India VIX - 14-Oct-2011

INDIA VIX - Negative Correlation With NIFTY

India VIX is a volatility index based on the NIFTY Index Option prices. From the best bid-ask prices of NIFTY Options contracts, a volatility figure - annual percentage (%) is calculated which indicates the expected market volatility over the next 30 calendar days. VIX value represents the Investors perception of market volatility in the near term.

For those keen on actual computation of VIX & its methodologies can read this White Paper published on NSE - White Paper on VIX. 

Higher the VIX Values Higher is the Expected Volatility & hence Higher would the premium be on Options Strikes (Calls / Puts).

Usually its seen that NIFTY rises when VIX falls & NIFTY falls when VIX Rises. India VIX was introduced from 2009 March.

INDIA VIX - 2 Year Daily Chart

VIX moves in a channel most of the times as, if economy is doing well Volatility would be low & hence Index would be slowly inching upwards & VIX would be in a tight consolidating range. There are very few instances (atleast from the day when VIX has been published that it has stayed above 40. During global turmoil VIX shoots up.

From the Chart its clear that VIX has shot up from levels of 16% in June'11 to close to 37% in Oct'11. Post that there has been a significant correction in VIX & it has fallen 25% from the peak of 37-38%.

It's in a trading range of 25-35. As per charts, a bounce can be expected from 25 levels (Channel Support) & may consolidate for few weeks near 25-30 before gaining strength to move up. If 25 is broken then its next support comes around 23. Once 25 is breached it will enter into the channel zone of 15-25.

Indicators: VIX has fallen below its 50 Day SMA. 200 D SMA is near 23 & inching up. MACD is in sell mode & RSI even after having multiple supports at 50 levels has gone to 45 & heading southwards. Indicating VIX can move still down.

Bottom Line: What it Implies for NIFTY? VIX nearing support indicates NIFTY also moving towards its crucial resistance levels of 5160-5180. If VIX bounces then it can be assumed that NIFTY is topping out for short term at around 5250 levels. If VIX indeed breaks the support of 25 and is headed lower, then it can mean that NIFTY has more headroom & can move to 5350-5400 levels.

Keep a close tab on VIX as it can also be a good indicator of how Index would move further. 

Would be adding more to this post on Superimposed Charts of Both NIFTY & VIX.

Let me know how you liked this article & would you be interested in reading more on the same lines.

*SMA - Simple Moving Average

Dollar Index View - 07-Oct-2011

Dollar Index & It's Negative Correlation (Inverse Relationship) to Indian Markets 

Foreign funds influence our Equity Index movements in a big way. That is if they start investing then the stocks move up & if they start pulling out money the stocks keep going down. 

This movement can be tracked effectively by keeping a close tab on US Dollar Index.

US Dollar Index is an Index of value of United States Dollar (USD) relative to basket of currencies. The Basket of Currencies and there weightages are shown in the below chart.

EUR: Euro, JPY: Japanese Yen, GBP: Great Britain Pound, CAD: Canadian Dollar, SEK: Sweeden Krona,  CHF: Switzerland Franc

Dollar Index gains or falls when USD appreciates/depreciates against these basket of currencies respectively.

In the recent past a lot is happening in the Euro Zone related to high probability of Greece defaulting on its Bonds, also situation is looking grim for other European Union nations of Spain, Italy, Ireland, Portugal & Belgium. During such times a flight for safety is happening and there is a fresh demand for USD as a Safe haven, although inherently US itself is in a double dip recession scenario. 

What it means for us? In Dollar Index Euro has highest weightage of 58.6% so any more problems in Euro zone would weaken Euro, thereby strengthening USD. If USD strengthens, Dollar Index would appreciate. 

Dollar Index having inverse relationship with Indian Equities would mean Equities falling more with Dollar Index rising & vice-versa.

3 Year Dollar Index Weekly Chart

The chart is self explanatory. In March'09 Indian indices & majority of large-cap, mid-cap, small-cap stocks bottomed out & ventured into a fresh round of upward journey. During that time the Dollar Index was at its peak around 89. 

After a steady consolidation around 72-75 for four months from Apr'11-Aug'11. DXY (Dollar Index) has broken out & in a fierce rally has managed to close above its 50 Week EMA & now knocking on the doors of 200 Week EMA. A cross above 200 Week EMA would make it more stronger. Immediate resistance would be faced at 200 Week EMA & next resistance at its previous peak of 81.44.

Indicators:

MACD: Still in Buy Mode with Strength increasing.

RSI: Above 60 & moving up, Indicating the strength in the ongoing rally.

ROC: Positive and around 4%, indicating the Momentum is still strong in the move.

A close above 79 levels and a rally towards 81 would mean Indian Index (NIFTY) would breach 4700 on the downside & move lower. Keeping a close watch on this would give a better view of the times ahead & how Index would move.


Bottom Line: Looking at the Price, Indicators, Moving Averages & the situation in the Euro Zone - Probability of Dollar Index  going up is higher than correcting from here.

Market Wisdom: A security is said to be in an Uptrend, if the price is above its 50 Period Moving Average & which in turn would be above its 200 Period Moving Average. 

A security is said to be in an Downtrend, if the price is below its 50 Period Moving Average & which in turn would be below its 200 Period Moving Average.

*EMA - Exponential Moving Average

Happy Trading / Investing. Would be glad to receive comments from all on the views expressed.