Sensex: Quantifying Sell in May

There is a very famous investment philosophy to Sell in May and return in October.

Lets see how that strategy works for our Indian Markets.

The conditions are to Sell on first day in May and Buy on first day on October with commissions of 5 bps.
We are testing this from year 1980 and 2010 so that it covers most of the history available.

How are the results? Well, its not profitable. The initial equity of $10K got reduced to $9.8K while buy and hold was massively up by ~2 times.

Here's the snap shot of the performance.

There were only 10 profitable years among the 31 years of testing with the year 2010 contributed massively $4780  to the results.
The profits are completely skewed by a single year.

This clearly shows that the strategy is not profitable in itself but there was one profitable trend. That was the higher probability of a dip in early May which lasts for 2-3 weeks on an average.

Here's the equity graph.

Nifty Two trendlines will define the move

Nifty index has been trading in a range for quite some time.

The index tested the trendline resistance from Nov and Dec highs but failed to cross it. The second test within a week again failed to move above it.
While on the downside the 200 SMA has been strong support for some time.

The daily charts also show another support zone at 5700 levels where the volume profile shows good buying action in the past.

The worrisome part is that the rise from 5700 levels has getting smaller and smaller and in April we had the third bounce which was half of last time and did not last for even 3 days.  This does paint a bearish picture.

Worth noting is the near stagnation at 200 SMA levels without taking out the peak of first test after the breakout from 200 SMA.

Any direction breakout from the above two trendlines will set the direction for future.

Attached is the chart.

Well its not all bearish for Nifty, there is a bullishness also in form of invested Head and Shoulder.  This particular pattern is in formation so have a watch on this.

The bullishness will come only on break above the neckline at 5950 levels.

The volumes which has been lower as per the textbook pattern. Need to watch the volumes on upside breakout here.

Nifty: Why 2011 is not 2008? Pattern repetition not happening

The 2011 first quarter looks quite similar to 2008 first quarter in some respects.

The market makes a top and then sharply falls. Then after being sideways for 4-6 weeks a rally comes. The rally soon falters and rest is history.

But the study shows that the pattern will not repeat itself. The initial analysis suggests that the signature of the move is different but the complete answer can be know in next 2 weeks i.e. by mid April.

First the charts showing the two periods.

The pattern though looks quite similar as mentioned but the key differences are:
1. The rise after the fall has been much stronger this time.
2. The volumes are better on rise for this rally.

Analyzing the 2008 pattern the index was above the 50 week SMA for 2 weeks and then in 3rd week the index closes below the 3 weeks low. The high of that week then becomes the resistance with ~20% fall coming on break of the crucial point of breakout from 50 week SMA.


The above are quite famous pattern for any down leg and is called A-B-C pattern. More details later.

Now coming to present, the Index has come out of the 50 SMA and will close above the 50 SMA for 2nd week in a row. If we consider this week as breakout point then the weeks low at 5660 is the crucial low to be maintained. For any fall to come then the next 2 weeks will be pointer.

So the 5650 (~ lows of 5660) will be the decider for the pattern.Keep watch on those levels.

Technical Analysis and Forex

Forex is the biggest and most liquid market in the world with some estimate putting it to be a $3,700bn-a-day volumes. The participation in this market is also quite high the low marigins at 1% attracts everyone from student to most sophisticated Algo traders.

Well my concern is Quant and Technical strategies so lets me update you about that correlation here.

The subject is a paper by St. Louis Branch of the Federal Reserve Bank that the simple Technical Strategies are not working that well in forex markets.  Link here.

Not quite surprising given that everyone can read and trade with simple strategies just by reading some books and blogs. And when everyone follows the same path it leads to cliff not to throne.

The paper at the same time mentions that the complex strategies are still profitable.
The complex strategies are however really complex like Neural Network trading, Cross currency pairs, Genetic Algorithms and much more.