Good Morning!

It’s time for bulls to make their presence felt

Dear Reader,

Last week, I wrote about the daunting prospect of overhead supply (selling by bulls trapped at higher levels) weighing on bulls. That hypothesis was validated by the markets as indices slipped in the latter half of the week. Triggers for the overhead supply remain unchanged. 

Proposed changes in the US and UK, which may reduce the flow of money to pension funds, are worrying bulls. It should be remembered that pension funds manage huge sums as long-term assets under management (AUM), which makes them the biggest institutional investors in equity markets. If AUMs fall in the pension fund industry, support to equity markets may be impacted as well. The delay in tying up trade deals and fears of slowing consumer spending worldwide are also weighing on sentiments.

This is an expiry week, and therefore, traders are likely to be preoccupied with rolling over or squaring up (closing) their trades. Volatility is usually higher in expiry weeks. The positive trigger that emerged is that traded volumes perked up in the derivatives segment. This was partly due to Jane Street being allowed to resume operations in India. Aggressive follow-up buying will be crucial to revive sentiments. Do note the Nifty-50 has slipped for four weeks in a row, and bulls are running out of time. If they are to get a grip on sentiments, they must make their presence felt before the 24,800 support I have been mentioning for a fortnight is violated.

In terms of sectoral action, public sector undertakings will continue to attract traders due to the emotional and financial stakes being relatively high in these stocks. Banking stocks within the PSU space will be particularly volatile. As we approach the Reserve Bank of India’s announcement on interest rates on 7 August, traders are likely to ramp up their exposure on these stocks. Larger two-way moves are expected on these stocks.

     

Rear View Mirror

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

The fall was led by the broad-based Nifty, whereas the Bank Nifty logged gains. Being heavily weighted in the Nifty index, banking stocks cushioned the declines in the Nifty which, otherwise, may have slipped significantly.

A weak dollar aided sentiments in emerging markets including India. Safe-haven buying eased in bullion, which otherwise remained firm. Oil and gas fell sharply as demand growth was feared to contract in the near future.

The rupee eased versus a weakening dollar, which underscores the nervousness in the forex peg. Indian forex reserves slipped marginally, which weighed on sentiments. The Indian 10-year sovereign bond yields rose which dragged banking stocks since banks are the biggest investors in bonds. NSE market capitalization slipped 1.54%, which indicates broad-based selling. Market wide position limits (MWPL) rose routinely ahead of the expiry.

US headline indices rose, providing tailwinds to our markets, which could have otherwise slipped deeper.     

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 compared to 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) –

Turnover contribution in the higher-risk, capital-intensive futures segment was marginally higher. Much of it can be attributed to the rollover of trades from the July to August series. This results in dual turnover being logged, which is routine.

In the relatively safer options segment, turnover rose in the stock options segment which is marginally more riskier than index options. Some of it can be rollover trades from July to August series. Overall. risk appetite remained subdued.

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 the number of rising stocks compared to falling stocks. As long as gaining stocks outnumber the losers, bulls are dominant. This metric is a gauge of the risk appetite of ‘one marshmallow’ traders. These are pure intra-day traders.

The Nifty clocked smaller losses last week, but the advance-decline ratio slipped from 1.11 in the prior week to 0.67 last week. That means there were 67 gaining stocks for every 100 losing stocks. Intra-day buying conviction was lower. This ratio must stay above 1.0 sustainably all week for bulls to regain their lost initiative.

A tutorial video on the marshmallow theory in trading is here

The second chart I share is the market wide position limits (MWPL). 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.

The MWPL rose routinely ahead of the expiry week, but the peak was lower than the prior month’s peak. This week being an expiry one, this reading can only fall this week. Swing traders are showing signs of hesitation. If markets rally strongly in the August derivatives series, bulls must ramp up their exposure levels to make their presence felt. Post-expiry routine decline should be watched keenly. If the low is higher than the 26.20 level of last month, it would imply some optimism.

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 fell with falling impetus readings. That tells us the fall was more of a gradual slide triggered by poor buying support rather than aggressive selling. Ideally, the price and impetus readings should rise in tandem to confirm a sustainable upthrust.

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.

Last week, the Nifty logged smaller declines, but the LWTD reading fell sharply to its lowest after the week ended 18 April, 2025. That implies lower fresh buying support for the Nifty this week. While short-covering can occur, it can cushion declines. For a fresh rally, aggressive follow-up buying will be required. 

A tutorial video on interpreting the LWTD indicator is here

Nifty’s Verdict

Last week, we saw a red candle on the weekly chart. This is the fourth bearish candle in a row. It was an inverted hammer candle. That indicates an abortive attempt by bulls as they tried to push prices higher but failed, and the index slid back into negative territory.

The price remains above the 25-week average, which is a proxy for the six-month holding cost of an average retail investor. The medium-term outlook remains positive for now, as long as the price stays above this average.

Last week, I advocated watching the 24,800 level, which bulls needed to defend in case of a decline. Note how the weekly low was 24,806. This threshold remains as the immediate support area to watch out for. The longer the index stays below this threshold, the more difficulty bulls may encounter on the upside. That is because overhead supply (selling from bulls trapped at higher levels) can limit rallies in the near term.

On the flipside, the nearest resistance is at the 25,250 level, which must be overcome if the Nifty is to have a reasonable chance to rally. 

Time maybe running out for bulls
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Your Call to Action – Watch the 24,800 level as a near-term support. Only a break-out above the 25,250 level raises the possibility of a short-term rally.

Last week, I estimated ranges between 57,500 – 55,050 and 25,525 – 24,400 on the Bank Nifty and Nifty respectively.  Both indices traded within their specified resistance levels.

This week, I estimate ranges between 57,725 – 55,325 and 25,375 – 24,300 on the Bank Nifty and Nifty respectively.

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

Have a profitable week.

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