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CM Strategy

Optionalysis: MA20 Beats Us Up And Teases With Another Potential Setup

Optionalysis

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 when it crosses +30 from above to below, or -30 from below to above.

We lost our last battle with the MA 20. It went below 30, we bought puts, and in two days: boom, we were down 50%.

MA20 Trades

Note: We had kept the stop at 30, but since we noticed the stop late as it fell below 30, we mark the exit at 25. 

Remember the strategy is:

• Enter puts or calls when it crosses +30 from above to below or -30 from below to above

• Sizing of positions and exits are discretionary

• One exception: max 50% losses on the options

This strategy has been lousy these last few months, with three losing trades and one winner. But before that, all trades were good. In general, losses are good if they are in a controlled level, and if you lose less when you lose and make more when you win. This time, we lost, and we haven’t lost a lot.

The MA20, though is back above 30. It’s at 31.5 and looks like it might set up another short soon, and we’ll have to buy puts. The MA5 (which is the same thing with a 5 day moving average) has shown early signs of a reversal, but it needs to move further down.

(You can see it at http://snap.capitalmind.in/#/mac – it is updated once per hour.)

MA20 MA5

This is a very risky strategy. Don’t try it unless you’re willing to lose nearly everything. We haven’t provided backtested results because the exits are discretionary and there’s no proper way to back-test a discretionary system. (Heck we could make up whatever exit we want). We’ve traded it in our accounts.

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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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