Good Morning!

Nifty close to a breakout

Dear Reader,

Last week, I wrote that public sector undertakings (PSUs) would hog the limelight with banks being the focal point. That hypothesis was justified by price action. I wrote that bulls carried a heavy load, and they would have to buy aggressively to turn sentiment around. While buying action was present but half-hearted, it was the run-up to the Bihar election results that triggered a short covering rally. Details follow below. Read last week’s column here.

Traders continued to feel optimistic, as evidenced by the margin-funded trading (MTF) data. They ramped up their borrowings to buy shares by 0.63%. I have been expressing concerns about the rapid buildup of speculative purchases in bullion in the MTF space. Traders reduced their leveraged purchases by 7.47% in Nippon gold bees and 7.54% in Nippon silver bees. That is a sign of healthy profit-taking.

This week is likely to be influenced by the optimism around a possible India-US trade deal. In terms of sectors, public sector undertakings are likely to dominate trading action. Banks are likely to be at the forefront. Do remember that the weightage of financial and banking stocks is a good enough reason for this sector to rise. Without a rally in this sector, there can be no sustainable upthrust.

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In the commodity segment, bullion experienced profit-taking on rallies, which was in line with expectations. I maintain my view that the short-term outlook may be unclear, but the long-term potential remains largely intact. Look beyond 2026. Avoid leveraged (buying with borrowed funds in MTF and/or futures and options) positions and stick to deliveries. 

     

Rear View Mirror

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

The rally was led by the broad-based Nifty 50, with the Bank Nifty bringing up the rear. The US dollar index (DXY) declined, boosting sentiments for emerging markets, including India. Safe-haven buying continued in bullion. Energy prices also gained with a weak dollar, as the dollar is the invoicing currency in the oil trade.

The rupee weakened slightly against the dollar, and yields on Indian 10-year sovereign bonds also increased marginally. This kept the Bank Nifty under pressure, but without this, it would have risen further. The National Stock Exchange’s (NSE) market capitalisation increased by 1.76%, indicating a broad-based rally. Continued buying is necessary to sustain the momentum.

Market-wide position limits (MWPL) increased consistently, signalling strong trader involvement. US headline indices showed mixed results, offering limited support 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 of 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) –

Turnover contribution in the capital-intensive and high-risk futures segment rose as indices improved risk appetite.

In the relatively lower-risk options segment, turnover contribution rose for higher-risk stock options, whereas low-risk index options saw a decline in turnover contribution. Overall, the risk appetite was higher in the derivatives segment. 

Matryoshka Analysis

Let us peel off 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 stocks to falling stocks. As long as the number of gaining stocks exceeds the number of losers, bulls are dominant. This metric gauges the risk appetite of one marshmallow traders. These are pure intraday traders.

The Nifty 50 logged a gain of 1.64% last week, and the advance-decline ratio rose in tandem. At 1.08 (prior week: 0.80), it indicates that there are 108 gaining stocks for every 100 that lost. That tells us intraday traders were mildly optimistic about the short-term outlook.

This ratio must stay above the 1.0 level with rising prices to indicate a sustainable upthrust.

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 gauges the risk appetite of two marshmallow traders. These are deep-pocketed, high-conviction traders who roll over their trades to the next session.

MWPL levels rose to a new high as the method of computing this metric was tweaked as of 1 October. Despite this tweak, risk appetite levels have risen. That raises the probability of higher volatility as larger positions will get churned as news triggers emerge. As long as prices rise convincingly in tandem with the rising MWPL, bulls remain in the driver's seat.

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, both indices logged gains, but the impetus readings for both fell across the board. That tells me the rally was triggered at least partially by short covering.

Ideally, the indices should rise in tandem with increasing impetus readings, indicating a sustainable rally.

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.

While the Nifty logged a 1.64% gain, the LWTD reading fell from 0.17 two weeks ago to 0.06 last week. That tells us the possibility of fresh buying support on declines may be weaker this week. While short covering can always cushion declines, it takes fresh buying to take markets to new highs.

A tutorial video on interpreting the LWTD indicator is here

Nifty’s Verdict

Last week, we saw a bullish candle with a relatively larger body compared to three consecutive bearish candles in the prior weeks. That shows bulls enjoyed an upper hand over bears.

The 25,000 threshold I supported was maintained, and the price remained above the 25-week moving average, which represents a six-month holding period for the average investor. That indicates the medium-term outlook remains positive for now.

Last week, I mentioned the 26,100 level as a hurdle that needed to be crossed before a sustainable upthrust could begin. That level remains the immediate hurdle to watch out for. A sustained closing above this hurdle is needed to signal a new rally. In the event of declines, the bulls must defend the 25,400 level to maintain the upward momentum.

Nifty must trade above 26,100 to signal strength
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Your Call to Action – Only a sustained trade above the 26,100 level confirms the possibility of a fresh rally. In the event of declines, the 25,400 level needs to be defended.

Last week, I estimated ranges between 59,025 – 56,725 and 26,000 – 25,000 on the Bank Nifty and Nifty, respectively.  Nifty rallied past the resistance by 10 points to hit 26,010. Bank Nifty traded within the specified range.

This week, I estimate ranges between 59,675 – 57,350 and 26,425 – 25,400 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.