Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Premium Portfolio

Optionalysis: The CAPM MA20 Shows Another Outlier Trigger


CapM Premium Header


The CAPM MA20 Indicator has gone south, indicating a potential move down in the near future. It is constructed by taking the number of Nifty stocks above their 20 day moving averages and subtracting from it the number that are below; in effect, it gives an idea of breadth.

The indicator will oscillate between +50 and -50. What we also do is to take a 5 day average of the number so it smoothes things out a bit.

We have noticed in the past that this indicator, when it moves down from +30 or moves up from -30 has a short term predictive capability – that is, buying put options or selling call options can result in a profitable trade.


This hasn’t been all that great recently with only one two instances of it going to +30 since November 2013, and in both such occasions the fall has been very small. In April and Jun 2014, the market fell less than 3%!

What is important of course is that the indicator hasn’t gone to the -30 levels since September 2013, which tells you how bullish this move has been. We haven’t even seen a 5% retracement for the Nifty in 2014!

(A retracement is a drop of 5% from the highest point after a move…which simply hasn’t happened)

How do we trade this?

It’s a short term indicator so we would prefer to either:

• Buy December or January puts. The Nifty 8400 December put is trading at Rs. 84, and should work in our favour if the strategy works. It will not lose that much time value as the November put (which will have only 6 days to go)

• Sell a November call spread. At this point however, the call premiums are so low (8500 call is at Rs. 34, with the Nifty at 8426!) that there’s hardly any point selling it.

However, this is a very risky strategy, and in puts there is a chance of 100% loss of capital. So if you’re looking to trade the downside, tread with extreme care.

On The portfolio, we take no positions except keeping our stop losses handy. If the Nifty does fall, our stops will trigger automatically. Members will note that Dolphin Offshore, a Capital Mind Premium Portfolio stock, is up 17% today. We don’t know why either, but we’ll take it.

We are unable to offer Capital Mind Premium Portfolio mails to trial subscribers; all paid members get full access including archives.



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.

Capital Mind for ZD



Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial