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DEFINEDGE WEEKLY NEWSLETTER
Date: 13th April 2020
Index
Options view…………………………………………….……………………………………………………………………………………. (3)
Nifty view………………………………………………….……………………………………………………………………………………. (6)
Follow-through stocks…………………………………………………………………………………………………………………… (8)
Sector performance ……………………………………………………………………………….……………………………………… (9)
Interpreting Market Breadth Indicator …………………..………………………………………………..………………….. (10)
Chart studies …...…………………………………………………………………….…………………………………..………………... (12)
A method of trading important support & resistance levels ……..………….……………..……………………... (16)
2
Options View
High volatility in markets
Markets are still volatile with mainline index NIFTY 50 on average making intra-day moves of 370 points in
April while it made 520-point moves in March. The VIX, a real-time volatility index of NIFTY closed at 49.74
on last Thursday and is still very high compared to its average historical values. And IV percentile, which
ranks the current VIX compared to its past values in 1 year, is still high around 93. Overall, volatility is still
high and markets are moving in a fast-paced manner in both directions.
Options back-testing of short volatility trades
Last week, in the newsletter I made the argument that it’s better to avoid short volatility options trades as
long as the IV percentile (IVP) stays above 90 and exit short volatility trades if IV percentile crosses above
90. To test this hypothesis, I did an options back-testing to see if this makes sense.
I did this options back-testing on NIFTY and BANKNIFTY with following conditions
• End-of-day (EOD) options data starting from 2014 to current was considered for this study.
• We enter a Short Straddle options strategy when IV Percentile crosses above 90 or crosses below 90.
This strategy involves selling 1 quantity each of at-the-money (ATM) put and call option. This
strategy gains from collapse in volatility and theta depreciation as time passes. If the underlying
moves much faster in one direction, then this strategy will lose.
• Trade is exited after 20 days or when 100% stop-loss is hit – whichever happens first.
Nifty options back-testing results
3
The options back-testing results for Nifty show that the short straddle strategy gains smartly if placed when
IV percentile crosses below 90 and the same strategy makes losses if placed when IV percentile crosses
above 90. Though both strategy conditions show comparable win rates, the second strategy (IVP crosses
above 90) has larger average losses compared to the average gains made while in the case of first strategy
(IVP crosses below 90) the average gains made were almost equal to average losses but due to higher win
rate, the strategy as a whole showed decent returns.
Banknifty options back-testing results
4
The options back-testing result for Banknifty short straddle strategy shows that this strategy performs
equally well both when IVP crosses above 90 or IVP crosses below 90 with comparable results characteristics
like average returns, profit factor and win rate.
Take away
The options back-testing results show that in Nifty it is better to avoid short volatility trades like short
straddle when IVP crosses above 90 and in Banknifty it doesn’t make any big difference if the short straddle
is placed when IVP crosses above or below 90. This can be due to Nifty being a low volatile balanced index
with stocks from diverse industries while Banknifty being a highly volatile bank specific index.
- Raghunath Reddy
5
Nifty: Setup is Bullish but Breadth indicates exhaustion!
Below is a 0.10% box-value chart of Nifty.
Short-term price structure is bullish. A super pattern has got triggered above moving average and bullish
count cluster is open.
Below is a breadth indicator chart of Nifty and sectors.
6
X%-Breadth indicator of Nifty 50 is at 98%. Meaning, almost all stocks of Nifty are in bullish swing. Not only
Nifty index but breadth of all sectors is also at extreme levels, it is at 100%. Meaning, all sectors are in
bullish swing.
Below is a table showing breadth of all sectors.
(Above table is readily available in TradePoint: Matrix -> Sector Matrix)
Most of them are above 90%. Meaning, there is a strong participation in this uptrend but it also indicates
exhaustion. Long-term trend being down, a caution needs to be applied when breadth is in the overbought
zone.
Such extreme levels of breadth can be followed by price or time correction. If a trend is strong, it will lead to
some short-term consolidation that will correct the breadth. Till then, position size can be reduced. If trend
reverses, we will get the bearish pattern on the price chart to trade.
If trend reverses, look for continuation pattern in relatively weak stocks or sectors - they could not perform
even when Nifty did well.
7
Follow-through
Follow-through is very simple yet effective tool of price pattern trading. In TradePoint software, there is a
scanner follow-through to all types of price patterns. Every follow-through pattern also opens vertical count.
Follow-through scanner will show list of bullish and bearish stocks with open vertical counts as shown in
below table.
You can view above table in Smart Scanner menu in TradePoint.
Scanner-> Smart Scanner -> P&F ->Follow through scannersdas
8
Sector Performance
Below is a table showing current performance and breadth of all sectors. It is calculated on different
timeframes, and higher timeframe has given more weightage in the method.
Scrip Price RS Breadth

Nifty Fin Service Bullish Bearish Overbought
Nifty Realty Bullish Bearish Neutral
Nifty IT Bearish Bearish Overbought
Nifty Serv Sector Bullish Bearish Overbought
Nifty Bank Bullish Bearish Overbought
Nifty MNC Bullish Bullish Overbought
Nifty Consumption Bullish Bullish Overbought
Nifty 50 Bullish Bearish Overbought
Nifty Pharma Bullish Bullish Overbought
Nifty Auto Bullish Bullish Overbought
Nifty Metal Bullish Bearish Overbought
Nifty Media Bullish Bearish Neutral
Nifty Pvt Bank Neutral Bearish Overbought
Nifty FMCG Bullish Bullish Overbought
Nifty Infra Bullish Bullish Overbought
Nifty Energy Bullish Bullish Overbought
Nifty Commodities Bullish Neutral Overbought
Nifty PSE Bullish Neutral Overbought
Nifty PSU Bank Bearish Bearish Overbought
Nifty CPSE Bullish Bullish Overbought
9
Interpreting Market Breadth Indicator
The Nifty has seen a sharp rally of 20.3% from the March 23 low of 7,610. Not many would have anticipated
this kind of a sharp pull back. And, if this kind of a rally was not anticipated, there is a slim possibility that
many would have participated in it.
The feeling now with many stock market participants would be: Have I missed the bus? Is the market going
to run away without me?
These are logical questions but once you have an objective method to assess the underlying conditions and
devise a plan accordingly, then the job becomes easier thereafter. You just have to diligently follow your
plan.
Let’s put the recent rally in perspective and understand how the market breadth has panned out and let’s
also consider if the rally is broad-based.
Here is the PF-X% breadth indicator capturing the Nifty 50 breadth across 3 box sizes – 1%, 3% & 5%.
In 1% & 3% box sizes, the breadth indicator has moved into overbought zone, indicating exhaustion. In the
5% box size, the indicator is in neutral zone at 56%.
Let’s also take a look at the breadth in Nifty 450 stocks (Nifty 500 minus the Nifty 50 stocks). Have a look at
the chart below.
10
It is positive to note that the recent rally has percolated to the broader universe as well with breadth
indicator for Nifty 450 basket venturing into the overbought zone in 1% box size.
What is even more promising is that the breadth indicator in 3% box size for the Nifty 450 stocks is also on
the verge of getting into the overbought zone. This suggests that the buying interest is not confined to
Nifty 50 stocks alone and it is much more broad-based.
If you look at the chart daily P&F chart of Nifty 50 index in 0.1% box size, the “set-up” has turned bullish and
there are open upside vertical counts too that are activated. The only cause of concern from the short-term
perspective is that the breadth in 1% box size is at an extreme zone. This might trigger some consolidation
or correction. Considering that the broader universe is also at or near extreme zone, it would make sense to
await a correction or consolidation before taking fresh exposures.
Have I missed the bus? The answer is a resounding No! Even assuming the best-case scenario of the worst
being over for the markets. In that case, Nifty 50 index would be expected to make new highs sooner than
later. But, remember price does not rally or fall in a linear or one-sided fashion.
There will be pull backs along the way, especially when the breadth reaches overbought zone. So, do not
get disheartened and look for opportunities. The short-term scenario looks bullish, but this can change as
quickly to bearish. Be conscious of that and have a well-defined exit plan.
Personally, am planning to take some exposure in Nifty 50 index when the breadth cools off to neutral zone
and if there is a fresh breakout in the index thereafter. My exit plan is a close below the recent swing low in
the P&F chart which is at 8,000. So, if I end up buying Nifty 50 ETF or an index fund, my exit will be when the
Nifty 50 index closes below 8,000. This is my plan and it suits my risk profile and investment horizon. It may
not necessarily suit your style. By all means chalk out a different plan and execute it. The key here is to have
a plan according to your requirements and more important is to execute it without any deviation.
- B. Krishnakumar
11
Chart Studies
EQUITAS
Observations:
• Current formation on 1% box-value chart is probable bearish ABC with bearish 4 column triangle
breakout.
• There is a series of bearish anchor column from 105 levels and also one of the underperformers on
the RS chart.
• A close below 37 will trigger a fresh bearish pattern.
• Pattern will negate above 43.
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BATAINDIA
Observations:
• Current formation on 1% box-value chart is Triple top buy.

• Price has taken support near intermediate objective trendline.
• A close above 1245 will trigger a fresh bullish pattern.
• Pattern will negate below 1180.
13
NMDC
Observations:
• Current formation on 1% bric-value chart is Probable follow-through to bullish engulfing pattern.

• It has bounced after taking support at previous resistance (principle of polarity) which was also a
Zigzag pattern
• Nifty metal has formed a significant support pattern on short-term brick-value chart.
• A close above 81 will trigger a bullish pattern.
• Pattern will negate below 74.
14
FEDERALBNK
Observations:
• Current formation on 1% box-value chart is Probable bearish ABC with Triangle formation.
• Price has taken resistance near 78.6% retracement level.
• A close below 39 will trigger a fresh bearish pattern.
• Pattern will negate above 43.
- Raju Ranjan
15
A method of trading long-important support & resistance levels
Double-top and Double-bottom are conventional support and resistance patterns.
These price patterns can be made objective in Point & Figure chart by defining a condition ‘O’ at same level
or ‘X’ at same level as shown below.
16
In fact, it is the reason why these patterns are called as Double-top buy and Double-bottom sell.
‘X’ at same level pattern indicate that there is a resistance. One box above the previous high will trigger a
breakout. Same way, ‘O’ at same level shows that there is a demand pattern but one box below prior low
triggers a bearish breakout pattern.
Hence, they are the probable breakout patterns.
But if breakout is not triggered - it shows that the supply (resistance) or demand (support) at that level is
significant. We need confirmation to define this pattern of support or resistance.
There are two possibilities to define the confirmation on a P&F chart:
1) Column reversal after support – resistance pattern

A) Positive Column reversal after ‘O’ at same level
B) Negative Column reversal after ‘X’ at same level
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2) Breakout pattern after support-resistance pattern

A) Double-top buy after ‘O’ at same level
B) Double-bottom sell after ‘X’ at same level
First possibility needs more confirmation and chart analysis. Second, is also known as ‘Double-top buy after
support’ and ‘Double-bottom sell after resistance’ patterns.
Scanners for these patterns are readily available in TradePoint in pre-defined scanner list and also in system
builder.
Below are some current chart examples showing breakout after pattern of support or resistance.
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These patterns are applicable on all instruments, timeframes and box-values. We can scan for these
patterns, apply indicators and perform chart analysis to improve the probability of success.
These patterns can prove very useful on higher box-value charts because they show price is at long-term
support or resistance level. Have a look at below chart of HAVELLS.
20
Box-value of above chart is 5%. The price has been in strong uptrend, but there were support formations
during the trend that gave pullback trading opportunities. It showed that price is retesting previous
important demand level.
These patterns on higher box-value charts can prove very useful for all types of traders and investors
including short-term traders.
Below is a chart if LICHSGFIN showing these patterns on 5% box-value.
Support or resistance on higher box-value indicates that important price point is being tested. If price turns
and produces another bullish column after support or bearish column after resistance on these box-values,
it can be a very significant impulsive move even for short-term or medium-term traders. It offers an
opportunity to participate in the trend after the pattern of reversal.
But it is difficult to trade or invest on the higher box-values such as 5% because:
1) It will take time to confirm the reversal (Even column reversal on 5% box-value chart will need a reversal
move of 15%)
2) Stop-loss is not affordable on such type of higher box-value charts to take trade or invest based on them.
How to use this information then?
We can go to lower box-value chart and seek confirmation there.
Below is a chart of COLPAL on 5% box-value.
21
The support pattern turned to a column of ‘X’. The support was around 1125 levels.
Below is 0.25% box-value chart of COLPAL.
A double-top buy on this chart got formed at 1175 levels, it was also a Low-pole follow-through pattern.
The long-term support that was seen at 1125 levels on higher box-value chart could be traded at 1175
levels on lower box-value chart.
22
Below is another example:
Support pattern in MRF on 5% box-value showing support pattern.
MRF on 0.25% box-value showing pattern retest follow-through.
We saw example of PNB earlier. Below is a chart showing the pattern on 0.25% box-value when resistance
pattern got formed on 5% box-value chart.
23
This simple pattern can prove very useful and scan-able on Point & Figure chart.
Long term support and resistances showing by higher box-value charts are more reliable. We can trade
them based on price patterns on lower box-values. They offer better risk reward opportunities.
What should be Entry and Exit rules?
Entry and exit should be as per the price pattern you are trading on lower box-value chart. For example, it is
double-top buy pattern on 0.25% chart that got triggered after ‘O’ at same level pattern on 5% box-value
chart – the stop-loss should be at double-bottom sell level on 0.25% chart or when the pattern you are
trading on 0.25% chart gets negated.
What if stop gets triggered for bullish pattern on lower box-value chart and support pattern is still
intact on higher box-value chart?
First of all, give yourself pat on the back for following the stop. It is good that you are out of the trade with
affordable stop. If another bullish pattern gets triggered and support pattern is still intact on higher box-
value chart – forget your past trade and enter again.
How can we scan for these patterns?
Below are the steps to find bullish candidates:
1) Run Point & Figure scanner for ‘O’ at same level on box-value 5%
2) Save the result in a group and give it a name. For example, group name is ‘Chal dekhte hai’ ☺
3) Run a scanner for Double-top buy on 0.25%v box-value on ‘Chal dekhte hai’ group.
Below are the steps to find bearish candidates:
1) Run Point & Figure scanner for ‘X’ at same level on box-value 5%
2) Save the result in a group and give it a name.
3) Run a scanner for Double-bottom sell on 0.25%v box-value on that group.
24
Why 5%?
It is not a rigid requirement. I also check it on 8% or 10% box-values. You can experiment with other higher
box-values as well.
You can also take advantage of System Matrix tool here. Create a system ‘O’ at same level from system
builder. Then go to Matrix -> P&F System Matrix and select that condition on different box-values.
Below chart shows ‘O’ at same level pattern selected for 0.25%, 1%, 3%, 5% box-values. When result shows
1, pattern exists on that box-value. When result is 0, there is no pattern.
You can experiment with different box-values on this tool and also look for candidates at important support
or resistance levels on multiple box-values.
10% can be a useful box-value for mid-cap stocks because they have a higher volatility than the frontline
stocks in percentage terms.
Below is an example of a mid-cap chart on 10% box-value. We can look for breakout in their 1% box-value
when they are at important support levels on long-term chart.
25
Steps for running a scanner on Mid-cap stock groups:
1) Run a scanner for ‘O’ at same level on box-value 10%

2) Save the result in a group
3) Run a scanner for Double-top buy on box-value 1% on that group
Major P&F patterns such as ABC, trend lines, Anchor column follow-through or indicators etc can help you
to trade these candidates on lower box-value charts.
This can be a very useful method of finding candidates even when you are trading the stock on some other
charting method.
To know the breakout level in advance, you can also run scanner like ‘Not-double top buy’ or ‘Not double-
bottom sell’.
With this, we are trading very important reversals derived from higher box-value chart. We are going to
trade patterns and not assumptions. Hence, we know the entry, exit and pattern negation levels in advance.
Same thing is possible on Renko chart as well. By looking for setups bricks at same level. In the next release,
we will make scanner for ‘brick at same level’ available.
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The setups discussed above are also applicable to Currency, Commodity and Mutual Fund schemes.
Please email your feedback and suggestions at info@definedge.com
- Prashant Shah
27
For further enquiries please contact

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info@definedge.com
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WWW.DEFINEDGE.

Date: 13th April 2020

Options view…………………………………………….……………………………………………………………………………………. (3)

Nifty view………………………………………………….……………………………………………………………………………………. (6)

Follow-through stocks…………………………………………………………………………………………………………………… (8)

Sector performance ……………………………………………………………………………….……………………………………… (9)

Interpreting Market Breadth Indicator …………………..………………………………………………..………………….. (10)

Chart studies …...…………………………………………………………………….…………………………………..………………... (12)

A method of trading important support & resistance levels ……..………….……………..……………………... (16)

High volatility in markets

Options back-testing of short volatility trades

Nifty options back-testing results

Banknifty options back-testing results

Nifty: Setup is Bullish but Breadth indicates exhaustion!

Below is a 0.10% box-value chart of Nifty.

Below is a breadth indicator chart of Nifty and sectors.

Below is a table showing breadth of all sectors.

(Above table is readily available in TradePoint: Matrix -> Sector Matrix)

You can view above table in Smart Scanner menu in TradePoint.

Scanner-> Smart Scanner -> P&F ->Follow through scannersdas

Scrip Price RS Breadth

Interpreting Market Breadth Indicator

• Current formation on 1% box-value chart is Triple top buy.

• Current formation on 1% bric-value chart is Probable follow-through to bullish engulfing pattern.

A method of trading long-important support & resistance levels

Double-top and Double-bottom are conventional support and resistance patterns.

Hence, they are the probable breakout patterns.

There are two possibilities to define the confirmation on a P&F chart:

1) Column reversal after support – resistance pattern

2) Breakout pattern after support-resistance pattern

Below is a chart if LICHSGFIN showing these patterns on 5% box-value.

But it is difficult to trade or invest on the higher box-values such as 5% because:

How to use this information then?

We can go to lower box-value chart and seek confirmation there.

Below is a chart of COLPAL on 5% box-value.

Below is 0.25% box-value chart of COLPAL.

Support pattern in MRF on 5% box-value showing support pattern.

MRF on 0.25% box-value showing pattern retest follow-through.

What should be Entry and Exit rules?

How can we scan for these patterns?

Below are the steps to find bullish candidates:

Below are the steps to find bearish candidates:

Steps for running a scanner on Mid-cap stock groups:

1) Run a scanner for ‘O’ at same level on box-value 10%

Please email your feedback and suggestions at info@definedge.com

For further enquiries please contact

Registered Office: 2nd floor, Ambashish, Pakharbag, Bavadhan, Pune – 411021 |

| Website: www.definedge.com | Email: info@definedge.com |

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