Monthly Archives: February 2016

Father of Technical Analysis

After we got some basics clear on ‘What is Technical Analysis’ and cleared some myths on the same, now lets get familiar with the roots of technical.

In 1882, Charles Dow and Edward Jones founded Dow Jones and Company. It is believed by most technical analysts that most theories where founded by DOW and he published his ideas while he wrote for Wall street Journal. Basic ideas of Dow is considered to be the pillars of technical analysis.

Dow was the first person to publish first ever stock market average which consisted of 11 stocks on 3rd July 1884. But after few year in 1897, DOW realized that two separate indices were required to gauge economy and then he constructed a 12 stock industrial average and 20 stocks average. As the Economy expanded, more and more stocks were included in the industrial index to gauge economy better and by 1928 , 30 stocks were included in the index.

Interestingly Dow has never written a book, but he had published his ideas in Wall Street Journal editorials. After his death in 1903, S.A. Nelson, complied everything in one book and it coined the word, “Dow Theory”, which is considered to be a based for learning technical analysis.

There are few basic tenants of the theory which helps to analyze stock and economy at any point of time. I shall discuss in detail on the theory in my next post.

Relationship status: “Complicated”

Last week we saw that Nifty kissed support at 6960 and the relationship was upto that kiss only for the last week. But today it got more complicated between supports and Nifty. Today it went more than a kiss below 6960 and it felt that relationship would go much beyond, but they fell apart and couldnt sustain for a day too! Nifty managed to close above support level of 6960 but it has left relationship status too: “Complicated” after its behavior in intraday. Its getting more difficult to take some call on the Daily charts so have considered Weekly charts for my analysis today. As you all could noticed in the attached chart, Nifty has taken back support of 200 Weekly average at around 6870 (yellow line), but still the week is left and anything could happen. On the second point of support, Nifty has closed exactly at the downside channel line support which is crucial as the channel is intact since the high last year. So now all eyes is surely on weekly close. BUT i could support a probable crossover on weekly chart which i have circled on the top. That are 50 and 100 weekly averages and its about to give a bearish crossover, and this could be for a pretty much long time. So we need to surely lookout for it through the week. So what next if we close below 6960? Then, we could surely see 6640 as i have circled red on the charts. 6640 has got more importance as its a Fibonacci support of rally from 5118-9119 and it is also coinciding with white trend line, which is intact since the low of 2252 in 2008. So, to sum up, Nifty is still in a complicated status and 6650 seems to be coming while on upside 7150 is strong resistance.  So may be need to stay cautious through this week on Index

Recommended Strategy for investor is Long Strangle: Buy 7050 CE Nifty and Buy 6900 PE Nifty

Cost and profit of strategy:

Premium of 7050 CE is 130 + Premium on 6900 PE is 109.80 = Premium payout of 239.80

Upside target: 7350 for the series:  Profit( 7350-7050)= 300 Points- Cost 239.80 = Rs. 60 

Downside target: 6600 for the series: Profit (6900-6600)=300 points-Cost 239.80= Rs.60

So if you are a investor, you can surely hedge your portfolio with this Strangle.

While risk takers can surely wait for either level and than take a long or short call on Nifty with a future

Bank on Banking

Banking stock has been the most under performing in the recent times. Especially, PSU Banks had been the most hard hit on NPA Concerns. But finally Nifty Bank charts are giving some positive divergence at the CMP:14036 with respective to RSI and Volume. As we all can notice in the chart attached, index has been trending in the downside channel, so the view for a short term still can be intact with Bearish but, looking the divergence as marked between the Nifty Bank against RSI and Volume,  we can take a bit risk at CMP. Already Budget was announced, and primarily studying it at a flash it is saying its positive for the Banking sector as govt has set aside a fund for PSU Bank’s NPA and also now analyst are expecting a rate cut before before next policy. Even the great cut on Fiscal Deficit is the achievement for the Indian economy. So surely one can take a risk on Nifty bank at CMP with the support from the PSU Banks,

Recommended Strategy for Risk Takers: Buy Nifty Bank 1 lot and Hedge with 13800 PE March


Recommended Strategy for Long Traders: Create a long Strangle with buying 14300 CE March and 13900 PE March on Nifty bank


Tgt for this expiry:14650 

Stop loss: 13600

Money Supply and Equity markets

We often here the word “Money Supply” while referring to our economy condition. So today i will try to explain in simple term, what exactly is Money Supply.

Money supply can be defined as amount of money or its equivalent in circulation at any particular time in an economy. Money includes:

  • Coins and Currency
  • Foreign Exchange Reserves with RBI
  • Time Deposits and Demand Deposits
  • Post office deposits
  • Or any such instruments

Supply measure of money in the economy could help monetary policy maker to take a interest rate decision to control inflation. As money supply in the economy increases, so will the purchasing power in hands of public. As public have more and more liquidity to spend, their need would rise which results in increasing demand of all goods and services. This causes inflation. Inflation to some extent is necessary for growth but hyper-inflation is dangerous for the country’s financial system. So with money supply in act with inflation, RBI balances economy by controlling the driving tool Interest rate.

Now going further there are mainly 5 components considered while calculating money circulation.

M0  also known as Reserve Money includes: Currency in circulation + Bankers’ deposits with the RBI + Other’ deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net non-monetary liabilities.

M1: Currency with the public + Deposit money of the public in banks

M2: M1 + Savings deposits with Post office savings banks.

M3: M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).

M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).

To Sum up M0 is the money which is owned by RBI and its known as systems reserve money. while other all components are owned by public and are in circulation or with banks as deposits or with post office. So higher the money supply with public higher would be the inflation.

Now lets take some example with the graph

in the graph Yellow line is M3 which means its the M1 (Currency with the public) +Banks foreign reserve and lending to commercial sectors and the Blue line is our Nifty index. While Pink line is our Repo rate. Time frame for charts is Monthly


  • 2008-2009: We experienced Lehman crisis because of which markets , which squeezed money from the circulation and foreign reserves which is a part of M3 decreased as FII sold off and took out dollars from the banking sector. So we saw all three leading downside as rate cut also didnt spur buying as FII were not confident yet.
  • 2009 bottom: We saw interest rates bottoming out, which led some money supply in the market and it spur equity market from the low of 2260 on Nifty.
  • Since 2010-2014: We have seen rising repo rates which has squeezed some money from the circulation but still markets performed as FII were buying during the time of post crisis. Banking and financial sector already in having huge NPA’s post 2008 crisis, it has squeezed its lending to commercial sector which is seen clearly with money supply line decreasing YoY on the charts since 2008 
  • 2014-2015 March As Money supply continued to decrease but markets pinched a new high, it was clear that FII money was driving market as there was no money circulation or supply in the domestic market as represented by yellow line which is M3
  • 2015 April-to present: As we knew that there wasnnt domestic buying in the markets as  liquidity was squeezing, our markets were purely dominated by global factors. Since March 2015, crude supply rising spurred crisis fear in the global markets which made FII exit our markets which was the result of the correction in last one year.

But now……..

I Expect that next rally would be surely dominated by the domestic players and that would be strong rally. Points for my support are:

  • We Have seen many banking companies cleaning up balance sheet as per new guidelines and as we have rate cuts now, they will surely start lending to good commercial sectors which have shown confidence.
  • As the money supply to commercial sector rises, it will rise money supply in manufacturing which improve profits which will eventually results in rally on the markets

But ofcourse it will take some time and we cant predict the low exactly as the divergence between domestic money supply and Nifty is the most widened in last 20 decades and it should narrow. I expect markets to stay volatile for next few months. Dont be saddened or fearful, if you are sitting on cash or can arrange some liquidity start shopping from here on..its honeymoon period for you guys…

Hope you guys find this post useful… leave a comment for any suggestion.



Some myths of Inter-market Analysis and Technical Analysis

It is believed that Technical Analysis can only predict equity markets for short term only but this is just a myth. Following are few points to correct your myth on this school of studies:

  • Any Asset Class:  Technical tools can be applied to any asset’s price forecasting which is not possible for Fundamental. For example, if you have price history of say, Vegetables, then we just need to work plot its chart and you can forecast future prices. So today, if you are sitting in India but have chart plotting of US markets, then you can surely predict them as good as some analyst in US.
  • Any time Frame: Technical analysis can be applied on any time frame of charts ranging from tick charts to even yearly charts while Fundamental can only be applied two longer time frame as Fundamentals doesnt change much in Shorter time frame.
  • Economic Forecasting: Technical analyst could predict some economic change earlier than fundamentals such as say rising commodity prices would suggest inflating economy which means economy would grow and interest rates would go down which is vice versa when commodity prices are expected to go down.

So now clarify with simple example myth of Inter-market analysis and technical analysis through a common example…Check out the attached Graph which is the monthly chart for comparison between three asset class of Indian economy WTI Crude (Blue line), Equity Nifty index (Yellow line) and IIP (Pink line). 

Now let me clarify myths :

  • It is believed that lower crude prices are good for economy and markets: As you all could notice that i have circled tops and lows of each index in comparison and we could conclude easily that on broader time frame, Equity, crude and Economy moves in the same direction. Rising crude prices have seen rising Equity markets and Rising IIP while vice versa is also visible.
  •  Most importantly it is believed that Technical analysis can only be applied to smaller time frames and it can only simply predict prices. So now let me tell you that this time frame is monthly time frame and if you could pick up the low or high on monthly chart than you can surely take decision for your portfolio. Interestingly, you can notice that Nifty has signaled reversals on top and bottom before crude or IIP has shown.  So this is surely saying that Technical can Forecast economy prior to Fundamentals through study of various asset class charts. All the three cases circled, you can notice that Nifty (yellow line) has topped and bottomed before Crude or IIP has done

So hope i am able to clarify some myths on Technical analysis and inter-market relations. Its purely just my view and you may differ with my idea.



Would it be just one kiss story or will go further?

Technically today was a good day on Nifty daily charts but the weekly closing hasnt been that significant for either side move. So we have to stick to daily chart analysis to get some clear trend. As we saw yesterday, that low was exactly kissed at the strong support of 6960 which was previous weeks low and also the Fibonacci support so it holds alot significance. Today it was trading way above that support but closing has brought me some fear for bulls back. Now the question remains that was yesterdays low to support just one kiss or we can see it again? Though its just a fear which can be controlled. Monday’s opening would decide whether Nifty charts have overcame fear or not? Whats the fear? ….Doji candle on closing today! It has peculiar characteristics of being a a part of reversal pattern and also a continuation candle signalling just a pause to current trend.  Only Mondays opening could tell us what exactly todays Doji signifies!! What should we keep in mind? 1. If we have even a marginal negative opening and if we dont breach todays high, then Doji would take a bearish view. 2. If at any point of time we breach todays high,  Doji could be considered just a pause to upside and rally should resume. Though these are the basic possibilities, but a significant one.  Though its a Budget day so we should keep positions hedged either ways

Simple tool for great trading idea on Bata India

We try to implement many technical studies and indicators to get some great multiplexer for long term, but a simple trend line could give you the same too. Today i want to show you graph of Bata India and interestingly you guys could notice that stock has been taking strong support on the white line drawn connecting lows on the chart. You would be glad to know that the graph is Monthly chart and Bata is taking support of this line since 2008. Stock has almost taken support and bounced back for 3 times prior and for almost more than 10 months to count candles.  So now today stock is trading at the same upward sloping line and it has been taking support since November.  To add other simple tool to trend line, we are getting higher highs and Highers lows, since last 3 months on same time frame. So going out with a common Stop loss idea, we should keep a SL of 3% below the line at 448 and which means sl comes at 434. So a long term investor who believes “Bhav Bhagwan che” can take a long call for 3 years  at CMP 468



Technical Analysis and Fundamental Analysis

Another step towards basics of Technical analysis is to understand how it is related to Fundamental Analysis and what does market prices represent. So lets look down at few points.

  • Technical Analysis considers only past price action to forecast future prices price, while Fundamental Analysis takes into consideration Economic factors of demand and supply that causes price to move higher or lower.
  • Fundamental Analysis represents the cause of the current market price of the stock while Technical Analysis studies the effect of such cause.
  • Market prices leads to known Fundamentals which means on crucial market reversal Technical Analysis leads the change as its based on market prices.
  • Market prices have already discounted known Fundamentals which means it moves in anticipation of unknown fundamentals by which Technical take a call through price patterns.

So this was to explain you guys that how are both school of thoughts related and both are important for research of and stock as it compliments one another always. In next post we shall continue further with the Technical Analysis tenant.

Just kissed activation level for the target 6600

Nifty expiry has been the worst this year as it has closed below 7000 level which was last resort psychological level for traders. As i mentioned yesterday that a trade below 6960 would activate 6609, today nifty made low exactly at  6961 which can be termed as ‘kissing support”for the downside breakout.  As you all could notice in the charts, Nifty has taken support exactly retrenchment level which completes a “Regular flat”  of second wave of the recently started rally from 6869. But if at all we close below 6960 tomorrow, then we have to reverse the chart and consider this as Motive wave for the downside. Currently, it seems we should reverse looking at the support from European markets, but you never know what they will end at night. So Wait and watch for tomorrow closing!!

Lets Start with Technical Analysis

A common definition of Technical Analysis as said by John Murphy: “It is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends”.

Technical analysis is basically study of historical prices where underlying asset has traded in past. Study gives more emphasis on the closing price after which Open, High and low are the considered for analysis. As a Support to price for analysis even  Volume and Open interest (For derivative markets) is considered to arrive at a conclusion on our technical research.

Three Rationales which analyst considers while  he carries his technical research are:

  • Market price, or stock price, discounts each and every event whether fundamental, political, psychological, political or any otherwise. It refers that prices are arrived with the difference in Demand and Supply of any factor mentioned Above.
  • Price moves in trend is the second rational which a analyst believes while looking at prices charts. Trend can be either Up, Down or Sideways but stock has to be in either of the trend.
  • History repeats itself:  Though not in the exact sense or prices but it should be in similar patterns or similar type of trend characteristics.

So to start off with what is technical analysis this could be the thumb post for you all. If you have any queries feel free to reply this post and you shall get reply asap. In next post we will try to differentiate between Fundamental Analysis and Technical Analysis.