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CM Strategy

Optionalysis: MA20 Update: Short Term Weak Reversal Visible

Optionalysis: MA20 Update: Short Term Weak Reversal Visible

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Capital Mind’s Proprietary 20 Day Moving Average based indicator – the MA20 has been working badly. Two times consecutively now it has gone down but not as far down as to trigger a buy. But it hasn’t touched the +30 line on the upside either, and has in fact made a lower high the last time around.

Both times, a short position would have failed miserably. The index has continued to go up.

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The MA20 is the number of stocks above their 20DMAs minus the number of stocks below it. It will oscillate between -50 and +50 at the maximum. The Capital Mind Theory is that if the index hits +30/35 and reverses down it is a short term negative move. And the inverse for a

The MA20 seems to be reversing again, at 19.2 now. While this is not a strong indicator of a down move (since it is reversing from +20, not from +30. Note that the MA 20 hasn’t fallen below -20 since Feb 2014, and has stayed above -30 for over a year now.

If you look at a shorter term MA in the same graph (the 5 Day Moving Average instead of the 20):

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This shows a potential down move but isn’t too strong either. Looks like 7600 may remain a solid support.

Remember this is expiry week, and futures and options expire on Thursday. Which means also that we can look at option pain to see where people are expecting it to end at. This gives us a range of 7850 to 7900.

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Our view is:

  • Without any major external events the Nifty expiry is likely to be around the current level or 50 points lower (7850-7900)
  • We have a holiday on Friday (Ganesh Chaturthi) so it’s going to be a long weekend. It may be useful to write September calls to eat premium.
  • The Capital Mind MA20 shows a weak sign of slowing momentum, and we will have to see if it progresses fast to below zero before we see strength in a downmove. The resistance at 7600 needs to be broken for a big short position.

You want to be extremely careful in taking large positions at this point. However, individual stock position might continue to look interesting, but as an index, this is a point to be wary. We’re not adding to long positions at this point.

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