- Wealth PMS (50L+)
The MA20 is our proprietary indicator about market breadth. The MA20 is calculated by taking the number of Nifty stocks above their 20 Day Moving Averages, and we subtract from this number those that are below. Since the Nifty has 50 stocks, this calculation will oscillate between -50, when there are no stocks above their 20 DMAs, to +50 when there are no stocks below. We have found that trading opportunities exist when the indicator goes above +30, or below -30, and turns around.
Just yesterday, it “flipped” from 29.5. While this is not exactly meeting that 30 criteria, it’s close enough, it seems.
The MA5 has flipped earlier but as we have seen, it is not that reliable an indicator.
The Trade: We would see a strategy that buys the 8200 call, expiring in July, at Rs. 150.
Stop losses are 50%, so this is a hugely risky model. But in general it catches swings well. There are no targets – we’ll post a note of the MA20 or MA5 goes to the other extreme, but exits are typically discretionary in here.
Why July? It gives us some more time – the June options expire next week.
We’ve had some good success using this strategy.
We have noted all calls on the google group. We recently bought 8400 calls at 62. We exited half at 88, and another half at 77. (All noted on the google group)] Here’s the trades so far:
Quantities are indicative, and we have considered the fact that we used different position sizes for each entry.
In this case we are taking a full sized position. In the above chart that would be a 500 Nifty, but note that it differs for everyone. A portfolio of size 5 lakh may not be willing to lose more than Rs. 15,000 on a trade, in which case a 50% stop loss would dictate a position of 200 Nifty only.
Please be careful. We have had six continuous successful trades. This system is not meant to be perfect. It’s going to take a loss sometime, and that sometime might just be now. The index is gyrating madly and we can’t be sure this trend will sustain.
(Note that recently we did take a loss on a BankNifty put but that was not based on this strategy)
The Nifty’s coming off a low. While we didn’t expect a move back so fast, it’s probably been because Ms. Yellen did not raise rates yesterday (which was obvious anyhow).
While we are bearish in the medium term (1 year) we think that technical signals of swings should not be ignored. The point is to make a profit – it doesn’t matter if you make it by being long or short, in bull markets or bear markets.
The immediate pullback is supported by an MACD cross, but this is not very reliable considering that it’s so much in negative territory (MACD on the bullish side works best when the blue line is above zero).
We think the downtrend has an upward barrier at the 8500 end, as there will be a strong resistance there.
Given that, we could derisk this strategy a little by taking a bull call spread : For every 100 Nifty long the 8200 Call, short 100 of the 8500 call (July) at 47. Given that the difference is 103 (150 minus 47), the stop loss will be at a spread of 52.
To be honest we’re a little concerned about this timing since the signal has come in a little late, however it is not prudent to double-guess a strategy. A stop loss is best or the marginally derisked call spread. If you’re not confident, you should reduce your position size instead.
Note: For tracking we are going to consider the full position on this (i.e. no call spread, no smaller position size). But obviously, this is not a recommendation, and we hope you will run your own risk analysis before choosing a position size to trade in.
Disclosure: We do have some positions on the Nifty and we will also follow this position closely. If this strategy loses money, we will lose money too.
Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.
Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.