Sunday, 25 November 2012
Tuesday, 18 September 2012
Size dose matter!....in Stock Investing Too...
One size doesn’t fit all! And this is especially true in the case of stock investing too. Companies of all sizes are listed on the bourses. But no two people can create the same portfolio out of these companies. This is because each person has a different risk profile. And each company carries a different degree of risk. The size of the company is determined by its market capitalisation. The market capitalisation of the company is determined by calculating the per share price by the number of outstanding shares. Simply defined, it is how much you would pay to buy every share of stock on the market. Based on market cap, these companies are broadly classified into three different groups: Large cap, Mid cap and Small cap. To know in detail about market capitalization and its different groups,
You need to invest your money in the stock market based on your risk appetite and your return expectations, thus choosing stocks from amongst these different market caps.
For example, large cap stocks are considered to be relatively safe stocks. These companies have been around for a while, are stable and generally have a great track record to boast of. So if you are one those who cannot afford to risk losing any money, you need to stay invested in only the large cap stocks. If the water is choppy, would you like to be in a large boat or a small boat?
But their large size also means they probably won’t grow at a very high rate. . Does this mean that you cannot make high returns by investing in them? Definitely not! For profiting from investing in large caps you just need to pick up the right one at the right price and time!
In case you are looking for companies with higher growth and have the heart to take up a little risk, then mid cap stocks are the thing for you! However, you should be careful while investing in these. While the group can boast of quality stocks that went on to become the future large caps, it is also stained with history of stocks that have gone down the drain. In times of volatility, mid-caps are the first to be affected. These stocks are the first to be picked up when markets show signs of recovery and the first to be dumped on hints of an impending fall. And so you, Mr Investor, need to be extra careful while investing in these companies. Be sure to pick up fundamentally sound companies with a good future.
Finally, for the adventurous and aggressive ones, the market has what it calls the small cap stocks. While small caps are extremely volatile and ripe with history of companies going bankrupt; there have been some that have managed to sail right to the large caps and made investors millionaires. However, the risk that comes along with these stocks is extremely high. And while you need to be careful before investing in midcaps, you need to be doubly so before investing in a small cap.The question that you should answer is whether you should go fishing for stocks in a pool i.e. only large caps or an ocean i.e. across various market caps.
Large cap stocks form a large part of holding for Institutional investors, like pension funds, insurance companies and similar organizations, as they give the much needed stability to your portfolio. They are like the main course of your investment meal. Of course the dessert (small caps) is tastier and exciting, but without the main course, you cannot have a balanced and fulfilling meal! So, irrespective of your investment objective, large caps should form a large part of your portfolio. In fact, if your appetite for risk is nil or very low, your portfolio should just consist of just these mighty large caps.
But if your appetite for risk is a little high, you can invest in the mid cap stocks, provided they are fundamentally sound companies and are available at the right price.
Further, small-caps provide a terrific opportunity for sharp growth, so you might also want to invest a portion of your money in these stocks. But you need to be sure that you have the stomach to bear the high risk that these stocks entail. Most importantly, make sure you research them before jumping in.
via- moneyworks4me
Friday, 31 August 2012
Price Action Trading Method
Swing Highs and Lows
The first thing that we need to recognise is what is a Swing High and Swing Low. This is probably the easiest part of price action and bar counting although the whole process gets easier with practice.
I define a swing high as; I define a swing low as; |
A three bar combination
A three bar combination
Market Phases
There are only three ways the market can go;
- Up
- Down
- Sideways
With the swing high/low definition now in mind we can start to build some layers on to the chart to identify these market phases and start to do a simple count of these swing highs and lows.
In short
- The market is going up when price is making higher highs and higher lows
- The market is going down when price is making lower highs and lower lows
- The market is going sideways when price is not making higher highs and higher lows OR lower highs lower lows
This may sound like child's play and a statement of the obvious but you will be surprised at how often people will forget these simple facts. One of the biggest questions I get asked is, which way is the market going? By doing a simple exercise you can see which way that price is going and decide on your trading plan and more importantly timing of a trade.
What do I mean by timing? It may be that you are looking for a shorting opportunity as the overall trend is down but price on your entry time frame is still going up (making HH's & HL's). There is, at this stage, no point in trying to short a rising market until price action start to point down (making LH's & LL's. More on this shortly).
Bias Changes
A Short or Bearish Bias Change occurs when the following sequence develops.
HH>HL>LH>LL>LH The bias change is confirmed when price moves below the las lower low made as highlighted on the chart.
Another way of saying this is 123 reversal and you are trading the pullback as your entry trigger (Red Line).
There are a few variations of this pattern but this is quite simply a price action bias change in its simplest form.
A Long or Bullish Bias Change occurs when the following sequence develops.
LL>LH>HL>HH>HL The bias change is confirmed when price moves above the last higher high made as highlighted on the chart.
Another way of saying this is 123 reversal and you are trading the pullback as your entry trigger (Blue Line).
There are a few variations of this pattern but this is quite simply a price action bias change in its simplest form.
Trending Price Action
After a bias change has been seen and confirmed, one of the phases that the market can then take is to start trending either up or down depending on the bias change previously.
In the chart below we can see what price ideally looks like when price is trending up and trending down. Each phase shows price making HH's & HL's on its way up and LH's & LL's on its way down.
Ranging Price action
Now this is where the chart can become interesting. By using the price action counting of the swing highs and lows we can know at a very early stage IFprice is going to start to develop range bound activity.
- Price is not making new highs OR new lows
I don't mean all time highs/lows or new day/week/month highs/lows... just simply a new chart swing high or low. Price will start to stall and not make a new swing high/low and typically will stay contained within the last swing high and low that was made on the chart. Isn't that a simple definition?
Range rule definitions
- Price doesn't make a new high or low on the move
- If price stays contained within the last swing high and swing low to be made, price will remain range bound until it makes news move highs or lows.
- Price confirms the range when a lower high and a higher low is made within the previous swing high and low.
In the chart below you can see that from the left side of the chart price is making LH's & LL's all the way to the first blue arrow which in real time would be the latest lowest low. Price then moves higher to make a HH. These two swing levels have been highlighted.
At the point of the chart, in real time, price needs to either start moving higher past the last swing high (red Arrow) making a new high OR move lower past the last swing low (blue arrow) making a new low. Until either of those things happens price will most likely remain range bound. In this example that is what happened.
Range considerations
Some considerations for identifying ranges at an early stage in real time are;
- That price could be creating a pullback or bias change and as the chart unfolds for you a new high or low could be made voiding the potential range.
- There are several definitions of a range one of the more common ones is that you are looking for a double touch of support and resistance. For me this is a little too late in the game as price may not create the double touch as in the example above. With this price action method you can identify the possibility of a range developing VERY early without having to worry IF price does or does not give you the double touch. As you can see with that definition you would interpret that price is not range bound at all but, you can clearly see visually that price is moving sideways without any definition.
What you should have learnt from this short article
In the below images we can see the pattern variation and compare them to the outlined pattern above. The only main difference is that you are looking for a breach of a previous swing high or low as the first qualifier to indicate a potential bias change. 
Acronyms used
www.trading-strategies.info Philip Newton is a professional trader and teaches new and experienced traders the skills needed to trade for a living. His live chat room is amongst the best in the industry. Inside the members area traders can watch videos of his trades and receive support for any question they may have. The live trading room is the heart of the website where the real learning begins. www.trading-strategies.info |
PRICE & VOLUME RELATIONSHIP
PRICE & VOLUME RELATIONSHIP
| Up-trending market | Price | Volume |
| Uptrend | Up | Up |
| Correction | Down | Down |
| Reversal | Down | Up |
| Down-trending market | Price | Volume |
| Uptrend | Down | Up |
| Correction | Up | Down |
| Reversal | Up | Up |
| Market direction | Price | Volume | Calculation |
| Uptrend | Up | Up | + Volume |
| Downtrend | Down | Up | - Volume |
| Corrections | Up / Down | Down | 0 |
Sunday, 26 August 2012
Momentum investing
Momentum investing involves buying and selling stocks that are likely to witness a substantial jump in prices in a short span of time. In other words, the investor buys stocks that are about to soar and sells them at a much higher price. As a momentum investor, one seeks to identify stocks that have the potential to yield spectacular returns within a short to medium holding period, say, 1-6 months.
When the market rallies, momentum stocks are usually better placed to lead the market and touch new highs. Typically, the strategy involves capitalising on an existing trend. So, one would try to lock in gains by riding hot stocks, those that are already witnessing a surge in prices, or momentum.
"Momentum investing is essentially about betting on stocks that have already gathered momentum."
This involves monitoring stock prices daily and cashing out within weeks or months of acquiring the asset. However, this is not as easy as it sounds. Momentum play can be highly misleading and frustrating at times. If you get your calculation wrong, the money may just as easily go down the drain. Without the right tools, getting a fix on such stocks is difficult. Hitesh Sheth, head, technical research, Prabhudas Lilladher, says, "Momentum investing can be rewarding if you can master the use of the indicators available. The strategy can work both ways—you can ride the bull markets as well as benefit from market declines."
How to spot momentum stocks
For those keen on making money from this strategy, there are several indicators or tools that can help identify momentum stocks. However, before learning about these indicators, you must understand the logic behind their functioning.
As anyone driving a car knows, he needs to slow down to change the direction. Likewise, the speed at which a stock is moving up or down will reduce before the final turnaround. The momentum indicators help you capture this reduction in speed. However, a stock that is losing momentum need not necessarily result in a turnaround. Just as a car can slow down, but then accelerate again, so should a loss in momentum be considered as an indication of a possible turnaround.
Through the following charts, we explain some simple momentum indicators and a few basic rules. You can start keeping track of the performance of some potential momentum stocks using these tools. Over time, you will be able to spot the stocks that can deliver high, double-digit returns in a few months or even weeks. These indicators are readily available for investors on Websites, such as yahoofinance.com.
Rate of change
The rate of change (RoC) indicator is a basic momentum oscillator, which measures the speed at which the stock price is changing within a defined time period. It calculates the percentage change between the most recent stock price and the price that existed 'n' periods ago. When plotted as a trendline, it forms an oscillator that fluctuates above and below the zero line as the RoC moves from positive to negative.
A value greater than zero indicates an increase in upward momentum (spike in RoC reflects a sharp uptick in price) and a value less than zero suggests an increase in downward pressure (plunge in RoC reflects a sharp fall in price). However, this indicator can be misleading if used in isolation. It should be used in combination with other momentum indicators.
Trading volume
Another indicator to be considered is the trading activity around the stock, which is represented by its trading volume. The stocks that are adequately supported by strong volumes can be assured of continued interest, at least in the near term. Low trading volumes, on the other hand, indicate lack of interest in the security and, therefore, a lack of momentum. Usually, momentum investors prefer to buy stocks that are rising with high volume and sell stocks that are falling with high volume.
The RSI compares the magnitude of recent gains to recent losses. It is calculated by using the formula, RSI=100-100/(1+RS), where RS is the average price for 'x' days when the stock closes up divided by the average price of 'x' days when it closes down. RSI ranges from 0 to 100 and a stock is considered to be overbought when this value is above 70, and oversold when it is below 30.
However, these are not considered as buy or sell signals because the stock may continue to move, taking the RSI to much higher/lower levels. Like other indicators, a signal is generated when a stock loses its momentum and turns around. In this case, RSI crossing the 70 mark from above is considered a a sell signal and crossing the 30 mark from below is considered a buy signal.
Monday, 30 July 2012
BASICS OF MARKET
What is economics?
Economics can be defined as a science which deals with distribution,production and consumption of goods and services.
What is GDP ?
GDP stands for Gross Domestic Product which is an indicator shows the total value of all the goods and services in a country within a specific time period.
What is the significance of GDP ?
It shows the economic stability of the country. GDP has an impact on everyone who is in the economy. Higher the GDP means, higher is the business, unemployment is low, everyone earns money and spending is also more. That results in good growth for Companies and as regards the stock market, the share price of the companies goes up.
How GDP is calculated ?
Most basic understanding of GDP calculation is adding up all the values what everyone under the economy earned in a year. This is also known as income approach. Another way of calculating GDP is adding up all values what everyone spent in a year. (expenditure method).
Expenditure method is the common approach calculated by adding total consumption, investments, Govt spending and net of exports.
In India, Reserve Bank of India announce the GDP growth rates periodically.
What is inflation ?
In a general term, Inflation is a sustained increase in the average price of all goods and services produced when compared between two given periods.
Eg : If the price of 1 Kg wheat is Rs 30/- in December 2010 and if it is Rs 33/- per kg now in December 2011. That means that inflation on wheat is 10%. ( price has increased by Rs 3/- over Rs 30/-in one year).
What are the causes for inflation ?
Inflation (Increase in price) can happen for various reasons.
1) If there is an increase in the cost of production like raw material price, rise in the labor costs etc, then the price of the finished products will definitely going to rise which may lead to inflation
2) Inflation may occur if the government of a country prints money in excess than what is actually required, to deal with financial emergencies. As a result, there will be more money in circulation than the products or services available in the market and demand for products increases which will drive the price higher.
Money supply plays a large role in inflationary pressure as well. It is important to control the money supply adequately, otherwise it may actually grow at a rate faster than that of the potential output of products in the economy, or real GDP. This will drive up prices and hence, inflation.
Low interest rates correspond with a high levels of money supply and allow for more investment in big business and new ideas which eventually leads to unsustainable levels of inflation as cheap money is available.
3) Inflation may also occur when Govt. imposes taxes on consumer goods like fuels or cigarettes. When the taxes increase, price also increase.
4) Inflation may be due to the national debts and international lending. The countries has to pay interest on the money borrowed from international institutions and as result increases the overall prices of commodities, to keep up with their debt repayment programs.
5) A fall in the exchange rate can also be a cause for inflation. Since the Govt has to deal with the differences in the imports and exports of the country, to make up with the difference there may be a overall price rise or taxes on other commodities.
How The inflation is measure ?
Consumer Price Index (CPI)
Inflation is measured through the consumer price index (CPI)
CPI is a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation
Wholesale Price Index (WPI)
WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy
In India, Reserve Bank of India, announce the Price Index on weekly, monthly basis.
How the inflation can be controlled ?
There are broadly two ways of controlling inflation in an economy – Monetary measures and fiscal measures
1) Monetary measures
2) Fiscal measure
Monetary measures are the common method used to control inflation. In this method Govt makes some monetary policy changes like interest rates, CRR etc to control the money flow in the economy. All these policies are to control the money flow in the economy and hence reduced the inflation
Fiscal measures are that , in which Govt makes some policy changes like reducing its own expenditure, reduces the public borrowings. Govt can also make some policy changes like banning export of some of the essential items like pulses, cereals and oil etc.
Controlling the money supply is very important to keep the inflation on check. How does money supply works ?
To understand this, let us consider an example
Consider an economy where there are only two people A & B doing business. Money supplied is Rs 100/-.
A and B do business with each other. A produces some goods and sell to B and B makes some goods and sell it to A. This cycle goes on. Money in circulation is only Rs 100/-
In a month, “A” produced some goods and sold it to “B” for Rs 100/-. Money comes to “A”. Same way “B” also produced some goods and sold to A for Rs 100/-. Now the money change hand and comes to “B”.
As a result, both A & B together made a business of Rs 200/- thus contributed Rs 200/- to the GDP in that month. Which means with a money supply of Rs 100, the GDP of the country in that month is Rs 200/-
If this cycle continues for 12 months, then the GDP will be 12 x 200 = Rs 2400. That is with a money supply of Rs 100/-, made a GDP of Rs 2400/- in a year. Money in circulation is only Rs 100/- but money keep changing hands.
Now les us consider little bigger example :
Assume that there is a village with 10 people doing 10 different businesses and the money supplied is Rs 10 lacs. Each one of them produce something and sell it to one another. Each one of them does a business of approx 1 lakh per month.
So the GDP is Rs 10 lakhs per month ( |Rs 1 Lakh business each ) which amounts to a GDP of Rs 1,20,00,000 a year.
That means that, Rs 10 lakhs money supplied in to the economy, generated a GDP of Rs 1,20,00,000 ( Rs. One crore twenty lakhs).
In both the examples above, we assume that all the parties BUY and SELL same amount every month.. All are earning approximately same amount In this village there were 10 businesses and money supplied Rs 10 lakhs and each one of them does Rs 1 lakh business per month. So there is no winner or looser. Money was changing hands at a particular speed and economy was running smoothly so far.
If some more people start doing business, then what happens ?
Assume that 2 more people of that village start doing business and their product being good, they become famous immediately and started doing Rs 1 lakh business per month same as other 10 business men who were doing business originally. Money supplied is still the same Rs 10 lakhs and there are 12 businesses now in that village.
Now, if the money changes hand little more quickly than before, then everyone can make Rs 1 lakh business per month and eventually the GDP should grow to Rs 1,44,00,000 in a year ( 12 business men doing 12 lakhs business each in a year).
But, if the money doesn’t change hands at the required speed ( velocity of money doesn’t change), then each one of the business men will be buying and selling less quantity than before and as a result each one of them would be doing a business of Rs 80,000 instead of Rs 1 lakh per month which they were doing earlier.
Assuming that each one would be doing a business of Rs 80,000, then the business per year will be Rs 80,000 x 12 = 9,60,000 ( approx 10 lakhs) a year which is 2 lakhs less compared to the business they were doing earlier.
Since there are 12 businesses in that village now, total GDP would be 12 x 10,00,000 (approx) = 1,20,00,000. ( which should have been 1 Crore 44 lakhs if the money as changed hands quickly). Here, though the GDP is still the same as before but divided among 12 people instead of 10 earlier and hence everyone feels like that the business is down or recession has started.
What we found just now is there is a mismatch in the “demand and supply” of money here. So the central bank (Reserve Bank) now should take some action ( increase the supply of money or some other action) and bring the money flow into normalcy.
This is just a simple example of how the money flow works.
What are the various ways RESERVE BANK adopt to control the money flow ?
Reserve bank controls the money flow in the economy through various meausures like, interest rates, repo rates, reverse repo rate, CRR, SLR etc.
bps
bps stands for basis point and used to indicate changes in rate of interest and other financial instruments. 1 basis point is equal to 0.01%. So when we say that repo rate has been increased by 25 bps, it means that the rate has been increased by 0.25%.
Repo Rate and Bank Rate
Repo rate or repurchase rate is the rate at which banks borrow money from the central bank (read RBI for India) for short period by selling their securities (financial assets) to the central bank with an agreement to repurchase it at a future date at predetermined price. It is similar to borrowing money from a money-lender by selling him something, and later buying it back at a pre-fixed price.
Bank rate is the rate at which banks borrow money from the central bank without any sale of securities. It is generally for a longer period of time. This is similar to borrowing money from someone and paying interest on that amount.
Both these rates are determined by the central bank of the country to control the demand & supply of money in the economy.
Reverse Repo Rate
Reverse repo rate is the rate of interest at which the central bank borrows funds from other banks for a short duration. The banks deposit their short term excess funds with the central bank and earn interest on it.
Reverse Repo Rate is used by the central bank to absorb liquidity from the economy. When it feels that there is too much money floating in the market, it increases the reverse repo rate, meaning that the central bank will pay a higher rate of interest to the banks for depositing money with it.
CRR (Cash Reserve Ratio)
All the Banks are required to maintain a percentage of their deposits as cash.
Eg: If you deposit Rs. 100/- in your bank, then bank can’t use the entire Rs. 100/- for lending or investment purpose. They have to maintain a portion of the deposit as cash and can use only the remaining amount for lending/investment. This minimum percentage which is determined by the central bank is known as Cash Reserve Ratio.
If CRR is 6% then it means for every Rs. 100/- deposited in bank, it has to maintain a minimum of Rs. 6/- as cash. However banks do not keep this cash with them, but are required to deposit it with the central bank, so that it can help them with cash at the time of need.
SLR (Statutory Liquidity Ratio)
Apart from keeping a portion of deposits with the RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio.
Example
If you deposit Rs. 100/- in bank, CRR being 6% and SLR being 8%, then bank can use 100-6-8= Rs. 86/- for giving loan or for investment purpose.
What is a Mortgage?
A mortgage is the transfer of an interest in property (or the equivalent in law – a charge) to a lender as a security for a debt – usually a loan of money. A mortgage represents a loan or lien on a property/house that has to be paid over a specified period of time. Think of it as your personal guarantee that you’ll repay the money you’ve borrowed to buy your home. Mortgages come in many different shapes and sizes, each with its own advantages and disadvantages. Make sure you select the mortgage that is right for you, your future plans, and your financial picture.While a mortgage in itself is not a debt, it is the lender’s security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.
Mortgages come in two primary forms, fixed rate and adjustable rate, with some hybrid combinations and multiple derivatives of each. A basic understanding of interest rates and the economic influences that determine the future course of interest rates can help consumers make financially sound mortgage decisions, such as making the choice between a fixed-rate mortgage or adjustable-rate mortgage (ARM) or deciding whether to refinance out of an adjustable-rate mortgage.
The Mortgage Production Line
The mortgage industry has three primary parts or businesses: the mortgage originator, the aggregator and the investor.
The mortgage originator is the lender. Mortgage originators introduce and market loans to consumers. They sell loans. They compete with each other based on the interest rates, fees and service levels that they offer to consumers. The interest rates and fees they charge consumers determine their profit margins.
The aggregator buys newly originated mortgages from other institutions. They are part of the secondary mortgage market. Most aggregators are also mortgage originators. Mortgage-backed securities are sold to investors.
Fixed Interest Rate Mortgages
The interest rate on a fixed-rate mortgage is fixed for the life of the mortgage. However, on average, 30-year fixed-rate mortgages have a lifespan of only about seven years. This is because homeowners frequently move or refinance their mortgages.
The Federal Reserve plays a large role in inflation expectations. This is because the bond market’s perception of how well the Federal Reserve is controlling inflation through the administration of short-term interest rates determines longer-term interest rates, such as the yield of the U.S.
Concluding Tips
An understanding of what influences current and future fixed- and adjustable-rate mortgage rates can help you make financially sound mortgage decisions. This knowledge can help you make a decision about choosing an adjustable-rate mortgage over a fixed-rate mortgage and can help you decide when it makes sense to refinance out of an adjustable rate mortgage.
BLUE PRINT OF INDIA
The man at the midst of all the action insists that the inspiration behind the National Manufacturing Policy which aims to achieve enviable growth figures in the next few years is not inspired by our northern neighbour, China, which has sustained rapid growth as it successfully scaled up its manufacturing capabilities over the past years. Leaving the ‘inspiration’ debate aside, what’s important here is that as the man of the moment, Commerce and Industry Minister Mr Anand Sharma, gears to introduce the first ever National Manufacturing Policy to the nation, we caught up with him to bring you some exclusive insights as to what’s going on in the power corridors.
The pace is hectic and feverish as he gets into last minute troubleshooting before the National Manufacturing Policy is unveiled. The journey from draft to blueprint is proving to be an uphill task with steep challenges. The draft manufacturing policy, which has been in the making for 18 months and aims to attract overseas investments besides increasing the share of manufacturing in the GDP, has been stuck due to inter-ministerial differences with opposition coming mainly from the labour and environment ministries. These ministries are seen to be blocking the policy, which proposes to simplify the procedure in designated areas. The draft policy had suggested that the procedures be simplified in several ministries, including Labour and Environment, where inspector raj and a plethora of approvals make life difficult for companies.
Apparently, the Indian industry had objected to the Environment Ministry’s intervention in some of the big-ticket projects that had halted the government’s development agenda and also resulted in declining foreign direct investments. The government is also concerned about an impending slowdown in the manufacturing sector and industrial production. While the industry raised concerns on the high cost of credit, investment slowdown, skill shortage, high input cost, hurdles in getting various clearances, environmental issues and debottlenecking of logistics, the ‘tool of change’ that this new policy is slated to be, promises to act like a magic wand.
To start with, the draft policy promises to create 100 million new jobs and take the share of manufacturing to 25 per cent in the country’s GDP by 2025. At present, manufacturing contributes 15-16 per cent to the economy. And there are actions already being taken towards achieving this national dream. States like Rajasthan, Maharashtra and Gujarat have already initiated the land acquisition process for the super manufacturing zones, known as national manufacturing and investment zones, proposed in the new manufacturing policy.
While the prospects are plum post this policy, it remains to be seen how it is implemented and practiced…therein lies the key to our fortunes.
Monday, 16 July 2012
Saturday, 14 July 2012
Wednesday, 18 April 2012
Thursday, 5 April 2012
The Hidden Strengths of Volume Analysis - Part 2
In part 1, I discussed two examples of how and why volume can show the changing face of supply and demand. When the order of supply and demand is change we will get a change in market direction, sometimes a significant change in trend or otherwise some degree of retracement of the prior move. We will now continue on from that discussion and show larger periods of transition which can lead to quite substantial turning points in the major trends. These can be easy to identify, but do require some patience. If you did not read the prior article it would now be worth reviewing that before going on.
Let’s firstly take a look at AWB Limited.
Since early 2006, the price of AWB had been in a downward spiral. The story that eventually came out suggested AWB was doing some bad business against the UN sanction in Iraq. The initial shock sent the shares plunging by 18% in a single week.
This is a sure sign of a change in sentiment and it’s not exactly rocket science to know there must have been some kind of bad news that changes the outlook.
But what is important here is that this significant sell off is actually the first sign that strength may start to appear in the near future. As I discussed in part 1, demand strength actually starts in price weakness and here is a sign of capitulation. A wide ranging bar on increased volume is a sign of panic and when we see panic we can usually expect that a bargain could be in the offering, but this is where the patience is required. What we usually start to see after capitulation is a transition from sellers to buyers. This transition has two important characteristics; firstly it takes some time and secondly prices do tend to drift lower. Let’s zoom into the AWB chart at Area 1 and also add our volume indicators.
Bar 1 is the capitulation; a very wide ranging bar and ultra high volume. Remember that ultra high volume is signaled when the volume histogram penetrates the volume Bollinger band. Bar 2 gaps lower but closes on the weeks high and does so on high volume. This is a sign that the Smart Money is interested in buying. There is no other way that prices can close higher on increased volume if buyers were not involved. Bar 3 however shows sellers returning; a push lower, a low close and another increase in volume. Bar 4 is the turning point and is a sure sign that buying interest is occurring. This is the time to start thinking that this market will turn higher soon. This bar shows a move to new lows but a complete rejection, i.e. a high close and very high volume. We’re seeing the Smart Money taking positions, even though the stock is drifting lower. Now take a close look at bars 5 and 6. What happens? Essentially they are inside days with a slight downward bias but look at the volume? There is none. Volume has dried right up. This means that sellers are done; they’re exhausted. Those that wanted to sell have either been fulfilled or do not wish to chase prices any lower. Bar 7 sees another probe lower, another high close and yet again a rapid increase in volume. Combined with bars 2 and 4, both of which show background strength, this is continued evidence that the stock is being accumulated. It’s only a matter of time before enough of the supply has been accumulated that prices will start to rise again.
For the next 2 months AWB rallied 34% off that exact low. The first signs of upward price momentum would be the signal to initiate longs. We have the Smart Money footprints in the volume so we just need to time the entry for our own comfort. Take a look at the bars from that low. All down bars had low volume; all up bars had high volume. There was a specific transition from sellers to buyers which led to a reasonable, albeit unsustainable, price rise.
The following chart shows that advance in more detail. Bar 8 was a very promising bar indeed; a wide range higher, a high close and a good increase in volume. With the high close we can deduce that buyers had the control. Bar 9 is an important bar for current longs. It shows an attempted push higher, a reasonably tight range but more importantly a weak close and solid increase in volume. This is the first time that sellers had come back to the market. Now these sellers can originate from two sources; either profit takers that bought at lower levels, after all, it was a rapid rise in quick time which will always create profit taking; or it is very old longs who were waiting for the evitable bounce to get out of their positions. We’re not to know which, but what we do know is that selling has emerged and that caution is required.
Bar 10 shows a rise into new recent highs but a close on the absolute lows. This is of paramount importance – what does it mean? Bar 9 identifies sellers because we had a weak close on high volume. Immediately following, Bar 10 shows a low close on low volume, which suggests buyers have disappeared. If buyers have gone, who is going to support the market if those sellers from Bar 9 decide to chase prices lower? Nobody. If there is no buyer demand or buyer support then prices have the risk of falling until buyer demand comes back again. And that is exactly what has occurred.
Subscribe to:
Posts (Atom)