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CM Strategy

Optionalysis: Why Are We Sounding Bearish? The Chart View.

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Blesson asked in the subscriber Google group about why Deepak was sounding bearish in two tweets:

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Day 1: This also sounds like a good time to buy puts. But maybe we should wait till tomorrow.

Day 2: Not shorting today. But it’s sure setting up properly.

We have Deepak answering this for you.

Why?

This is a good question. The answer involves analysis in multiple time frames. I was focussing on the Bank Nifty which is showing signs of topping out. Here’s the daily chart:

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We have a high of around 15750 not being broken, while we have seen a lower low.

We have a trend line (1) which is longer term that seems to have been broken but not deeply just yet.

The shorter term trend (3) is looking down and that is probably the basis for a near term downtrend.

The nice little wedge/triangle that we are at gives us a potential breakdown scenario to make a further lower low. One stop can be as close as 15250 based on the shorter term trendline, and the longer term stop loss would be 15750. Since this is wide, we might prefer to write the 15500 call; note that the set up is not very confident just yet.

Now let’s look at another time frame. Here’s the 15 minute:

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Here again, we see a gap (1) opening lower on friday, and the gap held.

On Monday (Day 1) the market kept the gap resistance, but didn’t actually break down. A break down would require a lower low, lower than that of Friday. So, there wasnt a point going long or short on the index just yet.

On Day 2 (Tuesday) the Bank Nifty opened at the upper end of the gap, and then closed it really fast. Just when it looked like it would break down, the Bank Nifty rose considerably, to end at a fairly high number (this is the future we’re charting) above 15100

This was looking up, straddling the upper Bollinger. But the setup looked like it was a panic move, and the setup for a short might have come today as the MACD turned negative and RSI (at the bottom) went below 50.

But, and this is important, we have still not made a near term lower low. The future will need to close at 14900 or lower before a major short position makes sense. However, writing calls is a less risky option, since we have a long weekend coming up and the option premiums will fall tomorrow.

Having said that, be aware that the RBI and the government is out there trying to counteract any negative market moves, and you may see some announcements that hurt short positions.

Note: This is purely educational. We haven’t yet initiated short positions though we think it’s setting up.

Note 2: Deepak will be speaking at TC 2014 on macro and markets at Trader’s Carnival 2014 in Goa. Posting could be light for the rest of the week, so we’ll make up today!

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