Too good to be true.

I have found that if something is too good to be true it usually is not true. This simple principle has helped me many times in my own trading and investing. The context in writing this today is an article in Bloomberg by Jeremy Grantham who says that the China story may well be flawed and in the next few quarters events are likely to take place in China which will scare away all the investors. It is quite possible that the much hyped China story may turn out to be a flop as the country could face setbacks not visible now.

This news adds up with the news item in FT which says: “Asia’s forever blowing bubbles” .

Gold may be forming a symmetrical triangle, says http://www.afraidtotrade.com/ in its analysis. The boundaries are between 920 and 980 dollars.

Nifty in trading range, may simply drift down!

As world markets begin a process of consolidation, the nifty may follow suit, simply moving sideways, not going anywhere. A small range in the Nifty is visible between 4500 and 4600. The next trade is liekly to come when the Nifty moves out of this range. Even a range breakout may not travel much, since there will be support at lower levels and resistance in the 4700 zone.

Buying New Highs

Saket asks: ” have a query on how to trade in stocks making new highs,how can we work on targets for these stocks,what can be the stops,what can be the strategies on such stocks”

Stocks making 52 week highs as well as all time new highs should be tracked closely. These are shares you want to buy.

Trade these stocks based on a daily chart. You can enter part of your position on the breakout to new highs, and rest on a dip. Keep a stock below the last (or even the second last) swing low. But keep wide stops.

There are no targets for stocks moving into clear skies. If you are trading them, then consider exiting on a range expansion (Big move in your favor). If you are investing, hold on for a wild ride.

A fine Technician and R Squared

In comments, Anupam Mazumdar asks about the R-Squared indicator “how we can do it(i mean formula or set up) ourselves using excel or some prog language like c++ or java”

Tushar Chande has written two books on technical analysis and trading. His first book, “The New Technical Trader” is pathbreaking in many ways because it discusses new ideas. In this book he discusses the R-Squared indicator to identify trendiness in the market.
The calculation of RSquared is easy:
RSquared = Square(coeffR(Length));
The function coeffR is calculated as below (in Easylanguage, used in Tradestation):
{*******************************************************************Description : This Function returns coeffRProvided By : Omega Research, Inc. (c) Copyright 1999********************************************************************}
Inputs: Length(Numeric);Variables: R(0), X(0), Y(0), UpEQ(0), LowEQ1(0), LowEQ2(0), LowEQT(0);
X = CurrentBar;Y = Close;
UpEQ = Summation(X * Y, Length) – Length * Average(X, Length) * Average(Y, Length);LowEQ1 = Summation(Square(X), Length) – Length * Square(Average(X, Length));LowEQ2 = Summation(Square(Y), Length) – Length * Square(Average(Y, Length));
If LowEQ1 * LowEQ2 > 0 Then LowEQT = SquareRoot(LowEQ1 * LowEQ2);
If LowEQT <> 0 Then Begin R = UpEQ / LowEQT; If R <= 1 AND R >= -1 Then coeffR = R;End;

I do not use the raw R-Sq values. I smooth them with a short moving average, say 3.

And what about the markets?
The choppy conditons seem likely to continue as the markets go through August when there is no event to influence prices. (At least, no visible event!).
But, some stocks are likely to continue moving up, or even gain momentum. Trading strategy may focus on individual stocks rather than the Nifty.