Market Chronicles for the week ended 6th November, 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/
The markets had one of their best weeks since June with the bulls fully in control, as US election related uncertainty was washed away. Global equities and other asset classes like gold and bitcoin rallied, as the dollar weakened and euphoria took over fear. We witnessed a proper risk-ON mode.
On the weekly chart, we see the Nifty50 having almost completed a V-shaped recovery, and ready to break it’s all time high, right around Diwali. Something which would have been taboo to even think ~4-5 months ago.
The daily chart saw an excellent breakout in the last 2 days of the trading week, and key levels to watch out for on the downside are 12030 and 11610.
Aside from some turbulence that we can expect near the highs, our outlook is BULLISH.
PS: The US election related volatility may have ebbed for now, but lawsuits may follow as each side battles for supremacy. We may well see another wave of high VIX scenario.
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)
Very bullish setup on this trend following indicator, Price above cloud, which is green. Tenkan and Kijun sen pointing up, with a free chikou span.
Ichimoku (W)
Nifty Intraday
Last week’s bullish RSI divergence on the hourly chart was one of the early bullish hints for this week. Some open gaps and key levels marked.
Bank Nifty
Bank Nifty was the man of this week’s match, gaining ~12%, breaking key levels to the upside. It has also completed a golden cross, i.e. the 50DMA crossing over the 200DMA. The open gaps of March could act as possible areas of resistance for the index.
Bank Nifty / Nifty (Relative Chart)
Bank Nifty looking at potential outperformance, after a strong breakout from the resistance level on the ratio chart.
Nifty Midcap 100
The index is at major downward trendline resistance, and 200 WMA. Breakout from this can bring good upside.
Nifty Midcap 100 vs Nifty 50
The relative chart seems headed towards the top of the range.
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
Nifty Smallcap 100 vs Nifty 50
Currency
DXY
The dollar index had a very volatile week, and is now at a potential breakdown level. A falling DXY is positive for equities. 92 is a crucial level.
USDINR
The currency pair rejected the historical CIP level, and moved lower from there. 74.4-74.5 remains a crucial resistance level.
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: 11,600-12,500
After a phenomenal week, Nifty OI looks quite interesting. While the highest put OI has increased by 400pts, the highest call OI remains at 12,500. On Thursday EOD, this figure was 13,000. This may mean that larger participants don’t expect this coming week to be quite as spectacular as the past week has been. Since highest put OI is at 12,000 it may mean that bulls will try hard to defend this key psychological level.
Bank Nifty
Last week’s range: 23,000-24,500
BN outperformed strongly and as a result, we see the lowest strike in next week’s range at 26,000 which is 3,000pts away. Overall range is quite narrow at just 1,000pts, but this is rather similar to what we discussed with Nifty as well – the market may not be expecting a large move the coming week.
Heavyweights in the Nifty 50:
Let’s look at some important stocks in Nifty50 that collectively make up around 43.68% of NSE’s flagship broad market index. This figure is lower than last month’s which means that the weightage occupied by the top five stocks has reduced. The only culprit for this is RIL which underperformed severely.
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 (13.24% weight): Reliance breezed through the 2000 psych level effortlessly, possibly on account of Future-Amazon dispute and speculations surrounding Mukesh Ambani’s health. However, the past three days have been kinder to this stock with bulls stepping in. Closing above 2050-2075 is important for the stock, otherwise bearishness may creep in. (Read the Basics of Dow Theory and trend by clicking here).
2. HDFCBANK (10.25% weight): HDFCBANK made an all-time high on Friday, closing above the previous ATH. This is a strong sign from a sentiment POV. It is said that after breaching ATHs, certain stocks have upsides of 10-20% in the medium-term. However, there are chances that depending on overall sentiment, HDFCBANK sees some profit booking.
3. Infosys (7.74% weight): US elections seem to have had a positive impact on IT despite a potential Biden win (as generally the markets prefer Trump). This might be due to the more Biden being perceived as more pro-outsourcing and pro-immigration than Trump, a big plus for IT companies. As a result, Infy has gained quite a lot from its short-term lows, but it now rests just under a resistance zone at 1123. If breached, it has the potential to make a move for a new ATH.
4. HDFC (6.87% weight): While HDFC Bank has hit ATH, HDFC is still 14.54% away from hitting its ATH. Interestingly, despite being an inherently strong stock, HDFC has underperformed even after considering the sharp positive movements lately. If the swing highs visible in the chart below are breached and 2100 is held, we could see very strong movements. It rests at an important level right now.
5. TCS (5.58%): TCS chart shows a great example of how significant gaps can be – we can see how clearly the gap support was respected. It’s very important for the stock to breach 2725 for fresh bulls to enter.
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: We mentioned how Kotak had reached its final resistance before pre COVID levels can be attempted. After breaching that level thanks to overwhelming positivity, the bank is just 30pts away from making a new ATH, the second bank this close to ATH from our list today. At this stage, holding above ATH will be very important otherwise long liquidation may be seen. Best to be cautious.
2. SBIN: SBIN bounced up from the FIB level we mentioned last week and has done phenomenally well this past week. Looking at the retracements and the general bearish trend the PSU bank was in, it could be short covering too, at least partially. The candlestick pattern for Friday doesn’t look reassuring as it attempted breaking prev day’s high but closed below p.close showing involvement of bears. Fresh bulls may consider positions above the day’s high or once 213.98 is retested. If bears enter below the FIB level, gap filling might be likely.
Volatility:
Even though the month has just begun, we can see that VIX has dropped by about as much as it increased last month. This is due to the bullish sentiment and with global VIX indices falling owing to US presidential elections coming to a conclusion. The index may go up if uncertainty surrounding events like our national stimulus package emerge, including potential confusion regarding the US elections (eg lawsuits, etc).
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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