Friday, February 17, 2012

EOD Analysis For 17th February 2012 and Outlook For 21st February 2012

Positive global cues and a flush of liquidity from all over helping bulls defy gravity once again. OI in Nifty futures hovering around the 30 million mark and VIX hovering around 24;

Critical levels and outlook remain unchanged

As long as 5177-5196 is intact, bears are in ICU and the bullish tsunami [this is undoubtedly a strong bullish tsunami from the lows of Dec'11] has steam. Breach of 5408 on closing basis can open another 144 points to the downside.
IMHO, 5408 is a very crucial level witnessed last year also; once breached convincingly on the upside on closing basis, does not give up so easily. Given the strength of the rally and the way the 5177-5196 has held firm for 14 sessions in a row now, IMHO this is the max downside on closing basis until 29th Feb '12 [unless some major bad news comes through]

The negative tinge for 20th Feb to 22nd Feb is open but I stand corrected with the word 'bearish'; just some retracement of the meteoric rise via profit booking.

Yet again, the weekly close has been stronger compared to the previous week; As far as possible, I avoid putting in my EW perspective as Raghuji and Wave Rider are pretty good in putting it all together with various scenarios. However, this weekend, I will put in my EW perspective by Sunday evening my time[in consultation with seniors as well] It will be a powerpoint slideshow that can be downloaded.

There is no perfect system and the relentless quest for finding that perfect system will only deter a trader from being consistent and applying the basic rules of trading [identify the trade, open positions with a hedge, and drop the losing leg after a certain threshold] If in doubt, stay out and don't open the trade - simple and easy [There is no rule that says trade everyday!!! That is a weakness a lot of human beings impose on themselves]

A Small Primer:

Some basic levels based on my limited experience of 16 months with Nifty and IMHO all trading in Nifty must make a note of these levels in their trading diaries

[I am ignoring the sub 4600 levels for now]

Set1: 4640-4690-4720-4750-4808-4840-4880
A close above 4880 opens Nifty for 144 points to the upside
A close below 4690 opens Nifty for 144 points to the downside
[The number 144 will be consistent at all critical levels; I just know it is a Fibbo number and for some reason it works; beyond that I have no logic to offer]

Set2:  4911-4944-4944
2 consecutive closes above 4944 opens Nifty for 144 points to the upside again

Set3: 5032-5092-5150 [There is a congestion band at 5169-5177-5196]
1 close above 5150 opens Nifty for another 144 points to the upside subject to volume and momentum [courtesy the congestion band mentioned]

Set4: 5225-5280-5348-5380-5408
5408 is a very very crucial level IMHO and close above/below this brings a lot of changes to Nifty; the importance gains more relevance on weekly/monthly basis

Set5: 5440-5480-5532-5580-5608-5655-5690

5408 to 5532 is a consolidation area on closing basis; once Nifty comes into this area, it tends to spend time gyrating here before assuming a definite direction

Set6: 5740-5780-5810-5850-5880-5944

5944 is the most crucial price level on closing basis for the upside. Once Nifty closes above 5944 on closing basis, it will zoooom and has 3 potential stops 6080-6180-6280. [Here, I need to thank a senior from mmb, MGUSA who very nicely explained and illustrated the importance of 5944 and now I realize the importance of that]

Beyond this is unchartered territory as we only have 2 price points 6338 and 6357. So even if one is not comfortable with all the jargon, just following these levels in sets above can make trading life simple. When spot price is above the mentioned level, the lower levels become support and when spot price is below the specific levels, they become resistances. [with a small tolerance of 20 points]

For those reading my blogs, leaving apart my personal bias and verbose commentary, these are the very levels that I always mention depending on price action - so far they have helped me. Just sharing the same with all of you as well.

What I have observed with myself and many people is that we don't take proper hedges - and we have an underlying psychological barrier that prompts us to think that our main position should end up as the winner; took me some time as well to come out of this mindset and was a costly learning experience in summer 2011! The thumb rule is simple - the losing leg should be dropped and the winning leg should be retained [even if it means that the losing leg was the original position and the winning leg was just the hedge - what matters for the trade is which leg is swelling trading margin and which leg is depleting it; the leg that depletes should be knocked out - period] Also, not every trade can result in success; even with all the notes, there are days filled with whipsaws when stop losses are triggered on either side! We have to humbly accept that and move on. Last but not the least, the stop loss needs to be modified once a trade is going in your favor so that you lock in some of the gains.


Anonymous said...

Sir, Please explain something hedging trade with Examples

Raghuvanshi said...

On a lighter note,they say that consider the bull mkt. to be over when the last bear turns bullish.Is today that day as Naagraj sounds apologetic being a bear----?

reachnagraj / theknight16 said...

@guest - please go through the archives of July/August 2011 where hedging for Nifty and Banknifty have been explained. The same has also been covered in the Futures and Options section of this blog. Good Luck

reachnagraj / theknight16 said...

Let us discuss after I send my draft version to all our seniors for review.