Market Internals

,

Market Internals based Signalling System | Intraday | Covid 19 Lockdown Project

,

For long I wanted to code a Market Internals based signalling system for Scalping, just didn’t have time. Thanks to the lock-down, I spent some time on the system and brought it to life.

The system operates on a very simple logic,

If the # of stocks above (VWAP + 1 SD) (Standard Deviation) in the universe (NIFTY 50 or Top 25) is greater than the number of stocks below (VWAP - 1 SD) go long, if the reverse happens go short.

As you all know its more about getting your bias right, so that you don’t take some probabilistic-ally stupid trades.

So here is a snapshot.

If you see below you get two different colored arrows, light green and dark green, likewise for reds, Dark green has been configured for the the top 25 stocks, and light green for the balance, that way I get to know which segment of the index is turning bullish or bearish. as you can see in the image below, in the morning it was the lesser weightage stocks that turned bullish first and then the heavy weights joined, but the reverse was true when the index fell mid day.

8th April’20 - NIFTY Futs

Working on refining the system more, earlier I used to set it on 1min TF but that gave several false signals, so move to 3 minutes now, lets see how this works.

,

Leading Constituents of NIFTY50 | My Counter-intuitive Findings

,

If you follow the blog you would have heard me say our NIFTY-50 index is pretty skewed from a weight-age standpoint, top 10 stocks account for close to 60% of the index, top 25 account for close to 80 and the balance 25 stocks account for just 25% of the index weight-age.

Intuition would tell us, so long as we follow the top 25 constituents i.e. (80% of Weight-age) we should be good. Good in the sense we should be able to predict short term (15 to 60 minutes) trends in the index.

To be frank I along with a few others spent several months in that top 25% rabbit hole, only to realize that the action more often than not begins in the bottom 25 stocks.

Here are some visualizations

Before we move to the visualization, please refer the Legends / Descriptors below

Legends / Descriptors for the NS Advance Relative Strength Indicator

As you see in the Legends we have two indicator panels below the NIFTY Fut price chart. The Top panel refers to the top 25 Stocks and the bottom panel refers to the Next 25 stocks.

Now let me take you though a few sample days when the Bottom 25 Stocks lead the top 25 and also the Index, though I have back-tested this phenomena, I am bound not reveal the specifics, but this is the idea and you can test it for yourself.

29th Aug’19 - Look at the Stocks above +1 SD of VWAP - They lead by close to 15 minutes

5th Sep’19 - Look at the Stocks Above VWAP line - They lead almost all through, even though stocks below -1 SD are fairly high on the top 25 Stocks.

12th Sep’19 - Look at the -1SD line crossing over the % of Stocks above VWAP line - Happened in the bottom 25 Stocks way before it did on the top 25

20th Sep - How can I forget this day - Look at the % of Stocks above 1SD line, again led the upper 25 by close to 20 minutes.

During the trading day, I keep an eye on the bottom 25 stocks and if I notice any divergence, I become cautious, as it could a portent of doom esp., if I am on the wrong side of the trade. Time permitting I also tell my mentees on the slack group.

slack.PNG

Something similar happened on the 20th of Sep’19, a day which would be etched in my memory, not because I was positioned on the right side of the trend, but because it was a classic demonstration of almost everything that Mandelbrot says in his book Misbehavior of Markets.

Back to the charts, this phenomena of bottom 25 stocks leading can also be observed through a sectoral index lens, since each of these segments top 25 vs next 25 have a sectoral skew within it, more about it next time.

Before I close -The usual disclaimer applies, don’t use this factor in isolation, there are other factors that I consider before initiating a trade, the purpose of this post is only to illustrate the informational value in tracking the bottom 25 stocks of the NIFTY50 index. About the 20th Sep’19 trade, no I am not saying I predicted it, all that I am saying is the same signal helped me capture a good part of the move.

,

Looking through the Index moves | Analyzing Weightage based Segments

,

One of the perennial questions that’s in my mind as an Index trader is “What caused that move?” - We at NiftyScalper have been down several rabbit holes to find the answer, hopefully there is some light at the end of this “Market Internals” tunnel.

One of the things we are experimenting at the moment is looking at the index in segments.

Below are the three segments that you can see.

Segment 1 - HeavyWeights - In Red - 60% Weightage

Segment 2 - Mids - In Yellow - 22 % Weightage

Segment 3 - Bottoms - In Blue - 18% Weightage

Creating these segments helps us see the Index in a different light. One of the initial beliefs which we had about constituent stocks is that the bottoms which constitute 18% of weightage may not have much predictive value for the index, but we are learning something new about that belief, which I would share further down in this post.

Lets go back to the initial question that we started with “What caused this move?” - When I ask that question do note that I am usually looking at those Short time frame swings or trends which last anywhere between 45 mins to an hour.

To answer that question we look at the Average % Change of Prices of Constituents stocks in the above three segments of the Index. Do note, the Red line is the HeavyWeights, Yellow the Mids and Blue the Bottoms.

Image 1

To make it distinct visually I have drawn these boxes. Look at the first box in Image 1. That upward spike and the up move thereafter, it was the heavyweights which caused it, also notice the other two segments in the same time window, they are clearly diverging.

If you ask “Who caused that Up move?” - The answer clearly is the “HeavyWeights”. And if you ask who caused that down move - The answer clearly is the - “Mids” and the “Bottoms”. You will notice almost all through the day that was the pattern, the Heavyweights were trying to puss the index up and the Mids and Bottoms were pulling it down. Now lets look at another day.

Image 2

This is a sort of range bound day with a mild downward bias, as you can see the HeavyWeights were flat and a bit positive too holding up above the Zero line, where as it was the Minds and the Bottoms who were pulling in the index down.

What I have learnt so far about Index moves is this

1) Constituent Stocks oscillate between the two states of “Convergence” and “Divergence”.

2) The state of “Divergence” can also cause a directional move depending on the strength of the segments and the degree of the move in terms of Price change.

3) We get to see more stronger moves when there is “Convergence”. For instance we may have had an upward trend in the Index in the Morning session, by mid day you may see a Divergence in the segments, for instance say - the Minds and the bottoms are pulling the index down - now there are two possibilities either they (Minds and the Bottoms) converge with the Heavyweights and move up or the Heavyweights converge with the Mids and the Bottoms and move down.

These are pretty much the things which happen in the Index all through the day.

Now the question would be - How does this help in Trading?

1) Looking for developing divergences helps in identifying the beginning or an end of a move. Divergences can start with the Bottoms as well, and in some times the other two segments can catch up.

2) Knowing which segment is in control also helps in making an assessment of the possible degree of the move.

3) Past patterns can be used to predict the future. Machine learning and data science can be of use here.

Hope you found this useful!.

,

Does it matter which Trading Room you join?

,

Choosing your Trading Room can be as exacting as Choosing your life partner

Are you part of a Trading Room? Or looking at which one to go with but not too confident where to put your money? Well having run a Trading Room and being part of a few well known ones, I’ve come to understand that there are a few things you need to consider before you have your pick.. As they say Birds of a feather flock together, so here’s how to find your nest..going with the bird metaphor!

Your Trading Worldview - What beliefs do you hold dear to you and what are you willing to let go? Gann numbers or Elliot Wave; Market profile/Orderflow or Market Internals? Quant based or Qual based trading...you see where i’m going with this. Seldom have i come across Trading rooms serving all and being good at it. See what aligns with your worldview before joining a Room

photo-1425421640640-64c4debea1b4.jpg

Learning Environment - Telling vs. Learning. Some Trading rooms ‘Tell’ you what trades to take and when, so you are more an implementer of their trading decisions and there are other Trading Rooms which may focus on working through a process that is consistently called out, so you are not just executing trades but also understand the logic behind taking a particular trade. One way to know if it is the later, is to look for consistency in the trading process/rules being followed. Do you understand why a trade was taken or cancelled. How do they rationalize losses? Do they provide reasons?

Metrics & Tracking - What gets measured gets done. Any room that is brave enough to put out their performance chart, every day, consistently , ‘Respect’. Day trading is like any other business, you need to run an end of the day tally, else how would you know which days you do better? whether there is a correlation between your green days and other factors like range etc? Any room which shies away from it , is not being true to the game.

Integrity - Claims vs. Reality. Timing is key here. Tall claims based on Hindsight Analysis are for newbies and seasoned Trading Rooms would stay clear of it and instead would be able to show real time decisions taken in the Room. Bet on that!

Look before you leap - Ask for a trial - any Room that is confident of giving you one, darn sure they know their business. It’s that clear.

Trading Instruments - Jack of all; Master of None. How does that sound? I will be a little hesitant to put my money there. Prefer to work with specialists and experts, in one or two areas . Know your instruments and chose your Trading Room partner. Side note: Did you know : In an Indian context trading Futures makes less sense compared to Options esp. intraday. Just saying, time you get that nuanced in understanding this game.

Trade Setups - What's your Risk appetite?What RIsk Reward ratio are you comfortable with?40 point SL ?30 point SL?10 point SL? And add to that the holding period, and the scene changes completely: Intraday vs Positional or Swing, both approaches have very different risk levels and risk management approaches. Choose a Room that aligns with your Risk appetite ratio

Charting & Live Screencast - This is a kicker. All trading rooms boast of proprietary indicators. Guilty as charged. But hey, there is a method to the madness. Does the Room take the effort to explain these indicator and point out why a certain decision was taken , have user manuals explaining these indicators and finally do they have enough back tested data in support of these indicators..then you have a winner.

Trust this helps you sieve through the noise and pick your Trading Partner. it’s not that you are going to be wedded for life so go ahead and walk down the aisle. Happy Trading.

Kavitha K7 & Sandeep Rao



,

Through the Looking-Glass, & what NiftyScalper found there | Market Internals - Part 3

,

This is the third and last post in this series,

Part 1 - Here

Part 2 - Here

**Read about what RSI is over here

In this post we will look at the good old RSI Indicator which has been re-purposed to be used as, both a trend indicator and an oscillator.

The math - We took the top 25 stocks (by weight-age) of NIFTY 50 and Averaged their RSI Value. So we have a Average RSI of the top 25 stocks vs. RSI of NIFTYFUT or RSI of 50 Stocks. Since the 25 stocks have close to 80% weight-age the cross over of the Average RSI and NIFTY RSI acts as a trend Indicator.

Notice the RED colored (NIFTYFUT RSI) Crossing over the Yellow Dotted line of (Average RSI).

We also back-tested for ideal Oversold and Overbought levels - you will see it marked with Blue colored markers in the images below. Typically a RSI Absolute Difference of 10 - 12 i.e (NIFTY RSI - Average RSI)

So here you have a Market Internal based Trend Indicator + Oscillator all built into one since indicator.

There are several other setups for trading pullbacks using this indicator, but thats for another day..

Please do not ask for the RSI Period settings on this one, but its no rocket science. Also, at NiftyScapler we don’t use any of these three indicators in Isolation.

Image 1

Image 2

,

Through the Looking-Glass, & what NiftyScalper found there | Market Internals - Part 2

,

In the previous post here we looked at the NiftyScalper Advanced Relative Strength Indicator which is a Price based internals indicator, in this post we will look at the next piece of the puzzle ie Volume.

If you read about internals for the US Markets you will come across something called NYSE UpVol and NYSE DownVol, more about it here.

Unfortunately our indexes don’t broadcast this info. But what do you do when you need something badly and cant get it, you build it.

Yes, that’s what we did, we created our own NIFTY UpVol-DownVol indicator for the top 25 stocks.

Do note that, instead of a ratio we decided to look at the Net Volumes as we would also get a sense of liquidity/participation along with the direction.

CumValue - Cumulative UpValue-DownValue; CumVol - Cumulative UpVolume-DownVolume

As you can see in the above image, there is a massive net sell in the volumes of the constituent stocks, now follow the price action in the next 30 to 45 minutes. Lets move to the next idea.

Based on a suggestion from a fellow trader and friend Navdeep we came up with a variant of NIFTY UpVol-DownVol which we call NIFTY UpValue-DownValue, here we look at not just the volume but Value i.e Volume * Price. This helps us normalize for situation where the volumes could be skewed due to higher or lower face values of stock prices. It also helps us recognize situations where only a few key stocks try to pull the index up or drag it down.

Look at the image below

You an see there was buying that was initiated, perhaps in a few stocks (quite heavily) hence reflecting in the Up-Down Value but Up-Down Vol remains in the red. As you would imagine this was a narrow range day with a tug of war between a few heavy weights and rest of the index.

As I sign off, I must contend that I these Internals based Indicators have really saved me a lot of head and heartache. I am able to filter out contexts that I don’t want to trade, quite well.

Update: 16th Jan’19

I found a similar spike in the CumVol, this time on the upside as discussed in the first image. Notice the price action after that.

Trend Day - 15th Jan’19

,

Pullback vs. Reversal | Can Market Internals Help?

,

Those of you who follow the blog regularly know that we at NiftyScalper have been working on creating tools to look at NIFTY Market Internals as a way of understanding the index moves better.

In this post I will spend some time on one aspect which if learnt can make a massive difference in your p/l.

We will look at understanding what is a Pullback and how do we know that its not going to turn into a Reversal.

What is a Pullback?

A pullback is a micro-counter-trend within a macro trend. Micro and Macro are time references, and for scalpers and day traders it can be 5 to 10 mins for Micro and 45 to 60 minutes for macro.

Pullbacks can be great opportunities to scalp so long as the macro trend continues.

What is a Reversal?

A reversal is a move which starts like a micro-counter-trend move, however does not go back to the initial macro trend and can potentially be the beginning of a counter-macro-trend.

I don’t want to hear your stories as to how many times what you thought was a pullback turned into a reversal, and that was the end of it, for some people I know that was the end of their trading account. Especially if you don’t have your stops in place instead have ‘hope’.

Given such grave and potentially devastating outcomes of what was essentially a misread price pattern, we at NiftyScalper thought why not check if Market Internals can help us with increasing our odds of identifying ‘potential’ reversals.

If you have questions about the market internals based indicator that I am referencing here, read this post.

Look at this image below. If you notice from the point which I have marked with a blue dot, the % of stocks below 1SD of VWAP which is the red line has been inching up, along with price also rising, almost crossing over the green line (% of stocks above 1SD of VWAP). Which is obviously a sort of divergence. From that point onwards, I would be wary of pullbacks as the strength of the move, in terms of the number of stocks supporting it is waning. So this was one way of looking at it.

NIFTY Futures 28t Nov’18

Lets look at this next chart, same day, same time frame. The blue dot is a common time reference across both charts.

The Red and Green line here are from a slightly different Market Internals indicator where we look at Standard Deviations from a 45 Minute Mean Price. As you can clearly see here, this one is far more pronounced, the % of stocks above 1SD of 45 Min Mean has been downward sloping as the price makes new highs and peaks.

You can see or yourself, as the support from internals declines, the probability of a pullback being just a pullback also declined.

To me it looks like there is a story here, something to follow up on.

I will keep you all posted. Till then Trade safe folks!

,

What are Market Internals & Why should you bother?

,

Before we delve into what Market Internals are, lets ask another question to ourselves - Why does a (Stock Market) Index move?

To understand that we need to move to one level deeper and ask as to - What is an Index?

What is an Index? - An Index is a weighted average value derived from a set of constituent stocks, ie the price of the constituent stocks. So if the prices of the constituent stocks go up the Index which is nothing but an average of those prices would also go up, and the same would happen if the prices of the stocks go down.

In a way we have now answered the question - Why does a (Stock Market) Index move? - An index moves because the prices of the constituent stocks change.

These changes can happen over various time frames. Within a few minutes? Sometimes hours, days, years and so on. But the phenomenon is the same - Prices of Constituent Stocks Change leading to a change in the Index Value.

Now with that sorted, lets move to the concept of Market Internals - Market Internals refers to the data derived from the constituent stocks, which could be used to understand the Index’s structure and strength better.

One way to think of Market Internals is to think of it as Instrument Panels in a Cockpit. If The Aircraft has to fly the way it ought to, all the reading on the instrument clusters need to be within a threshold.

Same is with an Index. If the Index is expected go up then the “Instrument Clusters” ie the Market Internals need to align in a particular way.

Lets take an example -

^NIFTY has 50 Constituents. Their Weight-ages look like this. The top 10 stocks account for close to 60% of the Index, the next 15 add up to 20% more, and the last 25 add up to another 20%.

In other words, being an index with just 50 stocks of which 10 stocks constitute close to 60% of the index makes it a very top heavy index.

This NSE Replica by Equity Master is a nice tool to give you a sense of what they call NIFTY Sensitivity. What it tells us is - For a given change in the price of Stock A how much will the Index Move. Lets look it up for HDFCBANK

For reference lets take the last one on the list HindPetro

HDFCBANK has a 15x more impact on the Index compared to HPCL.

Hope you are with me so far? - We are still exploring what Market Internals are?

Back to where we left.

Lets say you are an Intraday Trader and you expect the market to go from 10600 to 10700 today. A good 100 point move. For such a move to happen? What do you think would happen under the hood? Can HDFC bank be down say by 2% and a few other heavy weights are down or perhaps flat, would we still get a 100 point upside move. As you would guess the chances are quite less.

Like wise what if you see that the top 8 stocks by weightage are all nice and green, trending up - Now what would be the odds of getting that 100 point move? Quite good right.

Lets look at another aspect, what if the trading volumes in the top 10 are quite light compared to its 20 day average? Do you think we would have a trending high range day?

What if the to 10 and the next 15 stocks are going in opposite directions? Do you think we would get a trend day?

I hope you get the drift. Market Internals are these variables or data which are generated by the constituent stocks, analyzing which can help us understand the overall state or health of the market.

If you look at the US Markets esp. NYSE you will see that the exchange broadcasts live Market Internals like NYSE Tick - Which is the number of Stocks Upticking minus the number of stocks Downticking. In lie markets it gives you a sense where in which direction the skew is. This data can be in turn back-tested to identify thresholds of Intraday tops and bottoms. It should not be confused with Advance Decline Indicator which references the Previous Day Close for its calculation. Where as the Tick uses the previous close.

It would look like the one in the image below.

Image Courtesy - RedlionTrader

Second, they have something called NYSE Upvol and DownVol, which is broadcasted as two separate values, but many platforms allow you to plot the difference ie Upvol-Downvol. Which tells us which side is volume skewing i.e How much volume is associated with the Upticking stocks vs how much of it is with the Downticking stocks.

Image Courtesy - http://www.traderslaboratory.com/forums/topic/2524-nyse-up-volumeuvoldown-volume-dvol-comparison/

As Intraday Index Traders we in India miss out on this vital informational edge. Not calling it a Holy Grail but nevertheless extremely important to gauge the mood of the market.

As they say what do you do if you cant find what you want? You build one.

In the following weeks we will look at the various Market Internals based Indicators which we have created for our use at NiftyScalper.