Mentoring Session 4, Day 2: 25 May 2021

World Markets, VIX & Trading Ideas

We hope you had a fantastic learning session today in Live market where you witnessed how
the Markets are actually controlled by Big Boys and how they trap people on both long as well
as short sides. Also you got insights into some new concepts like World market data and india
VIX. So in this document we shall focus upon following topics

A. World Markets
B. India VIX
C. Trading Ideas for the day

A. World Markets
I’m sure that you must be versed with the term “Connecting the Dots” by now. Trading in the
markets is all about looking at various market influencing factors that we refer as “Dots” and
analysing them collectively.
So there are about 10 Dots that we suggest a Professional Trader must look at before taking a
trade. (Don't get disheartened by reading the number 10, your mind is capable of analysing
much more than that, it just needs to be trained). The first Connecting Dot is of World Markets.
We will learn important aspects about World Markets by trying to answer these questions

1. Why are World Markets important for Indian Markets?

2. Which World Markets have significant influence on our Market?
3. Which is the most important global economy for Indian Markets?
4. Which Global Indices do we need to track?
5. How can we track the World markets?
6. Is there any specific time period when Global Markets become less significant for Indian
Markets?
7. Relevance of SGX Nifty.
8. Can Banknifty and Dow Jones be related to each other?

So let's begin!
1. Why are World Markets important for Indian Markets?
In this era of Globalisation everything is connected. Trade, business and commerce has
actually eroded political borders between nations and continents. Our markets get a
substantial amount of capital from overseas investors and institutions. Also overseas
markets get a significant amount of capital from Indian HNI’s and institutions. In such a
scenario if anything happens in one part of the World will have ramifications across the
globe.
Lehman brother crisis, Dotcom bubble burst are historical examples to prove our point.

2. Which World Markets have significant influence on our Market?

Though there are more than 200 countries across the globe, we don't need to give
importance to all of them. We need to look at two sets of economies
● Developed Economies: US, UK, Germany, France, Japan
● Emerging Economies: Asian Economies like Hongkong, Indonesia,Singapore
Tracking these economies is more than sufficient to analyse World Markets.

3. Which is the most important global economy for Indian Markets?

Of all the global economies the US economy is most important for our markets. The
primary reason for this is the “Dollar” that is the international currency. Since the majority
of the global trade and financial investments happen in dollar terms, the US becomes
the most important economy. It is for this reason that the US Market usually represented
by US 30 or Dow Jones is considered to be the mother of all economies.

4. Which Global Indices do we need to track?

We need to track following Indices on live basis
1. Dow Jones: Index of Top 30 US companies. Since it is traded in the US the
timings of Dow Jones do not match with our Markets. It is traded from 19.30 Hrs
to 01.30 Hrs as per IST.
2. US 30 Futures: This is a tradable instrument and is traded from 5.30 Hrs till
01.30 hrs as per IST.
It is important to analyse both the Dow Jones (Spot) and US 30 (Future) together
to form a view.
Just go throught the following hypothetical example of how changes in US
indices can be interpreted for Indian Markets before our Markets open.
 S.no Change in Dow Change in US 30 Interpretation
Jones (Spot) (Futures) till 09.00

1 +100 +50 Bullish

2 +100 -75 Neutral

3 -100 +75 Neutral

4 -100 -50 Bearish

Though this is oversimplification of facts but you must understand the concept and apply
it yourself in real world market.

3. NIKKEI: It is the benchmark index of Japanese economy and is the earliest to

open as per IST. It trades from 5.30 AM in the morning.
4. DAX : Germany
5. FTSE 100 : United Kingdom
6. CAC 40 : France
7. HANGSENG: HongKong

5. How can we track the World markets?

These Global markets may be tracked on a Live basis on various websites like
Investing.com or Bloomberg.
OI Pulse’s Dashboard allows you to keep a track of US 30 Futures on a live basis.

6. Is there any specific time period when Global Markets become less significant for
Indian Markets?
This is a very important aspect to understand. Though for most of the times we will move
along with the Global markets but there would be times when we shall be highly
insensitive to World markets. These will be the times of important Domestic Events like
Budget, Elections, RBI Monetary Policy or any other important event of domestic
relevance.
7. Relevance of SGX Nifty.
SGX Nifty is the Indian Index traded on Singapore exchange. Since the trading hours of
Singapore exchange precede that of Indian Markets it may be a good sign to know how
Indian Markets are likely to open. However we should be very cautious because the
Volume traded on SGX Nifty is very thin. This is very important and at times may be
even used by some players to mislead Domestic retailers. It would be much wiser to
track US 30 and Dow Jones as their Volumes are much much higher and can not be
easily manipulated.

8. Can Banknifty and Dow Jones be related to each other?

This is a very important observation made by our experienced traders. If you see the
levels around which Dow Jones and Banknifty are trading you would be amazed to see
the correlation. They usually trade around the same levels.
This can be converted to trading opportunities at times. E.g if Banknifty is trading at
33500 and US 30 is at 34000 and we are bullish then there is a very high chance that
Banknifty can reach 34000.
The reason behind this is the game plan of Big Boys of the Markets. They tend to
converge at times. This has been observed many times in the past.

As an exercise you can track historical correlation between Nifty50 and DAX and look for
convergence.
B. VIX
It stands for Volatility Index and also known as the Fear Index. We can think of it as an
indicator that quantifies the risk perceived by the majority of market participants. If VIX
levels are high then it means markets are highly volatile and if they are low then it means
that markets are relatively stable.
Well this is the textbook definition that you would find everywhere on the internet but find
it hard to actually understand. So in order to get complete clarity we shall focus on
following aspects of VIX
1. What is Volatility in VIX?
2. What is the interpretation of VIX for rising and falling markets?
So let's begin!

1. What is Volatility in VIX?

Volatility is one of the most important but least understood aspects of Options trading.
We will try to understand Volatility through something known as the “Normal Distribution
curve”.
Though it may sound a bit complex, just try to understand through this diagram.
Volatility refers to how far the price tends to go away from current price.

In the above diagram along the X axis are shown the price ranges and along Y axis is
the probability of occurrence. You can observe that for the Price of 34000 three points
have been marked in the graph 1,2 & 3. Out of them Point no 1 is highest along Y axis
thus has highest probability of occurrence, that means that price 34000 is likely to be
attained with highest probability when we have “Moderate-volatility”. On the basis of this
we will try to understand volatility.

Just consider the following hypothetical example.

Consider we are looking at BankNifty just before the Union Budget is to be announced.
Nobody knows what the real outcome would be. The budget may be good and the
Finance Minister may announce reduction in Corporate Tax rates or the budget may be
really disappointing wherein the same Finance Minister may announce a hefty increase
in Corporate Tax rates to finance the expenditure against Covid. There is a lot of
uncertainty with regard to outcome.
In case the budget is positive the Banknifty may move strongly from 33000 towards
34000. But in case the budget is negative, BankNifty may move down towards 32000 as
well. This situation is known as the “HIGH VOLATILE” environment.
Thus during times of high volatility prices tend to move farther away from the mean or
current price.
Just look at the “High Volatility Distribution” curve in the diagram. 33000 is the mean or
current position and the shape of the curve is relatively flat as compared to other other
curves. So what does this mean? It means that the probability of price to stay at 33000
itself is minimum when we have a high Volatility. Also the probabilities of extreme prices
like 35000 or 31000 is maximum when volatility is maximum.
Now observe the “Low Volatility Distribution” curve. As per this diagram the probability of
price to stay at 33000 itself is maximum in this kind of environment whereas chances of
price going to extreme levels like 35000 or 31000 are very low though not impossible.

So just summing it up, in High Volatility environment Prices tend to go very far away from
the current level whereas in Low Volatility environment Prices tend to stay around the
current level or mean prices.
 So I guess that you must be clear now what exactly you understand by Volatility.

SO VIX quantifies the volatility as seen by the market participants. If VIX is high
then market participants see the market to be highly volatile and likewise very less
volatile if VIX is less.

Kindly go through following video to get a better view about VIX

https://youtu.be/wdkSqaLNVvk

2. What is the correlation between VIX and price levels?

We will not go into the science behind calculation of VIX as it is not necessary. What is
important is the relationship between VIX and Price and how it impacts the market
sentiment. We have summarised correlation between index prices and VIX which is as
under

● If Price Increases and VIX decreases it is a bullish scenario.

● If Price Increases and VIX increases it means the market doesn’t like upwards
movement of Price so it may revert back.
● If Price decreases and VIX increases it is a bearish scenario.
● If Price decreases and VIX decreases it means it doesn't like the down
movement of the market.
● If VIX behaves erratic during the day then VIX should not be taken into
consideration as a factor.

As an exercise plot the VIX chart and try to analyse the times when VIX levels
have been historically high.

C. Trading Ideas
Let us discuss ideas that could have been used to identify trading opportunities for this
particular day. Just like Day 1 we shall start the day with the preparation of a trading plan
and identify opportunities on the basis of it.
So let us start with ideas for the Opening Trade.
 Our Opening Trade idea shall be based primarily upon
1. Previous day Intraday Moves
2. Price Movements on a larger time frame (Daily)
3. World Markets
4. Open Interest
5. Any domestic news factor

We are currently on Day 2 on our Mentoring program and have not discussed the concept of
Open Interest yet. It would be a key input but for sake of simplicity and provide the building
blocks I shall discount this factor for the time being. But do remember that we treat OI as God
for options trading and we will do a lot of analysis in upcoming days.
1. Previous day Intraday Moves
Just notice that yesterday (i.e 24 May 2021) the price till 2 pm was in consolidation mode
and dominated by the Bulls as it hovered around the PDH (of 23 May).
Towards the end of day the Bulls started Bull rally from 34810 level and that too with
volume, but from around 35300 it took a sharp U turn and came down heavily and that
too with volume.
What do you think could have happened here?
It is possible that we had a strong supply around price of 35300
OR
Bulls booked their profit
OR
Bears entered the system
OR
Any of above mentioned factors
What can you conclude from the above
That Bulls are not in absolute Control.

Now observe the closing of the day

It happened below the VWAP but above the start point of Bull run.
It clearly shows that Bulls are not in control at the end of the day.

So are the Bears in Control?

That's also not true as though they have been successful in closing the price below the
VWAP but the closing is above
Start of the Bull run (@34810)
Much above the Day’s Low.

So overall we can conclude that

The Bulls have lost absolute control but they have not handed the ship to the Bears. In
such a scenario there would likely be a contest between the Bulls and Bears for
the control and Markets may consolidate the next day.

Now can we identify a price level that would be the LOC between Bulls and Bears for the
next day?
It will be the start point of Bull run (i.e 34810). Bulls would defend the level and we
can look for Buy on Dips till this level. If Bears are able to break this level at opening
then it would be a Sell on rise till this point.

So let us make a plan for different types of Opening

Gap Up Opening: On the basis of Price movements it is unlikely but if it happens

because of World Markets then there is no point in chasing it as Bears would bring the
down once, so it would be sell on every rise.

Gap Down Opening: If World markets turn downwards then we may have a Gapdown
opening. Bulls in this case would try to take the market up once and Bears would try to
bring it down. So if the price reaches PDL or 34810(the start of Bull run) after opening it
would be an excellent opportunity to sell. Thus sell on rise.

Flat Opening: Now if we have a flat opening then we will have plan according to the
price movement
If price goes down towards 34810 then it would be Buy on Dips as Bulls would try to
overcome Bears
If Price moves towards PDH then it would be a sell on rise as Bears would try to
overcome Bulls.

So I guess that based on the Previous day Intraday Moves we have a plan ready. Now
let us look at other factors.

2. Price Movements on a larger time frame (Daily)

We see that on a larger time frame the Bulls are still in control as the Bears have not
been able to take out the important price level of 34270. We shall be Bullish till this level
on a larger time frame. This level might be tested before the next big move, but for the
time being Bulls have the upper hand as per larger time frame.

3. World Markets
For World Market we shall analyse the Dow Jones Data of Previous session and
Dow Futures of present day till 9.15 AM as per IST.

Previous day Dow Jones Session (Index/Spot)

Previous day , Dow Jones was in control of the Bulls and price rallied from 34253 till
34393 about 140 points.
But to get a clear view we need to see how DOW Futures behaved till 9.00 AM in the
Morning before opening of our markets
Just by looking at the chart I can tell that DOW Futures is also in a Bullish mood.

So with Dow Jones (SPOT) in control of Bulls and next day US 30 (Future) also in
control of Bulls is good news for the Indian Bulls.

So any Gap Down is ruled out.

Now we will see how the market opens and price moves.

Any down move would be Golden Buy on Dips till 34810 level

4. Any domestic news factor

Nothing important about the domestic news.
So let us see how the opening was
 So we had a Gap Up Opening as the World Market was Bullish but there was no
point in chasing it up as Bears were in the system.
Bears brought the prices down to 34810 but Bulls defended that level till 10.18
and every dip was a good opportunity to buy.
Our Master scalper scalped his way to 1 % profit based on this strategy.

Thus I guess that you have an idea now how we can plan our opening trade.

Subsequent Trades
Around 10.18 the important bull level was taken out with Volume. This was the
LOC that we identified in our trading plan.
Once this was taken out we can think of having a bearish outlook but with
caution as the overall Trend is Bullish.
In such scenarios markets tend to consolidate. From now on seller would try to
control the market until the previous day Low or important support of 34270 is
taken out.

2 candle trade

After day of consolidation around 13.45 we saw the PDL got broken with Volumes
Since it broke with Volume it was good to enter in the third candle and look for “Sell on Rise”.
It was a good scalp to enter.

However you must be cautious as overall we are in the Bullish zone and any Down move has to
sustain otherwise Bulls will attack back.

This is what happened. Though Bears broke the PDL but they couldn't push the price further
down and thus Bulls came back, took the price upwards and closed it above VWAP
So I guess you can link how the price moves in the market with the catfight between bulls and
bears. You just have to understand this Market Sentiment and trade accordingly.

There are some other Dots that we need to learn to be able to identify Market Sentiment in the
correct manner. IV levels,Open Interest being the most important of them. Understanding these
would help you identify more trading opportunities.
In addition to this there is another interesting concept of Open High that we shall discuss in
subsequent days that would provide you more trading opportunities.

I guess that our efforts are matching your expectations from the program. We request you to
keep your learning spirit ignited for the upcoming sessions as this could be a turning point in
your life in achieving Financial freedom.
So on the basis of whatever you have learnt today try to prepare a trading plan for the next day.

Till then
Happy Trading