Can the premium or discount in Index Futures tell us anything about upcoming market moves?
Generally, when discount widens, the bearish mood of the market is increasing. When premium widens, the bullish 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 futures as a hedge. Nifty Futures are less volatile than individual stocks. If the stocks move up, the loss in the futures will be relatively less. This selling results in a huge discount on the Nifty Futures.
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 Simple moving average (yellow line) of (Nifty Futures Price – Nifty Spot Price) and a 9-period EMA (aqua line) of the moving average itself.
Observations:
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 bullish 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.
Generally, when discount widens, the bearish mood of the market is increasing. When premium widens, the bullish 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 futures as a hedge. Nifty Futures are less volatile than individual stocks. If the stocks move up, the loss in the futures will be relatively less. This selling results in a huge discount on the Nifty Futures.
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 Simple moving average (yellow line) of (Nifty Futures Price – Nifty Spot Price) and a 9-period EMA (aqua line) of the moving average itself.
Observations:
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 bullish 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.
Comment:
We have started to bounce as per expectations. We will wait for more confirmation for a bigger rally to start.
Comment:
This is looking good. A breakout above 14800 would set us up for all time highs.
Comment:
This played out beautifully.