Friday, April 23, 2010

Corelation (2)

This is a follow up to a post I had done on the 19th of March on inter-market associations for the swing trader, especially the kind who takes his cues from overnight moves in the SPX or the morning moves in the Hangseng or the Taiwan index. You can find my last post on the subject here.

I want to give a shout-out to Manu who follows the Taiwan index and had requested for the post.

That all the world markets are inter-linked is a foregone conclusion (especially for me) and the same can be verified by plotting their charts on google or yahoo finance where a study stretching back several years can show you similar peaks and troughs.

With that knowledge as a background, one can use one market to predict the moves in the other simply by using the popular "revision to the mean" approach.

Here's a chart of the co-relation:


The traditional co-relation factor between the Nifty and the SPX and Hangseng is 90 % whereas for the Taiwan index it is 73 %.

Now if we look at the 50 day average one can argue that the Nifty has underperformed vis-a-vis the SPX and the Hangseng.

The 10 day average shows the pendulam swinging towards the historical average and the 5 day shows a break-down in the Nifty- Spx relation, but not the Nifty-HSI.The chart shows that the Nifty-Hsi and the Nifty-Twii relation has gone back to it's historical average

We can analyse 2 things from the 5 day average data the chart shows :

1) The Hangseng and the Taiwanese indices are highly co-related at the moment to the Nifty ( 5 day average = historical co relation) .One can take cues from these markets for the Nifty session for the next few days.A higer/ lower close there should mean the same for the Nifty.

2) The breakdown between the SPX and the Nifty brings the principle of  "revision to the mean" in play.So either the SPX will correct over the next 10 days or the Nifty would rise over the next ten days to ensure balance.

Remember these are only cues to take note of. The best trades will always come from  the chart which is open in front of you!

5 comments:

mok 11852206222016240633 said...

Shai & Manu

Shai you have done a fantastic job on the correlation, so
1.. Hangseng & Taiwan can give a cue to the day till 9 am, when Price as usual will take control in our decision.

2.. Manu can explore [with his experience on beta pair trading] the possibilities of hangsengETF on nifty,
and someday when StraitETF comes real, then Shai's pulling to mean will make a pair trade possibility.

I have cut & saved the page for a future read, since am a bit tied up till june.

Thanks Shai for the good post,
thanks Manu for being the catalyst.

with regards

manu said...

shai pa ji..
good post and thnx..

viren pa ji kithe hai..

hope u understand punjabi:)

@mok
:)

Rajagopal said...

Shai,
Thank you. Though missed the previous one on VIX+OI r to Nifty range, the current one has prompted me to learn more.

Somewhere down the line, you may tie the "r" between N-50's individual RSI and NIFTY Range.

Oops ... huge ask.
Thanks.

Shai said...

Mok,

My Pleasure.

Manu,

Punjabi is cool ! Count a lot of people from the North as 'jigar ke dost'.

RajaGopal,

You will have to throw me some more bones of the 'r' kind ( if you are willing) :)

dr. saurabh said...

hi shai
just want to know whether viren is here or not.
as iam still waiting answer to my queries which i had asked last weekend.if u can help me.
thanx
@manu
will u mind sharing details abt beta pair trading strategy, as i wan to learn it , and any study material on net plz give me the link.
it would be gr8 if u share ur own experience of pair trading strategy with me.
thanx