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Monday, 10 Jan 2022
A weekly newsletter that delves into markets.
By Vijay L Bhambwani

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Good morning!

Bulls Must Climb a Wall of Worry

The pre-budget rally that I was expecting did arrive. After almost two months of weakness in equity markets, it brought cheer to the markets.

Last week, I wrote that the impetus (statistical velocity) and amplitude (magnitude of the price move) of banking stocks needed to accelerate to confirm a sustainable upthrust.

Banking stocks lived up to the bullish expectations and performed spectacularly.


Rear View Mirror

Let us take a look at what happened last week so as to guesstimate what to expect this week.

Itโ€™s immediately clear that Bank Nifty led the charge. Due to the 35.6% weightage of banking and financial sector stocks in the Nifty 50, this index gained too.

A firm dollar kept bullion prices under pressure, and expectations of tapering (slowing or withdrawing) the monetary stimulus by the US federal reserve also pushed bullion lower.

What is worrying for equity markets is the high oil and gas prices. This aspect will be the biggest wall of worry that the bulls need to overcome this week. Rising energy prices are inflationary and can dampen sentiments unless bulls buy aggressively.

The dollar remains a pressure too. The pressure on equity markets will jump manifold when energy and dollar rise together. This is because the landed price of crude and gas in India will rise due to commodity prices then due to a strong dollar. So far, only one of these (energy or dollar) has been rallying at a time. Should both rise together, the wall of worry becomes that much higher.

Indiaโ€™s 10-year benchmark yields crossed the round figure of 6.5% and closed comfortably above this threshold. That tells me bond markets expect higher inflation and/or interest rate hikes.

While rate hikes are not imminent right now, the markets are likely to sit up and take note of the yields hitting their highest levels in 20 months.

The NSE saw market capitalization of stocks increase 2.36% as the rally was fairly broad-based last week. The MWPL (market-wide position limits) is a fairly good gauge of risk appetite as it indicates how much of the SEBI permitted exposure traders are actually utilizing. The MWPL climbed, which is routine until the 3rd week of any derivative cycle, but the ascent rate was enthusing.

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Oil โ€“ The Wildcard

Any commodity trader worth his salt will tell you oil prices are a combination of several factors and various types of premia. The three primary types are โ€“ speculative, geopolitical, and terror premiums.

On Saturday, Saudi spokesperson Brigadier General Turki Al Maliki announced he had irrefutable evidence that Houthi fighters were using two port cities in Yemen, Hodeidah and Salif, to launch attacks on Saudi Arabia. He said it was enough to justify Saudi attacks on these two cities.

If that happens, the possibility of oil prices flaring up is fairly high. Do remember oil prices rose 4.08% last week (refer to the previous table). Of the three primary types of premia, I mentioned earlier, at least two โ€“ geopolitical and speculative premiums can rise. That can lift WTI (western Texas intermediate grade) oil prices past the psychological US$80/barrel mark.

This is one factor that can upset the bulls. Traders need to keep their ears to the ground and monitor the situation in the Middle East.

Niftyโ€™s Verdict

The daily chart of the Nifty 50 index (spot) shows the benchmark rose on 4 out of 5 sessions last week. The price is above its 25-day average, which is a month-long holding on the cost of bulls. That provides relief to bulls, who may buy more if the markets rise during the week.

The price has also broken out above a bearish sloped channel which indicates strength in the undertone. Should the bulls take and keep the Nifty past the psychological 18,000 mark, bears may be forced to cover their shorts, pushing the markets higher.

The rally encounters threat perception only below the 17,350 mark on a sustained closing basis. Any decline that does not breach this mark is only a technical correction. On the flip side, if the round figure of 18,000 is overcome sustainably, the upthrust may gain momentum.

I would like to see both indices gaining impetus (velocity) and amplitude (absolute gains) simultaneously. That would raise the probability of further up moves. These will be confirmatory signals that the bull camp is climbing the wall of worries with conviction.

Your Call to Action - Last week, I advocated a range between 17,925โ€“16,750 for the Nifty and 37,075โ€“33,850 for the Bank Nifty.

While the Nifty held to (near) perfection, the Bank Nifty exceeded the upper target by a wide margin. This week I expect the ranges to be between 18,400โ€“17,200 for the Nifty spot and 39,450โ€“36,000 for the Bank Nifty spot.

I maintain my view that fresh trades should be done only on light exposure levels and stop losses must be maintained strictly.

Have a profitable week!

The author is Head of Behavioural Technical Analysis, Equitymaster.


Written by Vijay L Bhambwani. Edited by Saikat Chatterjee. Produced by Nirmalya Dutta. Send in your feedback to

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