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CM Strategy

Optionalysis: Put-Call Ratio and MA20 Update – No Trade, But Signs of Peaking

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The Nifty has reached a point where it would break out of the downtrend, having come very close to its last intermediate high at 8480. However just as everything is bullish, there are signs of a near term peak again, though we must state that these signals are probably preliminary. In the light of the Greek thing over the weekend, we might as well see what’s “contra” to the bullish appeal in India.

The Put-Call Ratio

Using only the current month options, if we plot the Nifty Put-Call Ration (Put options to Call Options ratio), based on both Volumes (for that day) and Open Interest (or OI), here’s what we get:

PCR

Since we only look at the current month, the spikes are usually on expiry days. Ignoring them, we get:

• PCR (Volume) seems to be trending down (it’s close to 1 right now)

• PCR (OI) is at 1.46

The typical historical note is that the PCR tends to rise as the market rises (people buy protection) and falls when the market crashes. It provides pointers to tops and bottoms, sometimes moving earlier in anticipation.

At this point, the PCR (OI) remains in bullish territory, but the PCR (Volume) is trending downward. This dichotomy is probably explained by the fact that call options volumes are not increasing its Open Interest (i.e. people are likely to be squaring off their bets) while put option volumes show an increasing interest in the puts. We have seen this dichotomy before: In Jan 2015 and July 2014, when the PCR (Volume) fell before the PCR (OI) Peaked. In both cases the Nifty reached a near term high and dropped more than 5% afterwards.

(Not saying this will happen, it’s just a point to note. Also the PCR volume is less reliable near expiry)

The MA20 Very Close To 30, But Must Wait For a Dip

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. We then take a further four day MA of the resulting number to smooth it out.

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 whenit crosses +30 from above to below, or -30 from below to above.

The situation currently: MA20 is at +29.5, and going up. We have to wait for it to come down, so this is more of a status update rather than a trade.

MA20

MA5

The MA5 isn’t showing signs of a downmove either, but both look like they point to a potential peak in a short while. Just a quick note, have a good weekend!

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Disclaimer

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.

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