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CM Strategy

Optionalysis: A Quick Note About MA20 and Whoa Look Where It Is

Optionalysis Header

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.

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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 MA20 gave us a false signal last time, making us take a bearish position which resulted in a loss. But it was the first loss maker in 10 trades!

The MA20 is now at -46 (the theoretical lowest is -50!).

MA20

Our Lousy Preemptive Trade

On 26th August we were quite excited that the MA20 finally came down into the -30 territory so we instantly took a position that was bullish. This was a stupid thing to do because:

• Trading rule: Only buy when it crosses from below -30 to above -30. 

We preempted the trade which was a lousy idea. We only took a half position, knowing that we were preempting it, and the position was:

• Sell a 7800 put (around Rs. 175)

• Buy a 7500 put (around Rs. 90)

September expiry. Spread would give us Rs. 85. We set up a stop at Nifty 7800; (the Nifty was at 7880 when we took the trade).

Why Sell Puts? Why not buy calls?

Because the premiums were very high. Might as well take advantage and use a spread to lower risk, we thought. 

Things didn’t go well.

This reversed almost instantly and the trade lost money. We had to do an intraday exit. The exit was at Rs. 100 on the spread. (Rs. 201 on the 7800 put, 101 on the 7500 put)).

MA20 Trades

Since this is the only the second lossmaking trade, it doesn’t mean the system is screwed up. It might just be a normal move.

We will soon have a real proper trade when the signal comes. Till then we hold on! 

Slack Will Have It

We’ve been using the Slack group effectively (http://capitalmindpremium.slack.com) – please mailpremium@capitalmind.in if you haven’t yet got access. (Not available for trial members unfortunately). We’ll be posting in #actionable.

We would be very very careful at this point. While our philosophy is to ride the tide, we would suggest extreme caution because this is not a fool proof system. A 50% stop loss is our limit. If you’re new, you might want to keep your position size much lower.

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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.

 

 

Next Gen Financial Analytics

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