By the time you pick up this copy of Investor’s Guide and go through this article, the 10th ET Awards would have already honoured the finest of India Inc. Unfortunately, we didn’t have an award for the “best stock market indicator”. For, had there been such a category, there is absolutely no doubt that the SMR (Smart Money Ratio) would have won it hands down. Although its superiority over most other indicators has been proved time and again, the last two weeks have been absolutely phenomenal.
The SMR Fortnight
When the market was shut on Tuesday before last (6th January), Satyam was still a blue chip and the Nifty was on a clear uptrend although it was facing some resistance around 3150. However, the only indicator that was shouting at our face, asking us to go short, was ET Intelligence’s SMR. For, as is clearly visible in the adjoining SMR chart, the SMR was sitting exactly on its support, which had lent it support on umpteenth occasions.
So, it had to either collapse below this support, which would have signaled a bull market for the Nifty (unlikely in current circumstances) or respect the support once again and shoot up, thereby pushing the Nifty down. Then on Wednesday, the Nifty opened up and just when it was trying to take out the resistance at 3150, Raju opened his mouth (rather his computer) and the rest, as they say, is history. In a span of four days, the Nifty collapsed from 3150 to close to 2700, which saw the SMR fall from its resistance around 60 to its support in the early 20s. Then came last Wednesday (14th of January ).
The Nifty had lost well over 10% in just 4 trading sessions, which had seen it break through most supports and technically, it looked like a man at the gallows, with the noose around his neck, waiting for the hangman to make his move. But once again, SMR came to the rescue, and predicted that the Nifty had to go up on Wednesday. For, at close on Tuesday, the Nifty was perilously close to its resistance at around 60, which had been a very tough nut to crack in the past.
So, it had to either shoot up, breaching this resistance, which would have seen a repeat of the panic of October/November (unlikely in current circumstances) or respect resistance and scale back, thereby pushing the Nifty up. And lo and behold, the Nifty staged an astounding recovery on Wednesday, rallying well over 3%. Although many attributed it to rumours about a settlement between the Ambani brothers, the SMR had told us that it had to happen. Isn’t it?
A similar thing happened the very next day as although the Nifty fell below its Tuesday levels, the SMR barely budged up. This divergence, once again, told us that the Nifty had to go up on Friday and went up it did. And how spectacularly! So, to profit from this market, just keep a very close eye on the SMR. For, more than anything else, it is going to be your best friend, warning you of what’s in store in the future. And those, who have missed the Investor’s Guide’s past issues, calculating it is very simple. It’s nothing but the day’s closing India VIX level divided by the day’s near month Nifty put-call ratio.
The Death Trap
The Nifty daily chart (the one in the middle) makes it absolutely clear that the trendline, drawn from the bottom made on the 27th of October has been decisively broken.
At the same time, it also tells us that the trendline is now around 3000, only above which, will the uptrend resume. Having broken the uptrend, the Nifty currently finds itself in a very tight range, with clearly defined upper and lower ranges. So, these two horizontal lines should be used as stop-losses /triggers for all short-term trades, with closes above being stop-losses for shorts and triggers for fresh long trades and closes below these lines being stop-losses for longs and triggers for fresh short positions.
While that takes care of the extreme short term, if you look from a slightly longer-term perspective, a very dangerous pattern (for bulls) is getting formed in the Nifty. This pattern consists of first a bullish crossover of the 20 DMA above the 50 DMA, and then a bit of a downwards movement, followed by gains for a few days and finally, the death nail - the bearish crossover of the 20 DMA below the 50 DMA. As is evident in the other Nifty daily chart, the last two times this had happened - in May-June and July-August - the consequences had been nothing short of, in a trader’s lingo, DEATH.
As is clearly visible, even this time around, the bullish crossover has happened and has been followed by a meltdown and now the 20 DMA looks all set to do the bearish crossover below the 50 DMA. Interestingly, the way the averages are placed, if this bearish crossover has to happen, it will, in most probabilities, happen in the current week. So, if this happens sometime over this week, just do one thing - buy the 2500 February put and put them in a safe deposit vault. For, if recent history is anything to go by, this bearish crossover will open up the downside, with targets of sub-2000 Nifty levels!
With still two weeks to go for the settlement of the January series, shorts have already started rolling over into February. This is reflected by Nifty January futures shedding over 4 lakh shares in open interest, which trimmed its premium from 24.95 points on Thursday to just 13.05 points on Friday and Nifty February futures adding over 6 lakh shares in open interest, which trimmed their premium over the January futures from 8.5 points on Thursday to just 1.3 points on Friday. So, the writing is on the wall.
The current week might turn out to be very decisive. Unless the Nifty takes out 3000 in a day or two, which would put to rest the death trap, we might soon be staring down the barrel of a very long gun. Hence, keep an eye on the SMR, another on the death trap and keep the stop-loss tight.
SMR = India VIX / PCR
here,
SMR = Smart Money RatioIndia Vix = Volatility Index based on nifty option contractsPCR = Near month Put Call Ratio
The SMR Fortnight
When the market was shut on Tuesday before last (6th January), Satyam was still a blue chip and the Nifty was on a clear uptrend although it was facing some resistance around 3150. However, the only indicator that was shouting at our face, asking us to go short, was ET Intelligence’s SMR. For, as is clearly visible in the adjoining SMR chart, the SMR was sitting exactly on its support, which had lent it support on umpteenth occasions.
So, it had to either collapse below this support, which would have signaled a bull market for the Nifty (unlikely in current circumstances) or respect the support once again and shoot up, thereby pushing the Nifty down. Then on Wednesday, the Nifty opened up and just when it was trying to take out the resistance at 3150, Raju opened his mouth (rather his computer) and the rest, as they say, is history. In a span of four days, the Nifty collapsed from 3150 to close to 2700, which saw the SMR fall from its resistance around 60 to its support in the early 20s. Then came last Wednesday (14th of January ).
The Nifty had lost well over 10% in just 4 trading sessions, which had seen it break through most supports and technically, it looked like a man at the gallows, with the noose around his neck, waiting for the hangman to make his move. But once again, SMR came to the rescue, and predicted that the Nifty had to go up on Wednesday. For, at close on Tuesday, the Nifty was perilously close to its resistance at around 60, which had been a very tough nut to crack in the past.
So, it had to either shoot up, breaching this resistance, which would have seen a repeat of the panic of October/November (unlikely in current circumstances) or respect resistance and scale back, thereby pushing the Nifty up. And lo and behold, the Nifty staged an astounding recovery on Wednesday, rallying well over 3%. Although many attributed it to rumours about a settlement between the Ambani brothers, the SMR had told us that it had to happen. Isn’t it?
A similar thing happened the very next day as although the Nifty fell below its Tuesday levels, the SMR barely budged up. This divergence, once again, told us that the Nifty had to go up on Friday and went up it did. And how spectacularly! So, to profit from this market, just keep a very close eye on the SMR. For, more than anything else, it is going to be your best friend, warning you of what’s in store in the future. And those, who have missed the Investor’s Guide’s past issues, calculating it is very simple. It’s nothing but the day’s closing India VIX level divided by the day’s near month Nifty put-call ratio.
The Death Trap
The Nifty daily chart (the one in the middle) makes it absolutely clear that the trendline, drawn from the bottom made on the 27th of October has been decisively broken.
At the same time, it also tells us that the trendline is now around 3000, only above which, will the uptrend resume. Having broken the uptrend, the Nifty currently finds itself in a very tight range, with clearly defined upper and lower ranges. So, these two horizontal lines should be used as stop-losses /triggers for all short-term trades, with closes above being stop-losses for shorts and triggers for fresh long trades and closes below these lines being stop-losses for longs and triggers for fresh short positions.
While that takes care of the extreme short term, if you look from a slightly longer-term perspective, a very dangerous pattern (for bulls) is getting formed in the Nifty. This pattern consists of first a bullish crossover of the 20 DMA above the 50 DMA, and then a bit of a downwards movement, followed by gains for a few days and finally, the death nail - the bearish crossover of the 20 DMA below the 50 DMA. As is evident in the other Nifty daily chart, the last two times this had happened - in May-June and July-August - the consequences had been nothing short of, in a trader’s lingo, DEATH.
As is clearly visible, even this time around, the bullish crossover has happened and has been followed by a meltdown and now the 20 DMA looks all set to do the bearish crossover below the 50 DMA. Interestingly, the way the averages are placed, if this bearish crossover has to happen, it will, in most probabilities, happen in the current week. So, if this happens sometime over this week, just do one thing - buy the 2500 February put and put them in a safe deposit vault. For, if recent history is anything to go by, this bearish crossover will open up the downside, with targets of sub-2000 Nifty levels!
With still two weeks to go for the settlement of the January series, shorts have already started rolling over into February. This is reflected by Nifty January futures shedding over 4 lakh shares in open interest, which trimmed its premium from 24.95 points on Thursday to just 13.05 points on Friday and Nifty February futures adding over 6 lakh shares in open interest, which trimmed their premium over the January futures from 8.5 points on Thursday to just 1.3 points on Friday. So, the writing is on the wall.
The current week might turn out to be very decisive. Unless the Nifty takes out 3000 in a day or two, which would put to rest the death trap, we might soon be staring down the barrel of a very long gun. Hence, keep an eye on the SMR, another on the death trap and keep the stop-loss tight.
SMR = India VIX / PCR
here,
SMR = Smart Money RatioIndia Vix = Volatility Index based on nifty option contractsPCR = Near month Put Call Ratio
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