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What is India up to?

While all the talk has been about the Shanghai and its big rally for the year — not as much has been written about the Indian stock market. I am going to base the analysis here on the India Bombay Stock Exchange 30 Sensex index or $BSE.

I find the Sensex a bit more interesting here because although the Shanghai and S&P 500 retraced exactly 38% of its last move so far, the Sensex has retraced 61.8%. It has gone from 8k in March to 16k just recently before correcting and sitting over the 50% retrace at around 14.5k.

Over the weekend I posted on a global macro forum that the Sensex looks like it may have topped at the 61.8% retrace around 16k, with a huge gap to fill down to 12k. The 200 dma is down near 11k. I stated that it wasn’t a time to be complacent, but was then told by top market analysts that droughts and swine flu didn’t keep the Sensex from climbing. Well whatever the reasons, there is a huge gap down there that is just begging to be filled when I glance at the chart. I also mentioned a big concern is that just filling the gap or touching the 200 dma would be larger than a 61.8% retrace (corresponds to 38.2% on chart or ~13k) so that sets us up for a retest of the lows if not lower. Let’s analyze a condensed chart.

sc

The numbers are a bit hard to see, but the 61.8% retrace at the 16k level was hit and has been acting as resistance. If it punches higher than we are very likely to get to the highs at 21k. However, regardless of how hot markets are, they usually come down to touch their 200 dma at some point. Same thing with gaps, they usually get filled at some point. It looks like back in July the Sensex was trying to do just that but everything got aborted and all markets soared. Technically, that is an unfortunate event because now to fill the gap requires falling below the 38% retrace in the upper 12k. That puts a retest of the lows back on the table.

Of course, this is just the most likely scenario based on current data and no one or model can predict with certainty any event — just not a time to be complacent and to trade with technicals and serious risk management.

I trade the Sensex via IFN, and my models gave me a sell signal August 10th.

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August 18, 2009 - Posted by | Legacy Funds | , , ,

9 Comments »

  1. ok. I think patience is still the key. when S&P crosses 1050, planning to sell bearish call spreads on FXI, IFN, USO, XLB, XHB, XRT and a few others as well as some individual stocks. Planning to sell puts on SKF, SMN, FXP, SDS and some others. Planning to buy DOG and SH. Planning to buy cheap calls on FXP, SMN, SKF and some others. Planning to buy puts on SPY and individual names. going long UST, shorting gold silver and oil.

    Guess is will start getting positioned some combination of time and levels. Ideally, will start in 2 to 3 weeks at levels 3% to 5% more advantageous for me.

    Will be watching China, Baltic index, credit spreads, dollar performance, long bond performance, swap spreads, ted spreads among other things. will look closely at volumes and oscillators for clues.

    the number of different positions i will take and the amount will depend upon what happens over next few weeks.

    but i think the time for the bears is anywhere from a couple of weeks to 6 weeks away. not sure how to handle nonfarm payrolls. so, likely will not do anything meaningful until that is out of the way.

    Comment by Macro_Man | August 21, 2009 | Reply

    • Yes, although I expect next week to be negative due to a post opts exp, that may not be the end of the rally. I was expecting a high of 1120, but now thinking 1050 may be the upper end as I posted on seeking alpha. Now I see you come up with the same analysis. I might have to hire you to work at my hedge fund, seriously as I pretty much have the same game plan.

      I have kept my FXP short as it has a bit of a profit cushion since 8/12 but the stop is at 10.08 and believe it or not the low today was 10.10. We really need to see extreme bullishness, and rely on technicals to get the timing — divergences are setting up and we are in the later stages of the rally.

      Comment by Suzanne Hamilton | August 21, 2009 | Reply

  2. super, I am thinking crossing 1050…so 1050 is minimum number I think. Dont know what the upside is, you may be right on the 1120. The target range may be 1073 to 1120.

    I shorted like crazy last year…too early and closed too soon. So, while I ended up making money last year, it was a fraction of what I could have done, and I have a lot of respect for the bull-headedness of the bulls.

    This time, I have not been gored and would like to wait till close to or after the peak and hit on the way down. I would like my trades to work right from the beginning. I think selling bearish call spreads on FXI, followed by FXP may be the way to go..but, I am waiting for the 3000 level on the composite to get resolved first. Want it to cross over to the top side and then turn lower. I was emailing a friend in China and she is of opinion that things are going to turn lower. She is also thinking of lightening up…but nothing imminent. I dont know what she has, but she has stocks and apartments and works for private equity, so assuming she is pretty long risk assets.

    I totally agree we are in the later stages of the rally…I have a long history in credit and I want to see credit spreads widen more. Same with the TED, LIBOR levels, 2yr swap spreads.

    If spreads widen while stocks continue to go up, one would go bearish sooner; if credit spreads dont widen while stocks go up, one would have to be more patient I think. Credit spreads respond to stock performance, until they diverge…then it is bad for stocks. Likewise I am following the long bond and DXY.

    Looks like you are a very smart person with a good fundamental call. The risk is that makes you get short sooner than later…because you are much smarter than the average person.

    It takes a lot to see far ahead of everyone, but to wait till the right time 🙂

    Comment by Macro_Man | August 21, 2009 | Reply

  3. The TED spread looks ready to rebound, same with the junk yield over treasuries (too narrow for my comfort), same can be said of corporate yields. The S&P LSTA 100 leveraged loan index dropped for the 1st time in 6 weeks.

    Thanks for giving me credit for my fundamental calls — however if it isn’t obvious in my posts, my trading is mostly technical based with a global macro input. The strength of the entire system is in the risk management system and the overall portfolio risk being contained within a hard-coded max portfolio risk L:

    Quantify Macro Risk (M)
    Trend Detection (T)
    Select Risk/Return Tolerance Level (L)
    Volatility Analysis (V)
    Compute Position Size
    Compute Stop Level
    S = f (T,V)
    Apply Equity Risk (R)
    Position Size as % Equity
    P = f (M,R,S) (this is where Global Macro makes an impact)

    Risk-Adjust Portfolio
    Generate Correlation Coefficient CC for each trade
    Calculate correlation adjusted risk for each trade (R*CC)
    Calculate Portfolio Heat PH = (summation)R*CC for all open positions
    Accept Portfolio if PH L

    Anyway, it sounds like you did a great job of managing your risk last year and this. Trying to milk the last bit out of a long or short is usually not worth the higher risk involved.

    Comment by Suzanne Hamilton | August 22, 2009 | Reply

  4. It is quite clear from your posts and dialog that you are an expert technician and disciplined trader. That’s always been pretty apparent, what I have gathered over the past few days is your grasp of the macro picture as well, which many traders miss. It is certainly very good to have both strong technical skills as well as a very good big picture call. Quite rare indeed. All I was saying is, when one is good at the big picture and sees far ahead of the rest of us, it is tempting to be early, that’s all.

    Here is what I am struggling with. Timing of the next major leg (not a correction but the resumption of the trend). And, whether it starts with small steps or a steep gap. If it is baby steps, then I think the risk/reward favors being late and one can relax about the timing, because all one has to do is wait and join after the first 3% is lopped off. If it gaps lower, then one would rather position ahead and suffer for a few days/weeks…and am not looking forward to it. The thing with stops is..if one gets stopped out, then one is not supposed to put the same positoin on..so, what is the next entry point? And how many times to keep suffering damage by a thousand small cuts?

    China seems to have set the ball rolling, but may make another attempt to go higher before dropping. The credit indicators you mentioned are widening, but gently and are sill benign. If there starts to be a big negative divergence then we would know the timing gets closer and there is a catalyst. Other than that, there could be some unexpected catalysts. Just dont see anything other than China that can trigger the next move…unless at some point, people start looking for the exit at the same time and the machines all switch direction.

    I think the first move may be a gap lower; and that makes the timing crucial and I am struggling with it. Looking at some of the early years…looks like every deep drop was followed by a steep rally. Similar in percentage terms, so perhaps wait for the first bounce after the first drop and join in then? Dont know

    Comment by Macro_Man | August 22, 2009 | Reply

  5. Thanks again for the praise, and no doubt you are very sharp yourself. I was just concerned that I mislead you somehow and didn’t make clear that I put a much heavier weighing on technicals. The macro view provides an input that at most serves to reduce the position size because the technicals are in conflict with the macro picture. Obviously a scenario we have now with this “bear market rally”, and it is causing concern to all except the oblivious cheerleaders that believe in the rally.

    It most definitely is a struggle for all good traders now that are lagging the market, me included, and sometimes hard for clients to understand the high level of risk in chasing this rally. Sometimes I step back and think about how did people get sucked in to these bear market rallies throughout history — but it was easy for us to question it because we see the big drop that followed to lower lows, e.g., in the 30’s after the huge rally. But at the time they all thought the bear market was over and it was the start of a new bull market (I guess going by the 20% rule, which I don’t use). We don’t even have the volume to support this to be a new bull market. However, as you say fighting the trend gets one nowhere, so what does one do. You have to wait until the shortest time frame triggers (currently using either 15 min or 60 min intraday charts), and it will be a weaker signal because it will be in the opposite direction of other time frames. At some point the trend sticks and you get longer time frames firing off in the same direction so you increase your position size.

    I agree with you it is hard to know how the correction is going to start, and whether it is going to start with a big gap down or just small down days. The technicals will catch the change, it just becomes a question of if the move is too far from the trigger point then the risk/stop is too big. So if not positioned by then one can wait for the bounce as you stated, but it can be far below, and a similar situation for those that have been waiting for a pullback to go long.

    To answer your question, whatever indicator you use to trigger an entry, if you get stopped at some point (could be same day for short term systems) you will get another trigger for entry, even if at a less optimal price you still need to get back in. I will be doing a post today for a 16wema and maybe can demonstrate this — will be same principle for shorter time frame.

    As an aside I don’t know if you trade for yourself/clients, work for a firm, etc., but I am a member of a large group of bright global macro traders and we exchange ideas 24/7 basically. If you are interested in joining — you can just read the discussions, but I have a feeling you will be interested in getting involved with the discussions — no cost. If interested, just send me an e-mail shamilton@legacyfunds.net

    Comment by Suzanne Hamilton | August 22, 2009 | Reply

  6. Sure, thanks for the kind offer and will be honored to join. In the interest of disclosure, I trade for myself after working for many years in finance (the fixed income and credit markets is my entire experience). I was not a trader, but was a client coverage person and started actively investing only a short while ago. Before that was passive, just reduced positions and put them on a few times a year. Turned out to be lucky with the sectors and with the timing, so generated very good returns. Not being modest, it was beginners luck and instinct.

    I have been trading very actively only for the past 18 months…been very strong in macro/economy and the fundamentals/big picture..but terrible in technicals. Absolutely the exact opposite of a good trader. But, at least I was 100% consistent; as in being consistently wrong. Luckily, the macro calls saved me and I ended up positive last year. My gross losses were 25 times my risk capital and my gross income was 25.15 times my risk capital :). Talk about a bad trader who should have been wiped out many times!

    I was terrible this year also, but since I have been doing it full time, I am getting much better at it. Now, I realize my mistakes and learn from them, instead of repeating them ad nauseum. Finally, I stumbled into learning about technical trading by accident. I was a total non believer until I started reading books. So, my self teaching has been only since May/June 2009. I am a novice with regard to technicals; but studying every day. Once again, the macro has saved me and I am positive this year..though not as much as I would have been if I was a better trader.

    Wrote this up just so you know. Also, I would like to stick with the discussions on macro and sectors and not with individual stocks as a precautionary measure. Just like seeking Alpha does. I will follow up with an email.

    Thanks once again. In addition to being an awesome trader, you are very kind.

    Comment by Macro_Man | August 22, 2009 | Reply

  7. You you could edit the post title What is India up to? Legacy Funds to more better for your webpage you create. I liked the post even sononetheless.

    Comment by Schedule | October 29, 2010 | Reply

    • Thanks for visiting this site. Due to the best interest of our hedge fund clients, we have not been putting out new posts. However, as per your special request, we will make an effort to update the post.

      Comment by Suzanne Hamilton | October 30, 2010 | Reply


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