What is your ATM.? & NIFTY In the contraction phase.

Adapted from the SMB blog, read original post here.
Traders should identify a stock that due to technical and fundamental reasons has traded pretty much in one direction for months. That stock becomes your ATM. Keep it on your screen, know how it moves, feels and reacts. Since the stock has a clearly defined direction, you trade it only on one side. There is a lot to be said for having a directional view every day. SMB often refers to such stocks as ‘stocks in play’.

Heromoto is one such stock. Long term charts are bullish. Fundamentals are good.I have shown the chart a few days earlier. Since then, stock prices have rallied handsomely.

Gold is also ‘in play’.

How about more ideas from readers?

What the blogs are writing

Nouriel Roubini, economist, famous for predicting the 2008 crash writes an article titled ‘Is Capitalism Doomed?’. He says that the massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession.

CEO Joseph Ackermann of Deutsche Bank said that Europe’s sovereign debt crisis will stunt bank profits for years and could kill off the weakest. This spooked the DAX which fell almos 4% on Monday.

JP Morgan says: Stock mutual funds are having their worst year since 1998 relative to their benchmarks, as higher volatility makes it harder to pick stocks.  Among 2,806 funds tracked by the brokerage, 47 percent under performed their benchmarks by more than 2.5 percentage points this year, the most since the 55 percent recorded in 1998.

In the contraction phase

Regular readers know that I am a big fan of volatility cycles. These are essentially cycles of expansion and contraction. When the Nifty rallied from 4700 to 5080, there were large range bars which were the expansion phase. Once we have expansion, the next phase should be that of contraction which probably started on Friday and continued yesterday. Today (tuesday) should continue as part of that contraction.

We are traders. We undertand that the market follows patterns but each instance of the pattern is likely to be different in some way. This means that my expectation of contracting markets is broadly correct, yet today need not follow the expectation since each new day is unique. So, what could change? Expansion, obviously! While chances of an expansion today appear dim, there could be sharp move up or down. In fact, the worthwhile trade today will be if the market decides to go into an expansion. If we remain in a narrow range, trading is likely to remain choppy.

If you found this a bit difficult to read, do excuse me, but read it again!