Vijay L. Bhambwani's Ticker: Tug of war between bulls and bears

Last week, I wrote that follow-up buying would be required to keep the upward momentum alive. The market internals indicated a possibility of bullish dual pressure. Dual pressure occurs when bulls buy out of a force of habit, and bears cover in fear of bigger losses. So both sides buy in concert, and prices jump exaggeratedly. We saw dual pressure in the first half of the week. The tragic terror attack in Pahalgam marred the second half. Traders went on the back foot as sabre rattling by both nations unnerved sentiments mildly. But for the attack, our markets could have closed higher. We saw nervous selling at higher levels, which capped gains.

This week, we may see a tug-of-war between bulls and bears as the geo-political developments weigh on sentiments. Market internals and statistical data indicate that this tussle will continue until bulls absorb all selling pressure offered by delivery sellers, delta hedgers and short sellers. That means higher commitment levels are required from bulls. The best indicators to watch this week are the advance decline ratio, market-wide position limits (MWPL), traded volumes and basis (premium or discount enjoyed by futures compared to spot prices). If bullish activity dominates all these indicators, we may see the bears pushed onto the ropes like a losing boxer in the ring.

Banks will likely remain in the limelight due to the sheer weightage they enjoy in the Nifty 50. Public sector undertakings (PSUs) are also likely to see focused trading attention due to higher interest from retail players. The open interest by way of MWPL continues to remain elevated on these counters. Industrial metals are witnessing selling pressure at higher levels before the month's end. That will limit the upside in metal mining companies’ stock prices.

Oil and gas are reverting to mean and falling along expected lines. I continue to debunk these commodities' bull market and/or supercycle hypotheses and believe that these markets are well- / over-supplied. That means stock prices of oil marketing companies and allied gas and power companies may see higher-than-average activity in theta decay in the options trading segment this week.

Bullion is witnessing profit taking as geopolitical stress over conflict in Eastern Europe and the Middle East seems to be easing. Safe-haven buying momentum seems to be slowing down marginally. Should the US dollar index (DXY) firm up this week, I expect some more profit-taking in the near term. The long-term bullish story remains intact for patient delivery-based investors looking beyond 2025.

Do note this week is also short on account of Maharashtra Day on 1 May 2025. With all other factors remaining constant, short weeks tend to favour bulls. Make sure to maintain strict stop losses and enforce tail risk hedges on your open trades. That should limit the damage in case markets make sudden adverse moves.

A tutorial video on tail risk (Hacienda) hedges is here - https://www.youtube.com/watch?v=7AunGqXHBfk 

 

Rearview mirror

Let us assess what happened last week to gauge what to expect in the coming week.

The rally was led by the broad-based Nifty 50, and the Bank Nifty brought up the rear. The dollar index (DXY) saw mild strength returning, which triggered selling in commodities, including bullion. The rupee maintained the same level as the prior week.

The Indian 10-year benchmark bond yields were almost unchanged. The bond market is calming down about interest rates for now. Last week's gains in financial markets saw a narrow rally as the market capitalisation rose only 0.52%. Market-wide position limits fall routinely on expiry.

US markets rose across the board and provided tailwinds to our markets. 

Retail risk appetite 

I use a simple yet highly accurate yardstick for measuring the conviction levels of retail traders—where are they deploying money. I measure the percentage of turnover that the lower- and higher-risk instruments contributed.

Their risk appetite is higher if they trade more futures requiring sizable capital. Within the futures space, index futures are less volatile than stock futures. A higher footprint in stock futures shows higher aggression levels—ditto for stock and index options. 

Last week, this is what their footprint looked like (the numbers are the average of all trading days of the week) –

Turnover contribution in the higher capital-intensive, higher-volatility futures segment rose. This is partly due to last week's expiry. Traders close their trades in the expiring month and initiate them in the next month, resulting in dual turnover.

In the relatively lower-risk options segment, the riskier stock options segment saw higher turnover than the lowest-risk index options. All in all, I saw risk appetite remain robust.

Matryoshka analysis

Let us peel layer after layer of statistical data to arrive at the core message of the markets.

The first chart I share is the NSE advance-decline ratio. After the price itself, this indicator is the fastest (leading) indicator of which way the winds are blowing. This simple yet accurate indicator computes the ratio of rising and falling stocks. As long as the gaining stocks outnumber the losers, bulls are dominant. This metric gauges the risk appetite of one marshmallow traders. These are pure intraday traders.

The Nifty logged smaller gains than the prior week due to selling after the Pahalgam terror attack. The advance-decline ratio fell to 1.46 (3.69 prior week). I had advocated that the lofty 3.69 level was unsustainable, and the market validated that. Bulls enjoy the upper hand if this ratio remains above 1.0.

A tutorial video on the Marshmallow theory in trading is here - www.youtube.com/watch?v=gFNKvtsCwFY 

The second chart I share is the market-wide position limits. This measures the amount of exposure traders utilize in the derivatives (F&O) space as a component of the total exposure the regulator allows. This metric gauges the risk appetite of two marshmallow traders. These are deep-pocketed, high-conviction traders who roll over their trades to the next session/s.

The MWPL eased routinely after the expiry of the April derivatives contract. At 26.13%, the reading is higher than the prior month’s 25.47%. That tells me swing traders were willing to enhance their exposure and rollover their trades to the next derivative series. If the reading rises faster than empirical levels, bulls emerge with strength.  

A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here - https://www.youtube.com/watch?v=t2qbGuk7qrI

The third chart I share is my in-house indicator ‘impetus.’ It measures the force in any price move. 

Last week, I wrote that there was a divergence between the impetus of Nifty and Bank Nifty. Now we see a universal rally in the impetus of both benchmarks. That tells me both benchmarks saw forceful buying cum short covering. Remember the “dual pressure" I wrote about earlier. However, the indices had mild gains since the readings were near multi-quarter highs. One can give the bulls the benefit of the doubt due to the terror attack in Kashmir.

However, follow-up buying must be aggressive if the upward thrust is to extend. Bulls risk losing their newfound initiative unless they push bears to the ropes. Watch traded volumes, MWPL, and the advance-decline ratio keenly this week.  

The final chart I share is my in-house indicator ‘LWTD.’ It computes lift, weight, thrust and drag encountered by any security. These are four forces that any powered aircraft faces during flight, so applying it to traded securities helps a trader estimate prevalent sentiments.

The Nifty clocked smaller gains last week, but the LWTD, already in the negative, fell further into the danger zone. Last week, I had predicted limited buying support, which showed up as indices laboured to claw higher. With the LWTD reading further down, fresh follow-up buying may be milder. Things can improve if any fresh buying trigger or positive news development occurs. Short covering can always happen and may even push markets higher, but such a rally is unsustainable. We need aggressive, fresh buying to take markets to new highs.  

A tutorial video on interpreting the LWTD indicator is here - https://www.youtube.com/watch?v=yag076z1ADk 

Nifty's verdict

The weekly chart of the Nifty shows the index staying above the primary support area of 23,200 and the secondary support area at the 23,800 mark. Price stayed above the 25-week average, which is a proxy for the six-month holding on cost of a retail investor. That makes the medium-term outlook positive for now.

The last candle is an inverted hammer. That occurs when the market opens in the lower end of the range, attempts to rally, fails, and closes in the lower end of the range. It shows signs of hesitation or even nervousness. It is critical that bulls overcome the weekly high at 24,365 forcefully to trigger the next phase of the upmove. Defending the 23,800 and then 23,200 (low-probability event) on declines is a precondition.

It is also important that both Nifty and Bank Nifty rally in unison, or the upmove may falter. Banks command a ~35% weightage in Nifty 50. There can be no sustainable rally unless banking stocks participate.

Your call to action

Watch the 23,800-level as a near-term support. Staying above this level strengthens bulls.

Last week, I estimated ranges between 55,900 – 52,675 and 24,575 – 23,150 on the Bank Nifty and Nifty.  Nifty traded within specified parameters, while the Bank Nifty exceeded the upper target by 198 points before retracing.

I estimate ranges between 56,300 – 53,025 and 24,750 – 23,325 on the Bank Nifty and Nifty this week, respectively.

Trade light with strict stop losses. Avoid trading counters with spreads wider than 8 ticks. 

Have a profitable week.

Vijay L. Bhambwani

Vijay is the CEO of www.Bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani.