How to Analyse an Index- Nifty View.

How to Analyse an Index- Nifty View.

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Nifty weekly Analysis.

Warning– This is a very technical blog, if you’re looking for some entertainment you’d have a better time watching The Office. This blog is for serious traders only. This is an advanced level of analysis so if you’re a beginner, you might find some difficulties reading it. This is purely for educational purposes only. It’s NOT a Buy/sell recommendation.

Yesterday I analysed Nifty and as per my analysis, the price action was bearish while data points told me that a short gap up could be expected, the market would go up to 11,800 and might face resistance. And that is exactly what happened. The market rallied up to 11794 and fell down about -2.23%.

Let’s dive deeper into what today’s analysis is predicting.

This analysis is based on two main factors

  1. Price Action. It includes charts, support and resistance, divergence, Fibonacci points, Candlestick patterns, etc.
  2. Data Analysis. It includes Option chain, FII activity, Futures data, Open Interest (OI), advance to decline ratio, India VIX, etc.

Part 1. Price Action.

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This is Nifty’s daily chart. If you’re a complete beginner what you might interpret would be that there was a crash in March but the market is moving up and it might make a new high.

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The same chart, to me looks pretty bearish. Lets break it down. The first thing I like to do is mark 2-3 Support and Resistance zones. There was a major resistance near 11770 and the market retraced down from there.

The nearest support is 11150 then 10700 and finally 10150 level. So, based on the sentiments, the market will probably easily break the first support and head towards the second support.

Then I drew a trendline on the chart, but you can see that the upper price bands grew thinner and thinner as the price went up. A wedge could be seen on the chart. I like trading triangles and wedges. A clear breakout (breakdown) can be seen.

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Let’s look at divergence. There are three common ways I use to find a divergence, the first one is to use RSI, then to use Volume and finally MACD (optional). Since this is an Index, you can’t analyse the volume but I used RSI to find a divergence.

And I found one! The price made a higher high while the RSI was flat, it went a little down. And finally I use Fibonacci Points to align the support and resistance zones. Can you find similarities between Support and Resistance of Fibs and Price action? Yes. It only makes our analysis stronger.

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There is a Marubozu Candle formed and Marubozus are imo, pretty reliable. So, based on price action the market looks bearish. The reasons-

  1. Marubozu Candle.
  2. Retracement from the Resistance.

If you don’t understand data analysis, this alone is enough to conclude a bearish momentum. You can look the chart on multiple time frames too. now we’ll talk about data points.

Data points aren’t that reliable when analysed on standalone basis. But when you compare price action and data points, the combo is astonishing.

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I maintain many excel files and this is a sample of how I analyse an Index. I’ve only filled 2 days worth of entries to keep it simple. And based on our analysis, I’ve filled the necessary points.

Data Points/ Analysis.

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Let’s analyse the option chain. I personally believe that option chain analysis is very powerful, If done right. It is a leading indicator. It helped me analyse the 11800 fall of Nifty today.

I don’t know how clearly you can see the picture, but let me break it down. There was a monthly expiry a few days ago so the new option chain isn’t formed completely. I’ve used the 24 Sept expiry option chain.

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In the highlighted section you can see the major support and resistance areas depending on the Open Interest (OI). The PCR aka Put Call Ratio is 0.77, now, PCR can also be used as a contrarian indicator so how to analyse it, that’s up to you.

If I zoom in the option chain, you can see what kind of activity is going on. There is a short build up in the calls side. So you can clearly see a lot of call writing ATM and OTM. And short covering aka call unwinding is seen on the puts side. Since this is an activity on Puts side, we can conclude it as bearish.

Both calls and puts are telling us the same thing. The market will fall. That’s my conclusion.

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Now, let’s look at FII and Futures data. I believe that by following smart money a retail investor/ trader can increase his success rate significantly. And in a country like india, FIIs basically control the market.

Now, I won’t go too deep in this data to keep things simple. But here’s the participant wise data for Aug 31 2020. You can clearly see the positions of FII and DII, clients and Prop Desks in all segments.

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  1. Futures index long.
  2. Futures index short.
  3. Stock futures long.
  4. Stock futures short.
  5. Index options call long.
  6. Index options puts long.
  7. Index options calls short.
  8. Index options puts short.
  9. Stock options call long.
  10. Stock options puts long.
  11. Stock options calls short.
  12. Stock options puts short.

And finally we have the buying and selling activity of FIIs in all segments. We can simply calculate net buy and sell in all segments to find out the exact situation.

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This analysis cannot be done only on standalone basis. You need to use Price action and track this data daily to find any conclusion. Also, the advance to Decline (A/D) ratio was 0.4 today which is absolutely terrible.

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It means that out of 50 stocks, only 2 of the stocks closed positively and 48 fell (closed in red). So we’ve come to an end of our short analysis. I could only conclude it in 10 minutes using price action but when I add data points, the conclusion becomes more concrete.

I hope that you learned something and maybe found out a new way of analysing an Index. This is a little more complex form of analysis.

-Vikrant C.

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