Elliot wave theory on Bombay Stock Exchange

Yes, like everyone else i am also bitten by the elliotwave theory bug... so i decided to put it to test. Since many bloggers / columnist commentators have sucked curiosity juice from dow jones's comparison to elliotwave i am going to compare it to international stock exchange my pic India's Bombay Stock Exchange's Sensitive Index (SENSEX).

Elliot wave theory works on basis of fibonacci number sequence. where wave 1,3,5 are upward going waves while 2 and 4 are correctional waves. This theory was put in practice by Proff Prechter who was a Trading Analyst who set a 440% return record on options account in 1989 trading match .... ok enough of his background, although this is mathematically related theory pertaining to fibonacci sequence and its golden ratio of 1.6343 Precther and co. beleives that this number occurs in non-randomly fashion in today's stock market. Well tough to beleive that..... but if you implement a mass socio-economic tag or mass psychology tag then suddenly the theory becomes a hot property.

The theory is taught in many financial institutions as non-technical mass psychology theory so that traders can keep them selves ahead of the market....
lets put this theory to test I have taken a 5 year period of BSE : sensex and compared it witht he elliotwave thoery, okay to be precise i am comparing a "cycle"

WIKIPEDIA REFERENCE

The classification of a wave at any particular degree can vary, though practitioners generally agree on the standard order of degrees (approximate durations given):

* Grand supercycle: multi-century

* Supercycle: multi-decade (about 40-70 years)

* Cycle: one year to several years (or even several decades under an Elliott Extension)

* Primary: a few months to a couple of years

* Intermediate: weeks to months

* Minor: weeks

* Minute: days

* Minuette: hours

* Subminuette: minutes
 

ELLIOT WAVE



 BOMBAY STOCK EXCHANGE APR 04-APR09

 



Halleluajh !!!  wooow this thinge fits like a glove !!!!! in the five year spread...  this means that we are giong to see one more drop  Or below is the end of wave... although i must admit that i have chosen random interval of the uptick and down tick wave .... its like i am biasing the data to fit the model .... but over all first impression not bad... but i wont stop the autopsy .... too vage

                    

                                                                         OR

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Reserve Bank of India reduces its intrest rates

Indian Reserve Bank of India cut its lending rate by 25 basis points i.e. 0.25%
repo rate has been cut to 4.75 per cent from the existing 5 per
cent while the reverse repo has been cut to 3.25 per cent from the existing 3.5 per cent.RBI cuts interest rates by 25 bps LINK

Other headlines
RBI on a shopping spree for oil bonds


RBI to upgrade regulations to deal with menace of tax havens

A recent study indicates people from Indian Subcontinent have stashed more than 150billion $ in overseas places like, lichenstein, Mauritius, Switzerland etc .... U.S has started a crack down lets c what Indian regulators do about it

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How to have negative Federal rates 101

Interest rates have always been a motivator to circulate money in the market, with fed rates bottoming out i always wonder would there be a chance of fed going negative percentage. What i mean is say fed loans you 1000 bucks and your return 970 a return that is negative 3%. Why would anyone is such a sane mind would do that? any kindergartner would answer as ..no!!.. instead people would hoard it !!!..however this would not solve the problem we got in the first place by lending money to unqualified borrowers who foreclosed resulting in a spanner thrown in credit circulation.

I was reading a article in new york times by author Proff Gregory Mankiw one of his student suggested the following LINK

Unless, that is, we figure out a way to make holding money less attractive.

At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that. (I will let the student remain anonymous. In case he ever wants to pursue a career as a central banker, having his name associated with this idea probably won’t help.)

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit

Although this is a very clever scenario has never been happened before and chances are almost what Taleb would call as Black swan that it might happen :D. A seemingly Ridiculous thought which might make lending more money than hoarding feasible, hands down to the thinker.Interestingly China recently published that it has about 1.29tr $ hard cash will be driven to insanity if such a event occurs and might lend US back in negative interest terms , who knows actually this has tickle my brains to build castles in air. I don't know what other tricks the proff Mankiw's students have in their hat .... like currency expiration date, private circulation of money (deteroit dollar).In these days of electronic exchange of currency how do i know that currency given to me as salary has the number selected by fed to abolish...less than 5% of currency is circulated or stored in physical form.
There is continuing article in economist on this LINK on how to scare the hell out of china...
Rationally thinking china is doing a great national service for survival of United States, by buying and fed treasury bill, supplying high quality goods at reasonable price, and thus allowing the sinking dollar to cling straw. Scaring china out of 10% of its foreign exchange holding would be the day US would be out of existence.

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TIM Geithner plan

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Why are drug companies hyperventilating

Few weeks back if you noticed pharma companies were in merger takeover talks companies like wyeth & Pfizer , roche & genentech, people were exteremely excited to listen to these drug companies playing capitalism capitalism in times of utter chaos in financial sector. Few anchors of CNBC were pretty excited to see that American credentials of being free fair and capitalist nation exist, as if trying to defend the faltered economy. However there is a genuine reason behind these mergers and

and take overs for example pfizer accordint to a report in zack.com 40% of the pfizer 18 billion dollar revenue generating drugs are going to looose their patents in next 4 years these drugs include some of the famous ones like Caduet, Geodon, Viagra, and Xalatan between now and the end of 2012.Merck, will see 32% revenue of 2009 of its drug getting wiped of it balance sheet which includes medicines like Singular and Cozaar GSK has 4% revenue exposed, J&J has 6% exposed between 2011 and 2012.
Hence these companies are in takeover and merging mood, how can a company afford to tell its customers that sorry our 25% revenues are now 0% in 2012, so its a great time to short these companies, unless of course the merger proves inverse, but definately 2011 and 2012 will be the year pharma companies will have to forsee costcutting and increase in research spending, this would mean increase in outsourcing to 3rd world countries lab tests conducted on Indian subcontinent or Africa so lets gear up for watching collapse or say crack in wall of great pharma industries. But the Generic drug companies are here to make profit from these drugs especially drugs like viagra would definately have lot of takers on it so keep long options for some generic drug manufacturers, those in finance or credit business need to increase their credit riskiness of these companies and downgrade their credit rating unless they generate some break through durg like lipitor....


This is great time for a newbie generic drug manufacturer to approach pfizer merck or any other company to buyout their complete plants and place sales royalty turnkey business model.

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Kalman filter .... linear dynamic filtering

Kalman filter

what is kalman filter ?
Kalman is recursive Linear dynamic filter, based on markov chain perturbed or modelled based on Gaussian noise. The primary applications of kalman filter include Computer vision, Financial Engineering wherever there is involvement of predictive analysis. In practical applications Discerete Kalman filter is applied it works on the basic principle as shown in the figure below[1]

time update <-----------> Measurement update


Time update
i.e.Prediction

* to predict the next state
* to update the probability distribution based on current prediction


Measurement
i.e. correction
* determine vairance of measurement noise
* intialization of noise covariance

A detailed explaination is given in this kalman paper  

 


for example...
Time update
Predict next possible location of target in a 2D environment, to implement this practical task we first intialize the current pixel location (say A(20,30)) of the target to generate a possible probability distribution, ( generate priori) measurement update Predict next possible position the kalman filter will randomly choose particles from the region surrounding say radius r (say r = 10pixels) which will be the new vairance and evaluate the covariance with respect to possible target feature( i.e. small cut out from the image of the target) can be used. and define the particle within the gaussian boundry which minimizes the error, ending up generating posteriori . go back to time update.

Applications
Predictions of relatively linear dynamic stock prices
Prediction of target in target in Automatic Target tracking video survelliance
Embedded system applications include Vehicle stability, vehicle control , camera stability and control
weather prediction
speech analysis
Radar tracking


References and cool Stuff
-----------------------------
Basic intro to kalman
[1]http://www.cs.unc.edu/~welch/media/pdf/kalman_intro.pdf

Excellent resource of kalaman research papers and implemenntation 
[2]http://www.cs.unc.edu/~welch/kalman/

MATLAB implementation book 
[3]http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470173661.html  

MATLAB TOOLBOX

[4]http://www.cs.ubc.ca/~murphyk/Software/Kalman/kalman.html  
[5]http://www.mathworks.com/matlabcentral/fileexchange/5377  

2D Target Tracking using MATLAB
[6]http://www.mathworks.com/matlabcentral/fileexchange/14243  
[7]http://en.pudn.com/downloads50/sourcecode/math/detail173459_en.html  

Wikipedia page for reference

[8]http://en.wikipedia.org/wiki/Kalman_filter 

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Attention !!! Goldman Sachs is out of NEWS

Goldman Sachs (NYSE:GS)is one investment banking firm which is not making noise even as UBS , Bank of America, Merrill Lynch, and favourite whipping child AIG is getting broiled. It seems that these companies have not estimated how much actual damages are, for eg UBS came down last with 18billion dollar write downs..... how many is too much, and then
citigroup CEO Vikram Pandit shooting down an email to employees that gloomy days of loss making quarters are over, but sir, have u taken a breath and realised that although operating profits are higher than normal,you are discounting the fact that your company has a huge disadvantageous federal bailout loan on your head it is as if to say " Profits are kept privately but losses spread socially " . With due respects to the CEO and CFO i think all the American banking companies or Financial companies should go back to the drawing board and figure out once and for all how much losses they have made bring it down to table and take hit just for one time.

This is excellent tactic usually company does, let the bad news be let out when the market is bad, so when Dow is going down what the hell people care if u have consistently written down billions of dollars. That raises to the point where is "Quality Unparalleled knowledged Employee " which was long boasted by American Financial Institutions, which went there instead of becoming Doctors and Engineers. Where are brightest of all minds gone ???? eternal question i cannot understand..... where are the financial whiz kids now what are they doing now to solve the problem

Hence I feel something is cooking in the Goldman Sachs I think they are the ones who are assesing their losses and investigating their asset quality, which makes them one of the first ones to rebound in my opinion amongst the first ones to out shine and come out of the Great Recession of 21st century.

Like many I felt sense of exuberence when i see market rally as today's but this was immediately shot down by my friend who predicts that this is just a false start and calls it nothing more than " Emotional outburst" he says the worst is yet to come with dow shedding few thousand points down to 5000 -6000 range before it bottom's out

Even though we agree and disagree that greed, bonuses,falsification, ponzi scheme, idiotic quant modelling ....lead to the cataclysmic fall of this market i think these three factors will continue to thrive even in the worst of economies, and that is how Capitalism will be shaped.

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Roti Kapda Makan & Quant analysis

Roti (food an medicines) Kapda( clothing,toileteries ) and Makan (housing, construction )are three pillars of Indian industrial philosophy of survival and hence the industry around it can never affected even during the darkest of the hours, but in these uncertain days let me add the unpredictable variable to it. How can the  unpredictable variable


affect the growth of industry. The principle of non-linear dynamics in stochastic analysis of a stock market takes into account various factors of uncertainty, some of them failed recently due to lack of addition of failure variable to it or overlooking the failure rate as convservative it might sound its critical . Many Quant analyst forgot to add or forsee this hence i would like to propose a approach in which you can model uncertain eventualities happening at regular intervals or i.e non-linear dynamics taking place at linear time interval. This would add a tremendous boost to formulation of failure analysis of a prediction model. If you are student of stochastic mathematics then you know that prediction models are based on prior information ( probability distribution if u dont have u assume intial values)or 'priori', but what happens when hurricane,credit crisis or dot com bubble happens how can we predict and detect unnatural, hyper-active activity in stock market and develop our model, there are two theories i have had an eye on, first is the Fuzzy Dynamic Logic proposed by AFRL based scientist Dr. Daniel Perlovsky, his model is highly flexible and state of the art prediction models, and second one is the Rao-Blackwell theory.

In order to understand the first theory i would suggest use of the fuzzy dynamic logic text book by Dr. Perlovsky as it might be beyond scope of my blog to explain in one or two para. The second one is Rao-Blackwell filter, this theory proposes use of linear and non-linear dynamics parallel to various variables. For example probability of default can be added into the non-linear prediction analysis however growth of company can be a linear model. I don't know what variables financial engineers use but one thing i know that they use this science without understanding the philosophy of it . Using these techniques we can involve the uncertainty variable such as natural calamity, credit rating, leverage into a tighter leash of predictability, thus increasing "chances" of model to predict failure rate.

Before i finish my blog i reiterate that regression and curve fitting can be helpful if the ocurrance of the event is predictable 'priori' how ever events such as natural disasters and other failure scenarios have never before covered adding completely flexible dynamic to it and even if taken into account it is biased hence increasing the risk of failure.

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Citbank to its lowest point

As I write, Huffingtonpost is already displaying list of things which are cheaper then a Citibank share, this news is very very depressing to all of us as the pioneers of capitalism have come to such a cataclysmic grinding halt. Who would have imagined pillars of capitalism Bear Stearn's Lehman Bros. Merill Lynch would be victim of sheer greed. I am pretty sure that Vikram Pandit and his gang is up late nights trying to save citi from its complete annihilation,

Having said that all is not well in the heartland of economy,  people are depressed due to lack of jobs, executives forced to janitorial jobs and food banks flooded with people driving in their SUV's shows clearly how bad times are. There is a increasing number of parents who are bringing their kids back to live in  their basement, savings have increased to average rate of 5% highest since 1995 bankruptcy filing up 31%. However there is a silver lining....with news coming in today that huge reduction in the applicants for jobless benefits by up to 30,000 less, Walmart having surge in sale of 5.1 % regulators reducing tough regulations to help money flow in the inter banking loan...these indicators make may people on CNBC predict that there might be 100% jump in the share value of some financial institutions well as much as skeptical I am, sincerely wish it becomes true.

With such pessimistic numbers coming out in just one day .... I leave you with a dose of comedy by Jon Stewart who sums up his frustration on Rick Santelli and CNBC in one word F**K you..here is the video.

The Daily Show With Jon StewartM - Th 11p / 10c

CNBC Gives Financial Advice

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Joke of the Day

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