Technical Learnings: 7 legged Diametric patterns

I was hoping to cover all triangles first before I move on to 'Diametric' but since in todays post mentioned the possibility of Markets making a 'Diametric pattern', let me explain it today itself.

Diametrics are corrective  patterns and once they are complete the price tends to move sharply in opposite direction ( similar to triangles). But unlike triangles Diametrics have 7 legs and are extremely difficult to trade. Difficulty arises from the price movement. Just when you think a new high is formed price will start moving down and just when you think you have a new low price will again start moving up and to complicate matter further, Diametrics have 2 shapes and its very difficult to identify them till they are almost on the verge of completion.




7 legged Diametric Pattern

Point to note:

 

1. Diametrics have two types: A) Bow type i.e. contracting first and expanding later and B) Diamond shaped i.e, expanding first and contracting later.
2. Price move in opposite direction once pattern is complete and its usually very fast
3. Price action that follows after diamond type completion is usually faster than bow types ( so diamond type are more bullish/bearish)
4. In case of Bow type the G leg can cross or end below E leg. if it ends below E leg or in other words fail to cross high of E leg then its called as 'G failure'
5. If G leg does end as a failure then the price action which follows is very very sharp. sometimes its so sharp that it doesn't even allow traders to enter into a trading position
6. Both these patterns can also be read as 'double corrective' i.e, ABC-X-ABC ( however I prefer to read them as one)
7. Diametrics basically signal confusion which is there in the markets which is explained by overlapping price movements and once the confusion is cleared i.e. diametric is complete, what follows is a clear trend
8. And like all patterns diametric too can be found in both Bull and Bear markets. Above example is a Bear market example ( since prices are expected to move down once G leg is complete)
9. Time action between most legs can be similar (i.e. all or most legs might last for same number of days)

 

 

 

 

 

 

 

 

Nifty View: Update for 19th Dec 2018

Near Term Trend:  ↔️ (Sideways/Near maturing)

Market Update: Market opened weak in line with weak global cues and traded negatively for the first hour but soon reversed the momentum and ended the day at 25 points up around 10910 levels.
We had gone short in the morning around 10825 but were forced to close our position around 10905. Nifty had to cross above 10950 levels to give us a confirmation that its building a new leg upwards but a weak opening below 10850 suggested a likelihood of a corrective upmove which had either matured or nearing maturity. However looks like Bulls have some more steam left in them. Let me show you the below chart with my wave counts to help understand my point of view in detail.

Market finished a major corrective move in Oct end around 10K levels after that what we are seeing is another corrective leg ( its too slow and has overlapping waves). Move after 10k can best be described as a 'diametric pattern'. a diametric pattern has 7 legs ( ABCDEFG) and it can also be read as double corrective ( ABC-X-ABC).I prefer to read it a single move with 7 legs. Important characteristic of a diametric is leg is similarity between most legs ( usually time wise). Here you can see each leg is taking around 5 to 6 days to complete and today was the 5th day for G leg. I was expecting market to complete the G leg in the morning and reverse from there (but it can last for 1-2 days more). A leg of the diametric measured 600 points (10k to 10600) now G leg has almost measured 575 points in almost same time (10345 to 10915 so pretty close to A leg). Even though the down move didn't materialize today and if the diametric assumption is correct, we should see a down move starting pretty soon. On the other hand if Nifty start trading above 10950 levels then will have to see and modify wave counts slightly.

On the bigger time frame, this up move from 10K levels today has consumed 35 days now and as per the time cycle all bear/bulls move in 2018 have ended around 34-40 days. So there are plenty of indications that either this rally has matured or its very close to maturing. Off course this is just one of the probability as per me and everything will change if Nifty start closing strong above 10950.

Trading Recommendation: We had gone short in the morning and exited later with a loss of around 80 points. Even though there is no change in my overall assumptions we had to exit since trade today was not moving on expected lines. Will watch and enter tomorrow again if I feel so. Nifty is consistently outperforming global markets but theres always a risk of catching up so don't rely too much on this outperformance.


 

Nifty Trade Update - 18th Dec

Update 10:30 AM : Sell Nifty @10825 CMP

Update 02:45 PM : Exit , pls cover short at CMP 10905



Note: Spot prices mentioned, you may trade in futures/call/puts basis spot price.

Technical Learnings: Neutral Triangles

Triangles are most commonly occurring technical patterns yet they are neglected the most. Its relatively easier to detect triangle pattern and usually they appear during the last leg ( 5th wave). Waves are usually overlapping and thrust/movement once the triangle pattern is complete is usually unidirectional and one sided thus making it easier to trade.

Neutral Triangle




Neutral Triangles

Just like all triangles Neutral Triangles has five legs too ( just like an normal impulse) but below are some of the important things to note.

• The most important characteristic of neutral triangle is that wave 'C' is the longest among directional wave ( i.e. wave A C & E) 
• Wave 'D' is always bigger than wave 'B'
• Wave 'D' may or may not surpass end point of  'B' (in the above example its surpassing but its not mandatory)
• Wave 'E' can be longer or shorter than wave 'A' (usually similar to  wave 'A' in terms of price and time)
• Once the Wave 'E' is retraced (in faster time) it can be assumed that trend has changed and long/short position can be taken with  a SL at end point of D wave (or beginning of E)

Nifty View: Update for 18th Dec 2018

Near Term Trend:  ↔️ (Sideways with a positive Bias)

Market Update: Nifty opened with a gap up of around 50 points and throughout the day maintained its upward trajectory before closing around 80 points up at 10888. Dow had crashed 500+ points on Friday and traders were expecting a weak opening however market obliged by doing exact opposite. Some positive sentiments are building in Nifty on back of lower inflation lower crude and New RBI Governor.

Nifty today crossed 10850 in style by a gap up and has given a secondary confirmation that its probably ready for its next leg upside. But like I mentioned in previous post too we need Nifty to cross 10950 levels (that too in faster time) to get complete confirmation. Till then the downside gates will remain open. Point to note is that VIX is now sitting at 14+ levels, previously when Nifty was at 10900 levels VIX was at 20+ levels so markets are way more calmer now ( especially with election results out of its way now).

To summarize, the entire up-move from 10K levels does seem like a corrective move only as its really very slow and has too many overlapping moves but that doesn't mean you can go and short Nifty ( corrective moves can last for a long time) . Let me take this moment to explain one important characteristic of the market. This entire year all Bull/Bear moves have consumed exactly 34-40 days ( alternatively). this has worked out like a charm till now ( pls see the below chart). Now the question is will this work again? Today was the 34th day for Nifty, so can we expect another top in next 1-5 days?



Nifty Jan-Dec2018

See all major bull/bear phases have lasted exactly 34-40 days. So its time to be cautious don't get overexcited by seeing Nifty outperforming global markets.

Trading recommendation: No position still. If Nifty crosses 10950 levels then we might look to go long at suitable entry points else create short position at appropriate time. Till then sit tightly. 

 

Basics of Markets: Technical Patterns

I will use this space to explain various basics technical patterns, which every trader should know. Will try to post one technical pattern at a time (whenever I get time) and explain how it works.

 Every technical pattern may not always turn out to be what you expect but when it does it can surely help make you lots of money. Trading is a game of possibilities and you continuously need to scan market movement for various possibilities that may be present.



 

Top 3 Reasons: Why Most Traders Lose Money in Stock Markets

Stock market is simple game It goes up and it goes down so chances of winning or losing is always 50-50. So even if you flip a coin and trade basis heads or a tail you should be fine and in long run you will probably end up being at a breakeven point i.e. no profit no loss. But if this is the case then why more than 90% of traders lose money in this market? What makes it so bloody difficult to trade? If you ask me this question then I would say this is because of the following 3 mistakes which every trader MUST avoid. 

Mistake#1 : Tendency to book small profits but inability to take small losses: To me this is the single most factor causing most traders to bleed big time in stock markets. Whenever we enter into a trade we are quick to book profits. We buy Nifty at 10500 it rises 20-30 points immediately our palms start itching and we book profit. So no harm done, good we have booked profits. But what happens when we buy Nifty and it starts falling? We wait. It falls 100 points we wait a little more. It falls 200 points. We wait a little more then in the evening Dow falls 500 points and there is panic all around Nifty opens with another 100 point gap down next day and our loss is 300 points now margin call is getting triggered what we do? We have no option but to exit. So we did two trades, made a profit of 30 points in trade 1 and took a hit of 300 points in trade  2. How long do you think one can survive like this? We have a target for profits but no target for losses. If your upside target is 50 points then your SL should not be more than 30points. So in long run you should always be 20 points up ( even if you are wrong 50% of times). Idea is 'cut your losses short and let your profits run' but we end up doing opposite. We immediately book profit and wait for losses to mount till they become so huge that we are unable to bear them. Basically we do not exit loss making trade on our own we wait for markets to kick us out.

Mistake#2 : Not having a trading plan and trading basis gut/News based trading- We either do not have a trading plan or we keep changing it frequently. We give too much importance to news flow and social media and analysts saying Nifty has made a top or bottom. Dow rises 400 points  next day we think Nifty will follow suit so we buy Nifty and then feel surprised when Nifty end up closing negative. We then start blaming speculators and operators and say this whole market is fixed. My advise is never change your stance by a single set of data point. Data point will keep changing frequently but market trend will rarely do so. "RBI hikes interest rate" or " BJP loses state election" is no reason to go and short this market. The one thing about News is that its not exclusively available to you, everyone already knows about it yet we act as if someone whispered this only in our ears. Do not do that. If markets want to go up it will go up regardless of BJP win or lose RBI hikes or reduces interest rates or crude is at 140USD or 50 USD. Everything comes secondary. news flow or data points can impact market movements for intraday or for very short term but soon it will resume the main trend. So try to catch the main trend always, Do not be impacted by change in data points or negative news flow cause it just does not work. Be a leader not a follower.

Mistake #3: Expecting markets to follow you instead of following Markets (Quick to call out top and bottoms)- Most traders have very narrow view of Market and they will keep looking at market with their predefined mindset only. The problem with predefined mindset is that whenever we see a fall of 500-700 point we assume its a good time to buy and we are quick to jump on the idea that bottom is in place and its a good opportunity to buy. Similarly when a stock has had a good run up we tend to say " it has gone up a lot now it must fall so lets sell". Please understand there is a reason a particular stock has gone up or down and even if a stock has gone up100% there is no reason why it cant go another 300% up. We should never assume the top is in place or bottom is formed. Market is supreme and there is always a reason why it goes up and down and till the time you do not understand that reason do not take a bet against it. Its always safe to assume that main trend will continue ( instead of assuming that trend will reverse now). Let market decide when it wants to change trend and when it does you simply bow to it and move out, you do not fight. We keep fighting markets by taking contrarian view and assuming it will change its trend. Trends can run for days months or even years. Simply follow markets do not expect it to follow you. Markets are way much bigger that what you and I think. Give it the respect it deserves, do not fight it. Simply listen to what it says and follow no question asked. Period.

I can go on and on and list out 10 more reasons but the broad undertone of what mistakes majority of traders make is covered in these 3 points already. Its very difficult to master 100% of these traits and even experienced traders fail to do so but even if you manage to follow them 70-80%  of the times it will be good enough for you. The key here is that as soon as one realises that he is wrong then he should move out immediately. Its better to sit out with NIL position and letting go of some the probable profits then getting into a wrong trade and suffering losses. After all money saved is money earned.

Stock market trading is nothing but a mind game. You need to be mentally strong to survive here so keep your emotions aside, market has no regard for what you or I think it has a mind of its own. It teaches humility, the moment you think you have figured it out you will be proven wrong. Its like a test match where wicket is totally favoring bowlers and you are batting on 5th day. So face every ball as if its the1st ball you are facing, doesn't matter if you are batting on 100 or 200. Just like the game of cricket, complacency can be fatal in stock markets too.