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Three market indicators you should know
Timing is of utmost importance in the stock market. Prices fluctuate every second. So, 'when' you trade counts. In such a case, there is great need to be alert and anticipate stock market movements correctly.
Here are three publicly-available market indicators you can use:
The prices in the derivatives market is closely tied to the prices in the equity market. You essentially bet on the near-term future of the stock market. Also, the players in the derivatives market are usually experts and professional traders who may have more knowledge about the stock markets. So, it makes sense to follow patterns in the derivatives market to anticipate stock market trends. Put-call ratio is one such indicator of market sentiment. A 'Put' contract is one where you agree to sell an asset in the future, while a 'Call' contract allows you to buy at a fixed rate in the future. The put-call ratio is calculated by dividing the number of put contracts being trader in the derivatives market by the total quantity of call contracts. Higher the number, greater are the chances of selling in the future. This may lead to a fall in stock prices. Any number less than '1' indicates that there are more buyers in the market. This indicates a positive sentiment.
The stock market is known for its volatility. However, the amount of volatility changes on a daily basis. Higher the volatility, greater is the change in stock prices. The National Stock Exchange's VIX India index measures this volatility in the stock market. It is calculated on the basis of the prices of Nifty Options contracts in the derivatives market. It is also called the fear gauge. This is because, the VIX shoots up during periods of uncertainty and fear. It indicates an increase in risk. Usually, a rise in the VIX is followed by a fall in the market.
Sometimes, some news may cause the market to move drastically in a single day. This may not be in sync with the ongoing trend. The next day, it would correct a little and start following the same trend again. This can be identified using the daily moving averages or DMAs. Usually, analysts follow the 200-day moving average - the mean price of a stock or index over 200 days. This establishes the long-term trend. Unless there are new factors that may affect the stock or market significantly, the trend usually continues for a period of time.
The combined put-call ratio for futures and options contracts on the National Stock Exchange stands at 0.99, as of April 23, 2014. This means, more number of 'Call' contracts are traded on the market than 'Put' contracts.