Good Morning!

Follow up buying still missing

Dear Reader,

Last week I wrote that markets would gravitate towards fundamentals even as they remain hard wired to seek bullish triggers. While the market opened for the week with a bullish gap, higher levels witnessed profit taking. That not only capped gains but triggered selling in large enough numbers to force a weekly close at almost the lowest points of the weekly range.

Like I pointed out last week, the optimism over lower goods and services tax (GST) rates cheered traders initially. Spiking sovereign bond yields triggered a mini selloff in banking stocks. With the highest weightage of 37.86% in the Nifty 50, this sector commands a weightage higher than the next four heavily weighted sectors combined. There can be no sustainable rally in the markets without the participation of the Bank Nifty. I have often compared the two indices with the wheels of a bicycle. Unless the Nifty 50 and Bank Nifty move in unison the bicycle (market) becomes vulnerable to a fall.

Like the old saying goes—hope springs eternal in the human heart, US Federal Reserve chair Powell kindled hopes in the hearts of bulls. Egged on by US President Donald Trump, he issued forward guidance about considering a coupon rate cut in the forthcoming Fed meeting. The US indices vaulted on Friday. That may get factored in our markets on Monday, but I am unsure about follow up buying. Firstly this is an expiry week, that too a shorter week due to a holiday on Wednesday. Fresh buying may be weak under these circumstances while short covering is always an open possibility. Short covering can cushion declines or even trigger a temporary rally but it takes aggressive fresh buying to take markets to a new high.

Last week I wrote that industrial metals appeared weak on international commodity exchanges. That hypothesis was validated by the commodity markets. Of particular mention is the fall in copper prices. Known as “Dr Copper” or the “tin roof of the economy” this metal is used in almost every industry. It fell noticeably last week. Usually calendar month ends witness short covering in industrial metals. If they don’t rise this week, this is a chink in the armour of bulls. Metal mining stocks could face pressure at higher levels too.

     

Rear View Mirror

Let us assess what happened last week so we can gauge what to expect this week.

The broad based Nifty 50 rose whereas Bank Nifty dived due to zooming bond yields. The strength displayed by the US dollar index dragged sentiments for emerging markets, including India. The rupee on the other hand displayed strength as the Reserve Bank of India (RBI) stepped in to sell dollars and blunted the impact of a strong dollar. 

Safe haven buying spiked in bullion on Friday after Powell’s speech about a possible rate cut in September. Oil and gas fell along expected lines. The 10-year bond yield spiked 0.145% on falling bond prices. The National Stock Exchange (NSE) gained 1.94% in market capitalisation as the buying was broad-based in the initial sessions. Market-wide position limits (MWPL) rose routinely ahead of expiry.

US headline indices were a mixed bag. The Dow Jones Industrial Average (DJIA) benchmark logged weekly gains primarily due to Friday’s increase. These gains may reflect in our markets in the first half of the short trading week.

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 what percentage of the turnover was 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 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 average of all trading days of the week) –

Trading turnover rose in the high-risk, capital-intensive futures segment. Part of the reason was the rollover process ahead of expiry. Traders close their trades in the expiring week and initiate the same in the next month thereby logging dual turnover. Higher rollover also indicates higher risk appetite.

In the relatively lower risk, lower volatility options segment it was the stock options which saw higher turnover. Index options are the least risky segment of these four. So traders exhibited higher risk appetite on the whole.

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 number of the rising stocks compared to falling stocks. As long as 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 clocked smaller gains last week due to the late sell-off on Friday. The advance-decline ratio improved to 1.37 (prior week 0.90) which means there were 137 gaining stocks for every 100 losers. Intraday risk appetite was higher last week. Follow up buying is essential to maintain the upward tempo. 

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/s.

While the MWPL reading rose routinely last week, the gains were smaller and the overall reading was lower in the pre-expiry week as compared to the prior months. This indicates a certain element of hesitation in the bull camp.

For a sustainable bull market prices and MWPL must rise in unison. It will be critical to note the fall in MWPL post-expiry and compare it with prior months.

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 the Nifty rose whereas the Bank Nifty fell. However the impetus reading rose for both indices. That indicates the selling on Bank Nifty was due to higher momentum.

That is not a bullish sign for a sector that commands 37.86% weightage in the Nifty 50. Unless both indices rise together I would treat any rally as suspect.

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 reading rose from -0.20 in the prior week to 0.27 last week. That indicates short covering support might improve this week. That is commensurate with expiry weeks as more shorts are covered than rolled over to the next derivatives series.

What is needed is fresh buying to sustain the recent upthrust, albeit a shaky one.

A tutorial video on interpreting the LWTD indicator is here

Nifty’s Verdict

The weekly chart shows a bearish inverted hammer on the Nifty. That occurs when the closing is lower than the opening and the open is in the lower end of the weekly range. Bulls may attempt to push prices higher but fail and the price settles in the lower end of the week’s range. This is indicative of an abortive upmove as follow-up buying was lacking.

The price remains above the 25-week average which is a proxy for six-month holding on the cost of an average investor. That makes the medium-term outlook optimistic for now. Last week, I had mentioned the 24,200-level as a support and the 24,750-level as a hurdle. Bulls must defend the lower level and keep the Nifty trading above the higher level to maintain their grip on the markets this week, too.

Higher levels attracted profit sales
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Your Call to Action – Watch the 24,200 level as a near-term support. Only a breakout above the 24,750-level raises the possibility of a short term rally.

Last week I estimated ranges between 56,425 – 54,250 and 25,125 – 24,125 on the Bank Nifty and Nifty, respectively.  Both indices traded within their specified levels.

This week I estimate ranges between 56,150 – 54,150 and 25,325 – 24,425 on the Bank Nifty and Nifty, respectively.

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