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Monday, 4 July 2022
By Vijay L Bhambwani

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Good morning!

Can July Bring Respite from the Selling?

Since the year 2000, the Nifty has rallied on 15 occasions in July. That makes July a month dominated by buyers.

Will July 2022 be a month for the bulls? This week’s column will focus on inspecting that expectation from the bull camp.

Before proceeding any further, do note two aspects. First, past occurrences do not guarantee assured future repetitions, and we are discussing pullback rallies, not a complete trend reversal.

The overall structure of the market remains under pressure.

     

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Rear View Mirror

Let us analyse what transpired last week so we can guesstimate what lies ahead this week.

The pressure points in terms of a strong dollar and oil prices remained in place. Overseas indices remained under pressure. The pullback rally we saw in US markets on Friday raised hopes of a pullback rally in July.

The US markets are shut due to independence day. Therefore there will be no strong overseas triggers for domestic markets. That makes influencing prices a bit easier.

The positive aspects ere the easing bond yields, which means the market-to-market losses suffered by banks on their bond portfolios can halt for now.

The NSE market capitalization gained marginally, which hints at a relief rally. The previous week we saw a gain of 2.35% in capitalization too.

The MWPL (market-wide position limits) fell routinely on expiry. The fact that it breached the 19% threshold on Thursday tells me that the markets are trading extremely light. A little bit of pressure in either direction can send prices flying exaggeratedly.

Whichever way the cookie crumbles, an element of surprise is assured. Markets typically see bigger moves when surprises are sprung on them.

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Matryoshka Analysis

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

I start with the NSE advance-decline ratio. This indicates the risk appetite of one marshmallow traders. These are pure intraday traders who do not roll over their trades to the next session/s.

Last week we saw the ratio climb above 1 for three sessions. That was after the ratio fell to a low of 0.13 on 13 June. The next fortnight saw bulls on the ropes and lacking buying conviction.

Sharp rallies in this ratio were met with stinging sell-offs. It’s now appearing to find a bottom. I have written in the past this ratio is a leading indicator of market trends. So any change in the direction of the wind will show up here first.

Traders should watch their trading terminals keenly with an eye on this metric as a priority in the week ahead.

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The second chart I share with my readers is my in-house lift, weight, thrust and drag (LWTD) indicator. Like the principles of powered flight of an aircraft, any stock faces these four forces in a trading session.

The blue line is the percentage gain or loss of the Nifty spot. The red line is the LWTD indicator. This study gauges the risk appetite of two marshmallow traders (traders who roll over their trades to the next session/s).

Note how the index gain/loss line was prancing all over the place in bouts of extreme volatility. Declines were sharper than gains. This period coincides with the advance-decline ratio making a low of 0.13, as mentioned earlier.

There is relative stability in the Nifty gain/loss line now, and the LWTD indicator has turned above the zero line.

I have noticed markets seeking equilibrium when both lines are moving in the same direction. In case of divergence, the Nifty line tends to move towards the LWTD line. The week may open with the markets attempting to edge higher.

Follow-up action will determine whether bulls have the firepower to take the market higher in the following days.

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The third chart is my in-house indicator, ‘Impetus.’ It measures the risk appetite of two marshmallow traders.

Last week we saw both headline indices under pressure. However, the dips were on low impetus, which means bears were not pressing shorts aggressively. This may or may not be a sign of assured optimism.

We need to watch whether the selling abated as a temporary respite or bears are getting diminishing returns on their short sale endeavours.

Being in the lower end of the range, chances are the impetus reading will rise. Should that happen when both indices rise, that would indicate that bulls have the initiative for now.

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Nifty’s Verdict

The daily chart of the Nifty spot shows bulls managed to keep the index above the 8 March 2022 low of 15,671 on a closing basis. By itself, it’s a very small indicator of optimism.

What interests me as a day trader is the fact that the Nifty sprang higher from intraday lows to close significantly higher than the day’s low. Coming on a Friday, it’s noteworthy as risk appetite increasing ahead of a weekend usually sets the pace for the coming day/s.

On the flip side, the price remains below its 25-day moving average, which is a proxy for a month-long holding on the cost of a retail bull.

The open gap remains unbridged and will continue to close at the 16,173 level as the first indication that the bull camp is serious about gaining control over sentiments.

For any bear phase to end, at least one previous swing high must be overcome forcefully so that the selling supply is exhausted. The previous swing high is at 16,794. That is a long shot.

To sum it up - markets may be preparing for a relief rally in July, but it’s premature to assume a complete trend reversal.

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Your Call to Action- I suggest waiting for the gap to be closed at 16,173 and watching follow-up action thereafter.

I continue to “ladder” sovereign investments as rates fluctuate.

Last week I estimated ranged between 35,300–31,950 and 16,350–15,050 on the Bank Nifty and Nifty, respectively. Both indices traded within these levels.

This week I estimate ranges between 35,175–31,925 and 16,375–15,125 on the Bank Nifty and Nifty, respectively. Therefore, trade light and maintain stop losses diligently.

Have a profitable week.

Vijay L. Bhambwani - Head of Research, Behavioural Technical Analysis, Equitymaster

     

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Written by Vijay L Bhambwani. Edited by Saikat Chatterjee. Produced by Samiksha Khanna. Send in your feedback to newsletters@livemint.com.

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