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Saturday, December 29, 2007

Bullishness to continue

The trading activity in the final hour on Friday signalled bullishness, going ahead. However, if the past is any indication, the markets tend to have one good week, only to follow it up with weakness in the subsequent week. What happens on Monday will thus be a trend setter.

The markets opened on a weak note on Friday, the first trading day of the new January series, with the bears pulling the benchmark indices close to their support levels.

The reversal came towards the close, with the Nifty moving up from the day’s low of 6,022 to close at 6,080. The late charge should continue on Monday, the last day of the calendar year.

The Nifty is expected to hit its all time high of 6,185 and the Sensex should surpass 20,500. Going ahead, the Nifty is likely to target 6,300 and 6,350 levels and the Sensex should see 21,400 and 21,600.

According to a technical analyst at Motilal Oswal, the uptrend is expected to resume from the January series. The Nifty is expected to move towards the initial target of 6,185 as the undercurrent is still strong.

On a weekly chart, the spot Nifty has already crossed the previous week’s close of 6,040 and is now at the verge of testing the all-time high of 6,185.

An increase in Call options OI was seen at 6,100, 6,200, 6,300 and 6,400 strikes, indicating that operators were buying at-the-money Calls and writing out-of-the-money Call options.

Put options added 5.96 lakh shares at the strike price of 6,000, pointing to this as the support base for the Nifty in the near future.

Among the Nifty stocks, long OI build-up was seen in stocks such as Hindustan Unilever, National Aluminium, Punjab National Bank, Ranbaxy Laboratories, Reliance Energy, Tata Power and Tata Steel. Fresh shorts were seen in Bharti Airtel, Dr Reddy’s Labs, GSK Pharmaceuticals, ICICI Bank, Infosys Technologies, ONGC and Suzlon Energy.

Posted by Srivatsan at 7:27 PM

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Understanding Short Term Trading

Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.

Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.

Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.

Types of Moving Averages

1) Simple Moving Average (SMA)

SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.

2) Exponential Moving Average (EMA)

EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.

The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.

A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.

In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.

Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.

Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.