Market Chronicles for the week ended 30th 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 month of October 3.51% in the green. Here’s a quick view at the Monthly, Weekly and Daily charts. The rise has certainly slowed down, and we’re looking at sideways movement for now. This week ended marginally below the inside bar range.
Given the fact that the US elections are round the corner, we are reserving our directional view on the markets till this event related volatility settles down. Our outlook is highly cautious, owing to the same.
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 and weekly chart.
Ichimoku (D)
The index is currently resting on the tenkan-sen.
Ichimoku (W)
Nifty Intraday
Open gaps and key levels marked on the chart
Bank Nifty
Bank Nifty could not breakout of its previous swing high, and is slowly drifting lower. Retest of the ~22900 level is likely
Bank Nifty / Nifty (Relative Chart)
Serious outperformance in BN once the ratio breaks out above 2.15
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
Relative strength chart
Nifty Midcap 100
The index is at major downward trendline resistance, and 200 WMA. Breakout from this can bring good upside.
The relative chart seems headed towards the top of the range.
Currency
DXY
The dollar index breaking out is not a good signal for equities.
USDINR
The currency pair saw a sharp rise this week. Now at an important historical resistance zone
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
Last week’s highest OI strikes: 10,500-12,500
It has been a good week for option writers for the most part, with premiums being suppressed and decay being quite high. This coupled with the bearishness means that we see an interesting OI structure, from 11600 to 12500. 11600CE saw heavy writing on Friday and as a result, despite the market recovering 100+ points from lows, the option moved just a fraction of that. Call writing at ATM strikes means that bears seem to be holding the market, but with Friday witnessing some profit booking and covering of shorts in calls, it may mean that many expect Monday to be potentially better.
Bank Nifty
Last week’s range: 24,000-25,000
Both high OI strikes have attractive premiums, meaning it could be likely that this is the range we see for this week. Banks have been unable to perform that well after the initial spike (mainly thanks to Kotak Bank’s result). As a result, we may be seeing the range shrinking a little. Banknifty experienced sluggish option movements, too. While the future gained 200+ points, 23700CE gained just 20. This means that there is some factor that is suppressing prices significantly. One explanation could be the higher volatility which may be coming down sharply when the market recovers, causing a bit of an IV crush.
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.
In today’s edition, we have used a lot of Fibonacci retracements. This is because many stocks are either retracing or have broken out and are nearing FIB extension zones.
On the chart front, we’ve used naked charts, for the most part, to display the price action better.
1. Reliance (14.90% weight): Last week, we discussed how RIL may test sub 2050 levels or go lower if momentum fails. Leading up to the earnings release, RIL didn’t perform very well, except Thurs & Fri where it held its ground well. Closing under 2100 isn’t a good sign. THe 2000 psychological level is held for now, but unless the earnings (which have beaten street expectations) are able to generate demand for fresh long positions in RIL, we may see the stock moving sideways. (Read the Basics of Dow Theory and trend by clicking here).
2. HDFCBANK (9.67% weight): We discussed how HDFC Bank may experience some profit booking after enjoying good positive moves so far. However, the profit booking turned into a selloff thanks to institutional investors turning net sellers for most of this past week. As a result, the stock has erased most of the gains it made in the past couple of weeks and seems to be heading to 1157. If held, it may be an important level to buy. If it’s broken, it may signal short-term bearishness. With the management change and Aditya Puri’s alleged complete stake sale, the stock is understandably in a flux. The overall trend for this stock has been bullish since the COVID selloff eased.
3. Infosys (7.62% weight): With US elections looming over the world, IT stocks have faced a minor slowdown. This could be due to the H1-B visa norms, though Trump’s proposal to make it compensation-based might not have a large impact on IT workers as they generally earn well enough. The real problem may lie in US company performance & outsourcing post-elections. If a new President is elected, it adds uncertainty for IT companies like Infy among others. Coming to the chart, technicals show us momentum coming down, as shown by the RSI divergence which shows that momentum is making lower lows while the price is making higher lows. One way to interpret it could be that the stock is approaching the oversold territory at higher levels, potentially forming a base in a bullish trend & finding supports. Another way to think of this would be to think of lower momentum at higher levels causing prices to not grip on to higher levels.
4. HDFC (6.43% weight): Retracing from HDFC’s recent rally, we can see that it is taking some support at the 38.20% level of 1907. This means that as long as 1900 is held, we may see the stock bouncing up. Friday’s close is a spinning top, so as long as Monday trades above Friday’s high sustainably, it may gain till ~1975.
5. TCS (5.40%): Like Infosys, TCS has seen some downward pressure owing to sectoral problems. That said, because of the buyback at Rs. 3,000/share, the prices have performed relatively better. If the stock is able to decisively breach 2662, we may see it making a ~100pt in the coming days/weeks. The US election outcome + clarity on policy decisions will be key for this to happen.
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: Kotak Bank has reached the final resistance before it can make the final move towards pre-COVID levels. If the marked resistance is breached, we may see Kotak making some great moves. But let’s not forget that the bulk of this move happened due to strong results by Kotak Bank + news of acquiring IndusInd Bank. So if we see yet another trigger, we could see Kotak emerging as a strong pick among other banks.
2. SBIN: SBIN hasn’t performed that well as PSU banks in general have been slightly slow these past two weeks. We have retraced SBIN from its most recent swing high to try and see from where it may potentially bounce to attempt 200+ levels once again. We can see, thanks to the narrower bodies, that the stock is taking support at current levels and if buying continues (especially above Friday’s high), we could see the stock making decent moves. SBIN typically does not move big unless there is a strong external trigger, so even if the stock is bullish, it may not outperform the market without strong news.
Volatility:
The Monthly timeframe chart of VIX shows that the index has closed positively on a monthly basis for the first time since the 1st March candle. This is a very important thing, and while it may not necessarily signal an immediate alarm bell, it does show that we really are seeing a bearish market (as higher VIX is typically associated with that). Another reason for higher VIX could be the earnings season combined with US elections and the Indian stimulus package that is yet to be announced.
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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