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Volatility spikes likely this week

Dear Reader,

Last week, I wrote that markets could claw higher, read here, and prices validated my statistical hypothesis. The feel-good factor over a possible trade deal with the US and a phased ceasefire in Gaza kept hopes elevated in the bull camp. The rally was led by banking stocks. I have pointed out since I started writing this column that banking and financial stocks are the swing sector in the markets. This is due to the highest weightage these stocks hold in the Nifty. No sustainable rally in the markets is possible unless banking stocks are boosted.

Global financial markets remained in a state of denial despite deteriorating economic data. Germany announced weaker economic data and also proposed raising the retirement age for pensioners. The largest economy in Europe is buckling under the burden of a slowdown. While the ceasefire in Gaza is a welcome development, fighting escalated in Ukraine. Both sides started targeting their oil and gas infrastructure, which can trigger inflation at a later date if fossil fuel prices rise temporarily. The escalation of trade tensions between the US and China can be a disruptive factor this week unless a solution is reached immediately. The pull-push of good and bad news simply means that statistical beta (pure price volatility) will remain elevated, providing challenges to traders.

The unusual rally (which is not well supported by convincing statistical data) that I wrote about in my previous article (read here) may well continue this week. Follow-up buying from bulls will be a key factor. Refer to the Nifty technical analysis section at the end of this piece. The second half of the financial year marks the beginning of festivities in India. Consumer spending typically rises, and that causes a cyclical upthrust in financial markets. This year may see a repeat of this cycle, though of varying magnitude.

     

Rear View Mirror

Let us assess what happened last week so we can guesstimate what to expect in the coming week.

The rally was led by the banking and financial sector, which boosted Bank Nifty above the Nifty 50, which brought up the rear. Bullion prices rallied in spite of a firm dollar. That underscores the flight to safety prevalent in the markets. Oil and gas prices fell on profit-taking.

The US Dollar Index (DXY) rose significantly, indicating a gain for the dollar against the global currency basket. The rupee gained against the US dollar, which provided an additional boost for bulls. Indian 10-year sovereign benchmark bond yields rose mildly, which means bond prices fell. That capped the rally in Bank Nifty last week.

The NSE market capitalisation rose, indicating that the rally was somewhat broad-based. Market-wide position limits (MWPL) rose to new highs, which indicates aggressive buying. US headline indices fell across the board, which provided headwinds 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 contributed by the lower- and higher-risk instruments.

If they trade more futures, which require sizable capital, their risk appetite is higher. Within the futures space, index futures tend to be 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) –

In the higher capital-intensive futures segment, which is also more volatile and risky, turnover fell. In the relatively lower volatility options segment, turnover contribution rose in the index options. These are the least volatile and capital-intensive derivative instruments. Which means traders are hiding behind the safest segment in the derivatives space.

Overall risk appetite fell sharply last week.

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 calculates the ratio of rising to falling stocks. As long as gaining stocks outnumber the losers, the bulls are dominant. This metric is a gauge of the risk appetite of one marshmallow traders. These are pure intraday traders.

Nifty clocked bigger gains last week, but the advance-decline ratio eased to 0.95 (prior week 1.27). That indicates there were 95 gainers for every 100 losing stocks. That tells us intraday buying conviction fell sharply. For a sustainable rally, it is crucial that this ratio rise and stay above the 1.0 level this week. 

A tutorial video on the Marshmallow theory in trading is here

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

The MWPL reached a multi-year high at 48.91. Last week, I wrote that the method for computing MWPL was updated as of 1 October 2025. It now includes cash market exposure in addition to futures and options. We will need to adjust for this change and work with the updated figure.

The fact remains that exposure levels have risen, and therefore, risk appetite has risen in the swing trading segment.

A dedicated tutorial video on how to interpret MWPL data in more ways than one is available here

The third chart I share is my in-house indicator ‘impetus.’ It measures the force in any price move. Last week, I raised a red flag as both indices saw their impetus readings diverge. Price levels for both indices have risen last week. But Bank Nifty shows a sharply rising reading, whereas Nifty readings fell mildly. That tells me there was aggressive action on the Bank Nifty. Do remember that weightage considerations will ensure that banking stocks receive boosts in the future. 

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 them to traded securities helps a trader estimate prevalent sentiments.

The Nifty clocked bigger gains last week, but the LWTD reading fell to -0.03 (prior week 0.32). That means the probability of fresh buying this week is relatively lower than it was in the previous week. Short covering can be seen this week, which can cushion declines or even trigger a rally. But such rallies are typically short-lived. All in all, this leads to higher volatility. 

A tutorial video on interpreting the LWTD indicator is here

Nifty’s Verdict

Last week, we saw a larger bullish candle, which still failed to overcome the 25,550 resistance level. That resistance area remains as the trend-determining hurdle to watch out for this week. The price remains above the 25-week moving average, which is a proxy for the six-month holding cost of an average retail investor. That means the medium-term outlook remains optimistic for now.

The average itself is likely to provide support on decline and is currently placed at the 24,685 level. This reading will change daily. Bulls need to defend this level in the event of declines; failing to do so may lead to further downside.

It is essential that a breakout, if any, is accompanied by high volumes and an expansion of open interest for the rally to be sustainable. 

Nifty must overcome the 25,550 hurdle
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Your Call to Action – Watch the 24,550 level as a near-term support. Only a sustained trade above the 25,550 level confirms the possibility of a fresh rally.

Last week, I estimated ranges between 56,625 – 54,550 and 25,325 – 24,450 on the Bank Nifty and Nifty, respectively.  Both indices rallied past their resistance levels by a thin margin due to strong buying activity.

This week, I estimate ranges between 57,675 – 55,550 and 25,725 – 24,825 on the Bank Nifty and Nifty, respectively.

Trade light with strict stop losses. Avoid trading counters with spreads wider than 6 ticks. 

Have a profitable week.

Written by Vijay L Bhambwani, Vijay is the Ceo of www.Bsplindia.com. He tweets at @vijaybhambwani. Edited by Michael Steve Correya. Produced by Shad Hasnain.