Traders Corner

Certain candlestick patterns do not explicitly signal a trend reversal but only give an indication of whether the prevalent trend could halt or reverse. The bullish and bearish engulfing candlestick patterns belong to the former category while dark cloud cover (DCC) and piercing patterns fall in the later.

A DCC pattern is formed with two candles. The first candle is white and the second candle is black forming the ‘dark cloud’ that hovers ominously threatening the prevalent up-trend. Needless to add, the DCC pattern occurs near the top of an up trend.

The second candle in the DCC pattern gaps upward and then moves down, some way within the body of the first white candle but it does not cover the first candle entirely. If it did so, it would then get labelled as a bearish engulfing candle. The extent of penetration within the body of the first candle determines the strength of the pattern. When the second candle moves more that half-way within the body of the first candle, it implies that a trend reversal is imminent. Dark clouds (second black candle) that move less that half-way within the first candle can turn out to be a false alarm or minor halts within an up trend.

The piercing pattern is the inverse of the DCC pattern. While dark cloud covers occur towards the end of an up-trend, piercing patterns occur towards the end of a down trend and signal the possibility of a trend reversal from that juncture.

This pattern is made up of two candles as well. The first candle should be a long black candle as it would be part of the down trend. The second candle would gap downward and then move higher well within the body of the second candle. Again, the extent of the penetration determines the strength of the pattern.

A penetration that exceeds 50 per cent of the first candle’s body should be a more reliable signal of a trend reversal

Via BL

Trading Tutorials

For a day trader, each day is war. Just as a general with a detailed plan of action who eventually wins the war, the more the preparation that is put in prior to the commencement of the trading day, the greater the chance of a success.

Many a time, a trade is terminated prematurely, only to face the mortification of seeing the price zooming up. A well-drawn trading plan can help avoid such a situation. A trading plan should have: (a) entry level, (b) exit level and (c) stop loss.

Previously, we dwelt at length on the stock selection criteria. That would be the genesis of the trading plan. It would be a good idea to have a list of stocks for going long and another list for shorting. As the trading day unfolds, the stock that can be traded that day will become apparent.

Determining the entry levels in the stock should be done with the help of intra-day charts. Technical tools that are used during day trading should not be too many, either. Each day-trader should make a trading system comprising one or two oscillators to generate a buy signal. Oscillators can be combined with trend lines and patterns on the bar chart or candlestick charts. The price reversing from supports would also be a good place to initiate a buy. It would be best to stick to one or two oscillators alone, as greater the familiarity, the greater the degree of comfort.

Exit levels in day trading can also be determined with the help of technical tools. Some examples are sell signal in the oscillator, trend line and reversal from previous peaks, to name three. Apart from these technical levels, the trader can also determine exit levels with the help of a certain minimum expectation per trade. For example, the minimum expected return per trade could be 1 per cent.

Stop loss levels are the most important part of a trading strategy. The minute the entry point is decided, the stop should be placed a few points below. As soon as the trade moves in to profit, the stop should be moved up to protect profits. Day traders who excel in taking losses dispassionately definitely win big in the end

Trading Tutorials

We all know that there are three kinds of trend: up trend, down trend and sideways trend. The ancient Japanese discovered candlestick patterns that signal the onset of these trends. In our previous columns, we dealt with both bullish and bearish reversal patterns.

However, there are distinct candlestick patterns, which are considered as neutral or indecisive patterns. The most common among these is the doji pattern. When the opening price and the closing price of a stock are almost equal, the candlestick pattern is known as doji. The body of these patterns is just a small horizontal line. The shadows or wicks can, however, be of varying length. A doji line with long upper and lower shadows indicates substantial indecision on the part of market participation.

Doji line with long lower shadow and no upper shadow is called a dragonfly doji candlestick. This pattern is believed to have bullish implications. It is formed when the security falls lower during the trading session but recovers all the losses and closes near the day’s high, which is also its opening level; denoting bargain hunting at lower levels.

Gravestone doji pattern is the opposite of dragonfly doji pattern. In this pattern the upper shadow is longer and there is no lower shadow. The implication of gravestone doji is bearish. This pattern is formed when a bout of selling is experienced at intra-day high and the stock wipes out all its gains to close near the day’s low. Gravestone doji is yet another example of the colourful terminology used by the Japanese. This pattern marks the end (death) of an uptrend.

The candlesticks, which have a small bodies with long upper and lower shadows are called spinning tops. The colour of the body is not important in this pattern. These candlestick patterns occur on days of indecisiveness. Not much inference can be drawn from these patterns, except that the security is pausing or moving sideways.

Trader's Corner

The ancient Japanese employed extremely picturesque terminology while talking about chart patterns. For example, no one in a healthy state of mind can feel happy when they hear terms such as ‘hanging man’ or ‘abandoned baby’. These patterns imply downward reversals. Though the term ‘harami’ might sound insulting to those who speak Hindi, its meaning is pretty innocuous. The word harami means pregnant in Japanese.

The harami pattern consists of two candlesticks. One long candlestick followed by a small candlestick that is completely within the body of the first candlestick. In bearish harami pattern the first candle is white and the second is black, though the colour of the second candlestick is not important. The upper and lower shadows of the second candlestick do not have to be limited within the body of the first candlestick. However, it is preferable if the shadows are limited.

Bearish hanging man pattern is a distinct candlestick pattern. It looks like a cross and occurs near the end of an uptrend. The pattern is formed when the stock opens high and there is an intra day sell-off followed by a sharp recovery that brings the stock back near its opening level. So, the pattern has a small body with a long lower shadow (twice the length of the body).

Though both the bearish harami and the hanging man pattern do signal an impending trend reversal, it is best to wait and see the candlestick patterns on the subsequent days before selling the stock. A long black candle with a shaven head would be ideal for confirming the trend reversal. You can also confirm the signal with the help of other tools such as oscillators, moving averages etc. before deciding to act based on these patterns.

Trader's Corner

Run-away bull markets are not rare in the history of stock markets. After rallying in the face of all odds and surmounting a wall of scepticism, markets come to a stage when they suddenly break-out and begin a dizzying climb upward.

Many of the emerging markets have undergone (or are undergoing) such phases over the last three years. The most striking example is the move made by the Shanghai Composite Index since July 6 this year. The index has gained almost 60 per cent since this trough interspersed with almost negligible corrections. The Hang Seng has, of course, outdone the Shanghai Composite over the last three months. It is up, hold your breath, 80 per cent since its July trough!

The 36 per cent gain the Sensex has recorded since the August trough pales in comparison to the rallies in these indices. But the Sensex has had its wild days too. If we hark back to the riotous days of 1992, our benchmark recorded a gain of 133 per cent in the four months between January and April 1992!

In other words, though the Indian market seem over heated, over stretched, over valued and so on, this state of affairs can continue for some more time before the party comes to an end. The question is, how do traders play this phase?

Traders can make money in a downtrend as well as an uptrend. But initiating short positions in anticipation of a peak is akin to lying down in front of a moving road-roller. There would be plenty of time to go short once the markets reverse in earnest. Stay with the uptrend till important support levels are breached with certainty.

Do not plough back the profits in to the market, though the temptation might be great to do so. Stick to the initial capital that you have planned to trade with. If you are a compulsive bull, reducing the trading capital by 10 per cent with every 10 per cent rally in the index might be a good idea too.

Volatility and whip-saws will increase as the market moves higher. If you have that uncomfortable feeling deep within, just take a break for a few months.

Trader's Corner

An alert investor/trader would know intuitively when the markets are nearing a peak or about to form a significant bottom. For instance, I would know that the market is about to form a long-term top when my sedate, academically oriented neighbour would start waylaying his friends to share his latest stock market triumphs. Since watching the antics of neighbours is not always this fruitful, here are a few other pointers that can be monitored by novice investors to scent out a peak or a trough.

New fund offerings (NFOs) from mutual funds always pick up steam close to market peaks. When investors are bombarded with a plethora of schemes with themes that outdo each other in vagueness, it is a sure sign of trouble. The reason why the NFOs cluster near the market peaks is simple.

As more and more investors watch their neighbours flaunting the wealth that they have made in the stock markets, the feeling of being left-out grows. Since many new entrants prefer taking their first step in to the world of stocks through mutual funds, the demand for mutual funds grows. A case in point is the way Reliance Equity Fund creating history by collecting over Rs 5,000 crore in March 2006, just after the markets buckled under in May 2006.

Another indication of an overheating market is an increase in the number of initial public offerings (IPOs). The quality of these IPOs and the valuations would further signal if the promoters are exploiting the investor optimism. The IPO boom just before the Harshad Mehta scam broke out in 1992 is an unforgettable phase in our stock markets’ history. Investors went berserk over the deluge of public issues in this period. The third indicator that we want to dwell on is the rally in long-forgotten stocks and penny stocks. Any-time you see the dud stock in your portfolio that has not budged an inch over the last five years, being recommended by an ‘expert’, you can know that a crash is around the corner.

The above-mentioned are the signals of over heated markets. The reverse would be true near market troughs. Investor apathy would make fund managers and promoters postpone their public offerings. There would be no takers for even bluechip stocks leave alone penny stocks.

Trader's Corner

Stocks seldom open at the same level at which they closed in the previous session. When they open well above the previous session’s high or below the previous session’s low, they form a ‘gap’ in the chart. The Japanese, in their picturesque terminology, called these ‘windows’. Analysing these gaps or windows provides an analyst with vital clues regarding the trend in the stock.

While an analyst would welcome gaps in the charts, position traders would be happy to issue a ban on gaps, if they could. They play havoc with positions that are rolled over as stops become redundant in a large gap opening. The only recourse when stuck on the wrong side of a gap would be to book the loss and exit.

What can an intra day trader do if the market opens with a gap in the morning? He would need to take in to account the prevalent trend in the morning before acting on a gap. For instance, if the market is in a strong up trend, it can stabilise at the higher level after a gap ‘up’ opening and then move up further in the later half of the session. So, the trader would wait for the prices to sustain at higher levels for at least an hour and then play long with a stop just below the level where the gap began.

Similarly, in a market that is trending down, downward gaps would be common. If the price moves sideways after a downward gap, there is a high degree of probability that the price would fall further as the trading day advances and hence provides an opportunity to go short for the intra-day trader.

It is, of course, of paramount importance to determine if the gap is a strong one that will go unchallenged for many days or a weak one that will get filled the same day. The magnitude of the gap would play a critical role in deciding its strength. As a rule of thumb, smaller gaps are more likely to get filled the same day when compared with a larger gap.

The way to determine if the gap is small or large would be to compare with the previous day’s trading range. Gaps that are more than 50 per cent of the previous day’s trading range are more likely to remain open for a while when compared to gaps that are less than 50 per cent of the previous day’s trading range

Average Directional Index indicator

There are many among the investing fraternity who abhor stocks that meander sideways and tend to gravitate towards stocks that are trending upwards or downwards. Traders of course prefer momentum as it helps them to churn their positions faster.

One easy way of picking stocks that are in a strong up or down trend and not in a consolidation phase, is with the use of the Average Directional Index (ADX) indicator. The ADX line is plotted along with two other lines, the +DI and the –DI. The +DI line is the positive directional index and is derived by dividing the range of highs over a period by the price range over the last trading day and the previous close, smoothed over a given number of periods. For calculating the –DI the range of lows is switched with the range of the highs. ADX is the modified moving average of the difference of +DI and the –DI divided by the sum of +DI and –DI multiplied by 100.

There is no need for you to do these calculations manually since most technical software provide the ADX indicator. The ADX is plotted on a scale of 0 to 100. But the indicator scarcely moves above 40. Since ADX is plotted after taking both the +DI and the –DI in to consideration, the slope of the ADX line does not indicate bullishness or bearishness. It just helps the analyst to judge if the stock is in a strong trend or moving sideways.

Once the ADX falls below 20, it suggests that the underlying security is getting in to a sideways move. Conversely, a move above 20 from below would signal that the stock is getting ready to launch in to a strong trend, either up or down. The ADX reversing from 40-level is an indication that the prevalent trend could be reversing.

The ADX is certainly not the easiest of oscillators to interpret or use. The best way to use the ADX is to scan the charts using this indicator and select those stocks that are moving out of the 20 level as that would signal that the stock is moving out of a consolidation phase and is readying to explode upward or downwards.

Via BL

Trader's corner

Anyone who has dabbled with charts would agree that one of the easiest tools available in technical analysis is the moving average. It gives buy and sell signals at the apt juncture that can be used by traders and investors alike to take or pare positions.

Let us start by defining what a moving average is. As we all know, an average is the middle value for a set of data. Since the value of the moving average line is calculated afresh for a pre-determined period with the latest data, the average “moves” over time. The moving average line helps in smoothing the data and pointing towards the underlying trend in the chart.

There are numerous types of moving averages. The more popular methods are the simple moving average and exponential moving averages (or exponential weighted moving averages). To construct the exponential moving average, the latest data is multiplied by an exponential percentage thus giving greater weight to the most recent data. Other ways in which moving averages can be constructed are by assigning weights governed by the volume or volatility over the time range.

The oft-used moving averages are the 10-day moving average, the 21-day moving average, the 50-day moving average and the 200-day moving average. Buy signals are generated when the stock price crosses above the moving average from below after a down trend, whereas the stock price falling below the moving average from the top after an uptrend will be a sell signal.

Many analysts use multiple moving averages and use the cross-over of these averages to generate or to confirm buy and sell signals. Moving averages work well in trending stocks. But they are difficult to implement when the stock is moving sideways or not trending. So, before attempting to incorporate the moving averages the traders should first identify the stocks that show some trending characteristics.

Trader's Corner

The stock markets have an undeniable influence on the thoughts of the men/women related to it. Traders and full-time investors can think of little else in their waking moments, and in their sleep too. The fascination that the bourses hold for the observers who stand on the periphery, is no less.

They see the movement of the stocks emulated all around them. Elliott waxed eloquent about the similarity in the patterns of stock markets to the movement of the planets in the solar system. Benoit Mandelbrot, who is also known as the father of fractal geometry likened markets to oceans when he recently said that "markets, like oceans have turbulence’.

This opinion has already been voiced by Charles Dow almost a century ago. His famous article in the Wall Street Journal on 1901 in which he used the example of tides in the ocean to explain the trend reversal process in stock markets is truly unmatched to this day.

To the uninitiated, his words ran thus, “A person watching the tide coming in and who wishes to know the spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position to where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market. The average (of stock prices) is the peg, which marks the height of the waves. The price-waves, like those of the sea, do not recede all at once from the top. The force, which moves them checks the inflow gradually, and time elapses before it can be told with certainty whether high tide has been seen or not.” Dow’s method of determining a market top should be used on front-line indices. As per this theory, the long-term bull market will stay intact as long as the indices keep making a new high every few months. But there will come a time when the indices will struggle to record a new high even though the level of optimism remains high. That should alert an analyst regarding an impending bull-market top.

Trader's Corner

Humans are an optimistic bunch. They love sunshine, smiling faces, happy endings and soaring markets. Perhaps it is this natural trait that draws the investors to stock markets in the final stages of a bull market when things are extremely rosy with scarcely a cloud in sight.

It is again this tendency that accounts for the trader’s disillusionment since they invariably plough in all their capital near the market peaks only to see their accounts wiped out in a few sessions. Most of the pain can be avoided if traders stick to a trading plan.

Trading plans would have an entry point, the profit objective and a protective stop. Needless to say that enough deliberation should be done before deciding on the stock to trade on. If the trade goes against you and the stop is hit, it would mean that the entry signal was wrong and it would be time to move on to the next trade.

It never pays to keep reviewing a trade that has been stopped out. It will only cause unnecessary anguish as the stock would definitely have moved in the direction of your call after hitting the stop. Similarly, do not wage a battle with a stock that has made you book a loss. Many of us get in to this trap and keep visiting the stock every day to try and initiate a fresh trade in the stock that would wipe out the former loss. Apart from satisfying the ego, such an exercise is entirely meaningless.

The level at which stop losses ought to be placed and the amount of drawdown has been discussed in previous columns of the Trader’s Corner. It would however do to pay attention to the ratio between the stop loss and the profit target. For example, the profit target ought to be two to three times the amount risked in stop loss. If the stop loss is placed 1 per cent below the market price, the profit target ought to be at least 2 to 3 per cent above the price. This would ensure that the trading is rewarding in the long run.

Trader's Corner

We continue to mull over the ways in which the Fibonacci series and ratios are useful in real-time trading this week too. The regularity with which these ratios keep popping up while using technical analysis is astounding.

We discussed the Fibonacci retracements last week. There are two more (less popular) tools with which the supports and resistances can be gleaned with the aid of these ratios. They are the Fibonacci fan and the Fibonacci arc. Though these are not as effective as the retracements, knowledge of these tools will come in handy to fortify your analysis.

The Fibonacci fan is a three-line tool that uses the ratios .382, .50 and .618. To draw the Fibonacci fan a trend line is drawn from the nearest peak to trough or vice versa. Next, the vertical distance between a peak and trough is divided by the ratios 38.2, 50 and 61.8. Then three lines are drawn from the leftmost point in the trend line to intercept the vertical line at the three levels derived by the ratios.

A more picturesque way of utilising the ratios to derive supports and resistances is by drawing the Fibonacci arcs. The initial steps for drawing the arc are similar to that for drawing the Fibonacci fan. The ratios are divided from the vertical distance between a peak and a trough. Then arcs are drawn through these levels of 38.2, 50 and 61.8 per cent.

As the security moves up after a down-move, the Fibonacci fan lines and arcs provide the levels where the price would encounter resistance. Similarly, in a correction, these lines and arcs provide the support levels. The Fibonacci fans and arcs can be used in conjunction with other tools. The convergence of many tools at a specific support or resistance would make that level an important reversal point.

The major drawback with these tools is that they tend to lose their relevance in a prolonged sideways move. Secondly, since they are less used, they do not enjoy the psychological advantage that the Fibonacci retracement does.

Trader's Corner

Have you ever noticed that you tend to listen keenly to some analysts on the business channels on televisions whereas your mind switches off while others are speaking. A close scrutiny will show that the analysts whom you follow closely will hold ideas similar to your own. If you are a bull, then you will listen to all the analysts who predict a never-ending bull-market and turn a deaf ear to those who disagree.

This is a form of selective listening that is employed by most traders. A selective listener is one who hears another but selects not to hear what is being said, either by choice or desire to hear some other message. Traders very often fall prey to this habit. They mentally block the opinions and analysis that goes against their own.

Though all of us start with the noble intention of imbibing as much information as possible relating to the market, company, industry, product et al, it has often been observed that the nature of the open position that we hold sifts the information and only that which supports our decision is accepted by the mind.

Traders who are holding short positions in Nifty will gravitate towards the analysts who are predicting a fall in the market. Those going long on Reliance Industries will devour all the positive news pertaining to the company while pooh-poohing negative news.

This tendency gets aggravated when traders are hanging on to loss making positions and are seeing the loss increasing every day. Instead of facing the situation and cutting the loss short, they will look around for opinions that support their holding on to the position even if it is a futile exercise.

The first step towards breaking free of this habit is to be aware of this deficiency. Once this awareness has been ingrained, one would be able to absorb all the information relating to the position and taking a balanced view on it. If there is a need to book a loss then it should be done without trying to avoid the situation by looking for alternate opinions.

The other way to circumvent this issue is by making a brief note of all news, opinion and analysis concerning the stocks in your portfolio, both positive and negative. A review of this list with a consciously neutral mind should help in making the right decisions.

Trader's Corner

Many a time, during the trading day, one comes across the perfect break out in a chart accompanied by buy signals in the momentum indicators. But we do not act upon it. A stray news item we had read in the morning or a conversation we had with a friend a few days back holds us back. It is at times such as these that we wish we could transform ourselves into a robot, whilst trading!

Unfortunately, we have not progressed sufficiently to switch off our thinking abilities at the press of a button. But after spending many years mulling over the subject, traders have developed the mechanical trading style.

The mechanical trading style requires minimum human intrusion and ensures that emotional influences are divorced from trading decisions. Mechanical traders employ trading systems.

A trading system is a group of rules or parameters that can help one identify the entry and exit point in a stock. The success of the mechanical trading style depends on two factors — primarily on the accuracy of the trading system that is being used and secondarily, on the diligence with which the signals generated by the trading system are followed.

The trading system can be created by the trader himself or he can use a system made by others. A discretionary trader who has been in the field for many years and is conversant with the use of technical analysis would have no difficulty in devising a trading system.

He would need to take a combination of technical indicators such as moving averages, Bollinger bands, oscillators etc. and clearly define the entry and exit rules based on the signals generated by these indicators.

For example, a trader may identify the entry point when the 9-day RSI average moves above the 14-day RSI line and when the price bounces up from the lower end of the Bollinger band. The exit point would be when the average moves below the RSI line and the price turns down from the upper boundary of the Bollinger band.

Needless to say that there would be false signals and noises. So stop losses are an important part of trading systems.

Trader's Corner

The second tenet of technical analysis is that `price discounts everything'. To accept this tenet, one needs to spend at least a few years poring over the industries and companies' performance data, trying to correlate the stock price moves to such numbers. The frustration that this exercise leads to, will lead to dawning of the ultimate truth — price is determined by not just fundamental but political, psychological, economic and even manipulative factors.

That is the reason why most technical analysts believe that study of the market price is sufficient in forecasting the future trend in prices. If the stock is in an up trend, it means that the factors affecting the price are bullish — so demand is greater than supply. The reverse is true in a downtrend i.e. the factors affecting the price are bearish — so supply is greater than demand.

One of the reasons for the superiority of the study of market action is the inefficient nature of our stock markets where information is not disseminated evenly to all. Insiders who buy and sell based on news and information that is known to a select few cause sharp and unaccountable fluctuations in price.

The technical analyst can accept the sharp spike in price as a breakout and trade on it, whereas a fundamental analyst would have qualms about buying a stock without understanding why the price is moving in such a fashion. A sizeable portion of the move might be missed before such an understanding is achieved.

But this tenet is not infallible. Market action is at times entirely manipulative and undertaken by unscrupulous entities with the sole intention of luring naïve investors in to the counter. Technical indicators give false signals in such phases. They can also fail to give advance notice of an impending crash.

There are two ways in which such stocks can be dealt with. The easier recourse would be to avoid trading in such stocks. The second way out would be to move in and out of such stocks quickly, i.e. keep booking profits at every ascent.

Trader's Corner

The first tenet of technical analysis is that price patterns repeat themselves. The reason why stock price movements display recurring patterns is because stock markets worldwide are driven by men.

The basic needs and emotions of men have not changed from primitive times. There is no way we can do without food or sleep. Similarly, human emotions like love, greed, exuberance, depression, contentment, etc., will stay no matter how rapidly technology changes. Human behaviour, exposed to certain set of circumstances can be fairly constant and predictable.

Many of the tools of technical analysis are based on this psychological basis. The twin tools of supports and resistances are one such example. Supports are nothing but troughs (reaction lows) from where a downward movement can reverse. The sellers turn tentative at these levels and the buyers have the chance to wrest the advantage here. The reverse is true with resistance, which are previous peaks. The buyers get edgy at these levels and sellers gain more power.

How do these support and resistance levels work? Well, these are important points of reversal in the past. Every time the price nears these levels, the memories of investors go clickety-clack. They say to themselves, "hey, the price turned from here once so it can very well do so again". That is how these levels prove to be so effective. The human element!

The supports and resistances discussed above pertain to the highest price on a day when a major peak is formed or the lowest price on a day when a significant trough is formed. Other ways in which supports and resistances are derived are with the aid of trend lines, trend channels, Fibonacci retracement levels, moving average lines etc.

If a stock has reversed from a certain price more than once in the past such supports and resistances gain greater credibility. Once a support level has been effectively breached, it turns in to a resistance level for future upward movements. Similarly resistance levels, once crossed emphatically turn in to supports for future downward movements.

Trader's Corner

Trend identification can be called the keystone of technical analysis. The price typically moves in a wave like motion forming a series of peaks and troughs. The direction in which these peaks and troughs are moving is called the trend. In an up trend, we have a series of higher peaks and higher troughs. In a downtrend, we can see successive lower peaks and troughs. When the peaks and bottoms move horizontally we call it the sideways trend.

The weekly chart of Sensex mimicking the Indian rope trick is the classic example of an up trend. Take a look at the weekly chart of Jet Airways if you want to see a downtrend. The movement of Ing Vysya Bank stock since 2004 would remind you of a heady roller coaster ride. That is a sideways trend.

Trend identification is done with the help of trend lines. Constructing a trend line is fairly simple. When the stock is in an up trend, the trend line is constructed by joining the troughs formed during the up trend. Conversely, a down trend line is formed by connecting the peaks formed during the downtrend.

Trading with trend line is also rather straightforward and it is one of the first tools that a technical analyst learns to use. A buy signal is generated when the stock price moves above the down trend line. A sell signal would be generated when the stock price moves below the up trend line.

Let us elucidate with an example. Andhra Bank has been in a downtrend ever since it peaked at Rs 98.5 in November 2006. The next significant peak was formed at Rs 92.9 on February 2, 2007. We should join these two peaks with the help of a trend line. This downward sloping trend line is positioned at Rs 86 currently. So, a buy signal will be generated only if the stock moves firmly above Rs 86.

It is often observed that the trend in a stock can vary across time frames. If we revert to Andhra Bank, the long-term trend in this stock is up, the intermediate and medium-term trends are down and the short-term trend is up. It would be safer to trade long in stocks in which the trend is bullish across all the time frame such as Reliance Capital.

Trader's Corner

It would not be news to those associated with the stock markets that stock prices are sensitive to news. Memories of May 2004 when Sensex plummeted more than 15 per cent on a single day as the tidings of the BJP debacle in the Lok Sabha elections hit the markets would be indelible in the minds of most of us.

It is not always that news has this dire an impact on the stock prices. But research in this area shows that stock prices do react to news and the volatility in stock prices does increase in periods of high news flow and volatility subsides when news flow is lesser.

Trading on news is one of the forms of trading that is followed by the agile and active traders. There are two ways to do it. The first is to ferret out any potential news that can cause a major move in the stock price. We are not talking about listening at keyholes or any other under hand activity. All it would involve is simple research that would put you ahead of the rest of the pack.

The idea is to exploit the time lag that exists between the news being disseminated to the majority. One example is to keep track of international commodity prices such as sugar, copper, steel etc. These prices percolate down to the domestic commodity markets and then the relevant stocks start moving up.

The other way to trade on news is to take position as soon as the news breaks out in the media with the hope of having the first-mover advantage. As a greater number of people come to know about the development, the stock price would move higher/lower and the subsequent move should be utilised to exit the position. Needless to say this style of trading is fraught with risks.

Exaggerated moves made by markets in response to news often get corrected in the next trading session as was witnessed after the World Trade Centre bombing. The US market and the rest of the global markets bid adieu to a long-term bear phase the day after the event occurred. It would be prudent to wait for a period of consolidation after the news-driven breakout in which to enter in to a position.

Trader's Corner

Transacting on the stock markets is a complex activity and leaves even the most hardened investor in a slightly muddled state. The juggling between trading accounts, demat accounts, dealing with the market intermediaries, making sure that you are not cheated out of your due entitlements of dividends, rights, bonuses etc. and to ensure that the various communiqués from the companies in your portfolios reach you is an onerous task.

A disciplined investor would have no difficulty in keeping track of all the above. But more often than not, we wake up to the fact that we have missed a bonus or a dividend only when it is too late. Fortunately, we do not live in a land of barbarians where naïve and absent-minded investors have no venue of redressal. There are several bodies that exist mainly to oversee the smooth functioning of the capital markets and to protect investor's interest.

The first such organisation is the Securities and Exchanges Board of India. The SEBI Web site has online investor grievance forms for a plethora of complaints that can be easily filled by the investors. The Internet link is http://investor.SEBI.gov.in/

Before filing a complaint with SEBI, the investor should make an attempt to clarify the matter with the company or the intermediary concerned. Only when the investor is unable to extract a satisfactory response from the erring person/company should he approach SEBI.

SEBI can take a company to task in issues relating to issue and transfer of stocks and debentures, non-payment of dividend, not delivering the letter of offer for rights etc. In addition to taking action against the companies listed on the exchanges, complaints pertaining to misconduct by market intermediaries such as brokers, sub-brokers, merchant bankers, banker to the issue, registrar and transfer agents, underwriters, credit rating agencies can also be registered on the Web site.

Investors in other instruments such as mutual funds, venture capital funds, portfolio management schemes can also bring their grievances to SEBI's notice through this mode.

Trader's Corner

There are many animals that stalk the corridors of the stock markets. Among the four-legged ones, we have the bull, cat, dog and even stags. But none is as dreaded or as unwelcome as the bear. For bears personify periods of great distress when the portfolio whittles down to less than half of its original worth.

The origin of the word `bear' in the stock market parlance can be traced historically to London jobbers who sold bearskins before they had received it, hoping to profit from the difference between the sale price and the near-future purchase price — akin to short-selling today. Investopedia defines a bear market as a prolonged period in which investment prices fall, accompanied by widespread pessimism.

There is no strict limit for the magnitude of fall that should be recorded before a bear phase can be pinpointed. But the consensus veers towards a drop of over 20 per cent from a long-term peak that prolongs for more than two months.

Falls that are less than 20 per cent would then be called a bull market correction. If we go by this definition, the correction of May and June 2006 would meet the percentage-of-drop criteria but it would fall short on the time criteria as it lasted less than two months. The correction witnessed since February 2007 is nearing the two months deadline, but the correction has been only 16 per cent from the peak of 14723.

So going by conventional parameters, we are not in a bear market yet. But even if we are, is it as bad as it is made out to be? As the saying goes, all good things come to an end. Investors should accept the fact that bear markets are part of stock market cycles. The value investors should welcome a bear market when the mood is absolutely pessimistic and the stocks have no takers. The blue chips can be picked up at attractive valuations in such periods of prolonged down trend.

Investors who dislike being in a market when the stock prices keep sliding lower can reduce their exposure to the stock markets and channel their money towards fixed income securities instead. Traders would be the least fazed by the onset of a prolonged down trend. All they would have to do is to change their strategy from buy-in-dips to sell-on rallies