Market Chronicles for the week ended 16th October, 2020.
If you’re new to technical analysis and would like to know how to read the charts below, here’s a quick guide! https://www.investopedia.com/trading/candlestick-charting-what-is-it/
Nifty ended the 2nd week of October 1.2% in the red, after a sudden fall on weekly expiry Thursday.
Our outlook is BULLISH.
There is, however, slight cause for concern, as a bearish RSI divergence has formed on the weekly chart.
On the daily chart, we see Nifty taking support at between 2 previous peeks, but the bearish RSI divergence may be cause for worry.
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.
Note: Our directional views are subject to sudden and drastic change mid-week. For anyone who wants a daily update on the stock markets, we suggest you follow us on Twitter, for some more frequent insights. Our handles are @anoshmodyy and @MarketsWithKR
Moving Averages
A quick snapshot of how the major Moving Averages are placed on the daily chart.
Ichimoku (D)
Nifty Intraday
The RSI divergence on the hourly chart played out and dragged the index lower. Key levels marked
Bank Nifty
Bank Nifty consolidating near 200 DMA is a good sign. Also found support near 23000, which is the 50% Fibonacci level.
Bank Nifty / Nifty (Relative Chart)
The ratio chart still looks good, and it appears as though Bank Nifty can outperform in the near future.
Nifty SmallCap 100
The index is right at the confluence of major horizontal and diagonal trendline resistance. A breakout above this level will set the stage for the next leg up.
The relative chart is seeing a bounce from a previous CIP level.
Nifty Midcap 100
The index is at major downward trendline resistance. Breakout from this can bring good upside.
The relative chart seems to be headed lower, but this week rejected the lows.
Currency
DXY
Once again challenging the resistance at the downward trendlines.
USDINR
In sideways consolidation, and long term trendline support.
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
OI at higher strikes on the call side seems to be yet quite strong. Thinking about it now, it could potentially be positional call writers taking this option as a hedge – shorting an ATM call and then buying an OTM call can work well (credit spread). On the put side, we don’t have very strong OI figures. Higher strike puts show some profit booking by those who might have shorted puts positionally at higher levels. The 12000 strike as the highest OI, possibly as it’s the strongest resistance Nifty has faced this past week. At 24.7, the option premium is moderately attractive to option writers, too. This means that some participants do not expect Nifty to breach the 12k mark this week. On the other hand, given how well Nifty has supported 11300-11400, we could be seeing a higher OI on those strikes. And while premiums aren’t that attractive now, it’s already given reasonable returns as we can see how much the premiums have fallen by (field titled “CHNG”).
Bank Nifty
BN’s OI structure seems to be returning to normalcy as the range is more reasonable at 2000pts. Strikes between the two highest OI options seem to have a lot of involvement on the call side. This is quite different from Nifty’s structure, possibly because Nifty and Banknifty have moved independently. A similar interpretation as Nifty for OI is possible for Banknifty as well.
Heavyweights in the Nifty 50:
Let’s look at some important stocks in Nifty50 that collectively make up around 44.02% 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 September 30th 2020. As we had discussed last time, TCS has gained on ICICI Bank to break into the Top 5. RIL has performed quite well, too.
On the chart front, we’ve used naked charts, for the most part, to display the price action better.
1. Reliance (14.90% weight): We have discussed how a close above 2250-2280 is essential for strong buyers in Reliance to come back and push prices upward. This past week, RIL nudged 2300, but fell sharply on Thursday and Friday. In fact, Reliance falling this sharply (especially if you look at the intraday moves) has caused Nifty to fall quite a bit. As it stands, we see an RSI divergence which isn’t good for the broader trend. Unless momentum picks up soon, RIL might continue underperforming and move sideways. However, price is at an important support level, the CIP. (Read the Basics of Dow Theory and trend by clicking here).
2. HDFCBANK (9.67% weight): HDFC Bank performed exceptionally well over the past few weeks. This week, however, the stock retraced quite a lot, possibly owing to profit booking + marketwide selling. On Friday, we can see a bullish harami candlestick pattern. So if Friday’s high is broken and the bulls are able to take the price around Thursday’s open/high, we could potentially see a breakout. RSI levels below 60 were also rejected – a good sign as it shows that momentum is still healthy and bullish for the stock.
3. Infosys (7.62% weight): After a result that wasn’t too pleasing to the market, Infosys opened gap up on Thurs (ADRs were positive, too) but this gap was sold into and the price fell very sharply. Friday did see some recovery, possibly some profit booking by short parties, ultimately taking prices above the FIB support. This is a good sign as it shows that stronger bears weren’t able to drive prices lower. This combined with RSI 60+ means that Infy could still be a potentially bullish bet.
4. HDFC (6.43% weight): HDFC has always had interesting movements. Despite being a leading large-cap, sometimes its price movements can remind one of a midcap PSU. It faces very strong resistance around the 2000 psychological level mark, but as long as there’s healthy buying at around ~1950, we could see the stock doing alright. Given the knee-jerk movements, we do not feel this is an ideal long as risk could potentially be quite high.
5. TCS (5.40%): TCS faced some resistance after the phenomenal spike motivated by the buyback. It’s understandably retraced a bit, filling in one gap on Thursday. These negative moves aren’t that concerning as IT as a sector wasn’t too strong (along with the market as a whole). On Friday, we can see that there was some support after the gap filling. RSI continues to be above 60 which is good.
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: Despite being an inherently strong stock, Kotak Bank is facing some major resistance at around 1356-1360. If it’s able to close above that level, we could see some good moves. By the looks of it, the 38.2% FIB level at 1310 seems to be holding up fairly well. A stronger move could also help with momentum as it’s been stuck under RSI 60 since August. If we see it crack, ~1280-1300 should be a good line of defence for the bulls as that’s where we could expect stronger bulls to enter in the market.
2. SBIN: SBIN was able to do quite well, testing 200+ levels, but owing to PSU banks underperforming in the past week, it wasn’t able to hold on to those levels well. Thursday’s sharp negative move didn’t help either. If the stock can stay above 196, we could see another 200 retest soon. A decisive close above 203.5 could help drive prices even higher as strong bulls may enter. That price would be quite important as 50% typically are very strong zones on both, bullish and bearish sides.
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.
Thanks to a mild bearish bias this week owing to institutional selling, VIX has inched higher. It’s quite interesting though, as this is the first time since September that VIX has made a higher high, and the first time since August that it’s closed higher. Intra-week moves of VIX were quite interesting for learning purposes.
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.
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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