The Hindu Business Line : Tech Tools

How does the discount and premium on future contracts of September and October reflect in the Index valuation? Your clarifications would be appreciated. R. Varadarajan

Open interest is made up of both the long, as well as the short positions. If squaring up of short positions causes the reduction in open interest, it would be bullish.

If the reduction in open interest is due to covering of longs, it would be bearish, as it would indicate that the traders do not have any further hopes of a price increase and hence are exiting the counter.

The discount or premium on future contracts does not affect the index valuations.

Index valuation is based on the cash price movement of the constituents of the index.

However, if any contract is trading at a discount to its underlying, it would denote negative sentiment prevailing in that counter as it would mean that traders are betting on the price falling in future.

Conversely, a premium on any contract would indicate that traders are feeling that the price of the underlying would move up in the future and so are willing to pay a higher price for the future contract.

I am new to technical analysis. Please tell me the techniques to identify a buy signal in a chart. Also, please elaborate on over bought and over sold situations. S. Sankaran

There are numerous ways in which buy signals can be generated in a chart. Two basic means are (a) by means of a trend line, and (b) with the help of moving averages.

Using trend lines — When a stock is in a downtrend, draw a trend line joining the peaks starting from the place where the downtrend started.

When the downtrend reverses and an uptrend starts, the price will move above this downward sloping trend line.

The point at which the price crosses above the trend line is a buying point with a stop below the most recent low.

Using moving averages — Moving averages are superimposed on price charts.

The commonly used moving averages are the 10 day simple moving average, 50 day simple moving average and the 200 day simple moving average.

The point at which the price moves above a moving average would be the point of entry. Similarly, the point at which the price moves below the moving average being followed is a point of exit.

Moving average crossovers can also be used to generate buy signals. The price at which a 10-day moving average crosses above the 50 or 200 day moving average will be a buying point. Similarly, the price at which a 50 day moving average crosses above 200 day moving average would be a point of entry.

The periodicity of the moving average can vary according to the trading time span of the user. For example, a long-term investor would use the 200-day moving average to generate buys and sells while a short term investor would prefer a 10 day moving average.

Overbought and oversold levels are mentioned while talking about oscillators. Many of the classic oscillators move between overbought and oversold zones like Relative Strength Index, Rate of Change Index, Stochastic, among others.

When the oscillator moves in to the oversold zone, it is time to look for buying opportunity.

Similarly, when the stock reaches the overbought zone, it would do to get cautious and look out for downward reversal in price.

Lokeshwarri S. K.

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