Vijay L Bhambwani's Ticker: Nifty heading towards a decisive phase
There is hope for bulls, as the statistical data suggests that markets can still rally.
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Dear reader,
Last week, I wrote that bulls would have to do some significant work to push markets higher. Read last week's piece here. That was because bulls appeared lethargic and cautious about enhancing their commitments. As the end of December approaches, the window of a ‘Santa Claus’ rally is fast closing. There is hope for bulls, as the statistical data suggests that markets can still rally.
As the festive season approaches, traded volumes will shrink along routine lines as participants are away for Christmas and the New Year. It becomes easier for smart money and large players to influence prices with relatively small efforts, as markets lack depth. While the sustainability of the move remains an open question, a one-time price move can be attained.
Last week, I wrote about the US Federal Reserve's 0.25% rate cut being a positive trigger. On the other hand, the Japanese central bank raised coupon rates by 0.25% to 30-year highs. That is a negative trigger for emerging markets. That is due to the cash carry trade. Japanese money was one of the cheapest in the world, and global traders borrowed from Japan at lower rates to invest in overseas markets, which offered higher interest rates. This ‘cash carry trade’ resulted in bull markets in many regional markets. The Bank of Japan's rate hikes threaten to unravel the carry trade over time.
With these fears persisting in the undertone, bullion continued to surge higher. That is a sign of safe-haven buying. The long-term outlook for patient delivery holders remains optimistic. I continue to warn my readers against leveraging (buying with borrowed money under a margin trading facility and/or futures and options). Buy what you can with your own funds and avoid the margin calls.
Oil and gas prices fell along expected lines, as I have been consistently maintaining that energy markets are adequately supplied. While seasonal and periodic event-based upthrusts are expected to occur routinely, these should not be confused with structural bull markets and/or super cycles, as narratives in the public domain suggest.
Industrial metals remained firm along expected lines as I have pointed out for months. Metal prices tend to firm up around month endings on short covering and can lend some optimism to the stock prices of metal mining companies in the near term.
If the markets manage to rally this week, I expect public sector undertakings (PSUs) to take centre stage. Banks are particularly so due to their huge weightage in the broad-based indices. Energy-related stocks can also garner trader attention in both directions as prices move to align with fossil fuel prices. Being a shorter week due to a holiday, we may see some bullish activity as short weeks generally tend to favour bulls. Traded volumes will fall, and bid/offer spreads can widen, thereby crimping the take-home profits of day traders.
Fixed-income investors should continue to keep the powder dry in anticipation of better yields. Trade with a smaller exposure and maintain stop losses and tail risk (Hacienda) hedges diligently.
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 fall was led by the Bank Nifty, and the broad-based Nifty 50 brought up the rear. That was because the rupee hit a new low mid-week before recovering at the end of the week. Bullion witnessed safe haven buying, and silver made outsized gains on fresh buying cum short covering.
Oil and gas continued to remain under pressure. The US dollar index (DXY) gained last week, which dragged down emerging market sentiments. The rupee closed with gains as the Reserve Bank of India (RBI) intervened in the forex markets at the end of the week.
Indian 10-year bond yields rose, which in turn dragged the Bank Nifty further. The National Stock Exchange (NSE) gained 0.22% in market capitalisation, indicating that the optimism was broad-based. Market-wide position limits (MWPL) rose routinely.
US headline indices were a mixed bag but generally optimistic and limited the declines in 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 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 are generally 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) –
The turnover contribution rose in the higher-volatility, capital-intensive futures segment, as traders displayed increasing participation levels. In the lower-risk options segment, turnover contribution levels rose for relatively higher-risk stock options.
The overall risk appetite was higher than the previous 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 calculates the ratio of rising stocks to falling stocks. As long as the number of gaining stocks exceeds the number of losers, the bulls are dominant. This metric is a gauge of the risk appetite of one marshmallow traders. These are pure intraday traders.
The Nifty logged smaller losses last week, but the advance-decline ratio slipped to 1.03 (prior week 1.27), which means there were 103 gainers for every 100 losers. For a sustainable rally, this ratio must stay above the 1.0 levels with rising prices.
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.
MWPL readings reached a period high, also marking a multi-year high. That tells us swing traders were digging in and increasing their exposure levels. If follow-up buying is seen this week, markets have a fair chance of rallying.
Note that a higher MWPL brings higher volatility, as larger positions are shuffled and trigger greater price swings.
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 due to lower momentum readings, which suggests that the declines were primarily driven by a lack of buying rather than concerted and heavy selling. That is a mild relief for the bulls. Follow-up buying can turn sentiments around.
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.
Last week, the LWTD reading rose, and I suggested that fresh buying and/or short covering may come to the rescue of the markets. Friday's price action validated that hypothesis. Now, the LWTD shows an even higher reading of 0.57 (compared to 0.21 in the prior week). That raises the probability of even higher short covering and/or fresh buying this week.
A tutorial video on interpreting the LWTD indicator is here.
Nifty's Verdict
Last week, the Japanese candle chart of the Nifty showed a bullish hammer after two consecutive weeks of logging bearish hammers. That indicates that bulls resisted declines proactively and managed to push the index higher at the close compared to where it opened for the week.
The price remains above the 25-week moving average, which is a proxy for the six-month holding cost of an average retail investor. That makes the medium-term outlook optimistic for now. Last week, I advocated support at the 25,675 levels, which held and was defended well by bulls. The resistance and breakout at the 26,325 level remained elusive.
The resistance at 26,325 remains valid for this week, whereas the support area that needs to be defended is at the 25,350 level.
Your call to action – Only a sustained trade above the 26,325 level confirms the possibility of a fresh rally. In the event of declines, the 25,350 level needs to be defended.
Last week, I estimated ranges of 60,525 – 58,250 and 26,575 – 25,525 for the Bank Nifty and Nifty, respectively. Both indices traded within their specified ranges.
This week, I estimate ranges of 60,175 – 57,975 and 26,475 – 25,450 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.
Vijay L. Bhambwani
Vijay is the CEO of www.Bsplindia.com, a proprietary trading firm. He tweets at @vijaybhambwani.
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