Revenge of the Three Bears

As month end for September 2013 nears, I started establishing monthly view of October. Having ‘big picture’ for the month is important as it is like view from rear mirror of the car – something you keep in mind as you move along with your trades. Let’s look at the monthly chart of nifty.

Monthly Nifty Chart showing range

1. Nifty is showing range bound movement. The range is from 5500 to 6100.
2. Emerging Markets (EEM) overall showing range movement as well.
3. So for the trades, we have to avoid any extreme sentiments.

Now, I would like to highlight a data pattern that may be unfolding for the October. The data is for BSE Sensex, which is more or less in synch with S&P Nifty.

1. I have considered all the cases from 1997 to 2013, when Sensex closed in red for three consecutive months. This happened very recently for June, July and August. Three Bears!
2. Then 4th month, September closed in green. So I have taken all the cases when 4th month closed in green after three consecutive red months.
3. There are 8 such cases. For all instances, 5th month closed in red. The loss was in the range of -1.11% to -15.70%. This is what I call the revenge of three bears!

How we can use this information

As I mentioned earlier, this should be taken as warning and not the basis for initiating the trade. So considering monthly view and data pattern, in my all October trades, I plan to

1. Book profits at important resistance levels.
2. Keep tighter stop losses than usual.
3. Protecting my portfolios by buying puts or selling index futures.

Three Bears