Tuesday, April 29, 2008

Webinar on Moving Averages and Trendlines

Below is embedded a video seminar (webinar) which talks about trends, trendlines and moving averages. In case you like this webinar, and want more to come in the future, please click on the comments form below and leave your remarks

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Credit Policy Gives Positive Boost

I must apologize for not posting anything on the site except for the webinar for the last two days. It was a busy few days for me since Saturday. Anyways, I am back now and, hopefully, should continue to be regular like always.

Yesterday and today morning was nervous for the markets. The RBI credit policy announcement was supposed to come out today and a major percentage of the market was expecting a hike in the repo rates to control the inflation. A hike in the repo rates would have been negative for the markets. Fortunately, the nervousness subsided and a thrusting upmove came about when the credit policy was announced and it was made public that only the CRR would see a hike of 25 basis points while the repo and reverse repo rates would be left untouched.
This upmove today was significant in the sense that it crossed the 200 day simple moving average (the green line) today. The 200 day moving average determines the trend in the long term. The price above the 200 day moving average indicates bullishness while it suggests bearishness of the prices are below it. This move should find some resistance near 5300 near the blue trendline, though, according to our earlier post, the target still remains 5441.

Cipla has broken through its upward sloping trendline with the Relative Strength Index (RSI) showing a stronger dip than the price. This may not be very good for this pharma stock. Consider closing long positions.

This is the weekly chart of Hero Honda. Now that this range has been broken, we can look at some nice upmove for this auto stock. Consider buying on a pullback to 800 with a stop loss of 725 for a target near 960.

Sterlite Industries seems to have broken through the line at which it was finding resistance. With a stop loss of 800, it seems to be a good buy at current levels for a target of near 1040.

Tata Motors, on its weekly charts, has been moving within a range of 600 and 840 for over a year now. Now that it is at the bottom of the range, it seems to be a good time to pick up this stock for a target between 800 and 840.

For all those lovers of Tata Power out there (I hope you are reading, Mr. GK), this seems to be a good time to pick up the stock (or hold it if already holding) when it has broken through its resistance line at 1360. With a stop loss of 1300, one can expect a target of near 1700.

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Friday, April 25, 2008

Mutual Funds: What Are They?

Do you invest in mutual funds? If you do, you know what they are and what they can do for you. If you don’t know about them, it is high time you should. This post gives you from the most basic to the technical aspects of a mutual fund.

Who Needs Mutual Funds?

With the markets rising, as they have in the past four years, everybody wants to take advantage of the markets. There are two or three options available. The first one, but not the easiest, is that you get yourself registered with some broker, set aside some money for buying stocks and you’re on. But most people, with long working hours and stressful jobs do not have the time to monitor markets and that makes one lose a lot of opportunities.

Some people do not have the knowledge or the aptitude for stocks but still want to take advantage of it. The most convenient option for them is to give the money to a friend or an Uncle to invest on their behalf. But these friends or Uncles are sometimes scared to invest on your behalf because they don’t want to ride the guilt of you losing money if one of their decisions went wrong. Alternatively, even if they don’t feel scared or guilty and some of their decisions do go wrong, which inevitably will (because nobody is perfect), you won’t hold them in very high esteem.

The third option, and undebatably the best for such people, is to invest their money with a mutual fund. That way even if the mutual fund loses you money, the only loss of relationship you have is that you won’t invest money in that mutual fund anymore. As it is, you have a lot of other options available.

The third problem that usually comes is that you do not have enough money to properly diversify your portfolio and we all know the advantages of diversification to get good low risk returns. To properly diversify her portfolio, the investor would need to invest at least Rs.2-3 lakhs.

What Is A Mutual Fund?

Let us understand this with a very simple example. Suppose there are 10 investors, each with a capital of Rs.50,000/- to invest. None of them has a big enough capital to properly diversify their portfolio. So, they make a syndicate and invest jointly because then the combined portfolio of Rs.5 lakhs can be well diversified. But the problems that usually come with such a syndicate is that you can never trust the person completely who is in charge of all the funds. Secondly, you will always feel cheated or will always suspect the division of the profits, specially, if the investment amount of each investor is different.

So, they appoint a person who they all trust, and who has the knowledge of the markets and they pay him to invest on their behalf, and who divides the profits equally and fairly among all investors after deducting his own expenses for the time and the effort he has to put in. That, in a way, is a small mutual fund.

But Mutual Funds AMCs (Asset Management Companies) have thousands of investors and have crores of rupees to invest. That gives the fund manager control over his investments and can stay invested in stocks for a longer duration (assuming that not all investors will withdraw funds at the same time). The fund manager has a full research team backing him and he himself is knowledgeable about the markets and the AMC ensures that all profits are divided equally among all investors.

How Are The Profits Divided?

On each day, except Saturdays, Sundays and holidays, a Net Asset Value (NAV) is calculated which is nothing but the value of all the securities held by the mutual fund in its portfolio. Any investor who invests into a mutual fund is allotted units. The number of units to be allotted is calculated by dividing the amount invested by the NAV of that day. For example, if an investor is investing Rs.50,000/- in a mutual fund and the NAV on that day is Rs.150/- then she would be allotted 333.3333 units (50000/150). Unlike shares, where only whole numbers can be purchased, units can be allotted in decimals too.

Since the NAV is calculated on each day, any investor entering on any day can be allotted the exact number of units based on the value of the portfolio on that day. Similarly, any investor exiting on any day can be given the money as per the value of the portfolio on the day of exit. The amount to be paid to this investor is calculated by multiplying the NAV of that day with the number of units held by him. So, in the above example, if our investor decides to exit on a day when the NAV is Rs.200/-, she would be given a cheque of Rs.66,666/67- (333.33333 x 200), thus making a profit of Rs.16,666/67- in the transaction.

NAV Calculation

A very simple example of calculation of NAV. Suppose I have a mutual fund in which 100 people have invested (each investing Rs.10000/-), which gives me a total corpus of Rs.10 lakhs. I allot a total of 1 lakh units, each unit at Rs.10/-. Next day I go out into the market and buy shares worth Rs.9.5 lakhs and keep Rs.50000/- as cash. Suppose the value of the shares after 10 days is Rs.10 lakhs (which has since increased from Rs.9.5 lakhs). Now, the total value of my portfolio is Rs.10 lakhs in shares and Rs.50000/- in cash, thus making Rs.10.5 lakhs. Dividing this by 1 lakh (the total number of units issued) I get an NAV of Rs.10/50- per unit after 10 days.

There is a lot more to know about mutual funds but, I suppose, this post is going to become very lengthy if I delve any deeper into it. I will write another post about mutual funds in the days to come, which will talk about what types of mutual funds are there, what are the costs, what mutual funds to buy and some common mistakes people make when investing in mutual funds.

Update: This article was also published on the business and investing page of Reuters.

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Thursday, April 24, 2008

Nifty Downward Bias Continues

Today was again a flat day for the Nifty with a slight negative bias. No breakouts out of the range, just stayed within it but closed near the bottom of the range at 5000. As suggested yesterday, a move below 5000 could take the Nifty to a level of 4930-4940. There is another support at 4900 and the next one at 4830. We shall have to see which support the Nifty decides to respect, if at all it were to go below 5000. An upmove shall be productive only if it were to cross 5080.

But what I found interesting in this 30 minutes chart of the Nifty was that the Relative Strength Index (RSI) seems to be finding support at 40. This may be good for the market if it decides not to break down.

Today was also the F&O expiry day. That was expected to bring high volatility and choppiness into the market. But the kind of volatility that was expected did not come about. Maybe it was because of the low volumes and open interest this month which was caused by the nervousness in the markets.

As expected, our recommendations yesterday did not go right today because the broader market remained weak. That was what we had warned yesterday that though some buying signals were there, the reader has to use her own discretion whether to take the trade or not because we were expecting the broader market to come down.

No stocks being discussed today since the Nifty is showing signs of weakness and taking long positions now may hurt our financial health. We shall wait for the Nifty to give us a buy signal before taking any long positions.

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Wednesday, April 23, 2008

Small Downfall Still Expected

As expected, the Nifty did go down today. During the day the Nifty did try to go up but could not go above yesterday’s close. It did manage to reach there but turned down again to close near the lows of the day.

Today we have the 30 minutes chart of Nifty with us. In the last 3 days we have seen that the Nifty has remained within a very narrow range. It may be consolidating within the range. What will happen after the consolidation is over is anybody’s guess. It has support between 5000 and 5010 and resistance between 5070 and 5075. This gives us a total range of 75 points. Once the Nifty decides to move outside this range then it gives us a target of another 75 points in the direction of the breakout. Of course, these targets can easily be overshot too depending on the momentum.

Let us look at the pros and cons of this range. The pros first. The Nifty had gone up about 450 points in the current rally, on the daily charts, without any meaningful correction. A correction/consolidation is healthy for the market. We want the Nifty to consolidate and catch up its breath before it starts running again. We don’t want it to keep running, become breathless and then collapse. So in that regard this consolidation will be good for the market and the results will be known once the Nifty crosses 5080.

And the cons? The latest rally, which was today’s rally, failed to reach its earlier highs near 5070-5080 and that signifies that there is weakness in the markets at higher levels. Another interesting observation on the charts is that it has made a small bearish/inverted head and shoulders pattern within this range. This pattern, though, has not been confirmed yet. A break below 5000 will confirm this pattern. The target for this bearish head and shoulders pattern will be about 4940. At this point, there seem to be more negatives than positives in the short term.

There are a few charts which are giving buy signals and have been discussed below. But one’s own discretion is required because we are expecting the broader market to come down a little. Please note that some of these stocks may be available at a cheaper rate in a day or two but the buying signals remain valid till the stop loss level is hit.

Aditya Birla Nuvo is showing some signs of improvement, as can be seen from this daily chart. What looks positive for the stock is the support for the Relative Strength Index (RSI) near 40, as marked by the circle. A move above 1500, which may or may not come tomorrow, should be positive for this textiles stock. A stop loss of 1375 will be prudent while waiting for a target of close to 1700, where it will meet the resistance line.

Arvind Mills, on the daily charts, has broken through its resistance line accompanied by huge volumes. This is bullish for the stock. The RSI is close to 80 and it is generally advised to wait for a pullback before buying. But seeing the chart, we can see that Arvind Mills has closed near the highs of the day without showing any signs of a pullback. Under these circumstances, it can be bought at the current levels with a stop below 50 for a target of between 65 and 67.

Hindustan Constructions has been moving within a narrow range between 110 and 140 since the last month and a half. It is now near the top of the range and may break out of this range. If it does it gives us a target of close to 170. A stop loss below 125 may be safe. But this stock should be bought only if it were to go above 140. Ignore the movements in the first 30 minutes as they are subject to volatile movements more because of global cues than because of technical or fundamental reasons.

Another very interesting chart of Jindal Steel. As can be seen from the chart, the price has been making lower highs while the RSI has been making highs at almost the same level, if not higher. This is known as a bullish/positive divergence when the price is going down but the RSI is going up. Now it is close to its resistance near 2300 after a pattern which looks like a double bottom formation. Not only that the RSI which was finding resistance near the line has broken through it which gives an indication that maybe the price will follow. Buy only if it crosses above 2300 with a stop loss of 2100 for a target somewhere close to 2750.

Petronet LNG has been in a narrow range between 60 and 80 for a better part of this calendar year. It now seems to have broken out of the range, while the volumes, though increasing, remain significantly low. Not the kind of volumes one would expect to see with a breakout. So, one can take a risk using her own discretion to buy near current levels with a stop loss near 74 for a target of near 100.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the fall today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

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The Case of the Vanishing Strength

It was a mixed day for the Indian markets today. The markets opened on a weak note today and remained subdued for the next two to three hours. It was only at about 1pm when the markets turned in the positive but soon found resistance at higher levels and started coming down to close only 12 points in the green (Nifty) and 44 points up on BSE.

On the whole, it was a positive for the market that it recovered and closed in the green. What was not positive is the Relative Strength Index (RSI), which again failed to cross 60. It is marked by the blue circle in the chart above. The RSI, as the name suggests, measures the relative strength of the prices now with respect to its historical prices. Theoretically, RSI oscillates between 0 and 100 but 0 and 100 levels are rarely seen. RSI is considered to be oversold below 30 and overbought above 70. A lot of people prefer to say that RSI is bullish above 50 and bearish below it. I am one of the few who believes that RSI is bullish above 60 and bearish below 40. This is why I consider finding resistance at 60 a negative sign. All the strength visible on the charts now seems to be vanishing with the RSI not being able to cross 60.

There is another circle (green) marked on the RSI chart which shows that the RSI had found support at 40 in the beginning of the month. That was an early indication which showed that the prices could have broken out of the range. And that did happen. Today’s RSI is showing that the prices may fall soon, maybe as early as tomorrow. Today was the 6th consecutive close in the positive and it may show a red day soon enough. The last time we saw 6 consecutive up closes was in September 2007 (that time it was 11 consecutive up closes and that is actually quite a rarity). Such other occasions (6 or more than 6 up closes) were in Aug 2007 (8 closes), April 2007 (6 closes) and Nov-Dec 2006 (6 closes).

A downmove should find support between the 4900 and 5000 zone. However, if the Nifty were to fall below that there is a strong support at 4830 which should not be broken. A close below 4830 suggests bearishness.
4800 calls recommended in the beginning of the month could be sold off first thing in the morning. They are gaining about Rs.100/- per unit or Rs.5000/- per lot of Nifty (50 Nifties). No stocks are being recommended today since the market may come down tomorrow and things may be cheaper on Thursday/Friday.

Let’s take a brief look at the American markets. The Dow Jones Industrial Average (DJIA) was moving within a range between 11740 and 12740. Generally, too, there is a lot of resistance at 12740. A close above 12740 yesterday was bullish and that too with a gap. However, a problem with gap days is that the markets tend to close/fill the gap as soon as possible. If this were to happen as early as today then it would be considered a false breakout and we will come back into the range. A noticeable thing on this chart is that again the RSI has not been able to cross 60. But if this breakout is correct (we shall come to know in 2-3 days) then we have a target of about 13700 on the Dow. If that happens, our markets should also remain strong.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the markets today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future.

Happy Investing!!!