Market Chronicles for the week ended 25th December, 2020.
Nifty ended the truncated third week of December flat, after the initial shock scare on Monday when the markets witnessed a harsh selloff. Not all the indices recovered as much as the Nifty did, but broadly speaking, it seems like that was a one off dip in an otherwise roaring bull trend.
We remain BULLISH going forward, and any dips like the one on Monday, should be considered buying opportunities. As seen in the daily chart, 13150 has been established as a firm support level, from which prices bounced twice in a row.
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/
Big Boys
So far in December, FIIs have net bought 41325 cr of stock, while DIIs have net sold 33051 cr of stock. FII buying slowed down this week, while DIIs sold relentlessly
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 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. Worth noting how 20 MA arrested the fall with ease.
(Red = 200 MA; Purple = 100 MA; Blue = 50 MA, Yellow = 20 MA)
Ichimoku (D)
Nifty Intraday
Key levels marked
Bank Nifty
The bank index was among the worst hit on Monday, correcting 4%, but managed to claw back most of those losses in the rest of the week. We are optimistic of seeing a new ATH soon.
Bank Nifty vs Nifty (Relative Strength Chart)
The RS chart of BN finally resolved lower this week. Major support lies lower at the August highs, while major resistance lies higher at the CIP level as marked on the charts. Any major outperformance in BN will likely be seen once that level is breached to the upside
Nifty Midcap 100
The midcap index experienced quite a jolt on Monday, and subsequently managed to close above the past resistance level
Nifty Midcap 100 vs Nifty 50
Midcaps are breaking out relative to Nifty50.
The blue zone marked on the chart was not held, and we shall have to wait for a decisive close above that belt before midcaps can significantly outperform
Nifty SmallCap 100
The smallcaps seem to have more catchup potential compared to midcaps, as they are still 38% away from their 2018 highs.
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. Despite the major down spike on Monday, this setup is valid
Nifty 500
The broad market measure of Indian stocks also did very well this week, and this lends more faith in this rally. The index does look extended, but no sign of a top is immediately visible.
Nifty 500 vs Nifty 50
The zone marked on the chart was not held, and we shall have to wait for a decisive close above that belt before Nifty 500 can significantly outperform
Currency
DXY
As anticipated, the DXY continues to move lower after breaking down the support level of 92. This is overall quite positive for global equities. However, it may find support in the CIP level of 88-89. Also, currently, the Dollar index is seeing a major bullish RSI divergence
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. Overall, the pair looks weak.
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
NIfty OI was very interesting on Monday, right after the sharp fall. Despite the tremendous paranoia and uncertainty, put OI remained steadily above 13000 and call OI was high, above 13500. Now that the week has progressed and bullishness is still evident, we can see that call OI has once again come back to 14k, with put OI stabilizing around 13500.
One way to read this would be that larger players seem to have disregarded Monday’s moves and the market is back to expecting levels that it did before the dip.
Bank Nifty
We’re seeing something very similar with Banknifty. Last week, BN consolidated under 31k so it will be interesting to see if the index is able to breach that despite strong call OI at that level as it may indicate that as of last week, bulls were unable to clear that level. In our stock analysis (below), we can see that a few banks are well placed for a potential positive week ahead. This may help the index clear the psych resistance and hence, the highest OI strikes will change.
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.
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): The stock managed to recover well from its lows after facing some selling pressure on Monday. It appears to be taking support from a good support zone. If demand is strong enough, it may attempt higher levels, particularly the ones around ATH, this coming week. (Read the Basics of Dow Theory and trend by clicking here).
- Reliance Industries (11.17% weight): RIL bounced up well from its support level on Monday, after falling very sharp. The stock has underperformed severely in the past few weeks, but it appears to be picking up pace now. Clearly, closing sustainably above the 2000 level (marked with the horizontal line) will be crucial. Generally, the stock faces hurdles around 2040 as well which will act as important points to clear for the bulls. That said, unless sentiments are very strong, RIL could also move sideways after showing a couple of positive days..
- HDFC (7.23% weight): HDFC created ATH last week and immediately retraced from those levels. We can see that it is supporting the 78.6% FIB level so far. Generally, this is the first line of defence for bulls. Since the broadmarket is in a raging uptrend, it’s quite likely that this level is respected. If it is, we may see an ATH attempt very soon. This should have a significant impact on both indices as HDFC and HDFC Bank are known to move as a pair many times.
- Infosys (7.21% weight): Infosys did fairly well. In fact, IT was the only sector which was positive on Monday, and saw good demand throughout the week. While profit booking did take place on Thursday, the longer wick shows that there are still buyers left. Otherwise, we could’ve seen profit booking. Clearing 1240 will be important.
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: Last week, we drew a steep trendline. Kotak Bank breached that on Monday, and the price seems to have taken resistance around that line itself. It’s important to note that volumes are very low, but with last week being Christmas week, volumes are generally low.
- SBIN: SBI saw a great recovery after falling sharply on Monday. Thursday’s candle is slightly concerning as it has come down a fair bit from the highs, but profit booking is to be expected as it closes near swing high territory after a sharp bounce.
Volatility:
Last week, we talked about how many “expected” a correction and that it’d be interesting to see how VIX would react. And boy did VIX deliver! On Monday, the index was up double-digits. In fact, Monday and Tuesday saw interesting days for VIX as it closed very near to its high. However, things seemed to have normalized on Wednesday & Thursday.
Due to the sharp VIX movements, option prices were very choppy last week, with Tue & Wed being great for option writers.
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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