Looking through the Index moves | Analyzing Weightage based Segments

One of the perennial questions that’s in my mind as an Index trader is “What caused that move?” - We at NiftyScalper have been down several rabbit holes to find the answer, hopefully there is some light at the end of this “Market Internals” tunnel.

One of the things we are experimenting at the moment is looking at the index in segments.

Below are the three segments that you can see.

Segment 1 - HeavyWeights - In Red - 60% Weightage

Segment 2 - Mids - In Yellow - 22 % Weightage

Segment 3 - Bottoms - In Blue - 18% Weightage

Creating these segments helps us see the Index in a different light. One of the initial beliefs which we had about constituent stocks is that the bottoms which constitute 18% of weightage may not have much predictive value for the index, but we are learning something new about that belief, which I would share further down in this post.

Lets go back to the initial question that we started with “What caused this move?” - When I ask that question do note that I am usually looking at those Short time frame swings or trends which last anywhere between 45 mins to an hour.

To answer that question we look at the Average % Change of Prices of Constituents stocks in the above three segments of the Index. Do note, the Red line is the HeavyWeights, Yellow the Mids and Blue the Bottoms.

Image 1

To make it distinct visually I have drawn these boxes. Look at the first box in Image 1. That upward spike and the up move thereafter, it was the heavyweights which caused it, also notice the other two segments in the same time window, they are clearly diverging.

If you ask “Who caused that Up move?” - The answer clearly is the “HeavyWeights”. And if you ask who caused that down move - The answer clearly is the - “Mids” and the “Bottoms”. You will notice almost all through the day that was the pattern, the Heavyweights were trying to puss the index up and the Mids and Bottoms were pulling it down. Now lets look at another day.

Image 2

This is a sort of range bound day with a mild downward bias, as you can see the HeavyWeights were flat and a bit positive too holding up above the Zero line, where as it was the Minds and the Bottoms who were pulling in the index down.

What I have learnt so far about Index moves is this

1) Constituent Stocks oscillate between the two states of “Convergence” and “Divergence”.

2) The state of “Divergence” can also cause a directional move depending on the strength of the segments and the degree of the move in terms of Price change.

3) We get to see more stronger moves when there is “Convergence”. For instance we may have had an upward trend in the Index in the Morning session, by mid day you may see a Divergence in the segments, for instance say - the Minds and the bottoms are pulling the index down - now there are two possibilities either they (Minds and the Bottoms) converge with the Heavyweights and move up or the Heavyweights converge with the Mids and the Bottoms and move down.

These are pretty much the things which happen in the Index all through the day.

Now the question would be - How does this help in Trading?

1) Looking for developing divergences helps in identifying the beginning or an end of a move. Divergences can start with the Bottoms as well, and in some times the other two segments can catch up.

2) Knowing which segment is in control also helps in making an assessment of the possible degree of the move.

3) Past patterns can be used to predict the future. Machine learning and data science can be of use here.

Hope you found this useful!.