The selling pressure in key index stocks in the late afternoon may lead to a minor correction tomorrow, the first day of calendar year 2008.
There was buying on the side counters as the market wide advance decline ratio was 5.44:1 compared with the Nifty A/D ratio of 2:1. While the large cap stocks moved sideways, the small and mid cap stocks were in great demand.
Kamlesh Langote of vfmdirect.com expects a marginal correction in the near future. The monthly relative strength index (RSI) at 83 indicates overbought conditions. A monthly RSI above 80 is known to cause a sharp correction. There were corrections in May 2006 and August 2007 when the monthly RSI was 87.
However, there is strong support for Nifty at 6,100 and thereafter, at 6,000. The Nifty Put options added 2.43 lakh shares at 6,100 and 1.13 lakh shares at 6,000 strike prices, indicating these as support levels. Resistance is seen at 6,300 and 6,400, where Call writing was seen.
Reliance Industries was listless on Monday with January futures prices declining marginally by 0.47 per cent. The trading volumes were half that of Friday despite the reduction in the lot size from 150 to 75. The State Bank of India was steady, with trading volumes remaining subdued despite a smaller lot size of 125 shares (250 shares).
Infosys, TCS and Wipro remained weak on account of fresh short positions. The futures contract of TCS closed at discount to spot with open interest increasing by 2.41 lakh shares. But the Infosys Technologies contract closed at a premium.
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.
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