SwingTrader’s take on the Indian Stock Market

A sideways day today on less volume than yesterday. Everything still looks okay with market internals. The combination of advances/declines & advancing volume/declining volume suggests that rising stocks were dominating thruogh most of the session. The market (NIFTY) should get another move up from here but as I said yesterday if it breaks down from here the nearest support is 2725. We will see…

Many of the picks from 10/01/2006 which were valid for today got triggered and are look quite okay. Few picks that didn’t get triggered (listed below) are still valid:

From today’s scan: ESSAROIL, VIJAYABANK, BANKINDIA, HEXAWARE, UNIONBANK, ALBK, BPCL, HDFCBANK

NOTE: Too many bank stocks are setting up as buys. Ideally don’t trade too many stocks from the same sector, choose only one or two to trade.

I cannot stress enough the importance of collecting trading stats. I have been swing trading the picks from the above since the past 10 months or so. I have a habit of collecting detailed stats of each trade and now that I am analyzing the stats I realize that I need some way to tighten my trailing stop to capture more profits. At the moment I am losing a bit more out of my profits by the time the trade gets stopped out by the trailing stop (Highest High since entry minus 2 times ATR(10)). Since I am swing trading I need to be a bit aggressive about my trailing stop especially when my trade is significantly profitable. I am currently trying to come up with trailing stop strategy that tightens the stop based on the trade’s max profit. I will post an update if I come up with something interesting. If anyone is reading this blog I would invite them to share their ideas on this.

I was testing a scan to list stocks that might be reversing their trends (in this case from downtrends to uptrends). Here are few interesting stocks that I found that I will be watching in the near future.

I am planning to use this scan for position trading (trade duration lasting 2 weeks to 2-3 months). I will be watching these stocks to see if they really reverse trends by forming a base and then breaking out of it. If they do then I will enter on the first pullback and ride them as long as I can. Few of these stocks like IDBI & KTKBANK have already formed a base and have broken out of it, these I will enter on first pullback.

The market took a breather today with a sideways move. The volume was above average indicating a distribution day due to profit taking. We had a good move the past 7 days so there could be a pullback or sideways consolidation but you never know.

My Swing/Position trading scan returned the following picks:

DABUR & HINDLEVER were on yesterday’s list but did not break above yesterday’s high (triggering the trade). These appear on today’s list because yesterday’s signal is valid for 3 more days (if the stock is still looking fine and doesn’t breakdown in the meantime). For details see my post about my trading strategy.

If someone is using the above picks make sure you read how I enter trades. I would also urge you to be patient with the trade as these stocks are not strict swing trading picks that either fly off from the next day or hit the stops. These are swing to position trades that take time to develop and then fly. My average trade lasts 1-2 weeks.

Please post a comment if you need clarifications.

The rally goes on. Record number of stocks are hitting new monthly highs.

Scan Picks

ESSAROIL, DABUR & HINDLEVER

The charts of the above stocks look quite decent and can be traded.

Food For Thought

When you are trying to come up with a trading strategy try and make it as simple as possible. Use minimum number of indicators and make the signals objective. When I started to learn technical analysis around 5 years ago I read a lot on technical analysis and used as many indicators as I could on my charts to try and get as many signals I could. I always used to get thoroughly confused due to conflicting signals. Finally one trader who looked at my charts suggested I remove few indicators to get more clearer signals. When I tried it sure cleared up things.

Generally speaking, the choice of indicators depend on the sort of trading strategy you are developing. If it is a buy-the-dips-in-an-uptrend strategy then all you need is one trend indicator & one oscillator to indicate pullbacks. Anything more than this will start to create confusion. If you still want to add more indicators then at least make sure they are based on different data. For example – if you already have indicators based on price then have one indicator based on volume like the “On Balance Volume” or something based on a combination of price & volume like Accumulation-Distribution. But having multiple indicators based on the same data will just create confusion and lead to what is known as “PARALYSIS BY ANALYSIS”.

For my strategy I just look at two EMAs for spotting trends (actually even one EMA will do) and Fast Stochastics to spot pullbacks. I also have Average True Range on the chart but that is only for my position sizing & trailing stop computation and is not used for entry signals.

Well, it didn’t take too long for that to resolve. NIFTY broke out of the two week trading range on satisfactory volume (equal to about average 21-day volume). This could be the start of another leg up, let us see.

My trading scan turned up only GLENMARK today. This was expected, my scan doesn’t turn up picks when the market rallies strong because most of the stocks rise with the market so there is very little chance that there would be too many stocks that become oversold on such a day. I don’t like GLENMARK chart, the stock is just flag with no clear uptrend.

Let us see what happens tomorrow. There are few more things about my trading style that I would like to clarify so I will probably post something about it later today or tomorrow.

Before I post market internals/breadth charts I would like to point out that I use these charts only as guidelines. These act to caution me about the internal strength of the market. The ultimate indicator is price, its confirmation is required for taking any kind of action.

This is the standard advance decline line. If there is a divergence with the market index price then it could be warning of coming trend change. This indicator has to be used with caution because it leads the price by a wide margin. For example, if the market is rising and the advance decline line starts to fall it doesn’t mean that the market will start to fall. This divergence could go on for months before the price reacts or it might just turn out to be nothing.

In the NSE advance decline chart below note that it supported the market very well in the mid-2004 rally and it was neutral to supportive in the mid-2005 rally but its divergence with the market has now been going on for more than an year. It really fell off in Sep/Oct 2005 and has not recovered since. I am not sure how long this will go on but it is something to keep an eye on and not go over the board with long-term investing.

This is the monthly new highs – new lows chart (not the 52 week version). I use this to give me an indication of how the broad market stocks are performing in the intermediate term. For example if a strong rally starts I look at this chart to see if any significant percentage of stocks are supporting the rally but breaking out to new monthly highs. If they are not then it acts as caution. It is the same case for declines, if the market declines but not too many stocks hit monthly lows then it means that the broad market is not supporting the decline.

In the chart below look at the last part of the rally in Sep 2005, not too many stocks were hitting new monthly highs though the market was making new highs. Also look when the market rallies after a decline (especially the recent rally). There should be sudden spurt in the new highs indicating good market support for the rally. This recent rally (with today’s breakout) is looking good.

The idea behind this chart is mine. It uses the market advances/declines & advancing/declining volume to compute the power behind a day’s move. This gives important short-term divergence indications. This again similar to new highs – new lows should give clear indications when market rallies or declines. This gives clearer indications than the new highs – new lows chart. This is a more short-term chart than the monthly new highs – new lows chart.

In the chart below look for confirmations when a new rally begins after a pullback or a correction, there are clear signals visible.

In the US I have traded stocks & futures. I have swing traded stocks and later mostly concentrated on the Nasdaq 100 Index ETF (QQQQ). I traded commodity futures & also daytraded DJ Euro Stoxx 50 futures on the EUREX exchange. Initially I suffered many losses but quickly learnt how to control risk. One trader helped me a lot during this phase suggesting various strategies and pushing me to concentrate on risk management instead of trading strategies. By the time I started to get the hang of trading properly I had to leave US. I did manage to break into profits significantly before I left the US.

I arrived in India in Oct 2004. Have been swing trading stocks (on a small scale) since Jan 2005 to test out my strategies. I am currently researching methods to trade the NIFTY futures with minimum drawdowns. Ideally I would like to restrict my trading to NIFTY futures only. It is less work than swing trading stocks but requires more discipline & control in managing risk. My aim is to earn steady monthly income with minimum drawdown.