Smart Money Ratio(SMR) Indicator

Here is an extract from the Economic Times about the SMR Indicator

When the market was shut on Tuesday before last (6th January), Satyam was still a blue chip and the Nifty was on a clear uptrend although it was facing some resistance around 3150. However, the only indicator that was shouting at our face, asking us to go short, was ET Intelligence’s SMR. For, as is clearly visible in the adjoining SMR chart, the SMR was sitting exactly on its support, which had lent it support on umpteenth occasions.

So, it had to either collapse below this support, which would have signaled a bull market for the Nifty (unlikely in current circumstances) or respect the support once again and shoot up, thereby pushing the Nifty down. Then on Wednesday, the Nifty opened up and just when it was trying to take out the resistance at 3150, Raju opened his mouth (rather his computer) and the rest, as they say, is history. In a span of four days, the Nifty collapsed from 3150 to close to 2700, which saw the SMR fall from its resistance around 60 to its support in the early 20s. Then came last Wednesday (14th of January ).

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SMR = India VIX / PCR

SMR = Smart Money Ratio
India Vix = Volatility Index based on nifty option contracts
PCR = Near month Put Call Ratio

The Nifty had lost well over 10% in just 4 trading sessions, which had seen it break through most supports and technically, it looked like a man at the gallows, with the noose around his neck, waiting for the hangman to make his move. But once again, SMR came to the rescue, and predicted that the Nifty had to go up on Wednesday. For, at close on Tuesday, the Nifty was perilously close to its resistance at around 60, which had been a very tough nut to crack in the past.

So, it had to either shoot up, breaching this resistance, which would have seen a repeat of the panic of October/November (unlikely in current circumstances) or respect resistance and scale back, thereby pushing the Nifty up. And lo and behold, the Nifty staged an astounding recovery on Wednesday, rallying well over 3%. Although many attributed it to rumours about a settlement between the Ambani brothers, the SMR had told us that it had to happen. Isn’t it?

A similar thing happened the very next day as although the Nifty fell below its Tuesday levels, the SMR barely budged up. This divergence, once Dalal Street’s Nine Jewels
again, told us that the Nifty had to go up on Friday and went up it did. And how spectacularly! So, to profit from this market, just keep a very close eye on the SMR. For, more than anything else, it is going to be your best friend, warning you of what’s in store in the future. And those, who have missed the Investor’s Guide’s past issues, calculating it is very simple. It’s nothing but the day’s closing India VIX level divided by the day’s near month Nifty put-call ratio.

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