Equity valuation is the next step after equity research. After completing research as explained in previous post in this section we need to now conduct a valuation exercise which is the most crucial part of analysis. It is the process of arriving at value for a company or business. There are many models and formulas to arrive at a forecast value but i will explain you some common model’s in near future.
Equity value is the job to find out how much a company is worth currently and what it is likely to be in near future. It the current market price is lower than the future valuation then we shall buy that stock or business and vice-versa. A valuation model is generally expressed in Formula. Valuation model specifies what we have to forecast and than method to convert this forecast to valuation.
Valuation has became integral part of the financial sector where we are witnessing higher numbers of Mergers and Acquisition taking place on global platform. Valuation model remains common across globe so it becomes easy to value a company in any currency. We will further get into the approach of fundamental valuation in upcoming posts.
After reading Nifty chart closely today morning, i just came across a probable double bottom pattern which has been confirmed. Though i missed it while breakout but we had already recommended longs on other factors. You might be guessing that now whats the use of it?? Of-course we can be cautious near its target of 7620. Similar resistance levels are obtained from Fibonacci and 7600 Call Option. Even a Downside sloping trend line is approaching around the same level. So now we have almost 5 resistance near 7620-7650 making a strong level for a stop loss on shorts. I would be intact with my short call on Nifty as given in my post “Nifty in reserve” on 3rd march but on stop loss side, i would wait for two closing above 7620 before covering my short trading views and recommend you for the same. Many global events to unfold by monday so my eyes on global markets rather than domestic news!!!
Nifty continued with its wired trend of making Higher high and lower low for the second consecutive day but today its not the Doji but a strong positive candle. Technically, it may be called “Bullish Engulfing” but its not clearly near a new low so we can consider this just a continuation pattern that too a bit dicey one. From the derivative markets, we have seen addition in Open interest both on 7600 CE and 7400 PE equally today making situation more confusing. On daily charts indicators are pretty- flat while of-course on weekly charts as i have suggested medium-term outlook is positive. But on minor wave correction is expected soon on the index. So i remain intact with my Sell on Rise strategy for short term traders as i suggested on Nifty to reverse!
Before starting of with Fundamental research on any particular stock you must have a deep understanding of that business and the sector. There are two broad categories of information which is required i.e., Qualitative and quantitative information for analysis.
Qualitative Information includes insight of the business and industry working which could be obtained through material readings, newspapers , company announcements, recent company development reports, Annual reports of company, management discussion, detailed discussion with management or promoter. For going more deeper, some analyst also interact with employees and customers of company to get a taste of how company works in and out.
Quantitative information includes financial reports i.e., Balance sheet, profit and loss account, Cash flow statement and all other possible reports which marks company’s performance in numeric term.
These prerequisite information is required to project revenues, earnings and other financial parameters of the companies which results into valuation of each share of a company. Generally, analysts forecast 3-5 years of Financial parameters based on the history available. Though there is no fixed rule on the number of years to forecast as it purely dependents on company to company.
However there are few limitations to Equity research as in developing country or under-developed country, industry information is little bit difficult to get as data collection is not that accurate, Secondly, many management of companies are not willing to talk with the analyst or not want to disclose crucial information which could act as a hurdle while carrying out fundamental research.
So this was a brief about what is required to carry out research and what are limitations faced while carrying out research.
Nifty has given a close with a perfect Doji on Daily charts, signing a Pause to the previous trend or a break before going ahead. In simpler terms, Doji represents confused state of mind of traders. To add more confusion, today’s Doji pinched a New high as well as new low compared to previous closing giving No clue to technical analyst to decide further route on candle stick patterns. Taking some clues from Derivatives which suggest resistance building strong at 7600 and me too suggested you guys to short Nifty with the same stop loss in my post “Nifty in Reserve” on 3rd March. Indicators have turned flat on daily charts and Nifty bank has given a weak close today so i would suggest to hold on my short call on Index with the same stop loss of 7600. Tomorrow opening shall be crucial…!!!
My final target $38 has been triggered for long recommendation on WTI Crude which was given on post “Crude could rally a bit from here” on 18th Feb! We saw tremendous rally on the crude last night around the globe which was one of the biggest intra-day rally of 2016. Technically now crude has surely bottomed out for the longer term horizon and we could see continuation of strong short covering in the commodity in near future. But as on weekly chart we could notice that commodity is trading at resistance line around $38 while next resistance is at $40. So for a safe trade we should avoid taking a call on either side for trading in this range and rather wait for a confirmation. So my advise is to wait and watch until we get some strong move out of this range.
In last post in this section, i introduced you to different types of charts used for analysis and now we will go through some factors that should be considered while constructing charts.
- Arithmetic versus Logarithmic Scale
Charts can be plotted using either arithmetic or Logarithmic scale. Difference would be spotted on Y-axis where there will be equal spacing between each unit in Arithmetic scale while there will be equal spacing in percentage terms in Logarithmic scale. So a move on arithmetic charts from 5-10 would equi-distance to 50-55 while on Logarithmic scale, 5-10 move would be equi-distance to 50-100 where both means 100% move in the price. So for larger trend or long price move history Logarithmic scale would be more preferable for analysis.
Volume is one of the most crucial information after price on charts required for analysis. It represent the total amount of trading activity in that asset on that particular time frame taken under analysis. It is represented by a vertical bar at the bottom of any chart drawn. A higher bar means the volume was heavier for the day and vice-versa. And as Dow Theory suggest volume confirmation is more important with the price so you must strictly consider volumes while technical analysis.
Open interest in the future segments is the total number of outstanding or open future contracts that are held by market participants in secondary markets. They can be either longs or shorts or both.
So now you are aware of basic points which are considered along the price for construction of charts. We will explain all the points in detail in future post but should remember all factors while we take other crucial concepts.
Nifty’s move to 9119 in March 2015 from the previous high of 2008 around 6330 was applauded by our traders alot but not investors. This rally i would term as “Traders rally” because fundamentally we were not globally competitive as suggested by our rupee vs dollar (Green line) which has been weakening regularly. Because of our weak rupee, Nifty in terms of Dollar (White) has not even achieved 2008 high as you could notice in the charts. This huge divergence between the Nifty (Yellow line) and Nifty in Dollar terms need to narrow down soon and we could see fast rally in equity markets. But this rally would be accompanied by strengthening rupee.
Why would rupee strengthen? because finance budget and RBI has won back trust of Investors. By achieving 3.9% of Fiscal deficit target and setting off new target of 3.5% in budget, has surely given a confidence to global investors. Secondly, PSU bank’s cleaning up of NPA’s and Basel norms restructuring has given financial sector a boost. Thirdly, investor friendly initiative by many states in form of global business summit has boosted FII flows in various sectors. Fourthly, bounce back in Commodity prices will boost companies revenues which were hard hit in last few years.
So to conclude, Nifty has yet not at par with 2008 and as India is considered brightest spot in world map as only emerging market growing we can expect Equity market investment to be a multi-beggar even from current levels in next 5 years. Start investing if you havent yet.
Charts represents the traded price of underlying asset during the time frame under study. Charts can be of many different types but mostly commonly used charts are Bar charts and candlestick charts because it shows complete price action on the assets unlike line graph were only closing prices are represented. Charts also accompanied by Volumes and Open interest which are also important to focus on while carrying out technical research
There are Following types of Charts
It was just to make you familiar with different types of charts through this intro post. There many other professional chart patterns too but these are the ones which are most widely used and almost all software’s give facility to plot it.
Banks finally gave some strong rally and it triggered my upside target of 15350 as recommended at Lenders of Last Resort on March 2nd. Strategy recommended was to go long on 15100 Ce and Short 15500 CE. As recommended to 15100 CE should have been covered yesterday which traded last at Rs.500. and recommend to hold 15500 CE forward for next weeks strategy
As you guys can notice in the graph that a “Spinning top” has been embarked on daily charts yesterday and it has exactly pinched high at my red horizontal line which i had intimated you guys in the last post on Nifty Bank. After such a fantastic rally, a intermediate profit booking is expected on banking stocks of almost 50% of their recent rally. Even the Gap unfilled is at 14450 which is coinciding with retrenchment level. Had been tracking options on Friday and found out that writing has been done at 15500 CE and highest Open interest stand out there too suggesting a strong resistance on closing basis. So now traders can take a risk of going short for some gain.
Hold short on 15500 CE which was recommended in last post and now buy 15200 PE
Target: 14650 (Square-off all Options around that level)
Stop-loss: 15500 (Closing basis)