Generally, when discount widens, the mood of the market is increasing. When premium widens, the mood of the market is increasing.
However, sometimes premium may also fall due to:
1. When FII’s are long on the markets, they short Nifty as a hedge. Nifty are less volatile than individual stocks. If the stocks move up, the loss in the will be relatively less. This selling results in a huge discount on the Nifty .
2. Another reason for Discount happens during result season when Companies declare dividends, Index stocks go ex-dividend and it leads to discount in Nifty .
In the below chart, I ran a 20-day (yellow line) of ( Nifty Price – Nifty Spot Price) and a 9-period (aqua line) of the moving average itself.
1. A downward crossover is near to a short-term bottom in the market (during bull markets).
2. This also means, traders are not outright on markets when a bottom is formed and participate later on.
3. Markets ended with 5.8 premium on 20th April.
4. This could mean we are near a bottom unless we are in a big bear market like March 2020.
Disclaimer: This is only for educational purposes and should not be considered as investment/trading advice.