Longer Term View : Ichimoku Dependent!

Some time ago, I posted a weekly chart, requesting all my readers to exit out of equities because something happened in the charts which was signalling the end of bull market which started from October 2008. Which meant all rallies should be now sold into. That happened in January of this year, when Nifty after making its first lower high, formed a bearish engulfing candlestick pattern. Subsequently Nifty gave a sell signal on the Ichimoku Cloud as well. Since then Nifty has made a series of lower highs and lower lows.

This week it has broken the 200 week moving average, another confirmatory signal, which the long term players should beware of. Investing now, and giving valuation as a reason, would be foolhardy. The above chart shows how Nifty took some support at the 200 week moving average, and also gave a buy signal in October but the rally soon fizzled out and since it broke the 4700 support, another round of heavy selling could be expected even if there is some relief rally.

I wanted to point out, in this post the beauty of Ichimoku cloud which did not give any sort of buy signal, even though there were strong rallies from February to April and then in October. Ichimoku still believes that the trend is down and because its below the cloud expecting any kind of immediate support would be stupid.

I would like to point out that the monthly charts shows 4000 as support area.


Technically from an investing point of view, I will until there is a higher low formed on the charts and Ichimoku buy signal.

Could Not Resist Re-Posting It !

Happy Thanksgiving — the Dow could be going to 4,000

by PeterLBrandt

I hate to be the turkey of the day/month/year, but we are in a bear market. The only question is how low will this turkey go?
I am a chartist. I deal in chart patterns. I deal in possibilities, not probabilities and certainly not in certainties. I can only state what a chart is telling me by its geometric construction — and geometric patterns, even when clearly identified, are subject to failure.
Nevertheless, I am obligated to call a chart for what it is. Part of chart analysis is determining the price targets implied in a certain chart patterns. I get loads of criticism on this one. Whenever I state an implied objective of a pattern I hear the same whine:

“But, but, but,but, Brandt, you say in your book that charts are a trading tool and not to be used for price forecasting. Yet, Brandt, you make price forecasts. You are confusing me. You say charts should not be used for making price forecasts, but that is exactly what you are doing.”

If you are in this camp, I have one thing to say to you –  get over it, learn to live with it.
Charts are NOT for price forecasting. But a chart pattern carries an implied price move. I recognize that any given chart pattern has a significant chance of failure. But until a pattern fails or is not modified by a contrary pattern, then price targets are a good guideline.
When prices act contrary to the implications of a chart, then I run for the hills. But until then, I retain strong opinions (weakly held). If you can’t understand this nuance, that is your problem, not mine.
OK, all this was a build up to your Thanksgiving gift — a price forecast in the DJIA. Please step back and take a 30,000 foot view with me.
The rally from the March 2009 low was on decreasing volume. Rallies that do not draw in the public are very suspect, and prove more often than not to be corrective rallies. In this case, the correction is of the 2008 to 2009 price decline. That’s right, the volume profile of the this 32-month rally is much more typical of a bear market rally than of a genuine bull trend.
The founders of classical charting  (Schabacker, Edwards, Magee) identified something called a 3-fan principle. The 3-fan principle specifies that a corrective rally may be defined by trendlines with decreasing angles of attack. The concept also specifies that the violation of the third fan line establishes the top  of the corrective rally — and that the subsequent decline will retrace the entire distance of the corrective rally.

Now, you may want to give me with all the reasons why a return to the 2009 low is not possible. That’s fine — but, keep it to yourself. I will change my mind when price makes me change my mind, not one moment before.
The fact that the daily and weekly charts completed a H&S top simultaneously with the violation of the third fan line is a confirmation that the May and July highs will not be breached. Another classical charting principle is that H&S tops and bottoms (when they meet all of the criteria for the pattern, which this H&S top did do) represent a major turning point in a trend.
Next, let’s move from a 30,000-foot view to a perspective from the space station. Should the implications of the 3-fan principle be realized, something very, very, very (do I need to repeat the word “very” again?) significant would become apparent to a chartist.
A move back to the 2009 low on the quarterly semi-log chart sets up the possibility (not probability, not certainty) of a 13-year H&S top whereby the entire advance from the March 2009 low is nothing more than the right shoulder of this massive configuration.
Should the market decline toward the 2009 low, then the massive H&S top on the quarterly chart becomes a real (but wild) possibility. The rules of classical charting specify that a decisive completion of a H&S top should lead to a decline equal to the height of the H&S.

On an arithmetic basis, the target in the Dow would become lower than 1,000. On the semi-long chart the target would be around 4,000. So I will use the higher target.
Do I really think the DJIA will decline to 4,000? I have no idea. But I do know this — that if it does it will be one wild (and hopefully profitable) ride.

Nifty : Channeling Challenge

Last week's market action has caught the bulls off guard. After the October rally November was expected to be a follow through month or at the most a consolidation period. Well, taking market lightly never works!

Above is the weekly chart, the crack below 20 week moving average, shows that the bullish momentum is long gone and its time to beware of the bears. The other important observation is Nifty's inability to even challenge the upper trend line. This shows that Nifty was weak in its up move and the down move would be harsher!

Obviously all hopes are now on 4700 providing the support. I have generally seen, when some kind of level is over watched the market tends to ignore it and catch most people on wrong foot. So we can expect no support there (bulls would be crushed) or Nifty not at all reaching there (bears would be fooled). I believe the former to be more likely. The ultimate trick the market can play would be to fool both bulls and bears, which would be crashing below 4700 stop out all bulls and suck the bears in and then rally furiously much higher! This would be the toughest scenario to work on and "the vigilant" would be rewarded.

Another point I would like to make is about volumes. I know that the F&O volumes have been quite high, but the cash market volume is certainly pathetic. You can see how whole of 2011 have been on quite low volumes. Traditional technical knowledge suggest that a sell off on low volumes is a sign of correction in a predominant uptrend. But there is another aspect of it, low volumes can also be a reason for concern. Low volumes means there are less sellers with conviction, but it also means there are less buyers with conviction. So the correction with lower volumes cannot be taken for granted to be a dip to buy in.

I will be surprised if 4700 provides a great deal of support in coming weeks. The lower trend line is one to be watched and in case it breaks, well, welcome to the panic street!

Six Keys to Being Excellent at Anything

2:21 PM Tuesday August 24, 2010  | Comments (217)

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I've been playing tennis for nearly five decades. I love the game and I hit the ball well, but I'm far from the player I wish I were.

I've been thinking about this a lot the past couple of weeks, because I've taken the opportunity, for the first time in many years, to play tennis nearly every day. My game has gotten progressively stronger. I've had a number of rapturous moments during which I've played like the player I long to be.

And almost certainly could be, even though I'm 58 years old. Until recently, I never believed that was possible. For most of my adult life, I've accepted the incredibly durable myth that some people are born with special talents and gifts, and that the potential to truly excel in any given pursuit is largely determined by our genetic inheritance.

During the past year, I've read no fewer than five books — and a raft of scientific research — which powerfully challenge that assumption (see below for a list). I've also written one, The Way We're Working Isn't Working, which lays out a guide, grounded in the science of high performance, to systematically building your capacity physically, emotionally, mentally, and spiritually.

We've found, in our work with executives at dozens of organizations, that it's possible to build any given skill or capacity in the same systematic way we do a muscle: push past your comfort zone, and then rest. Aristotle Will Durant*, commenting on Aristotle, pointed out that the philosopher had it exactly right 2000 years ago: "We are what we repeatedly do." By relying on highly specific practices, we've seen our clients dramatically improve skills ranging from empathy, to focus, to creativity, to summoning positive emotions, to deeply relaxing.

Like everyone who studies performance, I'm indebted to the extraordinary Anders Ericsson, arguably the world's leading researcher into high performance. For more than two decades, Ericsson has been making the case that it's not inherited talent which determines how good we become at something, but rather how hard we're willing to work — something he calls "deliberate practice." Numerous researchers now agree that 10,000 hours of such practice is the minimum necessary to achieve expertise in any complex domain.

That notion is wonderfully empowering. It suggests we have remarkable capacity to influence our own outcomes. But that's also daunting. One of Ericsson's central findings is that practice is not only the most important ingredient in achieving excellence, but also the most difficult and the least intrinsically enjoyable.

If you want to be really good at something, it's going to involve relentlessly pushing past your comfort zone, as well as frustration, struggle, setbacks and failures. That's true as long as you want to continue to improve, or even maintain a high level of excellence. The reward is that being really good at something you've earned through your own hard work can be immensely satisfying.

Here, then, are the six keys to achieving excellence we've found are most effective for our clients:

1. Pursue what you love. Passion is an incredible motivator. It fuels focus, resilience, and perseverance.
2. Do the hardest work first. We all move instinctively toward pleasure and away from pain. Most great performers, Ericsson and others have found, delay gratification and take on the difficult work of practice in the mornings, before they do anything else. That's when most of us have the most energy and the fewest distractions.
3. Practice intensely, without interruption for short periods of no longer than 90 minutes and then take a break. Ninety minutes appears to be the maximum amount of time that we can bring the highest level of focus to any given activity. The evidence is equally strong that great performers practice no more than 4 ½ hours a day.
4. Seek expert feedback, in intermittent doses. The simpler and more precise the feedback, the more equipped you are to make adjustments. Too much feedback, too continuously can create cognitive overload, increase anxiety, and interfere with learning.
5. Take regular renewal breaks. Relaxing after intense effort not only provides an opportunity to rejuvenate, but also to metabolize and embed learning. It's also during rest that the right hemisphere becomes more dominant, which can lead to creative breakthroughs.
6. Ritualize practice. Will and discipline are wildly overrated. As the researcher Roy Baumeisterhas found, none of us have very much of it. The best way to insure you'll take on difficult tasks is to build rituals — specific, inviolable times at which you do them, so that over time you do them without having to squander energy thinking about them.

I have practiced tennis deliberately over the years, but never for the several hours a day required to achieve a truly high level of excellence. What's changed is that I don't berate myself any longer for falling short. I know exactly what it would take to get to that level.

I've got too many other higher priorities to give tennis that attention right now. But I find it incredibly exciting to know that I'm still capable of getting far better at tennis — or at anything else — and so are you.

Here are the recent books on this subject:

• Talent is Overrated by Geoffrey Colvin. My personal favorite.
• The Talent Code by Daniel Coyle
• Outliers by Malcolm Gladwell
• The Genius in All of Us by David Schenk.
• Bounce by Mathew Syed

* Thanks to commenter Rick Thomas for pointing out the misattribution.

Tony Schwartz is president and CEO of The Energy Project. He is the author of the June, 2010 HBR article, "The Productivity Paradox: How Sony Pictures Gets More Out of People by Demanding Less," and coauthor, with Catherine McCarthy, of the 2007 HBR article, "Manage Your Energy, Not Your Time." Tony is also the author of the new book "The Way We're Working Isn't Working: The Four Forgotten Needs that Energize Great Performance" (Free Press, 2010).

Emerging Market : Decoupled the Wrong Way?

For the past few days and weeks, I am observing that Nifty is under performing US markets. When Dow rallies the natural tendency is to expect Nifty to rally the similar percentage points and when it falls the same amount of correction. In the current environment where Global headlines dominate the proceedings I think its fair to assume it.

But as you too must have noticed, Nifty is not at all picking much of the positive sentiment that has developed recently in the US markets atleast. The chart below compares Nifty Vs S&P 500 for the past 3 years.

As you can see from Oct 2010 to Feb 2011 (4 months) Nifty has under performed SPX, since then it has been at par with it. Is another bout of under performance coming up for Nifty? Also notice how since Dec 2008 till July 2009 Nifty was trumping the SPX.

What I feel is that when RISK ON trade is on, emerging markets do much better than developed markets, and when RISK OFF trade is on, it fairs much poorly. So if fear trade is to carry on for some more time, expect Nifty SPX ratio to hit the 3.5 mark in near future. I checked the similar chart for Hang Seng instead of Nifty and it also tells the same story, only the situation is more grim.

Ed Easterling’s 12 Rules of Market Cycles

Ed Easterling’s 12 Rules of Market Cycles

by Barry Ritholtz

Ed Easterling of Crestmont Research boils down his views on long term markets to 12 rules of secular stock market cycles. In case you are unfamiliar with Ed’s work, several books, including Unexpected Returns: Understanding Secular Stock Market Cycles; he also wrote Probable Outcomes.
Here are Ed Easterling’s 12 Rules of Market Cycles:

1. Secular cycles are driven by the inflation rate (deflation, price stability, and higher inflation)
2. Secular bulls occur when P/E starts low and ends high over an extended period
3. Secular bears occur when P/E starts high and ends low over an extended period
4. Cyclical bulls and bears are interim periods of directional swings within secular periods
5. Cyclical cycles are driven by market psychology, illiquidity, or other generally temporary condition(s)
6. Time is irrelevant to the length of secular stock market cycles
7. Secular bulls require a doubling or tripling of P/E
8. Secular bears occur as P/E stalls and falls by one-third to two-thirds or more
9. When real economic growth is near 3%, there is a natural floor for P/E between 5 and 10, a natural ceiling around the mid-20s, and a typical average in the mid-teens
10. If economic growth shifts upward or downward for the foreseeable future, the natural range moves upward or downward, respectively
11. Inflation drives P/Es location within the range; economic growth drives the level of the range
12. The stock market is not consistently predictable over months, quarters, or periods of a few years; the stock market is, however, quite predictable over periods approaching a decade or longer based upon starting P/E

Good stuff. That’s an interesting take on broad cycles.

Best Action is Inaction

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In a previous career, the objective of my trading was to grab as many points or “ticks” as I could out of the day’s trading action.  Generally, the wider the trading range for the day and the greater the volatility, the more money I made.   The action since the beginning of August has been fertile territory for the day trader.  Unless you are a day trader, read on for my own educated advice.

Trying to establish a *position* or fundamental/technical trade in this sawtooth volatility is masochistic.

First, let me say that becoming a profitable day trader is not easy.  You must watch the market at all times and you must learn the discipline to cut losers quickly and let winners run.  At least 2/3 who try to become a day trader will fail and it will most likely take a year or more to turn the corner.  The good news is that a successful short term trader can bring knowledge gained from day trading into longer term trading strategies.

The first obvious and hardest lesson is to get rid of all pride, all pretense of “beating the market”, and to be able to admit defeat quickly by cutting losers short.  The reality is that over short trading periods, you will have a number of losing trades that is nearly equal to the number of winning trades.  The difference between success and failure is cutting the losers short and letting the winners run.  Over longer periods of time you might be able to increase your success ratio, but you still need to exert discipline over your emotions.

The second lesson that can be applied is to never force a trade.  If you watch the markets all day long, you almost feel compelled to be *in* them.  The reality is that you should almost always force yourself to wait until you cannot sit on your hands anymore.  As a daytrader, these compelling opportunities could be once or twice a day.  As a long term trader, these compelling opportunities could be once a year.  It is ok to sit in cash or to have most of your risk hedged away.  Being in cash or net neutral allows you to jump on an opportunity when you believe it looks screaming rich or screaming cheap.  Those who were anxious are most likely sitting on a loser, praying that the trade comes back, and too fearful to double down.

So stop worrying about “missing out” lest you want to get chopped up as well.

Barclays Technical Guru: Sorry, But Markets Broke Down Ominously All Over The Place Yesterday

Fans of technical analysis will enjoy this big chart from Barclays' guru Jordan Kotick who sees signs everyone that markets have broken down in a bad way.

THE BULL BEAR DEBATE

THE BULL BEAR DEBATE – A COMPLACENT MARKET OR A RESILIENT MARKET?

by Cullen Roche

This morning’s Barrons had a good piece by Michael Santoli discussing what he refers to as a market “held hostage” by Europe.  And it very much is.  Mr. Santoli cites the bull-bear debate surrounding this environment:

“The crux of the bull-bear debate today, then, is whether the market’s perseverance is best compared, in boxing terms, to a resolute fighter with an iron jaw or a punch-drunk tomato can without enough sense to go down. This can be a fine and imprecise distinction, and the first condition can morph into the second with one blow too many. But when a market refuses so many perfectly good excuses to collapse for good, its resilience probably deserves the benefit of the doubt.
As put on Friday by veteran market strategist Vince Farrell of Ticonderoga Securities:
“The market seems to handle whatever [is] thrown its way. The Greeks tried to take the system down, but it looks like, as the Spartans of old, they are being carried back on their shields. The Italians are hoping the full [Mario] Monti will pull a bunch of technocrats together and muddle through. U.S. economic news, on balance, continues to improve. Inflation came off the bubble in China and some are guessing the government will ease [interest rates] a bit by the end of the year.”

So, is the market resilient or complacent?  I don’t think it’s either.  For once, the market is acting quite rationally.  The concern in Europe is that the EMU’s leaders will let everything collapse.  This worst case scenario is incredibly frightening from the market’s perspective as it has the potential to cause a 2008 repeat.  So, when the news headlines appear to hint at Europe falling apart the market rightfully craters.  And when the worst case scenario appears to be off the table the market rallies back.  Despite the market’s fairly rational response so far, we are likely to remain hostage to the Euro crisis until a real fix has been implemented.   Don’t hold your breath on that….

Confused?

November series has been extremely tough for traders, especially for momentum traders who try to follow a trend, play break out and rely on a fast moving market. If you are caught wrong footed on a position or just confused as to what side to take, well welcome to the party.

The prime reason for this extraordinary environment is the increased focus of market and more so the media on news coming out of Europe. None of us know how long this will carry on, but it surely has become a joke to some extent. Things will sooner than later come to a break point when market will decidedly act.

I am trying to see how the Institutional Investor are playing this Market.

The chart below shows FII Index futures and equity action of FII as well as DII. The upper panel shows Long and Short position build up for each day and cumulative as well. The lower shows how much FII and DII have bought or sold in equities.

As seen from the chart FIIs added a whole lot of Longs and got rid of their Shorts on expiry day 25th Oct when Nifty rose by 94 points. They also bought decently in equities, though the DIIs sold it to them. So at this point of time we can expect FIIs are the ones who are bullish and DIIs bearish.

Focus on 28th Oct, when Nifty did a huge gap up and closed 159 points up. FIIs added more longs and got rid of shorts again. They also did a tremendous amount of equity buying, much more than DIIs supplied them. Funny thing to note: that level of Nifty has not been reached again.

The FIIs have since then (till 4th Nov) did nothing significant, except for reducing the longs. And on 8th and 9th Nov bought equity and increased longs, DIIs meanwhile are doing their selling.

Now come to what happened on 11th Nov, when Nifty closed on 5170, over 200 points below the Intermediate top. FIIs are suddenly cutting their Longs significantly and what more there are signs of Short addition. There is not much equity action, but its generally seen that equity action by FIIs lag their derivative action.

So are the FIIs finally given up on their bullish stance? Or this action on Friday just a one day panic. We will get clues for this in the coming week. To make things interesting US markets have rallied strongly on another set of news coming from Europe!

If we see FIIs shifting to bullish mood again next week, we can expect 5400 to be taken out in near future. But if we see the rally in global markets being ignored and sold into by the FIIs, there is a huge chance of this  being another bad series for Nifty. Note how DIIs have not at all shown interest in buying, which shows they are expecting lower levels again. My friends at Vtrender also point out how DIIs sell at market tops.

One thing is for sure DIIs are more sure about what they want to do in this market! FIIs were bullish, but looks like they may change their opinion. Whatever happens, one thing is for sure, these are extremely confusing times and everything depends on how the news flows, which is never a good time to be in the Market.

Does It Matter If Stocks Are Cheap?

DOES IT MATTER IF STOCKS ARE CHEAP?

by Cullen Roche

There seems to be a never ending debate these days about the “value” of the market.  The bulls cite trailing earnings to show low valuations while the bears generally cite forward earnings or cyclical data as evidence that the market might be expensive.  I’ve never found much value in P/E ratios or other such “value” metrics for that matter.  And honestly, unless you’re Warren Buffett or a hedge fund with access to the Board of Directors or other inside info you’re battling armies of analysts using the same metrics in the same manner.  The odds of you finding a diamond in the rough using P/E ratios or similar valuation metrics is frankly, very low.
And now, an interesting bit of research from Draco Capital Management shows that investors might place far too much emphasis on the “value” of the market.  In fact, their research shows that it’s nearly impossible to decipher future returns using present valuations (via Advisor Perspectives):

“But let me run you through a few charts that may raise some questions about your blind faith in the Price-to-Earnings multiple, the most popular way of measuring value.
What this first chart does is take a snapshot of the market’s P/E ratio on January 1, 1900.  Then it fast-forwards three years to see how much money you made or lost if you made an investment in the Dow.  Those two pieces of data become one little dot on our scatter-plot chart.  I’ve plotted points for every month in the 20th and 21st centuries.”

“In this chart we’re relating present valuations to future returns.  We’re checking to see if buying the stock market when it’s cheap translates into profits down the road.
Over a three year window, the data tell a fairly convincing story.  Valuations matter a lot less than we’re comfortable admitting.  As indicated by our regression line, there is a modest correlation between present valuation and future return, but with an R-squared of 0.03, it should be ignored.  So there you go.
Over a 3-year window, there is no correlation between ttm P/E’s and the degree of future profitability.”

They ran the same data over a longer period.  The results were pretty similar:

Let’s broaden our window a little further.  Let’s widen our scope to 10 years.  Does buying stocks when they are particularly cheap translate into more profitability for the coming decade?

“The visual correlation is a little more clear.  Our R-squared is a bit higher but is it even at the level where it’s statistically meaningful?  I’m still not sure I’m prepared to say that buying at lower multiples translates to higher profitability.
I feel good about saying one thing, though.  There are few guarantees in this business, but — surprise! — if you buy stocks when they are craaazy cheap and can hold onto them for 10 years, the odds suggest you’ll make money.”

Their conclusion:

“1. Correlation between earnings multiples and subsequent returns is loose.  Statistically speaking, it’s almost non-existent.
2. Unless you’re dealing with long holding periods, pretty much any outcome is in play.  Markets that are historically cheap can get a lot cheaper and take a lot longer than most humans are comfortable waiting before swinging back into profitability.
3. In truth, this kind of analysis is only really useful during a few select moments in history.  It’s only helpful at identifying extremes when the probabilities start to skew in the rational investor’s favor.  The problem is that during those extremes is when the fewest number of investors are bothering with this type of analysis.  They’re lost in all the other noise of the moment.  They’re buying tech stocks in 2001 because, it’s the future, maaan!  Or they’re cowering in their bunker in 1948.  Or broke in 1933.  Or high on the Nifty Fifty in 1965, among other interesting things.”

As they say, past results are not indicative of future returns.  Beware of those data mining using the rear view mirror.  These various valuation ratios might make the average financial advisor sound smarter than the average bear, but that doesn’t mean he/she is utilizing information that will necessarily lead to superior returns….

Dollar Bull Run?

The USD-INR chart shown below looks very bullish. After doing a perfect 62% retracement and finding support at the 44 mark dollar is strengthening. I would expect some correction or consolidation and then another rally till 52.

The rally from 39 to 52 looks very impulsive to me, and I would expect the next rally to be the same with base target of 57 and then to 65 in long term. Which actually paints a very bearish picture for equities and commodities.

Nifty : Internal Check

Time for some home grown charting!

The upper chart shows how Breadth of the market defined by Advance minus Decline and as seen its not going anywhere, so some kind of break out in near future should be expected.

The lower chart shows Close - Weighted price of Nifty. I have noticed earlier and marked again how this kind of negative divergence has lead to fall in market.

Combining the findings of the two and monitoring them in future if Nifty moves down and there is a break down in breadth. Look out below!!