GalaTime

Update on last week’s post: Buy Sensex, Sell Gold

Buy Sensex (or Nifty via NIFTYBEES) and sell gold (short GOLDBEES - in theory - or short a gold future).

July 16:

• Sensex closed at 12576, Nifty future closed at 3829
• GOLDBEES closed at 1361

July 23 (today):

• Sensex closed at 14960, Nifty future closed at 4490
• GOLDBEES closed at 1270

A long position on the Nifty future would be up 17% (Sensex up 19%). A short position on gold would have made 6.5%. That’s a total return of 23%+ in a week.

Now, it doesn’t matter whether I was right or plain lucky; the question is - what would be the right thing to do on this trade, given the unexpectedly large return in such a short time frame?

My thoughts:

• Don’t look a gift horse in the mouth - book partial profits immediately!
• Why not exit completely? Because analysis says that we’ve got some more room to go - on both sides of the trade. But with such fast & furious moves, we must expect to give up some profits in the interim.

This type of (oversold/overbought) trade allows a data-driven approach to identify a good entry point. But the best exit point is difficult to determine - at what point do the Sensex/Nifty no longer count as oversold?

I would exit the whole position if the Nifty crosses 4600 and/or gold drops below 12000 - but this is based more on a hunch than anything else.

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