Market Chronicles for the week ended 28th August, 2020.
Nifty ended the week a strong 2.43% in the green!
The tough resistance zone at 11377 was taken out by a gap-up on Monday, and since then there was no looking back. The last major gap from March, 11377-630 is now filled.
Our outlook remains BULLISH
The next hurdle to the upside lies at 12010-12060.
The uptrend is firmly intact as long as 11180-315 is defended to the downside. Latest major swing low is at 10890.
Please read on to understand our rationale. This article contains an analysis of technical parameters as well as open interest and derivatives data. All the information below has hints for what levels to watch out for in weekly trade. Replicating these on your charting software and keeping an eye on them can help minimize unpleasant shocks in your trading.
Moving Averages
A quick snapshot of how the major Moving Averages are placed on the daily chart. Nifty completed a golden crossover this week, ie the 50 DMA crossing over 200 DMA.
Ichimoku (D)
Ichimoku (W)
Price closed above the cloud and chikou is almost free of obstruction!
Nifty intraday
The entire week was positive, with not one down day. Intraday bearish moves did come, but it was Close > Previous Close throughout.
Bank Nifty
Incredible move for Bank Nifty this week, and especially on Friday. After a successful breakout from 23150, we had an excellent followup, and BNF now seems ready to challenge 200DMA!
Bank Nifty / Nifty – Relative Chart
Our observation went bang on. The pair has formed a double bottom, and as long as a ratio of 2.08 is held, we could be at 2.2 real soon.
Currency
The US Dollar Index (DXY) continues to weaken, currently at 92.3 with immediate support at 88.5. We also witnessed a major breakdown in the USDINR, as the INR strengthened by ~2.4% in the week.
Now that VIX (covered later) is back in its “normal” zone, the biggest risk to the Indian Markets would be a strengthening dollar, and we are going to be watching these 2 charts very closely.
OI Analysis:
Open interest or OI is the total number of open positions in the market. A high OI indicates that there is a lot of activity in that instrument. It does not indicate buyers and sellers individually but is instead a more holistic measure, i.e. it is the number of contracts between the buyers and sellers, not the buyers and sellers on their own. One of the ways OI analysis works is that high-volume market participants would have sold strangles at strikes which leads to higher OI. This type of reading does not typically account for other types of spreads that one may trade, but the data for it is available.
Nifty
Looking at the OI figures of 03rd Sep 2020 expiry, we can make two observations:
- There are several high OI strikes throughout the logical ranges between 10500-12100.
- Volumes are reasonably high which means liquidity is still sufficient.
- The range has moved higher till up to 12000, a mere 430pts away from ATH.
This is in principle similar to what we have seen in these past few weeks as well. What appears to be different compared to last week is the polarity. Last year we saw convictions being very high. This time, the greater OI at a wider array of strikes hints that perhaps even larger parties lack a clear direction and intensity of the moves we may potentially see this week.
While strikes closer to ITM will have a higher premium, they are also riskier. This could be why we are seeing more far OTM strikes having higher volumes. And this in turn could tell us that a larger move on either side cannot be ruled out.
Bank Nifty
When compared to Nifty, Banknifty’s OI looks cleaner and similar to what we’ve been seeing since the past few weeks now. There are multiple high-OI strikes with the highest ones being +/- 500-600pts away from Friday’s close.
In our previous edition, we spoke about how Banknifty could outperform Nifty drastically, and that is what we experienced this past week. So considering that we are seeing a similarly placed OI structure, it is likely that we see a similar move.
However, that is not to say that the structure is exactly the same. We can notice a lot more OI at more OTM strikes, just at a lower intensity. This may mean that while the larger participants are directionally biased, they do not have enough conviction to avoid a clear hedge.
Heavyweights in the Nifty 50:
Let’s look at some important stocks in Nifty50 that collectively make up around 42.83% of NSE’s flagship broad market index. The analysis is done on both, Daily and Weekly timeframes. Charts displayed are either Daily or Weekly depending on which provides a clearer picture.
The weights used as per the most recent NSE press release available, dated July 31st 2020. New weightages should be with us next week onwards. Compared to the previous period’s, this month has seen some major changes including Infosys replacing HDFC for the number three spot and TCS replacing ICICI Bank for the number five spot. This is most likely due to the strong performance delivered by IT stocks in the past couple of weeks. Interestingly, the overall weightage of the top five stocks continues to increase MoM.
1. Reliance (14.00% weight): Reliance shows us some beautiful price action. After breaching the upper trendline due to AGR dues uncertainty, it faced a fair bit of resistance from the gradual downtrend line. That trendline was breached last week and we saw the stock taking some good support from there. In the previous edition, we spoke about how despite lower prices, buying is fairly strong with RIL. That continued to be the case, with buyers holding important levels very strongly except for bear traps. With Future Retail’s deal finalization scheduled over the weekend, Monday should be an important day for the big daddy of the Indian financial markets. Given the strong sentiments, we are quite bullish on the stock. (Read the Basics of Dow Theory and trend by clicking here).
2. HDFCBANK (9.56% weight): HDFC Bank momentarily cleared the resistance zone we had discussed in the last edition before being trapped in the very same area. If we do not see the stock breaking out of this range and sustaining 1120+ levels soon, we could expect a retracement. This is because the highlighted area may act as a distribution zone before the prices dip. On the other hand, if sentiments are strong, we could see HDFC Bank performing very well. It is important to note that even though Banknifty outperformed the broadmarket, HDFC Bank has not been able to do so.
3. Infosys (7.56% weight): The IT euphoria took a break this past week as we saw a lot of very important stocks in the sector underperforming despite the broad market doing incredibly well. Here we can see how Infosys faced resistance two weeks ago and broke an important support zone on Friday. These aren’t good signs, especially because selling volumes are increasing. So while a gap-filling is highly unlikely, a 900 retest may be possible if strong buyers do not enter soon.
4. HDFC (6.59% weight): After managing to hold 1760 well, HDFC experienced some very strong moves. This positivity was seen on HDFC AMC, too. While buying volumes are quite strong, we could see them weakening a little bit. This is normal, but it comes at a time where a potential resistance zone is right around the corner. A close above 1915 is important for the buyers to remain decisively in control, even if it’s after a retracement.
5. TCS (5.12%): We still stand by last week’s analysis of 2200 being an important level for TCS. Just like Infosys, TCS too is lagging quite severely. Though in both cases, this underperformance comes after an extremely strong rally to ATH from low COVID price levels. Based on the candlestick movements, we can see a fair amount of lower level rejection which may indicate some accumulation happening at these prizes. So while the selling volumes are increasing, all this plausible buying may nudge the stock upwards.
Heavyweights in Banknifty:
Since we have started analysing Banknifty in Market Chronicles, we decided to include some top movers of Banknifty. The number one mover is HDFC Bank, which has already been spoken about in the previous section, so we will discuss two other important stocks here, namely Kotak Bank and SBI. Other banks have an impact on the index, but these along with ICICI Bank are typically the movers.
1. Kotak Bank: Last week, we spoke about how important it was for the buyers to take the prices above the highlighted area as otherwise sellers would remain in control. On Wednesday, we saw the first breakout above that line with reasonably high volumes. After some minor profit booking on Thursday (also owing to a flat-ish expiry), Friday saw a new swing high being created. This helped Banknifty reach a swing high, too. We could expect 1500 psych to be the next resistance level.
2. SBIN: SBI respected the trendline extremely well. In fact, it is quite possibly one of the most textbook examples of trend following we could have in this edition. We’ve followed it for two-three weeks now, and every time it has stayed within the channel’s range. On 30/07, we saw a fakeout which could be identified by the relatively low selling volumes followed by quick buying on the next day. We saw the prices moving slowly after that, but this week it finally broke out. The candle charts of SBIN also show a phenomenal uptrend including the gaps and increasing candle bodies. We could potentially expect some profit booking on the stock, but up until now, the buyers have been in control.
Volatility:
VIX continues to fall, but based on intraday price movements and overall sentiments, we believe that the actual price movements are not very well described by INDIA VIX this time around. If the markets continue climbing a wall of worry, we may continue seeing lower VIX levels, until it doesn’t. When VIX may just spike. This past week has been incredibly choppy in terms of price movements, with massive gap openings seen on intraday charts, too. These details are not captured by VIX which may be why we see it continuing to fall.
VIX has steadily fallen while the market continues to gain. The long wicks on the lower side indicate the few sharp dips that we are experiencing intraday. Closing below 20 is an important feat for VIX and it tells us two things:
- Future expected one-year returns of Nifty are shrinking owing to the post-COVID selloff rally.
- The market has almost returned to “normal” VIX levels.
Dividing VIX of 18.35 with the square root of 50 (number of trading weeks a year) gives us 2.60%. So if we go by the theory of VIX being equal to the market’s future expected returns, we could expect roughly a 2.6% move in this coming week. But these figures are large approximations so please be advised.
For your reference, a lower VIX (or lower volatility) is generally associated with price moves that are less choppier and more trending. It also results in lower option prices (due to a lower IV). But at the same time, the ATR (Average True Range) of the stock would be narrower.
If you’re new to technical analysis and would like to know how to read the charts below, here’s a quick guide!
Disclaimer:
We, Anosh Mody & Krunal Rindani shall take no responsibility for any losses occurring out of investment/trading decisions you make based on the contents of this article.
We are not SEBI registered investment advisors. This article is meant for educational purposes only, please consult your investment advisor before acting upon any information you see here.
We may or may not have open positions, kindly assume that we are biased.
Anosh Mody is an MBA student from SBM, NMIMS Mumbai. However, the views reflected in this article are strictly his own, and in no way reflect upon the B-School in any manner.
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