Market Breadth Indicator

After a 23rd July peak, Nifty has been dipping shallow and then reaching those heights again, but in a very tentative manner. Last week we saw levels from 5400 to 5475, of a meager 75 points, with entire trading concentrated in the region of  5420 - 5460 even more tight range of 40 points. So while we wait for breakout in either direction lets take a look under the hood.

Above is the chart which shows what was "most probably" happening in the stocks belonging to the F&O segment in the August series. I have chosen this as compared to entire set of NSE stocks because most of them belonging to the small cap universe tends to skew the count as well as percentage of stocks calculation. F&O segment is where the real game is played. Alternately we can use the valuation method but that can complicate things more.

So coming to the chart, I have marked the 4 regions in the chart which is based on percentage of stocks in F&O segment showing the 4 possible trading. Lowest region shows Long Unwinding, above that in a lighter reddish hue is Short Addition, the greenish hue above it marks Short Covering and the top most lighter greenish area shows Long Addition. The X-Axis as usual is the time frame.

I have also added Nifty chart right below it to make comparison easier. We see till 23rd June, 5350 in Nifty short covering was a dominant trade going on, which tell us a well known obvious fact that all rallies start with short covering. Notice how smart longs were getting into the party. We also see some short getting added!

After a period of lull, where we see short and long all getting added Nifty reaches the 5470 high on July 23rd, with quite a significant number of stocks adding long only the previous day (signs of excessive bullishness?). We also see that shorts were getting added in large number of stocks closer to that period, I feel the reason to it would be as Nifty was nearing a resistance level so were a lot of other stocks and hence these build up.

Now see what has happened after that, Nifty is where it is, but we are seeing Long Unwinding, which we have almost seen happen in august series! There is hardly any long position getting added, short covering has also increased which almost ceased during the 23rd July top!

You can, I am sure make more interpretations from this chart. But one thing that is on your face here is that there are lot of long as well as short positions, some of which have been flushed out of the system recently. If market breaks on the downside the longs (covering) will surely make things worse. If there is a breakout there are enough shorts build up in the system to spring Nifty to greater heights. We can see a burst of short covering yet again.

As this chart is based only on percentage of stocks exhibiting the trading biases, its only a breadth indicator and not a strength indicator.