Vijay L. Bhambwani's Ticker: Bulls appear to have an upper hand

Last week, I wrote that we should watch technology stocks, as they could hold the key to short-term market trends. Read that piece here.

Technology stocks displayed a steady trend, lending optimism to the undertone. Hopes for an early resolution of the Ukraine war, along with the trade deal between India and the US, also boosted sentiments. Short covering cushioned declines, and mild fresh buying was also seen. Bulls need to lend more aggressive buying support this week to propel Nifty higher from here. The traded turnover in the spot and derivatives (futures and options) was sharply lower, which is a small red flag.

The Nifty scaled a new high but closed in the vicinity of that level, as strong buying was lacking to absorb the inevitable overhead supply. This week, if bulls persist with their follow-up action, prices are likely to head higher. Last week, I wrote that there was hesitation in the undertone, and aggressive buying was missing. Such reluctance can drag sentiments lower. Monitoring traded volumes is essential this week.

Traded action is likely to be polarised around public sector undertakings (PSUs) and particularly banks within the PSU segment. It is essential to note that banking and financial sector stocks carry the highest weightage in the Nifty; therefore, a sustainable rally is unlikely unless these stocks participate.

In the commodities segment, bullion is rallying, as I have been advocating a long-term bullish stance despite short-term turbulence. Higher levels are in store for patient delivery investors looking beyond calendar 2026. Just avoid leveraged buying (buying with borrowed funds in margin-funded trading, and/or futures and options).

Oil and gas rose on seasonal considerations and may appear bullish on technical charts. However, savvy and experienced traders know much of this bullishness is due to winter demand. I maintain my view that the energy markets are adequately supplied. It is worth noting that energy prices on the Multi Commodity Exchange of India (MCX) were higher, partly due to the weakening of the rupee.

Industrial metal prices firmed up again on commodity exchanges, and that can have a rub-off on the stock prices of metal mining companies, which may be relatively buoyant. Barring unforeseen circumstances, this week is expected to see an improvement in sentiment compared to the previous week.

Fixed-income investors should continue to keep the powder dry, as the Reserve Bank of India (RBI) meeting to consider rate cuts will soon announce its decision. We can take a call after that announcement. Continue to trade with stop losses and tail risk (Hacienda) hedges in place. A tutorial video on tail risk (Hacienda) hedges is here.

Rear-view Mirror

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

The rally was led by the Bank Nifty, and the broad-based Nifty 50 brought up the rear. A weak US dollar index (DXY) buoyed sentiments for emerging markets, including India. It also triggered safe-haven buying in bullion. Oil and gas rose on seasonal considerations.

The rupee eased versus the dollar despite the dollar’s weakness. This remains a mild concern. The Indian 10-year bond yield remained relatively steady ahead of the RBI meeting. Market-wide position limits (MWPL) eased routinely after the November derivatives series expired.

US headline indices rose uniformly, providing tailwinds to our markets.

Retail Risk Appetite

I use a simple yet highly accurate yardstick for measuring the conviction levels of retail traders—where they are 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. 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 higher volatility and capital-intensive futures segment eased noticeably. This fall was offset by a significant increase in the turnover contributed by index options. These are the lowest volatility and relatively least risky of the instruments.

All in all, indications suggest cautious optimism. Traders must buy more aggressively if the rally is to sustain.

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 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.

Even as the Nifty logged smaller gains compared to the prior week, the advance-decline ratio improved to 1.25 (prior week 0.74). That tells us there were 125 gaining stocks to 100 losing stocks. That indicates that intraday traders demonstrated improved buying conviction last week. As long as this ratio remains above 1.0 with rising prices, bulls will continue to hold the upper hand.

A tutorial video on the Marshmallow theory in trading is here.

The second chart I share is the market-wide position limits, which measure the 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 eased post-expiry routinely, but the decline was deeper and more pronounced compared to the previous monthly expiry. This indicates that the post-expiry build-up of fresh positions was relatively slow. Swing traders appear to be cautiously optimistic.

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 rose with higher impetus readings, indicating a stronger buying momentum in the undertone.

Ideally, impetus readings and prices must rise together to indicate a sustainable uptrend.

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.

The Nifty clocked smaller gains, but the LWTD reading rose sharply to 0.08 (from -0.41 in the prior week), which suggests that fresh buying support may be higher than last week.

A tutorial video on interpreting the LWTD indicator is here.

Nifty's Verdict

Last week, the weekly candle chart logged a smaller-bodied bullish candle. The smaller body tells us the opening and closing levels were close to each other. That means higher levels experience a lack of buying conviction. Bulls must offer improved buying support if the rally is to extend.

The level of 26,277, which I advocated last week as the threshold above which the Nifty must trade to remain bullish, still needs to be watched. The price remains above the 25-week moving average, which serves as a proxy for the six-month holding cost of an average retail investor. That means the medium-term outlook remains optimistic. In case of declines, bulls must defend the 25,650 level if the upward momentum is to stay intact.

Your Call to Action

Only a sustained trade above the 26,277 level confirms the possibility of a fresh rally. In the event of declines, the 25,650 level needs to be defended.

Last week, I estimated ranges between 60,050 – 57,700 and 26,575 – 25,550 on the Bank Nifty and Nifty, respectively. Both indices traded within their specified ranges.

This week, I estimate ranges between 60,975 – 58,525 and 26,750 – 25,675 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.

Vijay L. Bhambwani

Vijay is the CEO of www.Bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani.