falling RSI and flattening Bollinger band shape.

Nifty offered second opportunity to enter by shorting @ 2:38 PM  ~ 5480 level with RSI falling(~40) and exit around 5440 level.

Nifty 2min chart

Nifty 5 min chart

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The really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions. - Warren Buffett

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5 important Trend reversal pattern

Head and Shoulders pattern is one of the most classic patterns in a technical analysis.

 

This three-peak formation is named for its resemblance to a head and two shoulders. The center peak (head) protrudes above the remaining two peaks (shoulders), which are set at or close to identical levels. The common line of support for all three peaks is known as the Neckline, which does not have to be a horizontal line. The final downward penetration of the neckline confirms the start of a new downward trend.
A real example which has formed on NIFTY daily chart is below

Inverse Head and Shoulder pattern follows the same model.

Double top is formed when the price of a pair in an uptrend rises and encounters resistance. Following this, price retreats to a support level which will become the neckline and subsequently returns to the resistance level. After failing to break the resistance level a second time the pair falls back down. At the neckline price breaks down into a new downward trend. 

 

The same but opposite scenario occurs in the case of a double bottom. A downtrend reverses after testing a certain support level twice. Failing to breakthrough, price reverses into a new uptrend

In the typical triple top formation each one of the heads is about the same size. A line of resistance can be drawn connecting the three tops. A neckline should be drawn connecting the support levels. After the third head, price falls below the neckline. The market may rebound for a short attempt at breaking back past the neckline only to be followed by the start of a new downward trend.

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F 'n' O Indicators

Trends in the F&O can reveal broader trends in the cash market that can be used while transacting in equities. Investors can look at various parameters and ratios to gauge the mood of the market and determine in the investment strategy. F&O numbers give a hint about the short-term market movement. A note of caution: investors should use the F&O trends as one of the tools in the decision-making process and not completely rely on them for investment calls.

 This is because the liquidity or trading is concentrated in the Nifty index and in 20-25 stocks in the F&O segment. Liquidity is necessary for better price discovery. A few stocks go without trading for many days.

Among index futures, the Nifty futures account for over 90% of trading. Around 250 stocks are traded regularly in the futures segment. The top 10 contracts contribute to over 35% of the total traded volume in individual stocks in the futures segment. In the option section  Nifty options comprise around 98% of trading in options. Of the 265 stocks eligible for the derivatives trading, less than 100 stocks are traded regularly in the options segment. The top 10 stocks account for over one-third of trading in the options market. Stock futures are more liquid than stock options. Thus, investors have to ensure that the stocks they are examining in the F&O segment have good volume to decipher the trend in the cash market. So now let's move to F 'n' O Indicators.  

Premium or discount to the cash market:

First, inspect if the stocks or indices are trading at a premium or discount in the derivatives market compared with their underlying to predict whether the market mood is bullish, bearish or indecisive. Suppose stock futures or index futures are trading at a premium compared with the underlying stock or index. This points to a bullish trend in the cash market. But a stock or an index trading at a discount in the futures market indicates a bearish market.Investors can also look at the quantum of premium/discount to the spot market.

 Quantum of premium or discount 

To understand the magnitude of the bullishness or bearishness. If a particular index is trading continuously at a premium, it would indicate buoyant market sentiments. However, if the premium turns negative (discount) to the underlying stock or index, it would mean the stock or the market is weakening or likely to weaken in future. 

But care must be taken when considering the dividend on stocks. 

Future price will be in discount if there is a dividend EX date announced in that particular month. Then the Future price is equal to Cash price minus dividend amount. That means future price is lesser than cash price which does not mean that stock is bearish.  

Put-call ratio: 

This ratio is also known as the put-call volume ratio. It is widely used to understand the sentiments prevailing in the cash market. The put-call ratio is calculated by dividing the daily or weekly traded volume of put options by the daily or weekly traded volume of call options. This ratio is not only easy to calculate but also simple to interpret. Higher the number of call options traded higher are the chances of the market turning bullish in future. If put options are more popular, bears could dominate the market.

An increasing ratio over a period of time means investors are putting more money in put options, implying the broad market outlook is bearish. Thus, the market can be expected to move south or witness a sell-off.This could also be the case of investors trying to hedge their portfolios. On the other hand, a declining put-call ratio indicates investors are showing more interest in buying call options and the market is likely to move up in the near future.

 Extreme values point to a trend reversal in the coming days. This can also be termed as a contrarian indicator. An increase in the ratio to unjustifiably high levels is considered a buying opportunity as traders start covering their short positions. On the contrary, too many call options or a low put-call volume ratio signifies the market has reached an overbought level and a correction is likely. In short, a very high put-call ratio indicates the bear phase is likely to end, while a very low ratio means bulls could lose the grip over the market and a market correction is likely.  

Put-call open-interest ratio:

The put-call open-interest ratio is also one of the key indicators of possible futures movement in the spot market. The put-call open-interest ratio is calculated by dividing the total open interest of put options by the total open interest of call options. For instance, if the open interest for put options is nine and the same figure for the call options is 10, the put-call open-interest ratio would be 0.90. A put-call open-interest ratio of more than one means put options have a higher open interest compared with the call options and, thus, the future price trend is likely to be bearish. A low put-call open-interest ratio means bullish sentiments are likely to continue in future. Investors can monitor periodical changes in the put-call open-interest ratio to gauge future market outlook.

The daily Put/Call ratio can be found out by clicking the link and then accessing the data  for current month of the year.

Daily volatility:

Investors prefers a bullish market and perceive it safe as well. On the contrary, a bearish market is considered risky. Therefore, increase in daily volatility is considered bearish, while lower or moderate volatility is taken as a sign of a bullish market. Daily volatility represents volatility of the future contracts on a particular underlying stock or index. These figures are available on the NSE website. India VIX represent the daily volatility on overall market on the NSE.

The daily India VIX data can be found out by clicking on the link.

Rollover:  

The near-month F&O contract expires on the last Thursday of the month. At the time of expiry or close to expiry, investors will find news articles discussing rollover. Rollover is applicable to future contracts and not options. If an investor is holding a position in futures, he will close his position in the near month or in the current month and take a fresh position in the next-month contract. Rollover helps investors to carry his position for a longer period of time. The investor will find the Nifty futures with expiry in next month at a slight premium. he will have to bear the difference. Further, the investor will have to bear transaction-related expenses such as brokerage.

The percentage of outstanding positions rolled over to the next month is used to gauge market sentiments. A higher percentage of rollover symbolises bullish undertone, while a lower rollover indicates bearishness. It is difficult to comment on the market mood by just looking at the rollover figures. Investors have to use other numbers to deduce the right conclusion. Every buy side has a sell side to it. As a rule of thumb, if the market is in a bull phase, a high percentage of rollover could mean the market would remain firm or move up in the near future. In an extremely bearish market, a high rollover could spell trouble as it could denote that the bears are convinced the market would fall in the future.

Open interest and change in open interest: 

Open interest in the F&O market along with price movement and traded volume is also used by traders to predict future trends. Open interest is basically the total number contracts — futures or options — that remain open at the end of the day. 

Don't get confused with open interest and volume of trade. Volume of trade and open interest are different. Volume is total no of transacted contract for the day and open interest is total number of contract (buy) that still needs to be closed by going opposite transaction.

 

 

 

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Top 10 candlestick patterns

The top 10 candlestick patterns are the patterns that are found most often and have proven to be the mot reliable.

Dark Cloud Cover:  This is a two-day formation which arises when the candlestick formed on the first day has a long white body followed by an opposite colored candlestick, which opened at a new high only to close below is the midpoint of the previous day's trading.  This pattern is considered a bearish reversal signal.

Doji:  When the opening and closing price are essentially the same, the candlestick formed resembles a plus sign, cross, or inverted cross and is referred to as Doji.  It represents indecision on the part of the market, and is interpreted by traders that a turning point is imminent.
Engulfing Pattern: This is a two-day pattern where the first day's body is smaller than the subsequent candlestick, and they are both of opposite colors.  This pattern is considered bearish when it appears at the end of an uptrend and bullish when it occurs in a down trending market.
Evening Star: Commonly regarded as a bearish reversal pattern, this three-day pattern consists of a long white body, followed by a smaller gap up candlestick, with the third and final day closing below the midpoint of the first day.

Hammer: When trading occurs significantly below the open, but ends well above the low and closes as its high, the candlestick formed has only one tail below its body.  When this formation occurs during a downtrend, it often signals a reversal. An example of trend reversal is seen last month in nifty 50.

                             Nifty  Monement during 10 Aug-5 Sep 2010


Hanging Man:  Identical to the Hammer, this candlestick pattern occurs during an uptrend, and signals a continuation of the price movement.
Harami: This is a simple two day candlestick pattern that has a relatively small body on the second day that is completely surpassed on both sides by the previous day’s candlestick and is always of the opposite color. It usually occurs during a minor correction in a bear or bull market and signals that this temporary uptrend or downtrend is reaching an end, and the underlying trend will continue.  It is especially considered a strong indicator when it appears together with low trading volume.
Morning Star: This formation is considered a three day bullish reversal pattern that consists of a long bodied black first day, a short gap down second day, followed by a third long white bodied candle, which closes above the midpoint of the first day.
Piercing Line: This is a two-day formation considered to be a bullish reversal.  The first is a continuation of a downtrend with a long black body.  The second day opens at a new low, but closes above the midpoint of the previous day's trading.
Shooting Star: The opposite of the Hammer, this is a one-day formation and occurs in an uptrend.  Trading opens higher and trades much higher but prices end near the low.  This pattern is viewed as a bearish reversal.
As you can see the top 10 candlestick patterns are easy to recognize and understand. Try and look at the patterns and understand them as opposed to memorizing them. Meaning try to understand why price is likely to follow the pattern.. 

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Reference : http://www.candlestickgenius.com

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5 most common Bullish chart pattern

In technical analysis, triangles appear to reflect a balance of forces, causing a sideways movement in the stock that is usually associated with decreasing volume and volatility. The ascending triangle (also called an ascending right triangle) is a bullish indicator.
An ascending triangle is characterized by a rally to a new high, followed by a pullback to an intermediate support level, then a second rally to test the first peak, followed by a second decline to a level higher than the intermediate-term support level and, finally, a rally to fresh new highs on strong volume.

Double-Bottom

 

A double-bottom occurs when prices form two distinct lows on a chart at approximately the same price level. Prices fall to a support level, rally and pull back up, then fall to the support level again before increasing. A double-bottom is only complete, however, when prices rise above the high end of the point that formed the second low.
The double-bottom is a reversal pattern of a downward trend in a stock’s price. The formation marks a downtrend in the process of becoming an uptrend.

Head-and-Shoulders Bottom

 

A head-and-shoulders bottom is a bullish signal that indicates a possible reversal of the current downtrend into a new uptrend in a security’s price.
A perfect example of the head-and-shoulders bottom has three sharp low points created by three successive reactions in the price of the financial instrument. It is essential that this pattern forms following a major downtrend in the financial instrument’s price.
Trading volume is absolutely crucial to a head-and-shoulders bottom. Traders should look for increasing volumes at the point of breakout. This increased volume definitively marks the end of the pattern and the reversal of a downward trend in the price of a stock.

Triple-Bottom

 

A triple-bottom illustrates a downtrend in the process of becoming an uptrend. This reversal pattern displays three distinct minor lows at approximately the same price level. Prices fall to a support level, rise, fall to that support level again, rise, and finally fall, returning to the support level for a third time before beginning an upward climb. In the classic triple-bottom, the upward movement in the price marks the beginning of an uptrend.
The three lows tend to be sharp. When prices hit the first low, sellers become scarce, believing prices have fallen too low. If a seller does agree to sell, buyers are quick to buy at a good price. Prices then bounce back up. The support level is established and the next two lows also are sharp and quick.

Rounded Bottom

 

Rounded bottoms are elongated and U-shaped, and are sometimes referred to as rounding turns, bowls or saucers. The price pattern forms a gradual bowl shape, and there should be an obvious bottom to that bowl. While price can fluctuate or be linear, the overall curve should be smooth and regular, without obvious spikes. The pattern is confirmed when the price breaks out above its moving average.
A rounded bottom forms as investor sentiment shifts gradually from bearishness to bullishness. As the sentiment turns down toward the bottom, there is a drop off in trading volume due to the indecisiveness in the market. There is a period of consolidation at the bottom (this must be present to consider it a true rounded bottom) as trading bounces within a certain range. Then, finally, there is a gradual upturn marking the shift to bullishness.
As investors become more decisive about the bullishness, there is an increase in trading volume.

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Chart Type

The movement of price of stocks can be recorded in many ways. The past prices provide an opportunity to look into the patterns, which can be of various forms and predict the future price of the stocks with higher chances of success.

Recording of stock price can be done by Tick-by-Tick basis, where all the ticks were recorded on which trading is performed or on a TIME INTERVAL basis where 4 points (open, high, low, and close) are recorded. The later one in more popular as it requires less data storage. Different time interval is suitable for different type of trading. For a strategy where an investor buys and holds the stocks for a longer time for appreciation, daily interval is more suitable. For short-term trading a smaller interval is preferable.

On a tick by tick data, chart is made by joining the last tick value to the next tick value on the continuous basis. 

 

 

Bar chart is drawn by marking drawing a vertical line whose length is the range (High-Low) of the interval and marking the opening price on the left side and closing price on the right side of the vertical line. 

Bar chart is the basis of CANDLE STICK charting, where a rectangle is drawn between open price and close price. The height of the rectangle is the difference between the two (open price and close price) and width is the time interval. A color scheme for rectangle is chosen to represent an upward or a downward movement during this time interval. Usually a white/green color is chosen for upward movement and a dark/red is chosen for downward move.   

 

The bar-chart and hence the candle sticks offer a wide range of patterns to infer from and most of the technical analysis is based on these patterns along with volume analysis. I will write about individual patterns in detail in my later posts categorizing with trends.

Recent development in technical analysis is due to use of GRID trading systems where buying and selling order and their density can be seen on the real time basis to determine the trend in very small span of time. A large no of automated system are based on this analysis with their strategies.

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Technical Analysis part-1

What is "Technical Analysis" ?

Technical Analysis is predicting  future stock price movements based on an analysis of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. It can  help investors anticipate what is "likely" to happen to prices over time.

The basic assumption in Technical Analysis is that the current price fully reflects all available information. It is similar to the strong and semi-strong forms of market efficiency, where all the market participant have knowledge of all the information. Because all information is already reflected in the price, it represents the fair value, and should form the basis for analysis. A technical analyst (TA) is concerned about two things

1. what is the current price?

2. what is the history of price movement?

The price is the result of  forces of supply and demand for the company's stock. The objective of analysis is to forecast the direction of the future price. Technical analysis represents a direct approach by focusing on price and only price,

Fundamentalists are concerned with why the price is what it is and doing all sorts of valuations. For TA, the why portion of the equation is too broad and many times the fundamental reasons given are highly suspect. Technical analysts believe it is best to concentrate on what and never mind why. Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After all, the value of any asset is only what someone is willing to pay for it.Who needs to know why?  Volume also play a very important role in technical analysis to assess demand and supply.


There is a positive skew towards technical analysis than fundamental analysis for its use in short term trading means for short term trading it is more preferred.

For a small and retail investor its never been easy to do the fundamental valuations as he/she doesn't have that much of time and resources to do so. A little understanding of technical analysis indeed helps a investor to  enter or exit market on the nick of time. In the next post, I am going to write about charting types and later on the inferences drawn from different charting patterns.

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