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Forecasting financial markets with no price data

Traditional technical analysis to forecast future prices of a tradeable financial asset mostly depend on old price history and almost all the technical indicators developed so far are various statistical forms of the historical price actions. We all know by now the limitations of such indicators being lagging behind the current market activities.

 

Another form of visualizing the current market status getting popularity nowadays is 'traders' sentiment' analysis. The clients accounts statistics available to all the financial brokers have established the fact that majority of the retail clients/traders act against the prevailing market trends and hence are most of the time trapped into unfavourable positions with unrealized losses mounting in their accounts. An oversimplified approach suggested by some broker houses is to always take contra positions against the crowd. However, this approach too has limitations because after minutely observing the traders' activities for a long time it can be noticed that retail traders are not always wrong. In fact, since a big part of the institutional profits come from these loss making retail traders' accounts, the golden goose can not be killed in one shot. Therefore the retail traders indeed make money some times, particularly when the market is consolidating or for only a short while when the market has just began to develop a long lasting trend (to be evolved gradually). At the begining of such secular trends, the retail traders are often right in spotting the direction and start making money, but are not able to ride the trend for long time. They liquidate their profitable positions quickly and tend to take opposite directional trades on minor or major pullbacks and thus get trapped into unfavourable positions again. However, this project is NOT about tracking such retail activities.

On the contrary, this project looks into the actions of large hedge funds on real time and tries to track the big money flow but without considering the underlying price movements. The basic premise for this project is to assume that when big institutions take a directional call in the spot or the futures market, their positions are almost always hedged with derivative products in the contra direction. For this reason I can not analyze the popular spot currency markets because no centralized exchange exists there to provide a comprehensive picture of the spot as well as the derivatives markets. Equity indices are most appropriate for my purpose and I have chosen the most popular index in the Indian stock market called NIFTY 50.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the figure shown above, the top chart is the daily OHLC candle chart (from 18th to 27th Oct, 2016) for NIFTY spot index and in the bottom part an indicator is being shown which gets it's values from the derivatives market. By it's default design this indicator (I love to call it Smart Money Tracker or SMT) is supposed to print positive value when the market closes UP on a particular day and a negative value when it was DOWN. As I mentioned earlier this SMT does not take any form of price data in it's calculation, establishing a high correlation with the market movements will be quite interesting. From only 8 days of market actions shown above it can be visualized easily that such a positive correlation exists between daily closing prices and the SMT.

 

Yet another oscillator like Stochastics, Momentum or RSI?? Looks like but with completely different ingredients i.e, no historical price data in its composition. So how is it going to help us in forecasting future direction. Let us have a close look again on the market activities between 20th and 24th of October. After a nice rally from 8550 level to 8700, the market paused and consolidated in this period. However, the SMT was nicely moving in a downward slope in these days. This indicated the instituitional players were distributing in this period anticipating a big move downwards in the following days. We can see what happened in the next three days.

 

We may have to wait for the next consolidation phase to get some idea from the SMT on the following directional move. So lets wait for that and I will keep this blog updated in the meantime.

 

Click here for a daily updated commentary on further developments


 

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