Recap
Nifty ended the 3rd week of June 2.7% in the green, with most of the gains being contributed by the last 2 days of trade. The INDIA VIX, a measure of market volatility also cooled off in the last 2 days, after showing signs of rising in the earlier part of the week, and is now back to last week’s levels (latest value 29.97).
The levels highlighted in our article last week worked quite well and we hope you benefited from the same. Here’s what we think of the week ahead:
Our CAUTIOUSLY BULLISH outlook remains unchanged. The medium term uptrend that started in late March is firmly intact. The HH-HL formation continues, with the previous swing high already taken out (on a closing basis). Market breadth has been excellent over the last week which also lends credibility to our bullish bias.
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.
Cause for caution:
There is a momentum divergence forming on the daily chart, with RSI and MACD not supporting the breach of the previous high. The divergence will get triggered if price dips below current levels.
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/
MAJOR RESISTANCES AHEAD
Monthly Tenkan Sen and Kijun Sen on Ichimoku
One of the big pain points of last week, i.e. the monthly Kijun sen & Tenkan sen at ~9970 has been taken out. However the monthly candle isn’t complete yet so this setup should be considered indicative, not conclusive.
The very powerful Ichimoku indicator explained: https://www.investopedia.com/terms/i/ichimokuchart.asp
200 Weekly Moving Average
50 Monthly Moving Average
These 2 crucial MAs still stand in the way as stiff resistance at 10265 and 10365, so we safely assume that this 100 point range is not going to be easy to clear. Do mark these levels on your charting software!
Moving Averages decoded: https://www.investopedia.com/terms/m/movingaverage.asp
Fibonacci Levels
At 10437, we will complete the 61% retracement of the great fall; this level can also act as a major resistance level.
Demystifying the art of Fibonacci Retracements: https://www.investopedia.com/terms/f/fibonacciretracement.asp
Gaps
Here are all the major gaps to watch out for. Yellow boxes are gaps which have been closed, blue boxes are open gaps:
Moving Averages
A quick snapshot of how the major Moving Averages are placed on the daily chart. Friday closing above 100 DMA is a good bullish sign:
(Red = 200 DMA; Yellow = 100 DMA; Pink = 50 DMA, Blue = 20 DMA)
The basics of Dow Theory: https://www.investopedia.com/terms/d/dowtheory.asp
What are trendlines?: https://www.investopedia.com/terms/t/trendline.asp
Gaps made easy: https://www.investopedia.com/terms/g/gap.asp
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.
Looking at the Nifty Open Interest figures (data from NSE website), we can see that the expected range for the coming trading week is expected to be extremely wide at around 1500 points. Interestingly, this contradicts the fall in India VIX which would theoretically reduce the range due to lower volatility. You can take a look at the OI in the image below. A few strike prices with low OI have been purposely hidden to enhance visibility.
Another interesting observation here is that even though the Nifty levels were lower last week, we saw 9800 put writing being quite heavy with the range between 9500 and 10000. However, we are at higher Nifty levels and we are seeing put writing at even lower levels. This might be a reaction to the several times that Nifty tested the 9800 level without closing below the level as this could put heavy pressure by MTM margin requirements on large ticket option writers.
We are seeing a significant price movement in 10200CE. Based on Hourly price patterns and the Open Interest data, it appears that call options are being written at higher levels. This may indicate that a few important option sellers felt that 10200 would be an important resistance for Nifty, but some may have squared off their positions based on the sharp fall in OI and spike in prices. 10300CE is seeing a fair amount of buying based on rising OI and rising prices.
Option OI movements right now seem to be quite volatile. This may indicate that we have a few very interesting trading sessions ahead of us this coming week.
Open interest explained: https://www.investopedia.com/terms/o/openinterest.asp
Heavyweights in the Nifty 50:
Let’s look at some important stocks in Nifty50 that collectively make up around 41.21% 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.
We have used minimal indicators to highlight price action as much as possible. Some important points to note are that on the Weekly timeframe, most stocks we will speak about here have their shorter term moving average (13MA) slightly below the market price. On the Daily chart, they are taking support from said moving average. Momentum for all is very good. Nifty index itself has an RSI of over 60 at this point.
1. Reliance (11.88% weight): Last week we discussed how well-placed RIL is. This week has been quite possibly its strongest in recent times, with three major investments coming in to Jio platforms. The company is now debt free well before the March 2021 target and the stock prices have hit ATH after ATH this past week. 1700 levels, if sustained, could make this an incredibly strong candidate for investors. Be cautious for profit-booking price retracements or announcement of Jio platforms’ IPO which may have an impact on stock prices sooner or later.
2. HDFCBANK (10.39% weight): After clearing most major resistances including the 1000 psychological barrier, the stock is now at an important resistance around 1035. Like HDFC, if this resistance is breached, we may see an attempt to swing high at 1066. On the lower side, if the market’s sentiment turns negative, we could see the 1000 level being tested, after which the price levels highlighted last week as well as the Fibonacci levels in this chart would follow.
3. HDFC (7.20% weight): Below is the Daily chart of HDFC because the Weekly chart indicates quite a lot of choppiness. This would show us the shorter term trend of HDFC. We can see the resistance it faced last week at around 1820. The resistance was breached on Friday owing to the strongly positive sentiments market-wide. This has now become a new support. If these levels are sustained, we could see HDFC potentially attempting 1900 levels or even testing the current swing high in the coming days.
4. Infosys (6.35% weight): The racial discrimination lawsuit did not have a significant impact on Infosys stock prices. The last week saw a very tight range-bound day, resulting in an inside bar being formed on the Weekly timeframe. An inside bar is when the candle is completely within the previous candle. It can provide a good risk-reward trade, but it may indicate either a reversal or a continuation pattern. A breakout could be expected above 728 or below 675.
5. ICICI Bank (5.39%): After a mildly negative start to the week, the stock saw very strong moves (visible on the Daily chart shown below) as the week progressed. This is in line with the broadmarket performance. On a broader timeframe, we can see how well lower levels are being rejected which indicates a considerable amount of buying pressure at lower levels. If the sentiment of the market is bullish, ICICI Bank may attempt 380 levels once again.
Volatility:
INDIA VIX is nearing its previous support of around 28-29. The minor fall we see on the Daily chart below is because of a strong positive sentiment in the market later in the week. A breach below 28 might just indicate the return of pre-covid high volatility (sub-20 levels). While this would not necessarily indicate that the market will resume its normal trend, it would indicate that most of the market participants have a reasonably stable outlook on the financial markets after the knee-jerk reaction due to the pandemic.
Does History Repeat Itself?
The last time Nifty spent a significant time below the 200 weekly moving average was in 2008-09.
Subsequently, when it broke out above this average, it rallied back to the previous high by late 2010 before facing bearish pressure again.
As it so happens, we are at the cusp of breaking out above the 200 WMA once again. Will we see a swift rally back to 12400, or will the ruthless bear dig its teeth in, and drag nifty lower?
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.
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