19 December 2010

Nifty Closing : An Indicator?

As we know most important periods of a trading day is the beginning and the end. Many intra day trading strategies are based on price action of the first hour. And many swing trading ideas come from what level a counter holds at the end of the day. Not that the middle period is not important, but it is generally seen big order flows come during the early and late periods. Also big players and longer term investors do their trades during the late session as volumes are relatively thicker.

So how can we identify these late players who trade big and are also indicator of a trend to continue or reverse. I have tried this using difference between closing price and weighted average price of each day. If we have a closing higher than the weighted average of the day, we can say that much more buying has been done during the latter part of the day, where we expect big players to have participated. Similarly if the closing came below the weighted average, we can say strong selling came later. It can also be looked as if these big players' trades trumped the more menial day traders!

Lets see the above chart for some confirmation. The chart plots Nifty Futures closing along with 10 day SMA of the difference of closing and weighted average price. We can see how the red line after making a "Top" almost along with Nifty starts sliding down and so does the Nifty! Also note how this indicator bottoms along with Nifty and after that starts rising rapidly, indicating buying pressure (closing above weighted average price of whole day).

Other observation, I can make is that though the Nifty price has not risen dramatically the indicator has made a new recent high. It can be either the start of a new uptrend, when big players latching on opportunities to buy low come and spike the prices higher at the end of day or short covering when seeing the prices not falling  shorts get covered. Whatever be the reason this is positive for the index. We need to carefully track this going forward to get an idea whether this is genuine buying or just some impatient bears covering short, which when ends will pull the Nifty lower again.

I am also adding the same chart for Bank Nifty and Reliance, the trend can be seen here as well.


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