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Saturday, October 30, 2010

Technical Analysis and Investment Portfolio Management

I suppose even the hardcore technical analysts might have a investment portfolio in which they might buy and hold scripts for significantly longer periods of time than the time frame they use in their trading activities. I also presume that their choice of scripts in the investment portfolio probably relies more on fundamental type of analysis.

I have been investing for over ten years now. And it is only been three years that I have been learning technical analysis and doing a bit of trading.

I have been trying to answer the question: can we use aspects of technical analysis in portfolio management also?

And the answer seems to be: yes, we can.

Let me illustrate this with an example.

I have been holding Asian Paints in my portfolio for over four years now. In the last 14 months particularly, it has shot up like anything - the PE ratio is hovering above 30 + and the fundamental analysts have been saying for quite some time now that it is overvalued.

I have been watching the charts of Asian Paints and holding my position because technically the stock is in a strong uptrend.

But now, it seems the technical charts are weakening. Lets look at the chart shown below. (You can click on the image to enlarge it.)



Clearly, it has fallen below 20 day SMA, and then below 50 day SMA, and now just got a bounce from 100 day SMA ( not shown in the figure ). But chances are that the 20 day High SMA will be a tough resistance to break through. and that the stock will fall again to touch 200 day SMA from where it will probably get a strong bounce.

So, as an investor, I can probably use this technical insight to encash part of my holdings and wait to buy it back around 200 days SMA. For example, if I am holding 50 shares of Asian Paints, this might be a good time to sell 10 shares ( 20%) and use the cash when the market undergoes a severe correction which it will somewhere down the road.

That is all for now ..... Cheers


If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Disclaimer: The above analysis is just that - my analysis. If you choose to trade on the basis of this analysis, you will be solely responsible for the outcome of the trade - profit or loss. Please keep in mind that trading and in particular day trading is not for the novice and there is significant risk of loss of capital in trading
P.S. It feels good to write in the blog again after a long time

Wednesday, March 17, 2010

Nifty Trading - The Day After ....the breakout ....

We live and learn. The market is supreme. When the market shows her hand, you gracefully accept that hand and prepare to follow her.

Ok, looks like the market has broken through 5150 with a lot of force. True that it is now in a congestion zone and therefore trading still needs caution. But what about the breakout? How to trade that?

First thing first. This is not a market to short unless you are a genius - very few of are by the definition of genius. So, no shorting for me not even intraday.

You can take a call to go long- As SS has pointed out many times including the last posting here, the moment of break out is also the moment of maximum risk.

One way to reduce the risk ( and of course the reward too!) is to go long on a pull back which will come in 80-90% of the cases, if not today, sometime tomorrow or later this week or next week.

Question is how do you identify a dip? Here are a couple of suggestions:

1. The indicator that you have been using to detect breakout must have a support line - it could be a trend line or a 200 minute moving average or a 100 minute EMA whichever. Now, usually, the pull back to this level even breaking this support is usually a good indication that this the correction you have been waiting for. The logic is simple and works for a forceful breakout like this. The indicator that is in use and signals trend reversal is likely to have a false indication this time around. The bet you are taking is that the trend is intact.

2. Or, you can simply look at the slow stochastic on the 5day yahoo chart. and wait for the time when the signal screams oversold and then buy there. Here is a chart on the left that illustrates this point.

Now what about SL? Any sensible SL will have to be around 5140-5120. And it might be more profitable to let the trend run and not necessarily close the position before the end of the day.

That is all for now ..... Cheers

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

Like this post? You can receive it free by subscribing. Just click on this link


Disclaimer: The above analysis is just that - my analysis. If you choose to trade on the basis of this analysis, you will be solely responsible for the outcome of the trade - profit or loss. Please keep in mind that trading and in particular day trading is not for the novice and there is significant risk of loss of capital in trading

Sunday, March 14, 2010

Nifty trading or perhaps time not to trade?


Nifty did breakout above 5000 on March 2, but upon quickly reaching 5100 it has lost some of its momentum.

One can say that the reason for this is that having broken out of 5000 , Nifty has quickly entered into a congestion zone of 5150-5300.

Now entering into a congestion and trading in a congestion zone are situations that are toughest for traders to trade in. Sudarshan Sukhani discusses this in this post and the previous post, where he says that

"
The trades that I have never found to be profitable for me are:
a. Entrance into congestion
b. A trade within a congestion
e. Trend reversal

"

When a master like SS has difficulty in this market set up, it is important to listen.

Should we then not trade at all? That is a personal decision. But here is one approach that suggests caution and it tries to preserve capital.

1. Trade only long.
2. As long as Nifty is between 5150 and 5330, trade only on major dips that take the market to its support around 4980 to 4930. A major dip could be Slow stochastic showing oversold in 15 minutes or 20 minute chart.


Now this kind of trading is difficult as it takes a lot of patience. You can ask what about going long between 5150 and 5350? The answer is it depends on your risk appetite. Given that it is a major congestion area, you are likely to get whipsawed many times trading long in this zone even though you are trading in the direction of the trend. Many mini losses will accumulate to generate a large loss. And going short is too difficult - at least for me.

So, for myself I am willing to let go of making money between 5150 and 5330 unless there is a set up that provides a great risk reward ratio - which is a major dip.

This also means that I may not be able to trade everyday. That is good - it will help me to develop patience.

And also, if I trade I will trade only one to two times a day and if unsuccessful, will escape with small loss.

Sounds boring? Well. it will protect my capital - think about it. And best of luck.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

Like this post? You can receive it free by subscribing. Just click on this link


Disclaimer: The above analysis is just that - my analysis. If you choose to trade on the basis of this analysis, you will be solely responsible for the outcome of the trade - profit or loss. Please keep in mind that trading and in particular day trading is not for the novice and there is significant risk of loss of capital in trading

Tuesday, March 2, 2010

Nifty Trading - what is the trend now? may be up, ..may be not !

Ok, despite the huge move on the budget day, Nifty gave up about half the gain and closed right at the 20 High EMA.

My own sensing is that it is too premature to think that the correction is over and that the up move has resume. May be it has, but it has to be confirmed.

I guess the up move will be confirmed, if Nifty were to close above the high of the last Friday. Alternatively, if you go short, your stop loss should be above that high say around 5030.

So the options are: if your hunch is to go long, either wait for it to close beyond 5030 or wait for a correction to enter on the long side around 4940. The trailing SL for longs should begin with 4780 and can be moved up steadily.

If you hunch is to go short, then you SL should be 5030 to begin with and then moved down steadily. The targets could be 4940 and then 4890 and then 4780.

Only the market knows what she will do. You can trade both ways, but a.) you need to know what your plan is and b.) exit with small loss if you are proved wrong by the market.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

Like this post? You can receive it free by subscribing. Just click on this link


Disclaimer: The above analysis is just that - my analysis. If you choose to trade on the basis of this analysis, you will be solely responsible for the outcome of the trade - profit or loss. Please keep in mind that trading and in particular day trading is not for the novice and there is significant risk of loss of capital in trading