Monday, July 6, 2009

NIFTY- NSE INDIA 200 DMA spread backtesting

Sensex /NIFTY 200 DMA spread was already in danger zone since last 2 weeks , that is spread of above +30% and today (budget day) it reached danger level of 36% ( intra day high 15097/11,100) . 200 DMA of SENSEX was 11,100. NIFTY 200 dma was 3370. NIFTY Spread was 33%. Within the NIFTY too , many stocks were at all time high 200 DMA spreads ( Top 3 - Jindal Steel-95%, Reliance Infrastructure - 90% L&T - 50%). Most Banks in NIFTY were above 40% and even 50% and today were among the top losers too.

Global cues - Shangai composite is in danger zone of 40% (3100/ 2220). as is most emerging markets like Brazil. The world wide rally in stock markets since 9th March 2009 was primarily because of US markets reaching extreme oversold conditions, ~-40% spread of S&P 500 vs 200 DMA, that was the 3rd time since last 70 years. That rebound in US markets led to revival across the globe added by by weakending dollar from 1.25 USD per Euro to 1.41. Breach of below 1.35 , the 200 DMA, will add further add ammo for worldwide bears. Even crude Oil is very close to breaking below its 200 DMA of 63.

I did a small study of 200 DMA spreads on NIFTY , NSE India,to identify these kind of extremes ( greed & fear) that could be early trend reversal indicators.

Objective :
  1. to use a simple technical metric, days moving averages DMAs to identify extremes - extreme greed / extreme fear. or identify an early trend reversals predictor
  2. 1st metric used - 200 DMA. why 200 DMA ? in bull markets , prices almost never breach below 200 DMA.
  3. 2nd metric used - 200 DMA spread. or the difference between cmp vs 200 dma . . (spread= (cmp- 200 dma)/ 200 DMA)
Background :it has been observed that typically spreads above +40% clearly indicate extremely overbought and a an early predictor of sharp falls.
  • for eg NASDAQ dot com bubble - spread was >+50%. we now have seen in even 9 years, NASDAQ has yet to reach the same levels..
  • Dec 2007 stock markets peak - a lot of markets - INDIA, CHINA,HK were close to 40%. china ( shangai composite) was +55-60%. we all know what happened over the next few months. sensex, china shanghai composite index fell over 55-60%
Approach: so now I have back tesing the spread on NIFTY,
NIFTY was launch in 1989 - at price of 300.
I have excluded 1990-1992 - an outlier period , during Harshad Mehta scam days, when spread was above 100%.
so I have taken data from Jun 1992 to till date. ~ 4,500 trading days or 17 years

Questions that the study sought to answer.
  1. What is the spread level distribution range? median , average, peak ?
  2. what happened after spread reached extremes ? how long did it take the market to fall ?
  3. how long did the high spread days continue? say >+30% spread, consecutive trading days.
  4. and on average what was the % fall 1/2 months later after the high spread period.
Here is a snapshot of the outcome:

Chart -1 -NIFTY spread vs NIFTY- 17 years chart.
Chart -2 -NIFTY spread vs NIFTY- 2 years chart.
Chart -3 -NIFTY 200 DMA Spread distribution pattern
Chart -4 -NIFTY - Consecutive trading days when spread was above +30%

8 comments:

ashish said...

Hey Fixer,

Really nice to see your posts for Nifty 200 DMA spread mean reversion. I want to discuss a few things. How can I contact you? I m also from India and look for big killings using index options.

Ashish

The Fixer said...

Hi Ashish,
Good to know that you are in India also and looking for options. You can let me know here if you are looking for anything specific on options. For a more updated NIFTY 200 DMA reversion, see my this post Nifty 200 DMA Mean reversion


On my latest bearish view and technical thesis you see the post here. Beginning of the end of the bull market
~Fixer

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