Welcome New FM

I am too tired to make a long post hence resorting to something of manageable size. Moreover making trading post or last part of MA posts will need lot of writing and probably many charts and I have no energy left for that. Still I think tomorrow or day after I would be able to make part 4 of MA and then on Sunday I will make a trading post. This time, even if I do not get a clear trade, I will still post what I think will happen with the assumptions and also what risk it poses. That should qualify as trading post. Rest you guys will decide and let me know through your comments.

Today was expiry day but still the markets did not move a total of even 1% in entire day. So much for expecting volatility on expiry day. This move does not mean that everything is calm and stable. Market simply appears to be cautious ahead of the two day EU Summit that begins today in Brussels. Though one cannot be too optimistic about outcome of this summit due to opposing views of EU leaders and too many undercurrents but more and more the summit appears to be Angela Merkel (Germany) Vs the Rest of the Europe. It is correctly so because whatever the cost of saving Europe most of it has to be paid by Germans. You can read about it here.

Then as I had expected, Manmohan Singh (MMS as I call him) started acting as soon as he took charge of Finance Ministry. Though not exactly any Earth shattering announcements, he made all the right noises. However what really is encouraging is his readiness to roll back some of the archaic announcements of last General Budget. Particularly sweet sounding to the ears of FIIs will be the rollback of GAAR (General Anti Avoidance Rule) which targeted Vodafone but spooked entire FII community. I personally would have preferred if somehow Vodafone was made to pay but the cost of going after them is too much. Sometimes it is better to loose a battle if it helps us win ultimately.

Another important step could be the clarification regarding taxation on P-Notes (Participatory Notes). Rather than changing all or rolling back all these policies, if MMS can only bring clarity about them in short time, he would have started well as FM me thinks. This is one area where he is comfortable as been there done that in 1991 and I hope he weaves his magic once again. We have problems but none of them insurmountable and fortunately we have a FM at the helm who knows all too well how to do that. If he addresses policy clarity issues, he will have more air to breath while tackling structural issues.

As for the market, we are delicately balanced at 200 EMA and are free to go either way and outcome of EU summit will play a role in NIFTY direction at least in next week. Will post about that on Sunday for sure. Waiting for your comments till then. Happy trading.

Moving Averages - 3

I am back. Did not think that I will be able to write again before weekend but God has been kind. So without wasting your time, will continue our Moving Averages tutorial.

In the first two parts we have seen what are MAs and popular types among them. I will resist the urge to get in to other types of MAs as honestly that will just be a general knowledge without any practical use for trading. So as discussed, we will see which duration we should use, which type and why?

Duration:

Most simply put, duration depends on what kind of view you need about the direction of the market. In other terms, if you are looking at short term trend or you are a trader you will use MAs of lowest duration like 5 day, 10 day or 20 day. If you have a horizon of medium terms (few months) you will be more interested in 50 day kind of MA and if you are a long term investor, your choice would be like 100 day or 200 day MA.

200 day EMA is probably the most popular among all. It is a very long duration MA and usually a strong and reliable indicator of trend, change in trend. It also usually is a strong support or resistance. Medium term investor prefer 50 day MA and short term trader 5 or 10 day duration.

Short duration MAs are very agile and they adapt to price very fast. You will see a change in them even with a single day large move. Long term duration MAs are lethargic. They tend to be very smooth and usually do not get affected by short term volatility. See the self explanatory chart.

Type:

Another normal dilemma is which type of MA to use. Simple MA (SMA or DMA) or Exponential (EMA)?

To be fair, none is better than the other. EMAs give more weight-age to recent prices hence quicker to react. SMAs are simple and represent true average of period under consideration. Usually SMAs are more reliable while indicating Supports and Resistance Levels and EMAs give an early indication of change in Trend.

As you can see in above chart, 50 EMA straightens out before 50 SMA as shown in first oval. At second instance also, 50 EMA starts to drop before 50 SMA.

Here I would like to make one thing clear that one should try various duration, types of MAs depending on one's objective, time horizon, investing style and comfort level. As I have mentioned in some earlier post that I am more comfortable with EMAs, similarly you should find out your own preference.

This now leaves one last post (I am not sure if I will be able to cover everything in one post) about how to trade using MAs. I will write more than one post if it becomes too long to cover all of it in one go. Just wishing that I get the time to do so quickly.

Keep the comments flowing.

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Charts

As promised I had started preparing for trading post but could not find a clear cut trade for the week. There were too many uncertainties and assumptions which were greatly diminishing the risk to reward ratio. I though after so many days if I am doing any trading post, I should be slightly more convincing. Another factor is this being expiry week, volatility may be little high for our comfort. So I decided against writing the trading post.

However, I did not want to go back to continuing MA post and was in mood to post some charts anyway. So I decided to improvise the trading post a little. Here I am posting charts of some very popular NIFTY components. Again the commentary is minimum.

Reliance:

You simply cannot skip RIL when talking about NIFTY. This stock used to be the single biggest factor in deciding NIFTY direction not long ago. However presently there is not much to say here. As you can see the stock is in clear downtrend in the channel. The channel has just intensified and this in spite the fact that there is an active buy back is in the progress. It was never my favorite and certainly isn't one right now.

State Bank of India:

This is the Indian bellwether of probably the most important sector in the World right now... Banking. This stock is a direct barometer of health of Indian Banking system though sometimes it has to bear the brunt of being a Public Sector Bank. As you can see, recently as a very short term level it has started creating higher highs and higher lows (This is the first principle of checking uptrend). But this is very short term and there is a strong resistance at the top marked by the trend line. Unless it decisively breaks that, I wouldn't go long in a hurry. In any case, Banking sector as a whole has just too many uncertainties these days and it is affected not only by RBI but ECB/FED and bond yields of even tiniest European countries. Only a brave heart will take a long term position here.

ITC:

Isn't it a beautiful chart. Has been going up consistently in spite of increased taxes on Tobacco items. ITC actually is a very diversified company from Hotels, FMCG to what not and it is very very difficult to find the fair value of this stock by fundamental method. Though the slope of the rise is not extraordinary the consistency of the rise in a volatile market is worth a note. It is just about to approach over bought condition and might see a piddly correction. This stock is for someone who is an investor and less for a trader.

Hope you will excuse me for not making a trading post and have enjoyed the charts here. Will get moving with the next post on Moving Averages and will also keep my eyes open for any suitable trading post. Keep the comments coming, they help me get back to writing.

Disclosure: No live trading position in any of the above stocks. Have a small no of RIL shares which are held since few years without any short term interest.