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Charts & Analysis

Nifty Stocks Above DMA Shows Potential Fall

A proprietary indicator I’ve developed, called the “Net stocks above the 20 DMA” is showing a potential steep fall in the index. This is calculated by finding out the number of stocks that are above their 20 day moving average and subtracting from it, the number below. This will oscillate between +50 and -50 (for the Nifty).

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I’ve observed that the 20 DMA line (red in the chart above) oscillates to extremes. When it pulls back from those extremes is when there is a potential trade.

Every time the index goes above 40 and comes back to below 35, it seems to lead the indication of a big fall coming up. However no system is perfect, so you can assume that once in a while the signal will not perform. Also, in the past the index has moved up for a few days after the 20 DMA red line in the chart above retraced, but the fall came many days later.

The implied trade is to either write calls for October (option implied volatilities are high) or buy puts (which are expensive). Going short with a future will need a hedge in the form of a call or such.