Bulls appear to be on the ropes

Dear reader,

Happy Republic Day!

Last week, I wrote that the near-term market outlook would be determined by the banking and financial sector stocks. That was due to the 36.56% weightage given to banking and financial stocks in the broad-based Nifty 50. Sure enough, the Bank Nifty dragged the markets lower. Read last week's piece here. In the prior week's article, I had advocated prioritising capital preservation over day trading profits. Markets validated that viewpoint.

The near future is characterised by volatility, uncertainty, complexity, and ambiguity (VUCA). Geopolitics, economics, modern money-market theory, and realpolitik are keeping financial markets on edge. I have been trading these markets since 1986, and the statistical ßeta (pure price volatility) that exists today is extremely rare, based on my experience. Retail traders risk punitive capital losses if they take markets lightly.

Trump’s moves on Iran and Cuba will occupy top-of-the-mind shelf space in every trader's mind this week. The US seems to want regime changes in Cuba and Iran and is using its forces to make its point. That is unnerving markets and triggering volatility. Last week, oil flared up in late trade as military action appeared imminent in Iran and possibly some intervention in Cuba, too. Gas prices spiked due to a polar vortex (an extreme cold event that occurs during winter). While the flare-up was temporary (the second-month futures trade at a massive discount to the first month), the inflation hawks were spooked enough to sell equity holdings. A new low in the rupee versus the US dollar exacerbated the nervousness. Imported inflation is a high probability fallout. That pushes up the cost of funds. Markets are going to feel nervous about that.

Oil and gas prices are likely to be driven by near-term newsflow. Fundamentally speaking, they remain adequately supplied. Bullion is showing signs of bullishness, and any escalation in geopolitical rhetoric may push prices higher. Barring the near term, which appears volatile, the absolute long-term is optimistic for the patient, long-term delivery investor. Avoid leveraging (buying with borrowed money) at all costs.

Industrial metals may witness mild routine month-end profit-taking. That may cap the upsides in metal mining company stock prices. The lack of confidence in fiat (paper) currency's buying power is likely to keep optimism in hard assets (commodities) elevated.

This week, the sectors to watch will remain public sector undertakings (PSUs) and banks, given their significant weightage in the Nifty. With a short week and a monthly expiry, volatility may be higher than usual. Trade light and maintain stop losses diligently. Deploying tail risk (Hacienda) hedges would be a prudent strategy. Fixed-income investors should continue to keep their powder dry in anticipation of better-yielding opportunities.

A tutorial video on tail risk (Hacienda) hedges is here.

Rear View Mirror

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

The Bank Nifty led the decline while the Nifty 50 brought up the rear. A weak dollar index (DXY) spiked bullion prices as safe-haven buying returned with force. Oil and gas prices rose due to geopolitics and weather, respectively. The DXY fell amid fears of a conflict with Iran, spooking traders.

The rupee fell against the dollar despite dollar weakness. The weaker the rupee gets, the more nervous the financial markets will be. Indian 10-year sovereign bond yields fell, cushioning the decline in the Bank Nifty.

The National Stock Exchange (NSE) lost 3.54% in market capitalisation, indicating the fall was broad-based. The market-wide position limits (MWPL) fell routinely ahead of expiry. US indices slipped slightly, providing headwinds for our markets.

Retail risk appetite – I use a simple yet highly accurate yardstick to measure the conviction levels of retail traders—where are they deploying their 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. In 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) –

Turnover contribution in the high-risk, capital-intensive futures segment rose mostly due to rollover of trades ahead of expiry. Even rollover constitutes risk appetite.

In the lower-risk options segment, turnover contribution rose for higher-risk stock options. Overall risk appetite was higher 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 computes the ratio of rising to falling stocks. As long as gaining stocks outnumber the losers, the bulls are dominant. This metric gauges the risk appetite of one marshmallow traders. These are pure intraday traders.

The NSE lost 2.51% last week, but the advance-decline ratio improved marginally. At 0.85 (prior week 0.74), it indicates there were 85 gainers for every 100 losers. That means buying conviction remains below the bare minimum. For a convincing rally, the reading should be above 1.0, and prices should be rising.

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(s).

The MWPL reading fell routinely ahead of expiry as traders surrendered some positions. What needs noting is how much the reading falls on Tuesday. Falling below recent post-expiry lows will indicate nervousness. Do remember my long-standing warning—high MWPL brings higher volatility, as bigger positions get shuffled.

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 when the indices' impetus readings diverged. While both indices fell this time, the Nifty's impetus rose mildly. That tells me the selling pressure in Bank Nifty was higher than the Nifty 50. Since banking stocks are heavily weighted in the Nifty, the latter index is getting second-order selling pressure.

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 any powered aircraft faces in flight, so applying them to traded securities helps a trader estimate prevailing sentiment.

The Nifty fell sharply last week and logged the biggest weekly fall after the week ended 26 September 2025. The LWTD reading fell to -0.57, which is the lowest in the chart period. That tells us fresh buying support is likely to be weak. While short covering may be seen, it won't be enough to trigger a sustainable upthrust.

A tutorial video on interpreting the LWTD indicator is here.

Nifty's Verdict

The weekly Japanese candle chart shows a prominent bearish power candle after a small-bodied candle in the prior week. This chart is revealing because the price has fallen convincingly below the 25-week moving average. This average serves as a proxy for the six-month holding cost for an average retail investor. Since the price is below the average acquisition cost, there will be nervousness.

Particularly concerned will be the leveraged traders who have borrowed money to buy stocks. This could be in the margin-funded segment, where borrowing has reached ₹1,16,726 crore. Or the futures and options segment, where leveraged exposure is ₹28,29,105 crore. Big exposure brings higher volatility and a greater risk of a crowded exit.

Last week, I recommended watching the 25,400 level as support, which was breached by a wide margin. That is a sign of further weakness. Only sustained closing above 25,750 can reverse sentiments in the near term.

Your call to action – Sustained trade above the 25,750 level indicates the possibility of a fresh rally.

Last week, I estimated ranges of 61,125–59,050 and 26,150–25,225 for the Bank Nifty and Nifty, respectively. Nifty exceeded the specified support by 252 points. Both indices violated their specified supports.

This week, I estimate ranges of 59,550–57,400 and 25,525–24,575 for 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,

Vijay L. Bhambwani.

Vijay L. Bhambwani is the CEO of www.bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani. Want this newsletter delivered directly to your inbox? Subscribe to Mint Newsletters on Substack here.