Market Chronicles for the week ended 5th December, 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 first week of December a healthy 2.23% in the green, even as naysayers called a top on every rally, supply was absorbed, and stocks performed very well this week.
We maintain that the markets are in a firm uptrend, and we remain BULLISH going forward. Any dips should be considered buying opportunities.
Big Boys
FIIs pumped in net Rs. ~10.2k cr into the markets, while DIIs dumped Rs. ~6.1k cr of stock this week.
Source: StockEdge
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
The weekly chart saw the index breaking away strongly from the trendline joining the tops
The daily chart has some key support levels marked, to watch out for in case of a deeper correction. We cannot rule out the possibility of a retest of the pre-COVID high, and that remains an important belt to watch in case the market crashes
Moving Averages
A quick snapshot of how the major Moving Averages are placed on the daily chart.
(Red = 200 MA; Purple = 100 MA; Blue = 50 MA, Yellow = 20 MA)
Ichimoku (D)
Nifty Intraday
Bank Nifty
The index had a volatile week finally ending 1.5% in the green, while a bearish RSI divergence continues to threaten the bank rally
Bank Nifty / Nifty (Relative Strength Chart)
The weekly relative strength chart is now facing resistance at a CIP level!
Nifty Midcap 100
Another week, another strong closing by midcaps! This vertical incline is bound to invite some pullback, but there is no sign of a top yet
Nifty Midcap 100 vs Nifty 50
Midcaps are breaking out relative to Nifty50, as seen in the ratio chart, which means we might see midcaps significantly outperform for a while
Nifty SmallCap 100
Smallcaps too had a good week, with the index closing 1.9% in the green!
Nifty Smallcap 100 vs Nifty 50
The ratio is forming an inverted H&S pattern with neckline as the CIP level marked in blue on the chart. Breakout above this can show good outperformance by smallcaps.
Nifty 500
The broad market measure of Indian stocks also did very well this week to close 2.42% in the green
Currency
DXY
As anticipated, the DXY cracked down hard below the support level of 92. This is overall quite positive for global equities
USDINR
The currency pair found support on the long term trendline and if the breakdown doesn’t happen soon, the major resistance level of 74.40-74.50 can be tested again
OI Analysis 6
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
Interestingly, for most of today, max OI strike was 13,200 for both, call & put sides. This is identical to what happened last week, right before a large move (a sharp dip followed by an even sharper recovery).
On an EOD basis, the highest OI strikes are between 13,200 and 13,500. Option prices are severely underpriced (max variance of over 120pts).
With put writers moving to 13,200 the bullish sentiment seems to have strengthened as the last week tested lower levels, too. That said, considering the low premium, it is unlikely that the 13,500 will have found many writers as the risk is quite high for just 18pts premium. The put, however, is attractive with a 58pt premium (with 75pts already eroded on Friday).
Bank Nifty
BN’s OI has consistently consolidated around this mark for the past three or so weeks, but the index seems to have recovered some of its lost momentum on Thursday & Friday.
Despite closing above the 30,000 psych hurdle, highest call OI remains at that mark which is odd. Interestingly, the highest OI change is on the 30,000 strike on both call & put sides.
Given the unusual OI structure intraday and EOD, something might be cooking.
Heavyweights in the Nifty 50:
Let’s look at some important stocks in Nifty50 that collectively make up around 42.66% 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. Another significant change is that Reliance Industries has lost its top spot to HDFC Bank and TCS has exited the Top 5, making way for ICICI Bank.
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. HDFC Bank (11.21% weight): HDFC Bank faced news-based hurdles on Thursday with RBI asking the banking giant to halt fresh digital launches. Despite this, buying remained strong and the stock held on well on Friday. Isolating the news & macro factors, our view is that as long as the trendline & gap open are held, the stock remains a good technical pick. Gaining in Nifty50’s weightage hasn’t had a considerable impact, but then again it may be the reason why the stock has managed to grip higher levels despite unfavourable news. (Read the Basics of Dow Theory and trend by clicking here).
- Reliance Industries (11.17% weight): Reliance has a tendency of retracing 50+% after making a fresh ATH, so technically this underperformance shouldn’t be a very big deal. Bulls would have had a tough time the past week as the weekly chart below shows clear retracement from highs. In fact, the week before’s high wasn’t even attempted. The overall price action is not bullish and the stock may test 1800 levels based on FIB retracements if smart money doesn’t enter soon. Sentimentally speaking, this could be because of the lack of a positive trigger – the stock already seemed overpriced after a swift recovery so investor confidence could possibly be the hurdle.
- HDFC (7.23% weight): Talking about raw price action, HDFC has formed a lower high, the first sign of a potential bear-dominated market. If it isn’t able to hold above the FIB level, it may have a tough time attracting fresh bulls. Friday’s price action shows how much selling pressure there was at higher levels.
- Infosys (7.21% weight): The trendline below isn’t perfect, but it gives a reasonable idea of the general trend & momentum of the IT giant. It is right at support, and after consolidating for the better part of a month, the IT sector may potentially show investors big moves.
- ICICI Bank (5.84%): This stock comes back to the Top 5 after a couple of months with a great move. The past week wasn’t very kind to banks but Friday was spectacular for ICICI Bank specifically, crossing the 500 hurdle with ease. As long as 490 is held, the stock should show some promising moves.
Heavyweights in 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.
- Kotak Bank: With banking in a slump last week, Kotak led the fall, but that changed on Friday. The EOD candle shows great buying at lower levels, even after a fresh weekly low was created. This recovery from lows had a material impact on Banknifty, too. Closing above Thursday’s high is a very bullish sign. Monday could be a favourable day for Kotak Bank.
- SBIN: SBIN continues to shine, being one of the top performing banks in the market last week. It has breached the 262 resistance for the time being, but filling the gaps may potentially be a challenge, as the stock has faced some headwinds while filling gaps in the past. If it fills the gaps, the markets could be in for a fun ride as it may continue showing large moves.
Volatility:
VIX closed below 20, an important sign.
But even though the broad market has seen phenomenal positivity, VIX seems to be msot comfortable between the 18-22 level. This may be due to the looming uncertainty about macro factors and unique business environment.
With Q3 earnings expected sometime in Dec-Jan, it may give further direction to market participants about the post-COVID business scenario. This may, in turn, impact volatility.
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) [https://www.investopedia.com/articles/trading/08/average-true-range.asp] of the stock would be narrower.
Moving Averages decoded: https://www.investopedia.com/terms/m/movingaverage.asp 1
Demystifying the art of Fibonacci Retracements: https://www.investopedia.com/terms/f/fibonacciretracement.asp 2
The basics of Dow Theory: https://www.investopedia.com/terms/d/dowtheory.asp 3
What are trendlines?: https://www.investopedia.com/terms/t/trendline.asp 4
Gaps made easy: https://www.investopedia.com/terms/g/gap.asp 5
Open interest explained: https://www.investopedia.com/terms/o/openinterest.asp 6
Disclaimer:
We, Anosh Mody & Krunal Rindani shall take no responsibility for any profit or 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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