Good Morning!

Bulls appear on the ropes

Dear Reader,

Last week, I wrote that the unique rally (unique because it was not supported by statistical data) could continue, provided the Nifty manages to clear the hurdle of 25,550 levels. Read the piece here. The index failed to clear this resistance area on even one day of the week. That set the grounds for a bout of profit-taking, which evolved into selling pressure in no time.

The noteworthy aspect of last week’s rally is that retail traders continue to nurse a bullish hangover. This is borne by the MTF (margin-funded trading facilitated by brokers lending money to investors) borrowing, which went up to ₹ 99,577 crore (prior week ₹ 96,338 crore). I have often expressed my concern about rising leverage (trading or investing with borrowed money), which brings higher intraday price volatility (statistical ßeta) as well as threat perception of a crowded exit. 

Crowded exits occur when panic triggers emotional selling at whatever price securities are traded at. That leads prices sharply lower. I saw very mild signs of this panic last week. Do remember this week is an expiry week, and traders do tend to square up some of their open trades rather than rolling over all their exposure. The other trigger is the Reserve Bank of India (RBI) announcing its decision on interest rates on 1 October 2025. That means banking and financial stocks are likely to remain in the limelight. With a weightage of 36.28% in the Nifty, this is a single sector. Whichever way the sector goes, it tends to take the Nifty 50 with it to a degree.

     

Rear View Mirror

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

The decline was led by the broad-based Nifty, and the Bank Nifty brought up the rear. A firm US dollar index (DXY) dragged sentiments further. Defensive buying accelerated in bullion. Oil rose on geopolitical concerns, while gas prices rose at the onset of winter. Much of the “rally” is nothing but the unusually high cost-of-carry (rollover premium) that is routine in winter.

The rupee tested new lows and dampened sentiments as the Indian 10-year sovereign bond yields increased. The National Stock Exchange (NSE) lost sizable market capitalization, which indicates that the selling was broad-based. Market-wide position limits (MWPL) rose routinely.

US headline indices fell and 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 what percentage of the turnover lower- and higher-risk instruments contributed.

If they trade more 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 the average of all trading days of the week) –

Last week, turnover contribution in higher volatility and capital-intensive futures segments went up. Most of it is due to the rollover process, wherein traders carry over their trades from the expiring month to the next month.

Stock options contributed marginally higher turnover in the lower risk, lower capital outlay options segment—again due to rollover.

Overall risk appetite was robust as traders were willing to carry over their trades to the next month in spite of price falls.

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 rising 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 logged the biggest weekly losses in the 20-week period covered by the chart. The advance-decline ratio, too, was weak at 0.47 (prior week 1.22), which tells us there were 47 gainers for every 100 losers. Intraday buying conviction simply crumbled rapidly last week.

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

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.

The MWPL reading rose marginally and was higher than the comparable period last month. This is because this derivative cycle is longer, and traders have more days to trade. However, the reading remains below the peak made in the July 2025 series. That tells me traders were guardedly optimistic about raising exposure levels. We need to monitor the routine post-expiry fall. If the decline is below recent levels, it could indicate nervousness.

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, but the impetus readings diverged. While the Nifty fell on higher momentum, the Bank Nifty saw momentum fall last week. That means the Bank Nifty fell more on routine unwinding rather than forceful selling.

Watch the correlation between both indices. The Bank Nifty can cushion falls in the Nifty due to the humongous weightage banking commands. 

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, I wrote that the LWTD indicator was pointing towards improved fresh buying possibilities. However, with the 25,550 hurdle on the Nifty remaining inviolate, the index crumbled under selling pressure. The LWTD is now at -0.54 (prior week: 0.49). That tells me fresh buying may be elusive with expiry-related short covering being an open possibility. 

A tutorial video on interpreting the LWTD indicator is here

Nifty’s Verdict

Last week, the Nifty logged a large bearish candle that failed to rally past the bearish red trendline. The price is precariously poised at the 25-week moving average, which is a proxy for the six-month average cost of any retail investor. This indicates nervousness. As I pointed out last week, this average can be a big support as I had pointed out last week at the 24,550 levels. That support remains the level to watch this week, too.

On the flip side, the Nifty must overcome the 25,550 hurdle provided by the bearish trendline before we can assume the next phase of the rally has commenced. For now, bulls seem to be on the ropes. If expiry-related short covering leads to follow-up buying, sentiments can improve. Failing that, fresh declines are not ruled out.

Nifty is precariously poised at a support
www.tradingview.com

Your Call to Action – Watch the 24,550 level as 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 56,425 – 54,500 and 25,750 – 24,900 on the Bank Nifty and Nifty, respectively.  Due to selling pressure, both indices breached their support levels by a thin margin.

This week I estimate ranges between 55,375 – 53,400 and 25,100 – 24,200 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.