Archives : SEASON OF FALSE BREAKOUT, FAILED TARGETS-20/02/2009
SEASON OF FALSE BREAKOUT, FAILED TARGETS – 20/02/09. Flip-Flop is a word, which aptly describes the market movement in the past month or so. The trading range for the market is getting narrower and narrower and the market is thus facing pressure of being a directionless. The broad range for the market is 2500 on the downside and 3100 on the higher side. The smaller range which is being developed For the past month every time the market gave an upward breakout, invariably the market went down in the next week and vice-versa when the market gave a downward breakout. Hence it is advisable to use Hedging Strategies. In the present uncertain market conditions one can say that this has been a Season of False Breakouts, Failed Target and Stop-losses getting triggered. Where is volatility?The past month was one of the most boring months in recent memory. The word which most traders fear ‘volatility’ went completely missing. As a result what followed was a trading month which can be most aptly described as listless. The trading community now is hoping the volatility returns so that they can be back to making money. In fact volatility is a key component which causes daily swings in the market and the traders are asking for it now. INTERIM Budget.The interim budget presented, strictly adhered to its name ‘interim’ and was nothing but an exercise in accounting and reassessing the records. Using the word ‘pedestrian’ would be an overstatement of sorts to describe this fiscal event. There was nothing in it for the industry or general public; and statements of intents too were missing. Anyway so let us not waste precious time and space for this one of the most forgettable monetary exercise and wait for four months for the final thing to come out. ANother rate cut.The December IIP nos. came in at -2% v/s +1.7% in November. The slowdown was expected but not to the extent of being negative. This was only the second time in last 15 years (last time being in October 2008) that the IIP nos. had declined to negative. Inflation has become a sort of non issue as it heads lower and lower and is on its way towards 2% in a few weeks time. The crude is showing no signs of going up and is helping the economy like ours. Also if the crude falls below $30/ barrel, then one can expect further fuel price cuts.All these economic facts will force the government to act and the RBI will have to cut Interest Rates further so as to boost the sagging Industrial Output. Since Inflation is on a way down, the RBI will have no hesitancy in cutting the Interest Rates further. TEchnically speaking.Every time it goes down around Sensex 8700-8600 and Nifty 2660-2685, it invariably bounces back to Sensex 9500-9700 and Nifty 2900-2950 odd levels. From the higher side of the range i.e. Sensex 9500 and Nifty 2900, the market invariably goes down towards the lower boundary of the range. This flip-flop of the market in a very small range makes life difficult for the traders as their Stop-losses keep on getting triggered.In the mean time, the Sensex and Nifty have both given downward breakout, only the momentum is slow. The Sensex is now on the verge of testing 8631, which was the higher bottom made. If the Sensex 8631 and Nifty 2661 is breached then certainly a retest of the lower levels will be on the cards. Then the Sensex will test 8467-7921 and Nifty will test 2570-2426.The Sensex has fallen leaving behind two falling gaps viz. 9279-9213 and 8977-8943. These gaps will act as a resistance going forward.The Trendline Resistance for the Sensex is at 9412-10107 and for the Nifty is at 2926-3078. Nifty has seen lot of PUT writing at 2500 and CALL writing at 2900 strike price for the March series. The market expects the Nifty to trade in the range between 2500 and 2900. How to make money?Most traders have had enough and are finding it extremely difficult to make money. The market is trading in small narrow ranges and lack of volatility makes life all the more difficult for the traders. So in such a scenario, I would suggest that traders to have sound knowledge of Options. By using Option Strategies, one can easily ride the volatility and still make reasonable profits. Like the time value in the premium of an option can be shorted and as a result one could make money, if the option expires worthless. I would suggest Short Strangles and Short Straddles in the Nifty to make money. Please note that these strategies should be used only after having complete understanding of the Option Strategies. strategy corner.As the Volatility is low, and the market is likely to remain in a narrow trading range, one can construct Option Strategy to take advantage of the situation.1. Construct A Short Straddle.Short the 2700 Call and Put for the March Series simultaneously. Short 2700 CE at 140 and 2700 PE at 135. Net Premium Inflow will be 275 and the Breakeven on either side will be 2975 and 2425. If the March Series expires within the range mentioned above then one can make profits. I suggest to square up after 5 to 7 trading sessions and make profits of the time value in the options. Please note in this strategy, losses can be unlimited.2. Contruct A Short Strangle.Short the 2700 PE at 132 and Short the 2800 CE at 88 both for the March Series and the net premium inflow will be 220 and the breakeven on either side will be at 2480 and 3020. One can make profit within this range. The highest profit will be 220, if the Nifty closes between 2700 and 2800 at the March expiry. The losses will start above 3020 and below 2480 on the lower side. One can book profits after a few trading sessions and even in this strategy losses can be unlimited.3. Bear Spread For The Nifty.Buy 2800 PE at 180 and Sell 2600 PE at 100 for the March Series. The view is moderately bearish. Net Premium outflow will be Rs. 80 and that will be the maximum loss if the strategy fails. Maximum profit will be Rs. 120. Last months Recommendations.Let us see how the recommendations given in the previous month’s article fared: PAIR1:Sell HDFC Bank 915 SL 966 Tgt 892-862-791.Buy IOC (445) as a Hedge against HDFC Bank. HDFC Bank collapsed to 853 (as on 20/02/2009) and IOC went up till 467. Hence one would have made decent profit as HDFC Bank fell by 7% and IOC went up by 5%. PAIR2:Sell McDowell 733 SL 775 Tgt 683-629-583. Buy BPCL (392) as a Hedge against McDowell. Mc Dowell fell to a low of 426 and BPCL went up till 423. The profits are mind blowing as the McDowell went down by 42% whereas BPCL went up almost 8%. Literally speaking McDowell gave a dream profit. PAIR3:Sell Tata Comm 450 SL 481 Tgt 418-390-374. Buy HPCL (291) as a Hedge against Tata Comm. Tata Comm collapsed to 385 (as on 20/02/2009) and HPCL went up till 306. Hence one would have made decent profit as Tata Comm fell by 15% and HPCL went up by 5%. Neat profits one can say. Recommendations: PAIR I: Buy Alstom Proj 301 SL 291 Tgt 320-336. Sell HDFC 1352 SL 1382 Tgt 1317-1260.PAIR II: Buy Matrix Lab 89 SL 85 Tgt 94-100. Sell ICICI 336 SL 343 Tgt 327-308.PAIR III: Buy Ind Info 53 SL 57-61. Sell TCS 474 SL 483 Tgt 460-445.