06 August 2011

Nifty : Following PCR Cycle?

Have found something worth a look in one of the charts. Was about to post it earlier, but looks like the longer I am waiting the closer it is getting to comfort!

Above is the chart of Nifty Put Call Ratio (PCR) and Nifty Future adjusted to near term expiry. The vertical lines are the expiry dates. First focus on the March, April and May series PCR, tagged as 1,2,3 in the chart.

What we see is that PCR for March opens decently over 1, moves flat, corrects to around 1 and then spikes to over 2 closer to expiry. Clear signs of an oversold market consolidating and basing and rallying along with short covering.

April expiry is quite boring, PCR remaining over 1 for most of the time but expiring under 1, Nifty doing it bit of movement but showing signs of distribution (PCR pulled lower by the end of expiry).

Now see the May expiry, Nifty starts on a weak footing and straightaway loses the plot. PCR consistently moves lower towards 0.5 and Nifty takes it on the chin.

Now, what is so interesting about this formation is that firstly it clearly shows how PCR can be helpful in tracking what Nifty wants to do and secondly it looks like this cycle is repeating again! Check the June and July expiry which shows ominous similarity to Match and April in terms of PCR and PCR trajectory. Also August is already following May footsteps!

If this is to be believed we are in for some nervous consolidation, followed by another fall. So the targets of 5000-4900 doesn't look too pessimistic for this series, which mind you is only a week and a day old!

This study also points us to the market cycle principles. What nifty is doing is mostly following a bear market cycle. Which is to correct, consolidate and rally (though less and distribute) and correct again. Had this been a bull market we would have seen a different form of this cycle which I believe would be rally, consolidate and correct (though less and accumulate) and rally again.

It would be nice to see if Nifty does follow this pattern, or has something else in mind. In any case it would be great to revisit this chart in few weeks time!


Post a Comment